Why a fund manager calls it quits on a stock

Any fund manager will always be keen to chat about what they’re optimistic about, whether that’s the next AI leader they think everyone else has missed or why they’re backing the market leaders.

Which is great, you want to know why they think that investment is going to deliver sizeable returns. Yet equally as important as knowing why you want to buy a company is knowing when and why to sell.

‘Sell discipline’ is something managers are rarely asked about but it’s one of the most important questions they can answer. It’s the rules a fund manager lives by when it comes to selling out of a holding. This is outside of when they are ‘forced’ to sell when a company is taken private, or they sell some of their holdings and recycle the profits into new or existing positions.

Many fund managers will be reluctant to sell if they’re convinced of the merits of an investment to avoid missing out on further gains. But there are times when a manager must reassess and hit the sell button.

It can be that the reason a manager sells out is the simplest one; “sometimes we get it wrong”, says Eric Burns, who steers the SDL UK Buffettology fund.

When the world changes or the business does

Every time Burns embarks on a new investment, he writes a ‘pre-mortem’, a one-page document specific to each company with a list of ‘sell triggers’ to keep an eye out for “and under what circumstances the original thesis would be compromised”.

This ‘pre-mortem’ “removes that element of emotion from the decision”, Burns says.

“Because we all have our ‘pet’ stocks and can get too attached”.

Burns’ process was put to the test when he sold out of FTSE drinks giant Diageo a few months ago.

It followed new CEO Dave Lewis’ plans to move away from its pure focus on high-end premiumisation towards a more balanced approach that includes mass-market affordability. A move employed in a bid to address its falling sales. This was a divergence from the original investment thesis Burns had backed the stock on.

Diageo owns global brands including Guinness, Jonnie Walker and Don Julio but has been struggling over the past few years, with a drop in its spirits sales in North America in particular proving to be a headache it can’t get rid of.

There’s been a broad shift in the Gen Z and younger millennials drinking less Burns said, and the widespread uptake of weightless medications hitting the sector which combined with this strategy pivot from Lewis, he decided to sell out.

This is an example of what managers call ‘bottom up’ investing, making a decision based on what’s going on at a company level versus letting the macroeconomic or ‘top down’ factors drive the investment case.

Lots of fund managers will describe themselves as bottom-up investors, but that doesn’t mean they ignore the wider backdrop. Sometimes, the balance sheet and overall strategy of a company might be great, but there are things going on in the world that make it incredibly unattractive, and the risk-reward scale tips too far towards the downside.

The war in Iran and the closure of the Strait of Hormuz is top of mind for all fund managers, and one of the big consequences has been a surge in energy prices and higher inflation.

A shutdown of the global oil supply was not expected by anyone coming into 2026, so anything energy intensive in a portfolio could act as a performance headwind.

Richard de Lisle, manager of the VT De Lisle America fund, had held swimming pool manufacturer Haywards since 2005 and sold it after it became clear that there may not be a timely end to the conflict.

“There’s no way that they're going to be selling many swimming pools going forward, what with the cost of energy to heat the pool and the way people are just so depressed with the cost of living with the US inflation rate going up top 3.8% ... So therefore, we sold the stock based on a change in the macro environment.”

Valuation: it becomes too expensive

Another sell trigger is when an asset becomes what the manager deems as ‘overvalued’.

One of the major market debates of the past few years has been whether the valuations of big US tech and AI companies are so high that they’re in a bubble, or whether their earnings growth from AI justifies the record high share prices.

Evenlode Global Equity managers Chris Elliott and Cristina Dyer root their sell discipline in being “valuation aware”, as Elliott explained, badging every stock with a pre-determined maximum position it will take in the fund.

When it starts to hit that ceiling, it will “flash red” Dyer said and the team will ‘trim’ their stake to keep it below the watermark, “nudging the portfolio” Elliott explained.

But sometimes the price just continues to go up beyond a point they’re comfortable to keep holding it, and a real time example of this was Microsoft, which the pair sold out of last year.

The US tech giant hit a record high share price last October at over $520, “quite high” Dryer said, and combined with “better opportunities in its competitors” they wound down their stake.

“It was nothing necessarily fundamental that has changed with the business,” Dryer adds.

Value fund managers base their entire investment thesis on exploiting the market’s inefficiencies at pricing companies, aiming to buy a stock for less than what the managers think it should be worth and making a profit when the share price moves up to where it ‘should’ be.

Defence stocks have been a ‘classic’ stalwart of value managers portfolios, such as Fidelity Special Values. Manager Jonathan Winton says they’ve owned “pretty much every defence company in the UK”. But the outbreak of the Ukraine and Iran war combined with a massive commitment from European governments to up their defence spending the sector had been rallying significantly.

For value investors, seeing companies they back for the long-term rally during what could be a short-term frenzy, this puts pressure on those core buy-and-sell rules.

Winton explained that as value investors there is always “some risk you sell out too early and leave something on the table” they navigate this by having a clear view going into an investment of what the earnings potential of the business is. If the external environment changes that then they can reassess, but ultimately, they’re likely to have a clear idea of what valuation multiple they are prepared to pay for a stock.

How to build your own sell discipline

Having a Bloomberg terminal screen of flashing colours and deep fundamental research to the level fund managers have isn’t something the average DIY investor can really aspire to. Certainly not alongside a full-time job, social life or any sleep.

But that doesn't mean investors cannot develop their own sell discipline.

Mike Sell, manager of the Alquity Indian Subcontinent fund, says “the rule of thumb is, if you think all the good news is in the price, then you should exit”.

“It's very easy to fall in love with a stock [or fund] and if you take a, step back and go, ‘I've made good money, hopefully in this company, it's done really well’, you should be dispassionate about it then you should, tough as it may be, say goodbye and look for your next investment,” he adds.