You’d be forgiven for thinking football has had its fair share of coverage lately. Somewhere between Leicester City’s incredible triumph and the build up to the Euro’s, it’s been hard to escape the beautiful game. And, so staying true to trend, we thought we would compare the potential similarities between managing a portfolio and the beautiful game. At first thought there aren’t many that immediately spring to mind, aside from perhaps the relegation/promotion of stocks between indexes and the fact the Sunday paper has a pullout on both. However, when you delve deeper there might be more similarities than you’d expect.
Pre Season (portfolio construction)
At the beginning, clear objectives will be likely laid out. You might be aiming for a Champions League spot (top quartile performance), outperform your near rivals (bettering peers from a similar size, dynamic, location) or simply your job is to beat the benchmark which is hopefully not someone like Sir Alex Ferguson (the benchmark might be the FTSE, good luck to whoever follows Warren Buffet). Other run of the mill questions will have to be considered like timescale (3-5 years or longer?), income or growth and any other tailored needs, such as insisting on buying players from France (or an ethical element to the stock selection). Don’t worry despite being from Newcastle we don’t insist on cheap, unproven foreign stocks.
Team Management (portfolio management) Styles
Active: Are you with your team as much as possible? In other words will your investments be managed on a day to day basis, actively monitored and adjusted when suitable. Ferguson was an active manager, on the touchline for 90 minutes, managing his players both on and off the field.
Passive: Some managers might not want to intervene with their players as much (maybe revisit stocks every quarter or so). This can sometimes go one of two ways, if you’re a Paolo Di Canio, banning tomato sauce and other minor discrepancies your players will just hate you (too much tinkering around and too much attention on your current holdings may lead to missed opportunities outside your personal ‘universe’). Although let your players drift too far and before you know it, they were in the local flares until 3am the day before a match and they’ve done their cruciate tripping over the step in the kebab shop. (It is important to not let stocks drift or stay out the loop, otherwise your worst performer or fund is down 20% and you have no idea why or what will reverse this). In the same way it’s important to see your players often enough, seeing your investment manager or equally your fund managers regularly can prevent them ‘slipping in with the wrong crowd’, or changing their initial thesis to one that creates too much style bias.
There are other contrasting styles of investing, including momentum and value. In the football world this would be the difference between a manager buying players that are seemingly cheap or ‘undervalued’, maybe making the most out of a player’s broken relationship with the manager and buying Afonso Alves or Fernando Torres after scintillating seasons… they don’t come cheap but hopefully they don’t do an Alves or actually a Torres. Close to the mistake of buying a player on momentum, let us all never forget Andy Carroll’s Liverpool transfer (an example of not being able to make the price work on a stock; Burberry) are value traps. These occur when a player gets released from his contract, or may have had a long injury lay off. Managers swoop like vultures for these players, only to be stung. An example of a great value buy would be Xabi Alonso, free to Bayern Munich… I rest my case. The example of a bad value trap? Falcoa to Manchester United, or when Graeme Souness thought he’d signed the next big thing, Ali Dia… on a free… from a bloke claiming to be George Weah’s cousin? What could go wrong?
Squad Selection (Stock Picks)
Again, depending on the risk level, most portfolios will share some of the same elements. Just like football teams, some will employ more attacking formations than others, but set principles remain intact. A risk seeking portfolio might be the equivalent of 3 up front, but then you’re vulnerable to the counter (i.e too much bias towards the risky end of a portfolio increases the potential drawdown in performance or you can ‘miss the boat’ by being too concentrated in any one area). At times, even the best of teams can set up to be defensive. Reverting back to styles, portfolio composition can change varying on market cycles, or if you’re defending a first leg lead and can possibly go out with one more away goal. The philosophy is simple, wait until the time is right. This is the exact reason you don’t send your keeper up for the first corner of the game, no matter how good he is at playing striker in training.
Goalkeeper: In every team, you need that last line of defence, the portfolio equivalent of a Manuel Neuer, so we will give this to cash. We’ll leave the debate of who out the two is safer for another time.
Defence: Most portfolios need another solid, no-nonsense performer. The equivalent of a player who has been at the club since his Dad tied his boots for him and they’ll always be something you can rely on. GILTS are a standard choice, every now and then they might get a goal from a corner but week in week out you know what you’ll get, if the exciting players in front of them are misfiring they hopefully provide much needed protection.
Midfield: This can all depend on how the portfolio is positioned, have you got two defensive midfielders shielding the back four, like a Matic player (or Kante if you have no risk appetite) or are you enjoying a bit more risk and playing with more support towards the attack? We’ll put corporate bonds and property in the centre of the park.
Forwards: You want to try and avoid a forward who’ll skew their performance stats from one game and then disappear for half a season (Wijnaldum), but you do need some flare in here. Ideally you’re looking for a player that can rescue your team’s performance or provide that little boost when times are equally good. Attacking must go to equities or and alternatives you may find, possible some ‘emerging’ talent from further afield also.
Leicester City have taught both the football world and investing community a lesson this season. Buy genuine ability and potential, go further to find ideas and research them properly, apply the right tactics and have everything working together properly for a reason. They proved that you don’t need to be a giant from Chelsea, Arsenal or Manchester to be top of the pile, you just need to do the job properly.
Investing…..”It’s a funny old game”