Although since 1984 the S&P 500 has overall greatly out-performed the FTSE 100 (+1021% against +575%), there are months in the year when the FTSE 100 fairly consistently out-performs the S&P 500.
The following chart shows the monthly out-performance of the FTSE 100 Index over the S&P 500 Index since 1984.
Looking first at the orange grey bars in the chart, this shows, for example, that on average in January the FTSE 100 has out-performed the S&P 500 by -0.6 percentage points (i.e. the UK index has under-performed the US index in that month). From the chart we can see that the five months that are relatively strong for the FTSE 100 are: February, April, July, August and December. For example, the FTSE 100 has out-performed the S&P 500 in February in 13 of the past 15 years.
Now, turning to the bown bars, these display the same average monthly out-performance of the FTSE 100 over the S&P 500, except this time the S&P 500 Index has been sterling-adjusted. One effect of adjusting for currency moves is to amplify the out-performance of the FTSE 100 index in certain months (April, July, and December). Conversely, the FTSE 100 under-performance is amplified in January, May and November.
Whereas, before, the relatively strong FTSE 100 months were February, April, July, August and December, we can see that the currency-adjusted strong months are just April, July, and December.
The FTSE 100/S&P 500 monthly switching strategy (FSMSP)
The above results suggest a strategy of investing in the U.K. market (i.e. the FTSE 100 Index) in the months April, July and December and in the U.S. market (i.e. the S&P 500 Index) for the rest of the year. In other words, the portfolio would be invested in the S&P 500 from January to March, at the end of March it switches out of the S&P500 into the FTSE 100 for one month, then back into the S&P 500 for two months, into the FTSE 100 for July, back into the S&P 500 for four months, then back into the FTSE 100 for December, and finally back into the S&P 500 to start the next year.
The following chart shows the result of operating such a strategy from 2000. For comparison, the chart also includes the portfolio returns from continuous investments in the FTSE 100 and S&P 500.
The final result: the FTSE 100 portfolio would have grown 7%, the S&P 500(£) risen 32%, but the FTSE 100/S&P 500 monthly switching portfolio (FSMSP) would have increased 114%. Switching six times a year would have incurred some commission costs, but these would not have dented performance significantly.
The above is an extract from the newly published UK Stock Market Almanac 2015.
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