17 Jun World Cup Wisdom
Last Thursday the 20th World Cup in history kicked off in its spiritual home of Brazil. Held every four years, the tournament brings together the greats of the beautiful game and grabs the attention of the entire world. On the back of this world cup fever, we thought it would be an appropriate time to discuss the lessons that football can teach us about selecting investments.
managers have often come with impressive track records from other leagues and have commanded high wages. However, very few have established themselves as greats
Shortly after collecting his 49th, and final, professional football trophy Sir Alex Ferguson announced his retirement from football management. During his 26 years at Manchester United he deservedly crafted a reputation as one of the most successful managers of all time. With thirteen Premier League titles, four FA Cups, two UEFA Champions Leagues and a win percentage over his 26 years of 60%, he has a record that may never be equalled. He is still the only manager in English football to have finished in the top three league places for over 20 consecutive seasons (22 to be precise).
One of the most impressive aspects of Ferguson’s glittering record is that the vast majority of his honours came with one club; Manchester United. There are plenty of impressive managers around the world, but it is increasingly rare that we see one stay with a club for such a long period of time. During his 26 years Ferguson built team after team to cope with different challengers to United’s throne. From the team that produced the likes of Beckham, Scholes and Giggs, to his last team that won the league title with Rooney and Van Persie, each ‘Fergie’ team has had his unmistakeable style, culture and strategy.
What we also saw during Ferguson’s reign over the Premier League was many other unsuccessful managers come and go. These managers have often come with impressive track records from other leagues and have commanded high wages. However, very few have established themselves as greats like Ferguson. This is very similar to the fund management world where we often see highly paid ‘experts’ fail in an arena where they have previously been successful.
Skill or Luck?
With both fund managers and football managers there could be some argument made that there is a lot of luck involved with good results. There are also many that would argue that a football managers ‘skill’ is largely based on the team that he is managing, in particular the size of its wage bill.
If you gathered one thousand people together and asked them to flip a coin, maybe one out of that thousand would flip heads twenty times in a row. In this example we all know that this can only be attributed to luck rather than coin flipping skills. However, if a mutual fund manager was to achieve the same thing with returns he would be labeled a genius.
only 5-10% of fund managers can be classed as have having above average stock picking skills
There are an estimated 76,000 mutual funds around the world and therefore the risk of picking a lucky coin flipper, rather than some one with actual skill, is quite high. As a result of this problem the concept of alpha was created. The idea of alpha is to asses the return of a fund based on the risk that it takes and how much it over performs its benchmark. This has been an important measure for investors to judge whether the risk a manager takes results in higher performance.
There have been a number of academic studies that have tried to introduce other factors to accompany the alpha such as the size of the fund and the number of years it has been running to truly asses the relative ‘skill’ and ‘luck’ of a fund manager. These studies have fairly consistently shown that only 5-10% of fund managers can be classed as have having above average stock picking skills. Of the rest some are more like our genius coin flipper and the vast majority actually under-perform the market when you take their fees into account.
In their 2013 study Adrian Bell et al. conducted a similar study for football managers. In their model they took into account factors such as the clubs wage bill, injuries, transfers and the availability of players throughout a season, to create a metric for how many points a manager would be expected to gain per game. They could then apply this to a managers career to see if they performed above, below or at the level of expectation.
Just like the 5-10% of elite fund managers the study showed there was a group of football managers that consistently performed above the expectations of their club. Interestingly, the majority of managers that performed at the top of this list were those with the longest history in the Premier League, such as Alex Ferguson, Arsene Wenger, Sam Allardyce, Martin O’Neill and Harry Rednapp.
Put simply what both of these studies show is that there is a group of managers that always perform above expectations. These managers are dominated by those with long track records and with football management the effect of these ‘top’ managers can be seen across multiple teams.
Applying This To Investments
It is our belief that the investment world also has its Alex Ferguson’s and there are various similarities between great football and investment managers. Below are some lessons we think football can teach investors.
As with great football teams, great funds tend to have a mercurial talent at the helm who stay there for a long time. Despite not collecting the vast amount of silverware that Alex Ferguson has, Arsene Wenger will no doubt be considered a great of the game.
Since joining Arsenal in 1996 he has won three league titles and five league cups. But on top of this impressive record what Arsene will be remembered for is the wonderfully attractive and unique style of football that he has consistently crafted at Arsenal.
When we look at fund managers we heavily favour those that have remained in the same position for a long time. Better than that, we try to focus on firms where the talent is also the owner and is therefore unlikely to ever leave. A fantastic example of this is Israel Englander and his Millennium Management hedge fund.
Millennium Management – Israel Englander
Israel Englander, ‘Izzy’ to his friends, is an American hedge fund manager and founder of Millennium Management LLC. He started his fund in 1989 with seed money of $35m, today it manages over $30bn. Englander and the team at Millennium boast one of the most impressive records in fund management history. Since it started trading they have produced returns of around 12% p.a. with positive returns in every single year of trading except for 2008 when they lost 3%.
There is no question that Englander himself is a skilled investor with a philosophy of “picking up nickels and dimes” rather than shooting for the moon. His investment philosophy has three main elements; a commitment to non-directional strategies, rigorous risk controls and the discipline to adhere to these principles. At heart Izzy is a talent scout and Millennium’s success ultimately lies in his ability to find traders who are capable of making money the Millennium way – small but consistent gains. Englander steers clear of forecasting believing the market “will go where the [it] wants to go” and wants to make money everyday.
The mantra of not losing money is an important rule at Millennium and traders that do not adhere to this do not tend to last long. They micro manage risk in a very hands-on way and scrutinise their teams in real-time. Importantly they are as concerned about trades that create big profits as they are about those that lose money.
Performance and Consistency
With football and investment it is obviously important to produce results, no one is going to employ a football manager that never wins. On top of this, the consistency of those results is also an extremely important factor. Jose Mourinho is widely considered to be the greatest manager in the world at the moment. At the age of 51 Mourinho has already won 20 trophies with various clubs around Europe. He boasts a 67% win ratio over his entire managerial career and between 2003 and 2012 didn’t go a single year without winning at least one trophy.
One of the most remarkable points about Jose’s career has been is ability to replicate success in multiple leagues around Europe. Starting with the Portuguese league, he has managed in England, Italy and Spain and has won league titles in all four countries. Very few managers in world football are able to compete with him on this level.
When looking at fund managers we could consider different market conditions similarly to managing in different professional football leagues. When markets are good then making money is relatively easy, it is when things turn sour that we can separate the cream from the rest of the milk.
The longer the track record of a fund the more data we have to analyse how it can cope with different market conditions. It is unfair to expect a fund, particularly one invested in equities, to make money all of the time. The key for us is how well can it preserve our clients assets and how quickly can it recover from drawdowns. One fund that has consistently done this is Orbis Investment Management.
Orbis Investment Management – Allan Gray
Orbis was founded in 1990 by South African born investor Allan Gray. They currently manage over $15bn and have a track record that is the envy of many in the industry. Orbis is designed to remain fully invested in global equities at all times. It aims to provide better returns than world stock markets without greater risk of loss. Since its inception Orbis has provided clients with average annual returns of 12.8% p.a. where the FTSE World as returned on average 7.1% p.a.
However, Orbis’ impressive returns have not come without negative periods. It’s strategy of always being invested in the market means there is no way for it not to lose when we see big market crashes like 2008. What has been impressive is Orbis’ commitment to its core philosophies and belief that its strategies perform. After the crash of 2008/9 it only took until early 2011 for Orbis investors to be back at their pre-crash level.
To us Orbis represents the perfect equity investment vehicle. Firstly, its 100% focus on equities means it is extremely transparent and liquid. Secondly, their long track record of out-performing the FTSE World is too consistent to be chalked up to luck. Finally, Orbis has no outside ownership and its shareholders are in the low double digits. Principally the fund is owned by its founder and his son, William Gray, who acts as the Chief Investment Officer. For his part Allan Gray has the public profile of a mole, purposely shying away from any industry spotlight. For him and his Bermuda based team the focus is all about adhering to their core principles of achieving the best returns for their clients.
Be weary of new trends
In 2011, at the age of 33, Andre Villas Boas became the youngest manager ever to win a European competition when he guided Porto to a UEFA Europa League title. Following a remarkable season AVB, as he had become known, tendered his resignation and flew to London to take charge of Chelsea.
The expectation was high for this young manager and despite his incredible success with Porto he never really found his feet in the UK. He lasted just nine months at Chelsea before he felt the brunt of the billionaire Russian owner Roman Abramovich.
From here AVB went to Tottenham Hotspur where despite an encouraging start he once again felt the axe of a football club chairman after just one and half years. He now spends his time toiling away in the relatively uncompetitive world of Russian football with Zenit Saint Petersburg. His story is an interesting fall from grace for a person who was once heralded as ‘the next Jose Mourinho’. What we find interesting about AVB is the lessons he can teach investors about being careful with new investment decisions.
AVB had a 84% win ratio at porto, one of the highest in Europe for that season. While at Chelsea and Tottenham this statistic fell to 47% and 55% respectively. That’s a drop of 43% in relative performance between Porto and his next appointment at Chelsea. Unfortunately, this is a trend we see all the time in the fund management world.
There are numerous examples of fund managers with stellar track records, who have moved to new investment houses and failed miserably. To us there could be many reasons for this ranging from changing the strategies that made them successful, to just being one of the good coin flippers we discussed earlier.
What AVB teaches us is that chasing performance is a dangerous and usually inefficient investment strategy. While he was manager of Porto he was lucky enough to have the services of superstar striker Radamel Falcao and Brazilian star Hulk. To us this is similar to judging an investment manager in a strong bull market.
When he moved to Chelsea he entered a league that was arguably more competitive than he was able to cope with. Like a difficult bear market he was unable to cope with the conditions and after humiliating losses to Queens Park Rangers and West Bromwich Albion, he lost his job.
In our opinion, investors should be weary of funds that have anything less than a 10 year track record. Moreover, special attention should be paid to the team that manages the portfolio beneath the fund. Very often you can see a distinct difference between the performance of a fund when they change the management, sometimes for the better, often for the worse.
Our analogy of football managers and fund managers is really just a bit of fun and we realise that there are distinct differences between the two professions. That being said, we fully believe in the points that we have made. Let’s not forget that fund managers charge a fee and as investors you should only pay people who are worth their salaries. Focusing on the past performance of a fund, the size of assets, the longevity of its managers and its organisational structure are all key metrics that will result in more successful investing.
If you would like to know more about the information in this article then send us your questions and one of our dedicated team members will contact you.
We look forward to hearing and working with you in the future.