13 July 2018
By John Husselbee, Co-Fund Manager HC Verbatim Portfolio Growth Funds
France’s 4-2 win over Croatia in Sunday’s World Cup Final has left us to reflect on another tournament of what ifs for England. If anyone doubts the reach of the events of the past month, 26.5 million of us in the UK saw England’s semi-final heartbreak against Croatia.
While a few less people might switch on the TV to watch fund managers run their portfolios, we have always believed the beautiful game has much in common with investing and can provide some useful insights. Football, like running money, is competitive, team-orientated, driven by results and league tables and difficult to predict – and ultimately, far more enjoyable when you are winning.
In a 2015 BBC documentary, Sir Alex Ferguson discussed the various responsibilities of a successful football manager and many of these read across to fund management: from the relationships with executives, analysing and picking the players/funds, to keeping fans/investors happy.
We have been lucky enough to hear the thoughts of Sir Geoff Hurst and Gordon Strachan at recent Liontrust events and both said the best teams are balanced, flexible and patient – and made up of the right combination of players in the right positions rather than a wishlist of stars.
All of these are key attributes of our winning by not losing approach to investing: building long-term portfolios based on clients’ attitudes to risk and staying patient, avoiding the clear own goals of buying or selling at the wrong time and overreacting to market noise.
Since the World Cup began in 1930, there have been eight different winners across 20 tournaments. Only two teams have ever retained the trophy, with Italy winning the second and third tournaments in 1934 and 1938 and Brazil victorious in 1958 and 1962.
This shows that winners tend to rotate and constant success is impossible. In the investment world, this highlights the importance of diversified, properly balanced portfolios. The same asset classes rarely top the performance charts year after year. Therefore, a well-balanced and diversified portfolio aims to produce smoother returns than that delivered by individual asset classes.
Similar logic can be applied to manager selection, with very few able to outperform every year. We believe consistency of performance is ultimately impossible but, in our selection process, consistency of process is key.
While we demand this long-term consistency from our managers, we also understand agility and flexibility are important to capture opportunities when they arise, and this is true as much for our own portfolios as well as the managers we choose.
Changing short-term tactics, without compromising a long-term strategy, can be key to outperformance and football shows the impact such tweaks can have. Bournemouth were the Premier League’s most successful comeback kings in the 2017/18 season, although they were also behind more than many other teams. Bournemouth managed to take a total of 21 points from losing positions in 27 games, winning five matches and drawing six.
Patience is a cornerstone of our investment process and we often talk about preferring to be the tortoise rather than the hare when it comes to generating returns. We are keen for our clients to get rich slowly and a vital part of this is shutting out market noise as much as possible and avoiding overreacting to short-term events.
While England managed to dispel the 32-year penalty hoodoo with the victory over Colombia, data relating to penalty kicks reveals interesting trends in behaviour. Figures show the best strategy to save a penalty is to stand still, with goalkeepers twice as likely to make a save if they remain in the middle rather than diving to one side or the other. Only 2% actually stand their ground, however, and this is due to action bias, where the value of being seen to do something is higher than that of doing nothing. If the keeper dives and the opponent scores, they tend to avoid blame; if they stand still and the opponent scores, they can expect abuse from the crowd.
In investment, this is the equivalent of managers feeling they need to keep trading or reacting to events to justify fees. We are keen not to be busy fools and only want to shift our portfolio when we are sure as we can be that it will generate returns for clients.
German goalkeeper Julian Pollersbeck was in the headlines last year, rummaging in his socks for notes on English penalty takers in the middle of a shootout. While James Ward-Prowse ended up sending a brilliant effort into the top corner, the lesson stands. Only make a move if you have done your research and feel you have a chance of adding value: there is little point doing things for the sake of it.
A final lesson from football relates to the topical question of fees and value for money. For the most part, the price of success in the game is clear if you compare league positions with spending. Manchester City and Manchester United had the highest average salaries in the 2017-18 season and came first and second in the Premier League respectively.
As a general rule, any team finishing higher and lower in the league than their spending can be said to have out- or underperformed expectations. In 2017/18, for example, Tottenham were able to finish third in the league with the sixth highest wage bill; in contrast, West Ham could only claw their way to 13th despite the seventh highest average annual salary.
In fund management, the price of long-term outperformance lies in truly active funds. We continue to see a role for passives to capture short-term market moves but if you want to generate wealth over longer periods, evidence shows exposure to some active managers is required.
The key here is to find those managers who are able to deliver value for higher fees and fund selection is where we can bring our experience to bear. To summarise what we look for in a manager – and to finish off with a second mention for my favourite team – we use the SPURS system:
Stamina – We favour patient, long-term investors from a similar mould to us and prize managers who can point to endurance and experience.
Process – A robust and repeatable investment process is a must for our chosen managers: while consistency of performance is impossible 100% of the time, consistency of process is a must.
Understanding – Among the softer attributes we look for are knowledge, insight and wisdom.
Resoluteness – Along with courage and conviction, determination and decisiveness.
Stimulus – Another factor to consider is a manager’s environment: what are the incentives and motivations for them to perform and what is driving them.
After a month of non-stop football and ultimate heartbreak for England fans, people might want a break for a while. But Champions League games are already being played and domestic league football kicks off again in early August, so all these lessons, and the highs and lows of watching the beautiful game, will be back before we know it.
Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. 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.