Investing like it’s a Football Team ?
This is interesting, never seen it from that perspective, maybe because I don’t watch football, As I always say good things have to be shared so why not share with everyone if its good.
Edmund Teo wrote this on the business segment of AsiaOne, I bet he is one hell of a football fan, It’s pretty interesting to know how these two can relate, investment and football. He is the regional director for investment solutions in Asean, Hong Kong, Taiwan, India at Russell Investment. I have to say nice title.
Usually I will browse the business segment for knowhow and investment advice and tips. Check out this latest one about picking/managing your stock like a football team, they are really bringing it down to a layman perspective, which is good in every way.
Taking a leaf from football to build an investment portfolio
AS INVESTORS, we are often not fully informed about the investment style that our fund managers are adopting. We can be guilty of basing investment decisions on the reputation of the fund management firm or the past performance of the fund.
Would you do that when selecting your dream football team?
It may surprise you to know that the art of building a winning investment portfolio, where multiple funds are chosen, is very similar to the process of selecting a winning football team. Like investing, you are faced with many uncertainties: weather conditions, field conditions and the calibre of the opponents. Here are some rules of the game.
Rule 1: Identify the ‘styles’ in play
Investment managers, like players in a team, demonstrate different ‘styles’:
Growth managers: where the manager focuses on companies whose earnings are growing faster than average. Often, these fast-growing companies will reinvest their profits back into the business, so the dividend yield could be lower than market average. But note that if growth slows, their stock prices are more likely to fall harder than average.
Value managers: where the manager focuses on undervalued companies whose true value should be recognised and price should rise to reflect their potential. Often these companies are solid, but not spectacular performers with good cash flows and dividend yields above market average. The risk is that undervalued companies can remain undervalued for extended periods of time.
Market-oriented managers: neither growth nor value, but where the manager focuses on themes to choose companies that should outperform market averages. For example, if the manager feels that the Singapore dollar is about to rise, he or she might focus on companies that import and reduce the holdings of companies heavily reliant on exports. Note that many themes can have very short life and catch investors unaware.
Rule 2: Diversity across style types
Do you think that the coach of Brazil’s World Cup team would have picked four Robinho’s if he could? Probably not. The risk of the field not behaving the way they would expect would be too great. As great as Robinho is, the coach probably wants more balance in his team. This is a multi-style strategy. This blending of styles can reduce risk and help provide a more consistent team performance.
Rule 3: Don’t rely on past performance
Everyone is familiar with the regulators’ admonition that past performance is no indication of future performance. This is true. The premiership football team champion of last year is not insulated from a relegation zone performance in the next. However, knowing the long-term track record of the manager and the quality of its players can help to ascertain if the team is experiencing a temporary setback or if there is a more severe problem.
So how do you select managers and portfolios? Russell’s approach is to base its manager selection on in-depth knowledge of the drivers of future performance. The quality of the people, and the processes these people use to make investment decisions.
Rule 4: Going for a goal is not for everyone
A lot of investors want to emulate the great Maradona, or even Ronaldo or Messi, and score marvellous goals. Depending on your risk appetite, investors should strive for balance and long-term sustainability of their portfolio.
Every winning team would like a superstar. As we know, it’s hard to maintain top performance over many years. What may be more attractive for investors, are the solid performers who strive for consistency and shun the limelight.
Rule 5: Stay in the game
Concerned over the recovery in US exports? What about the outlook for regional economic growth? How about the sustainability of China’s juggernaut? There will always be questions surrounding financial markets.
Just as true football fans are committed to the game in good times and in bad, so too should investors be committed to the markets, fully understanding that there may be fluctuations along the journey.
Rule 6: Replacing a member of your team
Suppose Wayne Rooney is seriously injured and unable to play for the rest of the season for Manchester United. Manager Alex Ferguson would have the comfort of knowing that he can call on Dimitar Berbatov, who has played so brilliantly this year, for the rest of the season.
Those building an investment portfolio should take the same approach.
They should have a list of quality substitutes to replace a manager who is going to face a crisis. Or simply, they should have identified a manager who can do the same task better in that particular market condition. Just as every fund manager always has their eye on their stock wishlist, so too should that approach be applied to managing other managers.
An international dream team
Investors need to understand the style of different managers in their portfolio, and why they under or outperform in different market conditions. Employing manager and investment style diversification is critical for reduced volatility across market cycles.
Think about it, would you want a Chelsea, Liverpool, Manchester United – or your favourite team – to be comprised of only strikers?