Investors should cash in their profits and switch out of equities, according to IFA Brian Dennehy, who believes this year is panning out to be a carbon copy of 2010 and 2011.

The managing director of Dennehy Weller believes the St Leger’s day method of investing, which involves selling out of risk exposure on 1 May and buying it back on the second Saturday of September, could work even more effectively in 2012 than it did over the last two years.

"There are lots of macro economic and technical market reasons why you should [sell]," said Dennehy." The 'St Leger' method worked superbly over the last two years and we expect the same again."

Heading into May 2012, Dennehy says there is an element of déjà-vu about market conditions.

"As in 2010 and 2011, markets have peaked in recent weeks," he explained. "The effects of the LTRO and Operation Twist are fading fast, just as the effects of quantitative easing were fading in 2012, and likewise with QE2 in 2011."

"And, once again, concerns over European sovereign debt are taking centre stage. Spain is grabbing the headlines, while in 2011 it was Greece."

There are a number of technical factors that support the St Leger method of investing. Trading volumes tend to be much lower in the summer months as this time of year ties in with the holiday season.

Cash infusions are also more plentiful in the first quarter of the year, stemming from tax refunds and bonuses. As a result, markets fall much harder in the summer if there are setbacks, since stocks tend to be on higher price-to-earnings ratios following a strong run in the first quarter.

Dennehy believes this last factor is particularly apt this year, as it was in both 2010 and 2011.

"There’s no denying those who had adhered to this investment mantra would have been rewarded in 2010 and 2011," he explained.

"If an investor had sold out of the FTSE 100 on 1 May 2010, re-bought on 12 September 2010, and then repeated the process in 2011, they would have been up 18.5 per cent by 16 April 2012. That compares to just 2.03 per cent for someone who 'bought and held' from 1 May 2010 to 16 April 2012."

Investors with exposure to smaller companies funds would have fared particularly well if they had sold in May of the past two years. According to Dennehy’s research, the average North American Smaller Companies fund would have returned 34 per cent more over the period if the St Leger theory had been used, while the margin of outperformance is 29.73 per cent and 10.55 per cent for IMA European Smaller Companies and UK Smaller Companies respectively.

Impact of the St Leger theory on IMA sectors, 2010 to 2012

Name	St Leger method (%)	Buy & Hold (%)	Difference (%)
North American Smaller Companies	43.59	9.59	34
European Smaller Companies	37.15	7.42	29.73
UK Smaller Companies	35.86	25.31	10.55
UK All Companies	23.6	9.68	13.92
FTSE 100 index	18.5	2.03	16.47
UK Index-Linked Gilts	13.68	26.27	-12.59
Sterling Corporate Bond	5.72	9.78	-4.06

Source: Dennehy Weller

Of the 25 investment sectors in the IMA unit trust and OEIC universe, all but three – IMA UK Gilt, UK Index-Linked Gilts and Sterling Corporate Bond – provided a better return under the St Leger method, compared with a buy-and-hold strategy.

While Dennehy believes there are a number of macro indicators that suggest lightning may be about to strike for a third time, he believes some funds are far better suited to a buy-and-hold strategy than others.

He points to the likes of Liontrust Special Situations and Newton Asian Income as two that are particularly well equipped to cope with mid-year volatility.

Performance of funds vs sector over 2-yrs



Source: FE Analytics

Both are among the least volatile portfolios of their kind, and top their respective sectors over a two-year period.