No time for defensives

We've entered that time of year when shares traditionally do badly. Since 1966, the All-Share index has returned an average of only 1.4 per cent between 30 April and 31 October. Not only does this compare badly with the 13 per cent average return between November and April, it is also less than the average return on cash. This raises the question: is now the time to buy defensive stocks?

Theory says no. If the outlook for the market is bad, we should hold fewer shares generally, rather than change the composition of our equity holdings. This is because defensive stocks' low beta means - by definition - that they will merely fall less quickly than the market if the market falls. It does not mean they will actually make money. For investors who worry about their wealth rather than their relative performance, there's little virtue in this.

So much for theory. What about reality? We can test the theory by looking at the performance of our benchmark low-risk portfolio since its inception in September 2005. During this time, the portfolio has outperformed the FTSE 350, with an (arithmetic) average monthly price rise of 0.46 per cent against the FTSE 350's 0.22 per cent. And all this outperformance has come between May and October. In these six months, defensives gained 0.11 per cent a month while the 350 lost 0.8 per cent a month.

But 0.11 per cent is feeble. It's less than you can get on a half-decent cash savings account.

A look at monthly returns gives us more detail. Since 2005, the market has done badly on average in May and June, and this has dragged defensive stocks down. This has offset the tendency for defensives to do relatively well in July, August and September.

In other words, beta (shares' sensitivity to the market) matters more than alpha (shares' non-market-related return). This is something that is often true in other contexts.

Now, this is only a small sample of noisy returns, so we can't rely much upon it. But it does corroborate the theory that summer is a bad time for defensives' absolute performance. If your aim is to make money, rather than merely lose it more slowly than your competitors, this speaks against buying defensives

visible-status-Public story-url-defseas_040512.xml