Did “Sell in May, go away” work this year?

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest. 

We’re currently in the midst of another period supposedly worthy of caution. September is often singled out as a poor month for shares overall. Again, September 2024 looked to be a good testing ground for this, with the FTSE 100 having barely paused for breath all year. So far this month, the path has proven a little rocky, but the market has now largely erased earlier falls.

Much of the sideways movement of the past couple of weeks can be put down to indecision about the immediate way ahead for the US. On the one hand, recent data have shown weakening trends in employment and manufacturing that have fed recession fears. On the other, there are interest rate cuts to come which ought to be positive for both the economy and shares in general. Leaping one way or the other in markets at the moment looks unusually risky. That’s reflected in a straw poll of investors conducted by Fidelity earlier this week:

Around half (49%) expect the FTSE 100 to end the year broadly where it is today – in the 8,250 to 8,500 area – with just 22% expecting the index above 8,500.

Much as we might like to, there’s rarely an opportunity to escape the fact that timing markets is no substitute for time in the markets. The long term outperformance of shares over other asset classes is why legendary investors like Warren Buffett and, in the UK, the likes of Terry Smith, Nick Train and James Thomson have the investment portfolios they do. These managers have a strong preference for holding their investments over the long term. 

For investors approaching retirement, the dangers of attempting to time markets are all the greater. Mistakes are harder to fix because there will be fewer market rebounds or pullbacks in future to right previous wrongs.

Here, the best tools to combat market volatility are having a diversified strategy and pound cost averaging via regular savings for adding to market positions. Both can help to ameliorate the effects of short term market moves when transitioning from a long term investment strategy skewed to growth towards a retirement portfolio most probably with a bias towards income.

Fortunately, for UK investors, the stock market continues to represent good value along with world-beating yields. UK shares currently trade on just 11.8 times forward earnings estimates, compared with around 18.8 times for world stocks³. Clearly, the Brexit/political upheaval discount has yet to fully unwind.

Moreover, taking share buybacks into account, UK shares are returning even more to shareholders than a 3.6% yield would indicate. Current returns look attractive given that interest rates on cash are set to fall while the dividends that companies pay tend to increase over time.

Deciding how to invest in the UK can be a challenge, given the vast array of funds, investment trusts and ETFs currently available. It’s quite possible to diversify your exposure by investing across a range of assets, investment styles and company sizes too. Fidelity’s Select 50 list of favourite funds aims to help hone a possible shortlist of funds from their entirety.

The FTF Martin Currie UK Equity Income Fund is one of three actively managed UK funds on the Select 50 list. Managed by Ben Russon, Will Bradwell and Joanne Rands out of Leeds, this fund aims to generate an income higher than that of the FTSE All-Share Index plus investment growth over a three to five year period after fees and costs.

Among the Fund’s 49 investments are holdings in some of the UK’s largest dividend payers, including Unilever, Shell and AstraZeneca, as well as medium sized companies including Cranswick and IG Group. The Fund pays a quarterly dividend and currently yields approximately 4.4%, an amount that is not guaranteed⁴.

The Liontrust UK Growth Fund is another actively managed Select 50 choice. It seeks to invest in companies with a durable competitive advantage that allows them to sustain high levels of profitability for longer than the market expects. Current large holdings in its 45 stock portfolio include AstraZeneca, Relx and BAE Systems⁵.

The Fidelity Special Situations Fund, run by Alex Wright, rounds out the active contenders. This is a contrarian, value-biased fund focused on underappreciated companies. As such, it offers an exposure to companies often not covered by other popular UK funds.

This fund currently has a broad-based portfolio of 107 separate holdings, with a 22% exposure to financials – mostly banks and life insurers. Large holdings include Imperial Brands, DCC and Aviva.

The Vanguard FTSE 250 UCITS ETF is one of two passive UK funds on the list. Fidelity’s experts like this fund due to Vanguard’s expertise in index tracking, a low ongoing fund charge and the fund’s focus on medium-sized companies, which have produced good long-term investment returns.

The other is the iShares Core FTSE 100 UCITS ETF, which holds the individual constituents of the FTSE 100 in the correct amounts to track the index. Fidelity’s experts note that BlackRock is a seasoned investor in passive funds and that this fund’s cost are low. As such, it may suit cost-conscious investors with a longer time horizon.

Source

^1,2 London Stock Exchange, 17/09/24
³ MSCI, 30.08.24
⁴ Franklin Templeton, 31.08.24
⁵ Liontrust, 31.08.24