Over the past 5 years, the exceptional US equity market generated a very healthy total return of 68%. Through the same period, a value-titled UK equity index gained 117%. The most unloved style in one of the most out of favour equity markets trounced the performance of the most in-vogue, technology-dominated region. Very few people would have predicted this 5 years ago, and I don’t think many would believe it now – even after it has happened! Why has this occurred, and why have so few people noticed?
The economy is not the stock market: The UK is one of the best examples of the stock market not being a reflection of its domestic economy – this is certainly true of its large cap, high dividend paying companies in energy, health care and banking. The fortunes of the sluggish UK economy are often not that important to UK equity market returns. Despite this, investors cannot seem to stop associating economic views with stock market expectations. This becomes a particularly acute impediment when it is your home market, as it is incredibly hard to separate your lived experience and the constant attention paid to the economy, from what actually drives equity market returns,
Starting valuations matter: Whenever an asset class delivers exceptional performance over a meaningful time horizon, everyone scrabbles around for compelling stories to explain it. The right answer is often that starting valuations were exceptionally cheap and the asset was unloved (which was very much the case for UK value stocks in 2021). This is not an exciting narrative and it doesn’t make great copy – but that doesn’t stop it being true. The exact pattern also happens in reverse, poor returns from an asset or stock are frequently a consequence of them having a very expensive starting point, rather than the stories that are told to describe why something has turned sour.
It helps to be lucky: Any investment that works well needs a healthy dose of luck. Although an asset class might have delivered very strong returns, that is just one path it could have taken out of many. Over the past five years the (then) cheaper area of the UK market benefitted from tailwinds such as rising energy prices and higher interest rates. In a different world this might not have been the outcome. Although we cannot control luck, buying undervalued assets helps to get luck on our side – because we don’t need much of it for things to work out well.
Set the expectation hurdle low: Investors often discuss developments around an asset class in absolute terms – something is either good or bad news – but everything should be set relative to expectations. Back in 2021, value investing was dead and nobody liked the UK market (they still don’t); expectations were so low that surpassing them wasn’t a difficult task. Unbridled pessimism can create an attractive, positive asymmetry.
It takes time: One of the many reasons that people dislike buying undervalued assets is that they need to know when something will improve. “What’s the catalyst?” is one of the most common and pointless questions in investing. Predicting a performance catalyst is usually folly and when an asset is widely disliked, hardly anyone even tries – the prospects are just too gloomy. What investors really need (and often don’t have) is time. Time gives us both the ability to accrue a high carry (earnings yield in the case of equities) and to wait for the pay-off that might arise from the option that we hold on things being better than depressed expectations.
Take your lumps: A notable feature of the UK value’s outperformance is that a major chunk of it arrived in 2025 – for much of the five year spell it remained a painful laggard. One of the toughest parts of trying to make the most of these types of opportunities is that – even if we are right – the returns don’t come incrementally, month-after-month, they often arrive in a short, sharp burst at a seemingly random juncture (this is especially true for concentrated markets or exposures). Having the temperament and process that allows for this type of return pattern is a mighty ask.
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One of the interesting aspects of this performance dynamic is that it has gone largely unnoticed. Most investors can’t resist chasing returns, but we have hardly seen money flood back into UK equities. Why is this? Largely because the narratives around US exceptionalism and technology remain prominent, and the US market has continued to produce strong performance. Meanwhile, the UK still remains blighted by perceptions of a structurally weak stock market and moribund economy. It might take a few more years of strong performance to remedy that.
What we have seen in UK value equities is not a one-off scenario. It happens over and over again across asset classes. Investors consistently ignore valuations, obsess over short-term market and economic catalysts, and get swept away with whatever powerful theme is currently dominating markets. This behaviour creates poor odds for long-term success.
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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).
All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point. Not investment advice.
