Investment conclusions from Leicester City
Well, they did it. And if you, like me, felt a strange, momentary anti-climax given Leicester City Football Club didn’t need to kick a ball last week to win the English Premier League, you should be over it by now.
With superlatives coming thick and fast, we might conclude that this is one of the most striking moments in the history of British sport.
As we discussed previously, it is hard not to hear the echoes in the challenges of successful fund management and behavioural bias.
Defeating the behavioural bias of loss aversion
Perhaps more admirable than winning the Premier League while defeating those wealthier, stronger clubs, is the stark fact that in spite of the temptation to limit their play and consolidate their gains, Leicester City collectively defeated the behavioural bias of loss aversion.
It was the equivalent of avoiding the fund manager’s temptation to lock in gains too soon and become overly protective, or an advisory client’s counter-productive desire to avoid losses at all costs without understanding risk as manifested by volatility.
It raises the question of how they have done it and what might we learn, so here are three Schroders conclusions from Leicester City’s success:
1. Predictably unpredictable
Let’s start with the manager, Claudio Ranieri. This is his first title as a manager in his 28 year career and many pundits predicted he would be a failure at Leicester. Those pundits forgot that the world is unpredictable.
Markets and economies ebb and flow, and are often at the mercy of sentiment. Our Schroders value team believes that the price you pay, more than the growth you get, is the biggest driver of future returns.
2. Value seeking and anchoring
Which takes us to price. Leicester’s whole squad cost less than one of the players at Manchester City. Leicester’s most-used starting eleven cost £23 million; in comparison, Chelsea’s most-used starting eleven cost £200 million.
It’s fair to say that most Premier League clubs are anchored to high prices and a cascade of rising prices has created a herding effect.
When a relevant value (an anchor) is available, people make estimates by starting from that value and adjusting to yield the final answer. Investors, like football clubs, often fail to adjust sufficiently from anchors, which impairs investment decisions. Leicester City managed to seek out the value in non-league clubs and abroad. They weren’t chasing the glamorous and expensive names that were over-analysed by the market. From our value perspective, we too look for genuine, cheap names that deliver strong returns over time.
3. High conviction and concentration
And the Leicester squad is an interesting collective observation. This is a smaller, more concentrated group of players, about whom Claudio has great conviction.
The low turnover in the squad represents value investing over time. We buy our stocks and play the long game. It’s worth also mentioning that there is no space for misplaced egos in an unemotional appraisal of risk and return.
And finally, what does the future hold? Leicester’s odds to win next year’s Premier League have come in from 5000-1 to 33-1. In some respects, this is where the work really starts and when loss aversion might really take hold.
For over 200 years, we at Schroders have not unnecessarily tampered with our processes, our values and our client relationships.
If Leicester City sticks to its long-term, tactical success with low squad turnover and an absence of fear, history might just repeat itself.
Stuart Podmore is investment propositions director at Schroders