Sell in May: Five funds to consider dumping

May is on the horizon and seasoned investors might recall the old adage "Sell in May and go away, don't come back till St. Leger Day", which advocates selling out of the stockmarket for the slower summer months and returning to the market in the autumn.

Some argue the saying has its origins from the days when stockbrokers left the City for a period of sporting and social events including Royal Ascot, Wimbledon, the Henley Royal Regatta, Cowes Week and ending with the St Leger flat race in mid-September.

Others say this pattern emerged even earlier, when many investors were farmers. Given that most stockmarkets were historically in the northern hemisphere, they needed to cash up equities to fund seeding, and then when harvests provided profits before winter time, they would reinvest their profits.

Over time it has come to be associated with a belief that the summer months are a dangerous period for investors, with a high incidence of market sell-offs. But should investors pay heed to this old maxim?

Over three decades, markets have risen 65% of the time during the summer and any low 'average' return during the summer months will be distorted by a handful of major crashes, a few which have occurred in the month of September rather than the early or mid-summer months, Jason Hollands, managing director at Tilney points out.

Gary Millward, financial consultant at Alan Steel Asset Management, says: "Despite constant "expert" opinions that the bull market which began in March 2009 (or the cyclical bull beginning in late 2013) should never have happened and will end in a crash at any minute, stocks have continued to deliver positive returns."

"But those experts we follow and who have called it right all along, are predicting a correction some time over the next few months. Whether that will be severe is probably unlikely, but if longer term investors have enjoyed heavy gains and would want to utilise capital gains tax exemptions or de-risk Isa and pension portfolios, then if there are no "charges" to pay, it may be sensible to consider trimming profits rather than on the whole dump funds."

Funds he is likely to trim would include tracker funds that blindly follow the up and down fortunes of the UK stockmarket. Millward adds it also makes sense to rebalance and take some profits in other big winners over the last 3-5 years, such as technology funds, US mid-caps and specialist Latin America, Russia and commodity funds.

Adrian Lowcock, investment director at Architas, says that last year is a reminder the sell in May adage is not guaranteed as markets rallied in the summer months following a short sharp sell-off after the Brexit vote.

He adds: "I would say that I wouldn't sell gilts if there is a correction due as there would be a flight to quality and US treasuries and UK gilts are likely to do well in that scenario."

But if you are committed to selling funds or trimming profits in May, these might be the funds you want to consider:

1. Ishares Core Gilt ETF

Patrick Thomas, investment manager at Canaccord Genuity Wealth Management, recommends selling this exchange traded fund. He says: "Government bonds continue to confound us. Growth remains healthy. Inflation is by no means low. US interest rates will go up further. Yet government bond yields continue to stay precipitously low. We would see gilts as a particularly overvalued area of the global sovereign bond market and would take profits on this ETF, as we feel fundamentals will come to the fore. Higher US interest rates may well be the catalyst for government bonds to fall. The question isn't whether, but when."

2. JP Morgan US Smaller Companies

Donald Trump's surprise election in November was greeted with a sustained rally in the US equity market, due to expectations that tax cuts, deregulation and investment in infrastructure will stimulate the economy. "We believe many of these positives are now factored into small-cap valuations, with the Russell 2000 trading at elevated multiples compared to averages over the past 10 years. And it will now be hard for active managers to find compelling investment opportunities among a diverse small-cap universe with forecast earnings growth of around 14% in 2017, compared to around 11% for the S&P 500. Under the current management team, who we rate very highly, the fund has delivered excellent returns and we would be taking profits here," says Thomas.

3. Artemis Global Emerging Markets

Emerging markets have rallied from their lows but remain vulnerable to any slowdown in the global economy, particularly those with exposure to commodity prices. "The fund also has a significant exposure to China which could be vulnerable in the event of any correction," says Lowcock.

4. Henderson European Selected Opportunities

Switching his attention to Europe Lowcock points out markets have priced in a victory for Emmanuel Macron in the French election. "However, any disappointment in the election and we could see a sharp correction," adds Lowcock.

Logic suggests all different types of European funds would be negatively impacted, but Lowcock thinks Henderson European Selected Opportunities looks 'particularly vulnerable'. He adds: 'John Bennett's fund has over 22% in European financials and would therefore be particularly vulnerable to a change in sentiment towards the region,' says Lowcock.

5. Fundsmith Equity

Millward says: "Fundsmith has been a favourite of ours for over five years. Terry Smith (the fund manager) has had a great run, and now attracting large late-coming inflows. It may be worth taking some profits now and switching to a multi-asset fund like David Jane's Miton funds as a safe place just in case."

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.