Is April the month when the storms blow over and a sunnier outlook inspires the return of growth? Or a cruelly deceptive time, when a few signs of life distract attention from largely barren conditions?
If you’re a literary critic, it depends on whether you read more into Chaucer’s Middle English evocation of April’s “sweet showers” , “breathy zephyrs” and “young sun”, than into TS Eliot’s broken images of the “cruellest month, breeding lilacs out of the dead land . . . stirring dull roots with spring rain”.
If you’re an investor, though, it depends on whether your mood is swayed more by US fund managers’ bullish view that we’re seeing the beginning of an equity market recovery, than by technical analysts’ charts depicting just another brief rally in a bleak bear market.
Investor sentiment is certainly open to suggestion. Paul Marsh, Elroy Dimson and Mike Staunton of the London Business School, in their latest analysis of market recoveries, say: “Investors fervently hope that March 6 marked the bottom of the current bear market – since then, UK equities have rallied by over 11 per cent.”
Joshua Raymond, market strategist at City Index, sees significance in the FTSE 100 breaking through the “key psychological” 4,000 level: “It has spurred optimism for a longer term rally.”
James Abate, manager of the PSigma American Growth Fund, now forecasts “a hugely bullish environment” for US stocks: “The S&P 500 could be up by well over 20 per cent by the year end.”
Even the grey headlines on FT.com looked brighter on Thursday: “Global equities rally on hopes for G20”, “Banks and housebuilders shine”, “Lending to business begins to increase”. Not exactly poetry, but music to some ears.
Seasonality has an effect, too, on portfolio diversifiers as much as versifiers. Two Canadian economists, Xifeng Diao and Maurice Levi, claim that equity investors are prone to seasonal affective disorder, or Sad.
In late October, the depressive nature of darkening nights appears to lower their appetite for risk. By late April, however, longer hours of daylight increase optimism and risk-taking.
But that doesn’t mean markets go forward when the clocks do. Diao and Levi found that a rising risk appetite pushes share prices up to a level from which returns disappoint – so the optimal time to invest is in the three months after the winter solstice, when returns are historically 13 per cent higher than in the previous three months.
How, then, should these occluded forecasts influence your choice of fund for a stock-market individual savings account (Isa)? If you see green shoots later in the year, do you choose a bullish US fund manager confident of outperforming the index? Or, if you still see a waste land, do you choose a defensive UK manager who should be able to shelter from further bear market cloudbursts?
Fortunately, there need be no April dilemma for longer-term investors, according to research from Vanguard, the US fund group that will be launching here in the summer. Its number crunching suggests a probability that an index will outperform active managers in all seasons and cycles.
In only three of the last six US bear markets did a majority of active fund managers outperform the Dow Jones Wilshire 5000 index, and in only two of the last five European bear markets did a majority of active managers beat the MSCI Europe index.
More significantly, those that outperformed over one period then failed to thrive. Of the 21 market beaters in 1990, only seven outperformed in the 1992 downturn – and, by the 2000 bear market, none of the 1990 crop was growing as fast as the index.
And in the last seven US bull markets, there has not once been a time when a majority of active funds outperformed the index.
Vanguard concludes: “During periods of market stress, it is common to hear that active managers can help investors by selecting securities or by maintaining a significant cash position. However, our evidence does not support this.”
What it does support is the evergreen quality of index tracker funds. Specialist trackers may even help investors to enjoy more outperformance, according to two other research papers distributed this week.
Rob Davies of Fundamental Tracker Investment Management argues that the way to get long-term money allocated correctly is by tracking indices weighted according to fundamental measures rather than market capitalisation.
Alternatively, Marsh, Dimson and Staunton advocate a sector tracking approach, as data from 1973-74 and 2008-09 show that the worst performers during a bear market period tend to be the best performers during a subsequent upturn.
Both strategies can be implemented by buying exchange traded funds for your Isa, with no stamp duty. Not even Chaucer’s sunny disposition inspired tax breaks like these – and he was Comptroller of Customs in 1382.
matthew.vincent@ft.com
