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Archives for Chris Heyworth

Share Market Seasonality

Come across the aphorism “sell in May and go away”?  Perhaps heard reference to the “Santa Claus rally”?  Many people believe there are seasonal patterns to share prices.  Some months are typically good with prices going up, and some not so good with prices going down or sideways.  Let’s look at some history using the S&P/ASX 200 Index.

This index shows the aggregate performance for the biggest (by market capitalisation, worked out by multiplying the number of shares on issue by the price per share) 200 Australian Stock Exchange (ASX) listed enterprises.  This index only shows price movements (does not include dividends) and the larger companies carry more weight in the index than the not-so-large ones.

Of course, if the index of 200 companies is going up this does not mean all the companies in the index are going up.  Only that a larger number of market capitalisation went up.  Individual companies may have their own seasonal price patterns.  However, let’s keep it simple and look at the S&P/ASX 200 Index (also known by its ASX code XJO).

This chart shows the average (arithmetic mean) of monthly price movements for the index for the last 12 years (May 2006 to April 2018).  The figures on the right edge of the chart show the average level of the index at the end of each month, using a figure of 100.0 as the starting point.  So, if the average of the index at the end of December is 101.2 this means the average price increase for the month of December for the period examined was 1.2%.  The figure for November is 98.4 and this means the average price decrease for the month of November for the period examined was 1.6%. The blue diamond above the April bar shows the result for April 2018 – a better than average one.

Based on the last 12 years the month of April has been a good one for the price of the S&P/ASX 200 index.  April 2018 was a better than average one.  Based on the last 12 years the averages for May and June have seen decreases.  This certainly does not mean that May and June 2018 will be negative ones, only that May and June have been weak months on average over the last 12 years.  No suggestion that any portfolio changes would be necessary.

We can look in more detail at these historical data in future articles.  For instance, a different chart will show the best and worst performances for each month as well as the average.  For something a bit outside the square, we can also arrange the data so it looks at performances on dates divided up on an astronomical basis (Aries, Taurus, etc.) rather than calendar months.  Keep watching for future articles.

Please note this article is providing general advice and information. It has not taken your personal or financial circumstances into consideration, if you would like more tailored financial or investment advice, please contact us today. One of our advisers would be delighted to speak with you.

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Sell in May & Go Away

“Sell in May and go away” is a well-known saying in relation to share markets.  Does it have any validity?  Well, the first question that needs to be answered is “go away for how long?”  The phrase is likely a take on an old English saying “sell in May and go away, come back on St Leger’s Day”.

Horse racing buffs may know that the St Leger Stakes is run in September each year.  So, the rationale would be to sell shares in May and buy them back in September expecting the (buy) price in September to be less than the (sell) price in May.  Easy enough.  Let’s see how successful this would have been.  We’ll keep it simple and not include buying and selling costs or tax implications.
We’ll use the ASX top 200 index (the XJO) to back test the strategy.  We’ll compare the value of the XJO at the beginning of May to the value at the end of August for the last 20 years.  Here’s the table of results:

Year May August Change Percentage Successful?
1997 2421 2526 +105 +4.3% No
1998 2745 2430 -315 -11.5% YES
1999 3001 2875 -126 -4.2% YES
2000 3115 3297 +182 +5.8% No
2001 3329 3275 -54 -1.6% YES
2002 3348 3120 -228 -6.8% YES
2003 3008 3200 +192 +6.4% No
2004 3400 3552 +152 +4.5% No
2005 3991 4446 +455 +11.4% No
2006 5273 5115 -158 -3.0% YES
2007 6166 6247 +81 +1.3% No
208 5654 5135 -519 -9.2% YES
2009 3780 4479 +699 +18.5% No
2010 4807 4404 -403 -8.4% YES
2011 4823 4296 -527 -10.9% YES
2012 4396 4316 -80 -1.8% YES
2013 5191 5135 -56 -1.1% YES
2014 5489 5625 +136 +2.5% No
2015 5790 5207 -583 -10.1% YES
2016 5252 5433 +181 +3.4% No

 

Summarising these back tested results for 1997 to 2016:

  • The “sell in May and go away” strategy would have produced a beneficial outcome in 11 out of 20 years. The average beneficial percentage is 6.2%.
  • The “sell in May and go away” strategy would have produced a detrimental outcome in 9 out of 20 years. The average detrimental percentage is 6.5%.

“Sell in May and go away” would have produced only a marginal benefit if applied as noted here over the last 20 years.  An interesting saying, but not a viable strategy.

Please note, this article is for general advice purposes only. It is not taking into account your particular circumstances or your personal finances. As mentioned above, this is a simplified analysis, and does not take into account certain financial implications (such as buying and selling costs and tax implications). If you wish to discuss the matter in further detail or wish to book an appointment to discuss your personal financial situation and future financial goals, please contact us to book an appointment with one of our advisers.

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Managed Funds: Demystified!

Whether we are talking about commercial activities, government, leisure pursuits or just day-to-day living the use of jargon is very evident. That is, specialised language concerned with a particular subject. The financial services sector abounds with terminology relevant to its activities and products and it can help the user of these services to sometimes simply go back to basics to make sure everyone understands what is meant by certain words or terms.

An oft-used phrase is “managed fund”. The product providers keenly push the potential benefits of their managed funds. For instance: easy diversification; expert money management; invest for income, growth or both; convenient regular savings plan. These benefits are fine, however, this marketing stuff does not explain how a managed fund works. Let’s lift the lid on the operation of managed funds and make sure we understand what is going on.

There are a variety of different styles and tax structures for managed funds. In later articles we will cover how entitlement to income and capital growth from the investments are handled, how superannuation funds and insurance bonds differ from managed funds that distribute their taxable income to investors, explain the differences between unlisted and listed managed funds and also how “active” funds contrast with “passive” funds. For now, let’s focus on plain vanilla unlisted managed funds where the investor is responsible for any tax on investment earnings.

These managed funds operate as unit trusts, a well-established and cunningly effective way of dealing with pools of money for collective investment where new participants in the pool can easily join and departing participants can be paid out without disrupting things for the other participants. The participants in these structures are called “unitholders”.
When a new unitholder joins (or an existing unitholder invests more money in the pool) new units are issued by the fund manager. When an existing unitholder leaves, their units are redeemed by the fund manager. So, new units could be issued and existing units redeemed every day impacting the number of units on issue. The price at which new units are issued or existing units redeemed is where the effectiveness of this structure comes in.

The fund manager would value the investments held in the collective pool, typically every day where prices are readily available. These investments could include cash deposits, interest-bearing securities and listed shares. Physical properties are valued less frequently. So, the total value of the collective investment pool is calculated (let’s say this is $100,000,000) then the number of units on issue is sourced (let’s say this is 25,000,000 units). Dividing the value of the pool by the number of units on issue gives the worth of each unit (in this example $4-00 per unit). If no new units were issued nor existing units redeemed and the underlying value of the investments in the pool increased the next day to $100,500,000 then each of the 25,000,000 units would have an underlying value of $4-02. In practice the numbers would not be neat and round as shown here.

So, if new units are to be issued the underlying worth of each unit might be $4-00; many unit trusts would charge a small premium for issuing new units, so the actual issue price might be $4-01. A new investment of $25,000 would receive 6,234 units at $4-01 each. If existing units are to be redeemed the underlying worth of each unit would also be $4-00; many unit trusts charge a small amount for redeeming existing units, so the actual redemption price might be $3-99. A redemption of 5,000 units would receive proceeds of $19,950 at $3-99 each unit. The “buy/sell” difference between the issue price, redemption price and unit price is retained by the fund and is designed to avoid continuing unitholders being negatively impacted by transaction costs incurred when new units are issued or existing units redeemed.

So, unit trusts are a simple and effective way to administer pools of investments where new participants can join and existing participants leave with minimum fuss.

Please note: The information provided in this article is general advice only. It has been prepared without taking into account any person’s individual objectives, financial situation or needs. Before acting on anything in this article you should consider its appropriateness to you, having regard to your objectives, financial situation and needs. If you would like more tailored advice, please contact us today. One of our friendly advisers would be delighted to speak with you.

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