The World Cup and portfolio management

There’s been an unspoken agreement that we wouldn’t talk about football and fund management. Not least because lots of good stuff has been written on the topic over the past couple of days in the wake of England’s defeat. But faced with the prospect of another analysis on the potential impact of Andy Burnham as UK Prime Minister or the trajectory of chip stocks in Asia, we’ve decided that the unspoken agreement isn’t worth the paper it’s written on. 

We should caveat all this by saying that we spend most of our time thinking about investments rather than football, but we think they are both about making decisions, sometimes quickly, in uncertain and fast-changing environments. So, we wanted to think about decision-making and portfolio construction in the context of the match.

The most obvious point is that, from what we can tell, the manager’s job is to make decisions under conditions of uncertainty. He or she doesn’t know in advance if those decisions will be “right” or not. That’s the job. In that sense, it’s the same as portfolio management.

Drilling down further, the outcome doesn’t always tell you whether the decision was a good one or not. Luck plays a large enough role in football, and fund management, that a manager can get a good outcome from a poor decision – or vice versa. Parking the bus for thirty minutes against possibly the greatest attacking player in history could work, but does it seem like a good bet to make?

Then there are the correlations. Different assets can move in different ways, bonds and equities might usually be negatively correlated, but is that always the case? History says no. Asset class correlations aren’t stable, and that makes the manager’s life harder. For instance, history might suggest that gold will perform well as a geopolitical safehaven, but it doesn’t always work. Similarly, you might expect players to hold their line at the edge of the penalty area. But sometimes they find themselves pinned in the six yard box. 

We should also consider diversification. When you construct a portfolio, you’re looking for assets that you think are exposed to different themes or trends. You typically don’t want a portfolio that’s positioned for only one outcome. The future is cloudy, even if hindsight is always really clear. Similarly, when you look up the pitch, and see no outlet available, perhaps it means that your team isn’t quite as diversified as it could be.

Then there’s the question of plan B. To quote Mike Tyson “everyone has a plan until they get punched in the mouth”. If a portfolio manager is investing in tech and the cycle turns down, how should they shift the portfolio to reflect that change? In a similar vein, if the plan is to defend a lead to the final whistle, and your opponent equalises, how should you react? The starting assumptions have changed.

Finally, there’s the question of expectations. A statistician might look at all this and say “the number four team in the world lost in the semi-final, in line with expectations. Nothing more to say”. But we all have hopes and dreams, and sometimes there’s more to life than statistics.

So where did all this get us?

It’s a reminder that decision-making under uncertainty is hard. The future is unknowable, the assets somehow unpredictable, the market environment is complex and adapting. Market volatility is a fact of life. Having a robust process and a well-diversified portfolio can help to protect your wealth, while having a long time horizon can see you through the difficult times.