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The UK is the world’s ultimate jumble sale, says abrdn manager

24 November 2022

With so much uncertainty in the UK’s future, Wes McCoy says he has shortened his investment timeframe to two years.

By Tom Aylott,

Reporter, Trustnet

Those investing in the UK need to take a short-term view of markets as the market is so fast moving at the moment, according to Wes McCoy, manager of the £352m abrdn UK Value Equity fund.

He said that timing plays a crucial part in making good investment decisions, but it is difficult to make a long-term forecasts in the current climate.

Many growth managers encourage an investment horizon of 10 years and above, but the average holding period in McCoy’s fund is two years.

He said: “Those statements are wonderful, but the problem is that it creates a certainty that the world can’t match.

“I’d like to say that there are investments that I can hold forever, but it’s so difficult to make that call in our environment. It’s more logical for me to look at what I need for the here and now.”

Indeed, market volatility paired with government instability has led to some sizable deratings across UK assets, which were already considered undervalued prior to 2022.

McCoy said: “The UK is the ultimate jumble sale – the world's gaze is on this whole mismanagement of things and we're the only major country that's being looked at like an emerging market.

“You can be sad about the demise of the UK’s reputation, but it’s a great opportunity to be framed as something bad but not be as bad as they say.”

Rather than being disheartened by declining markets, McCoy said that cheaper share prices work in his favour.

There is now a much larger pool of undervalued opportunities to choose from, but rather than viewing it as an exciting time to buy assets at discounted prices, many investors are fearful to act.

“It’s a jumble sale and a lot of it is junk,” McCoy said. “It’s a mess but you just have to work through it. The good thing now is that it’s a big jumble sale without many buyers.

“The inalienable truth is that people buy things that go up, so they won’t invest now because they’ve just lost money. I feel sorry for those people because that’s the opposite of how it works.”

The abrdn UK Value Equity fund manager has used this to his advantage. After producing a top-quartile return among his IA UK All Companies sector peers in 2021, he is in the second quartile in 2022, giving the fund very strong three-year numbers, as the below chart shows.

Total return of fund vs sector and benchmark over 3yrs

Source: FE Analytics

McCoy said that many of the UK businesses that have been derated this year display decent resilience to turbulent market environments despite their declining price.

Big growth companies in the US that breezed through the past decade are adapting to massive market changes, but UK companies have adjusted to more challenging conditions since the Brexit referendum impacted markets in 2016.

McCoy said: “Those companies will adjust but it'll take them time, whereas those UK companies that have been under pressure for years are now more efficient and better set up for difficult times.”

However, investors still need to be careful about not leaning too heavily into value – some value funds can focus too much on nabbing a bargain and risk buying poor-quality companies.

Equally, McCoy said that some growth funds sell compelling long-term stories but hold overpriced stocks, and in either case, investors “start to enter the world of fantasies”.

“You have to watch out for the extremes because you risk the danger of losing that canny behaviour and stop being careful about what you pay,” he added.

“Some investors can get too focused on stories and not enough on valuation, and what you pay for something is important. On the flip side of that, everything that's cheap is a place to look, but it isn't the answer – you have to sift through those companies and ask yourself why they’re cheap.”

The UK may hold some enticing value opportunities for investors willing to do the research, but timing plays an equally crucial part.

Investors need to consider how long they want to hold an asset and what return they want to achieve from it over that period, but the UK market is a tricky one to predict.

UK equities faced challenges after the Brexit vote in 2016, then Covid in 2022, and now a flurry of economic troubles in 2022 – McCoy said that he can’t make a call on when this negative period will end, so investing over the short term is a good strategy at the moment.

“There is a long list of reasons to be fearful, but that's a good thing if you’re value orientated because fear is opportunity,” he said.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.