FEATURE: ANALYSIS
27%, 40% and 50% of subsequent SELL IN MAY
FTSE 100 performances over one, two A close analysis of market
PROFILE – FACT BOX
and three-year investment periods movements over the past quarter
respectively. Th e higher the yield at the century tells us that the old adage:
start of the period, the higher the ‘sell in May and go away’ stands the
subsequent return. Th e equivalent test of time, as it does in many
statistics using price/earnings levels as equity markets. Performances over
the indicator – where one would the six month periods from end-
expect a negative correlation with April to end-October tend to be far
subsequent performances – are 10%, worse to performances over the six
31% and 46%. month periods starting in November.
Easier said than done, of course. Since inception the FTSE 100 has
History does show that abnormal averaged a performance of -0.4% over
returns are predictable and achievable if the six month periods covering May to
the turning points in valuation October compared with performances
indicators can be pinpointed, but during the periods from November to
spotting those turning points is the April that have averaged 6.7%. Th e
diffi cult part. Nevertheless, I would fi ve largest gains – all of more than
argue that one lesson of the past 25 20% – have occurred during
years is that there are identifi able November to April periods. Th e fi ve
Adrian FitzGerald, ASIP
periods – whatever means of largest falls – including a 28.0% fall in
Career highlights:
identifi cation the investor chooses to 2008 – have all occurred during May
Adrian FitzGerald entered the investment
use – where constraint and discipline to October periods.
industry in the 1970s, joining Baillie
are clearly called for. Numerous factors have been
Gifford in Edinburgh as a trainee
It is also worth highlighting the shift investigated to explain this
investment manager. In 1979 he moved to
in equity valuations relative to gilt phenomenon including tax eff ects,
join the research team of stockbrokers
valuations. Back in the early 1980s the holiday eff ects and weather-related
Wood Mackenzie, where he worked in the
yield ratio (long gilt yield/equity yield) infl uences. However, no consensus
fi elds of investment strategy and
was a prominent and successful view has yet emerged as an
quantitative analysis. Today, he combines
consultancy with teaching and is
indicator of the relative attractiveness of explanation, but perhaps one of the
currently director of Professional Investor
the equity market. A fi gure higher than more convincing arguments is that
Consultancy and a visiting lecturer in
2.4 was generally perceived as an these results suggest that an ‘optimism
fi nance at Edinburgh Napier University.
indicator that the equity market was cycle’ operates in markets. Th at is,
overbought; a fi gure of less than 2.0 was investors become more optimistic –
read as a negative sign. Th e highest and perhaps overly optimistic – as the
fi gure recorded – using the FTSE 100 new year approaches and then fi nd STATS.
yield – was 3.07 just before the October that they have to start reining back
1987 crash. their hopes and expectations once they
TABLE 6: FTSE 100 MONTHLY AVERAGES
Since mid-1998, however, the yield are several months into the new year.
ratio trading range has shifted to a Whatever the cause, the seasonal
Average performance(%)
much lower level. Th is can be attributed pattern in the stock market is an January 0.84
to lower dividend growth expectations observation of the past 25 years that February 0.84
and/or greater risk aversion. Since that should be noted and is one that March 0.72
date, the yield ratio has averaged 1.36, should be monitored in future. It also April 1.53
reaching a peak of 2.07 in March 2000 seems safe to assume that the periods May 0.09
and a low point of 0.59 in November of excessive volatility – and the
June -0.52
2008. Expectations of signifi cant creation of market valuation
July 0.35
dividend cuts do of course partly ineffi ciencies – experienced in the
August 0.65
explain the latter. [For the purpose of past will also feature in decades to
September -1.59
this exercise, the published equity yields come. Investors prepared to heed such
October 0.39
since 1997 have been grossed up to lessons can only improve their
November 0.72
present them on a comparable basis to chances of exploiting future
December 1.90
those of previous years] opportunities.
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 47
42-4742-47 FTSE.indd 47FTSE.indd 47 1/6/091/6/09 12:07:1512:07:15Professional Investor Summer 09.49 49 4/6/09 15:41:03
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