Sell in May? Funds and investment trusts to consider offloading

May begins tomorrow and seasoned investors might recall the old adage ‘Sell in May and go away, don’t come back till St. Leger Day’. It advocates selling out of the stock market for the 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 and Wimbledon. Others say the saying emerged much earlier when farmers would reinvest their profits when the harvest came in at the end of summer. Over time it has brought about the belief that market sell-offs occur in the summer months. But should investors pay heed to this old maxim?

Over the last 32 years markets have risen 66 per cent of the time from the start of May to mid-September, according to research by Tilney Bestinvest. This compares with markets generating returns of 78 per cent across the full calendar year.

‘While market returns in the summer months can be unpredictable, systematically exiting the market during this period does not convincingly stack up as a strategy in the modern age,’ Jason Hollands, managing director at Tilney Bestinvest points out.  He adds: ‘Pursuing such an approach could also clock up transaction costs and capital gains tax liabilities, which are not factored into our research.’ 

He argues a key reason to remain invested throughout the year is that the summer months are typically when companies pay their final dividends. ‘Investors contemplating exiting the market for the summer should take particular care to be aware of the “record date” at which they must still hold their shares in order to be entitled to receive any final dividends for the year.’

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

1. AXA Framlington UK Select Opportunities 

It has recently been announced that long-serving lead manager Nigel Thomas is stepping down from this fund. ‘Thomas has built up a significant investor following over his 40 years in the industry, and while I believe the fund will be in safe hands with Chris St John as lead manager from 31st December 2018 much of the strong track record of the fund is attributable to Nigel Thomas,’ says Rob Morgan, investment analyst at Charles Stanley.

Morgan adds that it won’t be an easy job managing such a large fund with investor outflows, which are inevitable following a manager change. While he advises against a knee jerk reaction, Morgan thinks it’s worth looking around for alternatives.

2. Lindsell Train Investment Trust 

Jonathan Moyes, head of research at Whitechurch Securities, begins by saying that the decision to sell this investment trust will no doubt prove controversial given Nick Train’s extraordinary long-term track record. ‘However, whilst global equity markets have encountered greater volatility in 2018, the trust’s share price performance has continued to surge, outstripping the performance of the trusts underlying assets by over 20 per cent in the first four months of the year.’ The premium is sky-high, currently standing at 37 per cent, which Moyes described as ‘excessive’. 

Furthermore, he points out that 42 per cent of the trust is invested in Lindell Train Ltd. ‘Were Lindsell Train’s high-quality investment style to fall out of favour with investors, this would add a great deal of uncertainty to the value of the trust and the sizable premium placed on the shares.’ 

Therefore, he believes taking some profits would be the prudent thing to do.

3. F&C Private Equity Investment Trust

‘Private equity investments are certainly flavour of the month at present,’ says Moyes. He has singled out this trust for selling in May, because ‘emotions run high in the highly volatile world of private equity investing, with share price performance flipping between euphoria and despair’.

Moyes argues that while the management team have done well to lower financing costs, and de-risking the proposition following the fallout from the global financial crisis, ‘share price performance has surged ahead of underlying asset value, with the shares now trading on a premium, euphoria appears to be setting in’.  

4. LondonMetric Property

Commenting on this trust, Moyes says: ‘Were I a holder of LondonMetric Property I would have been extremely pleased with the performance of the trust over the longer term.’ However, this has not escaped the notice of investors, and it now trades at a 20 per cent premium. Further, he argues the trust is by far the most liquid of the UK commercial property trusts. 

‘Whilst strong performance certainly helps, I believe the liquidity of the shares is influencing the trust’s sizable premium.’ But he cautions that in a more challenging environment, this liquidity can work both ways. ‘I would be tempted to seek greater value in some of the smaller commercial property trusts, where more enticing yields and attractive discounts can be found.’   

5. Monks

Patrick Thomas, investment manager at Canaccord Genuity Wealth Management, concedes that Monks, run by Charles Plowden at Baillie Gifford, has been a star performer in the global equity space. ‘However, if you are looking to raise some cash it does look expensive on a 4 per cent premium as well as an expensive aggregate underlying valuation of 21x forward price to earnings ratio compared to the MSCI World Index which trades on 15x forward earnings.’ 

Thomas adds that investors could instead access the trust’s Baillie Gifford stablemate, Scottish Mortgage, which is trading closer to net asset value.  

6. Fundsmith Emerging Market Equity 

Terry Smith’s foray into emerging market investing has not got off to a good start, with the trust returning 11.3 per cent on a three year view, lagging rivals, with the average global emerging market investment trust showing a return of 24.6 per cent, according to FE Trustnet, the analyst.

While loyal followers of Smith will keep the faith, Thomas has lost patience and has labelled the trust a sell. 

He says: ‘FEET is a good example of why one should not necessarily buy a brand name manager as they will not necessarily be able to execute in an unfamiliar market.’ It is trading at a small premium ‘with a substantially worse performance profile that its emerging market peers,’ he adds. 

While Thomas likes the approach of buying good companies that are capable of weathering more challenging economic environments, he argues that Austin Forey, manager of the JP Morgan Emerging Markets investment trust is ‘doing something similar with a far more impressive track record, and the trust is trading at a reasonable discount’. 

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