The end of the English Premier League soccer season is upon us and what a season it has been. The reason this season will go down in history as an extraordinary one is because of a little known club called Leicester City, otherwise fondly known as “The Foxes”. They have achieved arguably the biggest upset in sporting history. That is no mean feat. The Foxes finished in 14th place last year, narrowly avoiding relegation, after being promoted from the Championship (the league one tier below the Premier League). To add a little more context to this: The Premier League has only been won by four teams in the last 20 years. The previous champions, Chelsea, have a squad that cost 10 times as much as Leicester, and the same applies to most of the top six English Clubs. The odds at the beginning of the season were quoted by bookies at 5000-1 that Leicester would be victorious. All in all, what an upset.
Bloomberg’s John Micklethwait compared this feat to that achieved by the Oakland Athletics in American Baseball. The coaching staff in the scenario assembled a squad with a very limited budget compared to their rivals. They managed this by selecting players based upon statistics and not player valuations. This story is retold in the movie “Moneyball” for all those interested. Leicester went about their squad composition in much the same way. Under coach Claudio Ranieri the squad was compiled to do exactly what he intended to do from a strategic stand-point. On paper the squad has no “big-name” players and is underwhelming, yet together their ability to execute their style of football is impeccable. The purchases of Kante, Mahrez and Vardy all speak to the well thought out strategy and squad composition mentioned above. Kante for example was the fastest player in Europe to reach 100 tackles completed, and his intercept ratio of 4.2 interceptions per game is simply astounding. All very important if you play a counter-attacking style of football.
It may be easy to pick up that I am enchanted by this fairy tale. It is hard not to be. Some would say that this is sport, and has no relation to investing. I would beg to differ. The parallels are very clear and obvious. If one thinks of each asset class as a position it makes the image far clearer. On the soccer field you have goal scorers known as forwards, midfielders and of course defenders. In this metaphor let’s think of our forwards/goal scorers as growth assets like equities. The midfield is made up of medium risk assets and diversifiers that work hard to not only help out going forward but also defend as much as they attack. This would include property, commodities, credit and any other alternative asset types. The defenders are your last line of defence and should be made up of your most reliable assets like cash and bonds.
I hope at this point most people have an idea of what I am referring to. The squad selection is exactly what a fund manager does. He selects players to fill the team. If you had a manager that only selected goal scorers /forward then you might have a team that good at scoring goals but cannot defend or create meaningful chances. So not much use in the overall context, the opposite is also true if you have a team of defenders only you are unlikely to score any goals.
The soccer metaphor makes sense, but how does this link to Leicester City? If you look at most funds and fund managers you may start to see a lot of familiar formations and players. The reason is that people like to believe that selecting the “big-name” players, you are likely win more often than not. I would argue then instead of selecting asset classes based upon perceived market value and popularity you should look at the composition of your team from a statistical perspective. Including underrated players in your team often makes the team far stronger especially if you trying to execute a specific game plane.
Let me use two examples of this portfolio composition and try and draw some real life parallels. South African Listed Property has been one of the most under-utilised investment asset classes by multi-asset portfolio managers for the last two decades. Over the last 15 years property has outperformed the local stock market and to add to that it has had a correlation with local equities of around 0.223. Which means it not only behaves very differently but also adds to the funds attacking and defending levels.
If averages are to go by, local managers have avoided listed property with less than 2% exposure for most managers historically speaking. If you were not driven by what the league or “big clubs” were doing then it would make a lot of statistical sense to include listed property in your midfield as not only a good attacking asset but also a fairly good defensive one as well.
Gold may be another example. This is a midfielder that finds itself in most squads but often by default. The reason is that gold miners are a big part of our stock market historically and the likes of AngloGold and Anglo American by way of example have often been included as a goal scorer/forward. The reality is that gold stocks and the underlying asset can have very different trajectories over time. Gold is well known for its store of wealth, as an inflation hedge and an asset of last resort or “safe-haven” asset.
This makes it a bit like a midfielder that’s very good at turning another teams attack into your attack by stealing the ball and running with it toward goal before the opposition gets a chance to turn around. One could say a little like a Kante from Leicester.
These would be great players to have in a team if the team was designed to allow these players to have a roll in the side. No point in buying a player that isn’t going to play well with the rest of the team. So the decision to include any player cannot be made in isolation because it’s the team that wins games and not individuals. I think this might be the biggest take-away from the Leicester story. The reason I say that is because despite their remarkable accomplishment I doubt that they will be able to repeat it now that their strategy has been made mainstream. It is also possible that many of their star players may leave to bigger more established clubs who are able to pay larger wages. I hope for those that do leave that they don’t find themselves forgotten in a squad of stars.
The Leicester story is about incredible team work and very astute and thought out squad selection. The same applies to portfolio management at more than one level. You need the right manager, you need the right strategy and then you need the players that not only suit that strategy but perform together as a team. Easier said than done, but Leicester have defied the odds by simply playing the odds.
We like to think we do the same.