It’s Euro 2020. Suddenly, everyone (including myself) is temporarily a football expert. I pretty much know nothing about tactics when it comes to football, but I do know something. You have to score goals to win. However, even that needs the caveat that, this needs to be done, whilst preventing the opposition from scoring. Ok, I’m not claiming either of these comments are particularly ground breaking.
Keeping with the Euro 2020 theme, are there any parallels between the investing process and football? Generating alpha is like scoring goals. A portfolio manager can be seen as our striker. However, just as with the beautiful game, you need to have a team. A striker doesn’t score goals in isolation. The rest of the team needs to support them, and feed the ball to them. If there was no one feeding them the ball, they would need to run continuously up and down the pitch which is an impossible feat. Even for some of the most talented players up front, like Mbappe, they need to have someone passing to them, in this case often Pogba.
In an investment team, we could view the midfield as being like a combination of the all the support functions, the ones who feed the ball to the strikers, to allow them to score goals. They are the research, technology, compliance, middle office etc. If there were no support team, a portfolio manager would have to do absolutely everything themselves. They would need to create all their own models. They would need to read every single bit of research. They would need to develop every single IT system. They would need to calculate all their own P&L etc. There wouldn’t be any time left for a portfolio manager to do their primary role, namely to invest!
The defenders and the goalkeeper can be seen as the risk team. They are the ones who can put safeguards in place to reduce the likelihood of large losses. Of course to some extent the portfolio manager is also having to play in defence too. Preventing large losses is a key part of the investment process. No matter, how many goals we might score upfront, it’s a bit futile, if your defence concede many more!
On the management side, you have the board setting your investment mandate. As for the spectators, they are the ones investing. They want you to win, but they also want to see your process. After all, who supports a team, but never wants to watch them play?
The football analogy might not be perfect, but it is nevertheless a somewhat different way to view the investment process. Either that, or I’ve been watching way to much football over the past few weeks!