Interactive Investor

A one-month trade with 93% success rate

2nd December 2014 08:54

Lee Wild from interactive investor

As the calendar year draws to a close, portfolio managers begin thinking about preparing their fund for the 31 December snapshot that appears in the annual report, a process referred to in the City as "window dressing". That's the theory anyway. None will admit to it, but true or not, the team at Societe Generale has come up with a long-short trade for December that works most of the time.

"Our backtest based on the Stoxx 600 shows that, in December, going long the Top 15 year-to-date outperformers and Short the Bottom 15 year-to-date underperformers works," says the French bank. "This strategy has delivered a positive return in 14 years out of 15."

SocGen begins at the end of November by ranking Stoxx 600 securities worth at least €5 billion (£3.96 billion) according to their year-to-date share price performance in local currency. It buys the 15 best performers and sells the 15 worst performers for an equal monetary value on 1 December. Unwind your positions on the last day of December, and voila!

Back-testing the strategy reveals an average return of 5.7% over the last 15 years compared with1.6% for the STOXX 600. And for 2014:

Our 'Long Leg' is well diversified and includes three Danish stocks, not surprising as the Danish equity market has been the best performer in Europe this year (+21% YTD). Our 'Short Leg' is clearly over - represented by Oil - related names with five stocks and Food Retailing with four. Moreover, it includes nine UK stocks, which is coherent with our equity country allocation strategy of avoiding the UK equity market.

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This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.