Investors who wait for more certainty before they invest in the UK are likely to miss out on the majority of gains from the recovery, according to Columbia Threadneedle’s Richard Colwell, who says the best opportunities do not arise from market timing, but in “leaning in and going against the crowd”.
Already out-of-favour among investors at the start of the year, the UK underperformed every major market barring Brazil and Russia from January until the end of September.
Performance of stock markets in USD
Source: Columbia Threadneedle
Yet Colwell, who runs the £3.2bn Threadneedle UK Equity Income fund, pointed out that while everyone in the UK is “emotional, fed up and frustrated with the ‘doom loop’”, it is worth remembering that stock markets are “not a popularity contest”.
“It’s not about who’s got the best government or the most conviction in their Covid policies or the emotional ups and downs over Brexit negotiations,” he said.
“These shouldn’t detract from what is staring us in the face, which is great valuations across the spectrum in the UK market. International companies that are listed in the UK, minding their own business, getting on with stuff, pound for pound are on double discounts versus if they were quoted in Europe or certainly in the US.”
Of course, when any manager points out just how cheap the UK is compared with the rest of the world and the buying opportunity this represents, many investors are likely to be left scratching their head, saying: “Didn’t they tell us that last year?”
Colwell admitted that attempting to promote the merits of investing in the UK has left him feeling like King Canute at times over the past few years. However, he said the point is that while trends often go on for longer than predicted, this does not invalidate the message, but instead amplifies the impact when the switch in momentum finally takes place.
“It is times of great uncertainty, like coming out of the financial crisis, that give the best opportunity,” the manager continued.
“It’s not about market timing, it’s about leaning in and going against the crowd. It’s a contrarian call to be looking for ideas in the UK and it isn’t all about a narrow part of that market, the Covid and Brexit victims. That gives you good optionality but you’re not going to put all your chips on black.
“You’ve got to be brave and have some exposure to those stocks, but it’s also in some of the international quality-growth stocks actually trading at a discount to their peers overseas because of that weight of money that has come out of the UK.
“So those valuation charts, which I’m sure you saw a year ago: let’s get the pencil out and draw the line a bit lower. Can it go any lower? Well, I suppose it can go over the page.
“We are as cheap as we’ve been relative to the market on a combination of classic ratios since I started my career in the late 1980s and I think on many measures we are as cheap as we’ve been since the 1970s.”
Another obvious riposte is that the reason the UK is out of favour is that it is full of mature stocks in industries whose best days are long behind them, such as oil & gas and banks.
Yet Colwell said that even if you strip out those parts of the market, the UK is still undervalued, having only recovered about half the losses from March’s crash prior to the recent positive vaccine news.
The manager likened the aversion to the UK to the oversimplification of the growth versus value debate, which he described as symbolic of the divisions seen in society and politics.
“You know, ‘are you a Roundhead or are you a Cavalier?’, and never the two should meet,” he continued. “It is all extremes, there are no shades of grey and I think that’s too dogmatic, too rigid.
“I am a contrarian investor with more of a value orientation. I don’t think that’s particularly controversial. Why would anybody be anything other than a value investor? Why would you overpay for growth?
“But you shouldn’t be mechanical about just assuming mean reversion and buying everything that is optically cheap. You’ve got to kick the tyres, you’ve got to do scenario analysis and try to make sense of the structural headwinds and figure out, is that priced in or not?
“When the sky is grey or raining and the market is distrustful of a stock and maybe double discounting, putting a low valuation on distressed profits and cash flow. That’s the opportunity.”
And Colwell said that if fund managers don’t act soon, the long-term value opportunity could soon be lost for good.
He explained: “We are big owners of RSA and it has had approaches. We are also starting to see bits in stocks I don’t own. It’s interesting, William Hill and G4S, why are these stocks getting approached now when there’s that uncertainty?
“Well, the obvious reason is because there’s a lot of cash out there burning a hole in people’s pockets and these prize assets are available because we, the investment community, continue to be too timid, too bearish on the intrinsic value of UK stocks.
“As a consequence, if we continue to follow the herd in that respect, then we’re just presenting a great prize for private equity buyers or overseas corporates to come in and exploit this valuation arbitrage.”
Data from FE Analytics shows Threadneedle UK Equity Income has made 139.95 per cent since Colwell became manager in September 2010, compared with 91.12 per cent from the IA UK Equity Income sector and 86.59 per cent from the FTSE All Share.
Performance of fund vs sector and index under manager
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.82 per cent and is yielding 3.98 per cent.