09 August 2019
By John Husselbee, Co-Fund Manager HC Verbatim Portfolio Growth Funds
Never one to miss a chance to bring a sporting element to our columns, we have used the recent World Cup hosted by England and Wales – and won in nail-biting fashion by England – to have a look at the similarities between investment and the world of cricket.
With six balls in an over, we have six similarities to share and the first lies in the heavy use of jargon across both – and on the investment side at least, one of our roles as a multi-asset manager is to translate this for clients.
When it comes to bonds for example, which could rival cricket for extensive jargon, we select this asset class for four simple reasons: to provide income, capital preservation, inflation protection in some cases and diversification to equities. The latter is the key factor behind multi-asset investing and why we are against zero weighting asset classes: we have broadly been bearish on bonds for several years but understand that when equities fall, as in the fourth quarter of 2018 for example, a position in fixed income can help offset that.
The second ball looks at different forms of cricket and the types of batsmen that tend to thrive in them to find a common thread in the relationship between risk and reward.
Test cricket is the longest form of the game played over five days, allowing the batting team time to build a large innings without excess risk. Next is one-day cricket with 50 overs, the format of the Cricket World Cup, which demands batters take more risk in order to build a score in a limited time. Finally we have T20, the shortest format, with each side bowling 20 overs requiring the batters to aggressively attack each ball.
When it comes to finance, the ‘batters’ are investors who differ in their appetite for risk and the level of aggression required to achieve their financial goals.
Our third ball focuses on diversification and here, the comparison goes across both style and geography. On the cricket side, most teams will select different types of bowlers across pace, swing and spin, and, as we always point out in investment, winners tend to rotate from year to year.
Looking at investment style, data shows how different fund approaches have led the performance charts over the last decade and a particular style can go from top to bottom in the space of 12 months: value was the best-performing style in Europe in 2013 and 2016 for example and the worst in 2014 and 2017 as conditions changed.
Furthermore, any cricket fan will also be aware how teams have to prepare for different grounds around the world. In general, Australia and the West Indies have dry, hard pitches that favour fast bowling, England has green pitches that favour swing and India and Pakistan have rough pitches that favour spin. This would suggest a tilt towards one particular pace of bowling to match conditions, just as we tilt towards cheaper assets when investing to suit the market and economic environment.
Our next ball, and the fourth in this over, looks at the most common ways of getting out, with data pulled from more than 100 years of test cricket showing 41% of all dismissals came from being caught in the field. Moving to investment, we are looking at what might ‘catch’ us out in 2019 and continue to focus on what we call the three Rs – rates, recession, and resolution.
Rates is as the Federal Reserve and other central banks either accelerate or decelerate monetary tightening, Recession, whether or not we fall into prolonged slowdown, and Resolution, whether or not the lingering issues of trade and Brexit can be resolved successfully. The latter is particularly hard to call, particularly as President Trump continues to bowl the world googlies.
The fifth delivery focuses on team selection, which is just as important when selecting a diversified portfolio of funds as it is when putting together a squad for a world cup or test series. Just as the England selectors build a squad of batters, bowlers, wicket keepers and all-rounders – with huge variety across all four – we construct a portfolio largely comprising equities, bonds and alternatives to meet a range of risk targets.
The last ball in our over is about keeping score and the abundance of statistics in cricket, which reads across the performance and risk monitoring side of our investment process. Continuing to ensure our managers are doing what they promised – again, looking for that consistency of process – is vital to maintain our overall winning by not losing strategy.
Now if we call a no-ball, this will allow us to highlight one more similarity and the opportunity to discuss the importance of partnerships in cricket as well as in investment. Beyond the relationships we look to form with our advisers, it is also important – echoing the diversification point again – to find the right partnerships in terms of fund selection.
Take the batting pair of Alastair Cook and Andrew Strauss for example: England’s most successful partnership with more than 5,000 runs between them over seven years. We combine fund managers such as Nick Train, who runs Lindsell Train UK Equity, and Fidelity Special Situations manager Alex Wright to form our UK position.
Train is a classic quality growth manager who rarely adds new stocks to his portfolio – Manchester United was a recent purchase – while Wright is from the Fidelity contrarian value school, following in the footsteps of long-term Special Situations manager Anthony Bolton.
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.