An investing strategy that exploits a seasonality anomaly of the FTSE 350 construction sector.
The following two charts analyse the monthly seasonality of the FTSE 350 Construction & Material sector [NMX2350]. The charts plot the out-performance of the sector over the FTSE 100 Index.
The chart below plots the average out-performance for each month since 1999. For example, the construction sector has out-performed the FTSE 100 Index in January by any average 2.4 percentage points over the 18 years since 1999. The value for April is negative (-1.3), indicating that on average the construction sector has under-performed the market in that month.
The following chart plots the proportion of years that have seen a positive out-performance by the construction sector in each month. For example, the sector has out-performed the market in January in 13 of the last 18 years (i.e. 72%).
The characteristic that jumps out from this analysis is the relative strength of the construction sector in the four months: January, February, November and December.
The above analysis suggests a simple strategy (Construction Sector 4M Strategy) that invests in the Construction sector continuously in the four months from November through to February of the following year and is in cash for the rest of the year (i.e. the remaining eight months).
The following chart plots the value of this strategy if it had been set up in 1999 and run through to today. For comparison also plotted is the value of a buy-and-hold FTSE 100 portfolio (both series are re-based to start with values of 100).
By mid-2017 the FTSE 100 portfolio would have had a value of 113, while the Construction Sector 4M Strategy portfolio would have a value of 625.
A good way to build value!
For reference, the seven stocks in the FTSE 350 Construction and Materials sector are:
- Balfour Beatty [BBY]
- CRH [CRH]
- Ibstock IBST]
- Kier Group [KIE]
- Marshalls [MSLH]
- Melrose Industries [MRO]
- Polypipe Group [PLP]
The above is an extract from the newly published UK Stock Market Almanac 2018.