Sell In May And Go Away(?)

May Day is coming, and how apt it is to pen down something which sounded like a nursery rhyme for investors and traders.

You may have heard of the jingle “sell in May and go away”, but where does this adage come from? Accordingly, the phrase originated from London’s financial district, but somehow made it to Wall Street and to a certain extent our local Singapore market. 

 

There is a second part to the phrase, and it goes like “come back on St. Leger’s Day”. St Leger’s Day, or known as St. Leger’s Stakes, is a horseracing event that takes place in September. Thus “sell in May and go away, come back on St. Leger’s day” implies that we should exit the market or reduce our investible stakes during the period of May to September (to add, a modern version of the adage goes something like “sell in May and go away, and wake me up when September ends”).

 

The ”sell in May and go away” also has another name: Halloween Effect. The main difference between the two is the market reentry period, for the Halloween Effect the time to buy back into the markets is in beginning of November, after the Halloween holidays.

 

When I first heard about them, they sounded like one of those traditional rules that does not seem to make any sense. The very first thought that came to my mind was: is it a form of self-fulfilling prophecy? And is it just affecting the United States and United Kingdom markets, since it was deemed to be prevalent there?

 

According to a 2001 research paper on the study of the Halloween Effect¹ on 37 financial markets (Singapore included) between the years 1973 and 1996, an investor adopting the Halloween Strategy (i.e., sell in the beginning of May to park in a risk-free asset, and then buying back into the market in end October) would fare better in returns in most of the markets than an investor who buy-and-hold throughout (that included Singapore). A related follow-up 2018 paper² sampled the period between Oct 1998 and Apr 2017 of the same countries still showed roughly the same results.

 

Based on the research numbers, this prophecy holds true, most of the time (2020 was a glaring exception, and we knew what happened back then). And since the frequency of it happening is high, shouldn’t we just ditch buy-and-hold and follow this to get higher returns? With the number of low-cost brokerages around nowadays and that meant lower transaction costs, it makes more sense to adopt this approach.

 

The Bedokian’s Take

 

Past performance is not indicative of future results, but I admit the “sell in May”/Halloween Effect defied known logic, at least for me. Statistically, the average smoothed-out returns over the November-April period do look better, so I guess there will be people who declare this as empirical proof that it works.

 

In my opinion the results are not empirical enough. Yes, it works most of the time, but if I want to adopt this, I must make sure it works all the time. However, we all know economics and the stock market are not hard sciences like chemistry or physics, so if it could be wrong on one occasion, I would rather be prudent and stick to my preferred investment strategy and methodology to reduce uncertainty and risk, than to go by the time of the year to make buy-sell decisions.

 

 

1 – Jacobsen, Ben and Bouman, Sven. The Halloween Indicator, ‘Sell in May and Go Away’: Another Puzzle. 1 Jul 2001. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=76248 (accessed 20 Apr 2023)

 

2 – Jacobsen, Ben and Zhang, Cherry Yi. The Halloween Indicator, ‘Sell in May and Go Away’: Everywhere and All the Time. 1 Oct 2018. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2154873 (accessed 20 Apr 2023)

I Am Back To Prospecting

Admittedly I had not done much prospecting recently. Yes, I have had added some new counters such as the Russell 2000 Covered Call ETF and Alphabet, but the former is an ETF and the latter was one that I had followed and monitored since the mid 2010s. Yes, the prospecting I was talking about is on looking for companies from the ground up; and embarrassingly the last counter which I had done serious prospecting was YHI International (which I wrote here, back in 2018).

So, from then till now what have I been adding into our portfolio? Basically just looking at (and buying into) our current counters and went the ETF way, as I had written here. Any reasons for the lack of prospecting? Well, there are few, with the major ones being commitments to work, family and personal matters. On top of these, even when there is an ounce of free time, I would be monitoring the current holdings and their developments, penning down my thoughts in this blog, reading up on articles and books (investment, economics and other stuff), etc. Basically (and truthfully), prospecting had taken a back seat these few years.

 

While enduring a high fever and shivering under the blankets a week or so ago, an epiphany struck (and if you had noticed my investment journey started with an awakening as well, which I had described my experience here) and my 39.x degree Celsius heat-induced brain pointed me the direction of relooking at annual reports and such, among other non-investment related thoughts (I kid you not). So now I am trawling through screeners and annual reports again of totally new companies, and funnily I swear that I had probably gone through some companies which I had reviewed years ago. Maybe these companies that I had encountered before were still within my current selection criteria.

 

With this, you may be expecting another “Inside The Bedokian’s Portfolio” article soon, but it is not uncommon for me to declare a “no buy” after an extensive prospecting exercise, and will just average up/down my holdings again, though I will keep some counters and companies in my watch list. If I had made a decision, I will definitely write about it, but will be after I had invested in the company.

 

 

Inside The Bedokian’s Portfolio: Global X Russell 2000 Covered Call ETF

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what we have in our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will briefly give an overview of the counter, why I had selected it and what possibly lies ahead in its future.

For this post, I will be talking about the Global X Russell 2000 Covered Call ETF (RYLD), listed in the NYSEARCA. Technically speaking, this counter does not reside within our Bedokian Portfolio. As mentioned in this post, RYLD sits within our trading portfolio due to its derivatives nature (i.e., options).

 

If you want to know more about covered calls and their ETFs, you may want to read here.

 

Overview

 

Incepted on 18 Apr 2019, RYLD is a covered call ETF that writes call options on the components of the Russell 2000 index. As of 6 Apr 2023, 31.65% of the ETF is consisted of the Vanguard Russell 2000 ETF, and small portions (not more than 0.25% of holdings) of actual shares of companies found in the Russell 2000.

 

Why RYLD?

 

There are several covered call ETFs available out there, some of which included the famous QYLD that tracks the covered calls for the Nasdaq 100 and XYLD for the S&P 500. The reason why we selected RYLD was that small-cap companies tend to be more volatile than large-cap ones, and that is good for option premiums. 

 

Option premiums were usually correlated with a security’s implied volatility (IV), and that means the premiums (the main source of dividends from covered call ETFs) would rise if the IV is higher. Sitting pretty on the dividend yield front at 13.4% (as of 6 Apr 2023¹), it is one of the highest amongst the covered call ETFs.

 

What’s Next?

 

Covered call ETFs typically have one main weakness: limited upside. And if you looked at our disclosure below, the dividend yield of 13.4% (or 9.38% factoring the 30% withholding tax imposed on U.S. based securities) was very much offset by the capital loss (around 15.2% currently for us), but this does not mean that we would not continue to invest. On the contrary, we will nibble at RYLD more if it goes down further. We are planning to hold RYLD long term, collect more dividends and reinvest them on RYLD and/or other U.S. dollar denominated securities.

 

Disclosure

 

Bought RYLD at:

 

USD 23.60 at Mar 2022

USD 20.00 at Jun 2022

USD 21.19 at Aug 2022

USD 19.20 at Oct 2022

USD 19.195 at Feb 2023

USD 17.95 at Mar 2023

 

Disclaimer

 

Reference:

 

https://www.globalxetfs.com/funds/ryld/

 

1 – RYLD. Yahoo Finance (accessed 7 Apr 2023)

It’s AGM Season!

If you had invested in equities of individual companies and units in real estate investment trusts (REITs) and held them in the Central Depository (CDP), or through your CPF investment account (CPF-IA) and/or supplementary retirement scheme (SRS) account, you would have received notices of annual general meeting (AGM), examples of which are shown in the picture below (Fig. 1).

Fig. 1: Examples of AGM notices (source: own photo)

If you search enough on the internet, you would have realised, at least for local listed companies and REITs, a lot of AGMs were held in the month of April. With the lifting of COVID restrictions, an announcement in December last year by the authorities stated that the option of having online official meetings, which included AGMs, would cease from 1 July 2023¹. From the slew of AGM notice letters that had been sent out, many companies and REITs were bringing back physical AGMs.

 

Being a shareholder and/or unitholder, you have the right to attend the AGM to vote on matters, businesses and resolutions as detailed in the AGM notice, ask questions and clarify issues with the board of directors and senior management, and depending on the company/REIT, to enjoy refreshments provided or get some cash/shopping mall vouchers (or probably nothing at all).

 

I had attended a few AGMs before COVID, and it was really an eye-opener. After verifying your identity at the entrance of the venue (usually a ballroom in a hotel or a function room in a convention centre), you would be issued a voting device that looked like an old Nokia feature phone, with number buttons and a monochrome screen. This was used to vote on the resolutions. After the resolutions were passed, the session would open to the shareholders/unitholders for question time.

 

The AGM was one of the few moments where you share a (ball/function) room with the elites of the business world. You could say that you had sat opposite with so-and-so to discuss on important matters (though so-and-so was likely seated on a stage in front and you were just one of possibly tens or hundreds of shareholders/unitholders present).

 

After everything was over, and if there were refreshments, this was where the fun begins. Depending on how the food was laid out, the shareholders’/unitholders’ (hereafter referred to as “crowd”) behaviour ranged from orderly to chaos. The most memorable incident that I had witnessed was a food item being cleared out by the crowd in less than 10 seconds after it was being replenished (the refreshments were teatime food items by the way).

 

AGMs are usually held during office hours, so working folks (like myself) would have to take leave to attend, which I do once in a while as a break from my work. Still, the crowd size is relatively big especially in AGMs of larger companies and REITs.

 

If your shares/units are not held in CDP/CPF-IA/SRS, i.e., through custodian, do enquire with the brokerage that held your shares/units and ask if they could arrange for your AGM attendance.

 

 

1 – Ang, Rosalind. Temporary option for companies to hold official meetings online will stop from July 2023. The Straits Times. 16 Dec 2022. https://www.straitstimes.com/singapore/companies-can-no-longer-hold-official-meetings-online-from-july-2023-minlaw (accessed 2 Apr 2023)