Active Investors And Football Fans Can Learn From Each Other

The sports fan and the active investor share a common refrain: this could be our year

etf
|
Reviewed by: Robin Powell
,
Edited by: Robin Powell

As every sports fan knows, following a team can be a thankless task. Of course there are consolations – the excitement, the buzz of winning and, for the lucky ones, the occasional piece of silverware. For most of us, though, the reality is rather different.

Fear, frustration and despair are more commonly felt emotions among the claret-and-blue section of Birmingham’s footballing community. How fans of our even more hapless rivals across the city have managed to keep going all these years, goodness only knows.

Yet they do. And we do. We do keep going, season after season, and shelling out a fortune for the privilege, hoping – expecting, even – that this year will be different.

What similarities there are, I mused while heading to Aston Villa’s first home match of the season, between ever-hopeful football fans and those investors who continue to put their faith in actively managed funds. Look at the data and there’s no rational reason for doing either.

Look At The Data

 

Around 1 percent of actively managed funds beat the market with any of degree of consistency, and I was a pimply youth when Villa were last Champions of England. Then 12 months later, would you believe, we were Champions of Europe. But within five years we were back in English football’s second tier, and though we’ve had our moments, the intervening 28 years have been thoroughly unremarkable. If Villa were an active fund, they’d have shut it down or merged it with another fund in the late 1980s.

Yet comparing football (or sport in general) to fund management is only valid to a point. The single biggest difference is that it’s far easier to distinguish between luck and skill in the former than the latter.

Lucky Or Skilful?

According to research by the Pensions Institute, it takes 22 years of data to be 90 percent certain that outperformance by a particular fund manager is genuinely down to skill. Random chance certainly plays a part in football - the deflected goal, the foul in the penalty area the referee fails to spot - but generally it’s the most skilful teams that win out over the course of a season. Yes, we’ve had our fair share of misfortune at Villa over the years, but nothing a few stellar signings every summer wouldn’t have put right.

Indeed, television money and the inflated transfer market have only served to accentuate the relative importance of skill in football. A youngster looking for an English team to support today can choose any of five or six cash-laden clubs and reasonably expect a few trips to Wembley over the next 10 years.

Fund management, though, has gone the opposite way. Investors might feel a sense of security in opting for one of the big brand names, and that’s certainly what the advertisers are trying to achieve. But the fact is that, generally, the bigger the brand, the higher the fees, and the lower the net returns. In other words, investors think they’re paying for Chelsea or Manchester City when they’re more likely plumping for Villa, Sunderland or Bournemouth.

But there is another fundamental difference between sport, where even small differences in skill can lead large differences in outcomes, and investing. This distinction is brilliantly explained by Larry Swedroe in his recent book, The Incredible Shrinking Alpha. Swedroe focuses on tennis, and specifically Roger Federer, who at the height of his powers was the greatest tennis player of his era. That was despite Andy Roddick having a better serve, Andy Murray a better backhand, Rafael Nadal a better baseline game and so on.

Facing Almighty Opponents

 

Yet while Federer’s opponents were other tennis players, fund managers aren’t just up against the Murrays and Nadals (or the Messis and Ronaldos) of the stockpicking world; no, they’re attempting to outwit a far more formidable opponent, namely the collective wisdom of the entire market.

 

It’s as if, Swedroe says, each time Federer stepped on court he faced an opponent with Roddick’s serve, Murray’s backhand and Nadal’s skill at the baseline. If that had been the case he may never have won a single tournament.

So we really shouldn’t be surprised that so many active funds, like my football team, have underperformed for decades.

Every year, we hear fund industry gurus says we’re entering a stockpicker’s market, and doubtless sooner or later they’ll be right. Part of me will be relieved when they are as this painfully long losing streak for active funds is becoming faintly embarrassing.

In the meantime the media will carry on pointing to the outliers - and by the law of averages there will always be outliers - as “proof” that active management “works”. And it’ll continue bombarding us with tips as to who the next stars are going to be.

But investing, like supporting a football team, is supposed to be a long-term commitment, and the long-term data doesn’t lie.

By the way, Villa lost 1-0. But, you know, it’s funny, I’ve got a nagging feeling that this could be our year.

 

Robin Powell produced and presented How to Win the Loser’s Game for Sensible Investing TV. He is a journalist and the founder of Regis Media, a content marketing company for the evidence-based investing sector.