Last year I updated a piece of research titled 'The Winter Fund Portfolio 2021 – exploiting a seasonal trend', as I do every year. The research was inspired by a recognised phenomenon in investment markets whereby, according to the Stock Market Almanac, the 1st November marks "the start of the strong six-month period of the year for stocks". The Winter Fund Portfolio has proved to be one of the most popular research ideas on 80-20 Investor so I keep the format of the annual review the same for easy reference to previous years.
My research piece produced two Winter fund portfolios which had successfully exploited this seasonal trend over the previous 10 years. I named these the:
- Consistent Winter Fund Portfolio
- Aggressive Winter Fund Portfolio
The methodology of how I built these portfolios can be found in the original research piece. To remind you, below are the constituent funds for each portfolio:
Consistent Winter Fund Portfolio
- BlackRock - UK Smaller Companies
- BMO - UK Mid-Cap
- Fidelity - UK Smaller Companies
- Invesco - UK Smaller Companies Equity (UK)
- Liontrust - Special Situations
Aggressive Winter Fund Portfolio
- Fidelity - UK Smaller Companies
- Franklin - UK Mid Cap
- MI - The MI Discretionary Unit
- Slater - Growth
- Unicorn - UK Smaller Companies
Winter Fund Portfolios during 2020 to 2021
It is worth going back and reading last year's review of the Winter Fund Portfolios to familiarise yourself with where we were this time last year, heading into the winter. 2021 was an incredible year for the Winter Portfolios with the Consistent Winter Fund Portfolio making 38.85% during the year while the Aggressive Winter Fund Portfolio made 46.98%. Meanwhile the Winter Portfolios' risk/return metrics outshone their respective benchmarks. But how did they perform during 2021/2022?
Consistent Winter Fund Portfolio 2021 to 2022
The chart below shows the performance of the Consistent Winter Portfolio versus the FTSE 100, FTSE 250 and FTSE 350 over the last year.
2022 has been a difficult year for investors, with bonds and equities both tumbling. The Consistent Winter Fund Portfolio (the blue line) has not been immune from the market slump. However, the performance still hugely outstrips that of the FTSE 250, which has often been the leading alternative in these annual reviews. This outperformance has been entirely due to the portfolio reverting to cash over the summer months.
Interestingly the FTSE 100 has been one of the best performing global stock markets throughout 2022, due its lack of exposure to technology stocks and its higher exposure to oil and gas stocks. The FTSE 350 is a combination of the FTSE 100 and the FTSE 250, which explains why it lags the FTSE 100 but outperforms the FTSE 250.
The above chart also shows what would have happened if you remained in the Consistent Winter Portfolio without reverting to cash over the summer (the dark green line). It highlights just how the outperformance of the Consistent Winter Portfolio was down to its cautious approach over the summer months.
The table below shows the individual performances of each of the funds in the Consistent Winter Portfolio up to the end of April (when the portfolio switches to cash) as well as the performance over the last year. Once again, one of the stand-out performers has been Fidelity UK Smaller Companies which I held in my own £50k portfolio until 8th March 2022.
| Name | % performance - 1st Nov 2021 to 30th April 2022 | % performance -1 year to 1st Nov 2022 |
| BlackRock UK Smaller Companies | -15.94 | -30.14 |
| CT UK Mid-Cap | -7.13 | -11.69 |
| Fidelity UK Smaller Companies | -5.48 | -13.79 |
| Invesco UK Smaller Companies Equity (UK) | -10.92 | -27.86 |
| Liontrust Special Situations | -6.91 | -11.94 |
Now let's look at the performance of the Consistent Winter Portfolio, FTSE 100, FTSE 250 and FTSE 350 since November 2009, which was the starting point of the original piece of research. The first chart shows the position this time last year...where the difference in performance between the Consistent Winter Portfolio and FTSE 250 was marginal. However, as I pointed out at the time the alpha generated by the Consistent Winter Fund Portfolio from 1/11/09 to 1/11/21 was far in excess of the other indices while the beta (how much a portfolio's movements simply reflect the wider market) was much lower. The volatility of the Consistent Winter Portfolio remained much lower while the Sharpe Ratio (the extra return the portfolio gets for each unit of risk it takes) was far higher. This was not surprising given that half the time the Consistent Winter Portfolio is invested in cash.
Fast-forward to this year and the picture is now very different (see below).
The Consistent Winter Fund Portfolio's long term performance now significantly outstrips any of the other benchmarks. In fact the long term outperformance of the strategy is at its widest since inception. But as I highlighted last year, it's not just the absolute return number that you should focus on. If we look at the key risk/reward statistics (see table below) versus the FTSE 250 benchmark (which is the leading alternative), the FTSE 350 and the FTSE 100, the alpha generated by the Consistent Winter Fund Portfolio from 1/11/09 to 1/11/22 is still far in excess of the other indices while the beta (how much a portfolio's movements simply reflect the wider market) is much lower. The volatility of the Consistent Winter Portfolio also remains much lower while the Sharpe Ratio (the extra return the portfolio gets for each unit of risk it takes) is far higher.
From a risk/return perspective, the Consistent Winter Fund Portfolio still wipes the floor with the FTSE 250 (and the other benchmarks) because it is invested in cash half of the time yet still produces strong returns. In the table below each key statistical measure is coloured coded by row, with blue being the best and red the worst for each statistical measure. Bear in mind that when calculating the alpha and beta measures for each portfolio that the FTSE 250 is used as a benchmark, so the scores for those statistics are relative to the FTSE 250. Hence why the FTSE 250 alpha is 0 and beta is 1.
As a reminder, here is what each statistical measure means...
Alpha
Alpha is a figure which measures a manager’s apparent skill at picking winning investments versus their benchmark. Alpha is the excess return versus the return of a portfolio's benchmark (i.e the market). So a portfolio with a positive alpha indicates that the manager has outperformed through skill. While a negative alpha figure would indicate underperformance. The higher the alpha figure the better
Beta
Beta measures a portfolio's sensitivity to the general market in which it operates. The market always has a beta of 1 by definition. So if a portfolio also has a beta of 1 that would mean that if the market rose by 5% then so should the portfolio. If the portfolio has a beta of -1 then as the market rises so the portfolio falls. A well-managed index fund will have a beta of exactly 1. Portfolios that outperform the market when it does well but do even worse when the market is going down will have a beta above 1.
Maximum Drawdown
This is the biggest fall experienced in a given week.
Sharpe Ratio
The Sharpe Ratio is a measure of the excess return a manager is achieving for the risk they are taking. The higher the Sharpe Ratio the better.
Sortino Ratio
This is very similar to the Sharpe Ratio but places more emphasis on the manager's ability to manage on the downside.
Volatility
This is a measure of a portfolio's dispersion of returns, or in plain English the variability in those returns. Think of it as a measure of how much a building is prone to wobble. The more prone it is (the higher the volatility) the more it will sway in an earthquake.
Aggressive Winter Fund Portfolio 2020 to 2021
But what about the Aggressive Winter Fund portfolio? The Aggressive Winter Fund Portfolio (the dark blue line below) unsurprisingly underperformed the more conservative Consistent Winter Portfolio as you'd expect, but it still managed to outperform anyone who remained invested in a FTSE 250 index tracker fund.
Funds to watch - Winter 2022
In November 2021 I created a wider shortlist of funds based upon the fund selection process for each original Winter portfolio (which is a 10-year backwards-looking process) that could be well placed to benefit from the obvious seasonal trend during the winter months. I loosened the criteria to allow for funds that had had 8 positive winters in the last 10. The table below lists those funds alongside their return during the 6 month winter period. In addition, those highlighted blue outperformed their peer group average over the same time period (which was -14.02%). As you can see the outcome was mixed.
| Name | Sector | % return November 2021 to April 2022 |
| AXA Framlington UK Smaller Companies | UK Smaller Companies | -21.49 |
| BlackRock UK Smaller Companies | UK Smaller Companies | -15.94 |
| Fidelity UK Smaller Companies | UK Smaller Companies | -5.48 |
| FTF Martin Currie UK Smaller Companies | UK Smaller Companies | -14.76 |
| Invesco UK Smaller Companies Equity (UK) | UK Smaller Companies | -10.92 |
| Jupiter UK Smaller Companies | UK Smaller Companies | -17.92 |
| LF Gresham House UK Micro Cap | UK Smaller Companies | -16.06 |
| Liontrust UK Smaller Companies | UK Smaller Companies | -13.88 |
| MI MI Sterling Select Companies | UK Smaller Companies | -18.97 |
| Premier Miton UK Smaller Companies | UK Smaller Companies | -9.86 |
Applying the same process as last year, I've once again produced a shortlist of possible candidates for a '2022 winter portfolio' as shown below. A number of the funds are already members of the original Winter portfolios or made it onto 2021's shortlist of funds to watch.
While we shouldn't draw any conclusions from what happens this early into "winter 2022" but the highlighted funds have certainly started well:
Summary
Once again the evidence shows that over the long term you can exploit the seasonality of stock markets, and occasionally you can profit in the short term, but it isn't a certainty that you will make a profit every winter. Also, over the long term you are better off trying to exploit this particular market anomaly via active funds within the UK smaller companies sector rather than using a passive approach (say with either a FTSE 350 or FTSE 250 index tracker). In the short term, an index tracker can of course outperform, as the FTSE 100 did in 2022. If you recall, the long term outperformance of the Winter Portfolios shouldn't be a surprise given my previous 80-20 Investor research article titled 'The sectors where active funds beat passives' which showed that active funds hugely outperformed passive strategies within the UK Smaller Companies sector.
