You may remember Sir Alex Ferguson and his 26 years at Manchester where he won 13 Premier League titles, four FA Cups, two UEFA Champions Leagues with a win percentage of 60%.
One of the most impressive aspects of Ferguson’s career is that the majority of success came with one club. Also, during Ferguson’s reign many other unsuccessful managers came and went. 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?
If you gathered 1,000 people together and asked them to flip a coin, maybe one of them would flip heads 20 times in a row. In this example we all know that this can only be attributed to luck rather than skill. However, if a football or investment manager was to achieve the same result then he would be labelled a genius.
There are an estimated 76,000 investment funds around the world and therefore the risk of picking a lucky coin flipper, rather than someone with actual skill, is quite high.
In their 2013 study, Adrian Bell et al. conducted a study of football managers. In their model they took into account factors such as the club’s 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 fund manager’s career to see if they performed above, below or at the level of expectation.
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 Redknapp.
Put simply, what this study showed is that there is a group of managers that always perform above expectations.
It is my belief that the investment world also has its Alex Fergusons 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, seven FA cups and five league cups.
When I look at fund managers I heavily favour those that have remained in the same position for a long time. Better than that, I try to focus on firms where the talent is also the owner and is therefore unlikely to ever leave.
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.
Pep Guardiola is widely considered to be the greatest manager in the world at the moment due to his consistency. One of the most remarkable points about Pep’s consistency has been his ability to replicate success in multiple leagues around Europe.
When looking at fund managers we could consider different market conditions similarly to managing in different professional football leagues. The longer the track record of a fund manager managing their fund the more data we have to analyse how they can cope with different market conditions.
It is unfair to expect a fund or football manager to win every year or season. The key is how well they perform over multiple years or seasons and when they lose, how badly do they lose, for how long and do they always appear near the top of their best performing peers.
Preserving capital is as important as making money. There is no benefit in winning 5-0 one week if you lose 5-0 the next week. Preserving clients money in bad times is like preserving goal difference through defeats and Pep Guardiola is a master of this.
Stay tuned for next week when we disprove the myth that “Wall Street is random” and that it is better to be investing in index-tracking investments rather than backing the best fund managers.
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