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Lessons From The Beautiful Game
dfm-investment

An interesting analogy between football & investment management

Lessons from the beautiful game

The 2018 World Cup kicked off and is expected to be one of the most watched sporting events in the world.

What is unexpected are the results and performances of some of the top teams; four of the top five pre-tournament favourites failed to win their first match and continue to perform unconvincingly so far.

It may not be immediately obvious, but the role of a football manager offers a topical analogy for the skills required and challenges faced by an investment manager.

Conviction & discipline

There are several key characteristics common to both disciplines, the most obvious of which is the ability to maintain conviction and discipline, particularly with respect to one’s philosophy and process.

An investment manager without sufficient discipline will be far less consistent in their decision making and more likely to have unpredictable returns in the long run based on our experience researching managers over the last 20 years.

Perhaps hand-in-hand with this is the ability to remain focused.

Both football and investment managers are constantly surrounded by a plethora of opinions and ideas and the ability to block out unnecessary noise is often the key to separating a good manager from a great one.

Statistics & objectives

Then, when building the team, football managers don’t simply pick eleven players with the most impressive statistics (the most goals or assists etc.) but instead take into consideration which combination of players operates most effectively to achieve the manager’s objective.

Similarly investment managers are tasked with selecting the ‘best’ investments from a wide ranging universe with various mandates and constraints to consider.

Again this process is not as simple as choosing the strongest performing investments.

It involves selecting the appropriate combination of holdings which, when used together, creates a robust portfolio with the highest probability of achieving the desired outcome.

To achieve this, portfolios must be balanced across a mix of asset “ classes and also within asset classes (e.g. style tilting within equity, varying interest rate
risk within fixed income).

Furthermore, the optimal blend will likely vary depending on market conditions and the stage of the economic cycle, which is not too dissimilar to a football manager changing formation depending on the opposition.

Best selections today unlikely to remain so indefinitely

Even with the final team selection confirmed, there is more work to be done.

Circumstances change throughout a tournament; some players underperform or become injured.

Parallels can be drawn to an investment manager, given the dynamic nature of the markets – it would be myopic to expect best ideas today to remain best ideas indefinitely.

An active managers role, is to adapt to the ever changing circumstances confronted.

To ensure portfolios remains optimal and appropriate active managers need to monitor holdings closely, constantly search for ideas to challenge existing investments and tactically tweak the asset mix to reflect prevailing conditions.

Patience & strategy

creates a robust portfolio with the highest probability of achieving the desired outcome

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