It’s coming home

I spend 97% of my time not thinking about the England football team¹. But every two years(ish), I’m drawn in. Whether it’s the World Cup or the Euros, I’m suddenly buying a tournament wall chart, listening to Baddiel and Skinner on repeat, and becoming nostalgic about tournaments I wasn’t even alive to see.

Of course, not everyone is interested in football. Some people just want high quality finance-related content. So, I thought I’d try and satisfy both audiences by drawing some parallels between investing and the UEFA European Football Championships.

Have a look at half-time, and see you at Wembley!

Different positions = multi-asset diversification

Football teams aren’t just made up of strikers. Nor are they just made up of defenders, or midfielders. Football isn’t like sprinting, where there’s only one dimension – fastest wins. A team doesn’t just need to score goals, but prevent them too, which requires different skills. No one player is the best at every dimension, so a mixture is needed. Too much of one thing can leave you vulnerable somewhere else. Not a million miles away from how we think about asset allocation and diversification.

Squad selection = strategic asset allocation

There’s always lots of fuss before the tournament about who will make it into the England squad. The manager must make a choice. Gareth Southgate is aiming for the best possible starting point for his decision-making during the tournament. He needs to know the strengths and weaknesses of the players he’s picked, and the possible interactions between them all.

I think of this quite like our strategic asset allocation (SAA) – our framework for any given risk profile. We want to make sure that the blend of assets we have is prepared for all investment environments, and we want to have a deep understanding of the characteristics of our chosen squad members.

Team selection = tactical asset allocation

However, there are only 11 players allowed on the pitch at any given time. So, the manager has to understand the kind of match that’s about to take place – the context, the opponent, the conditions – and then assemble a subset of the members of his squad in the right way to win.

Gareth Southgate does this in a way which looks quite a lot like tactical asset allocation. He uses teams of analysts to break down the likely different aspects of the game, and then matches his selections appropriately. We do something very similar in looking at which of our fixed income or equity asset classes might do well or badly in a certain environment, and then looking to allocate accordingly.

And of course, in any game, there can be shifts in the situation which require a change; whether it’s a goal, or an injury, or a red card (or, whisper it, a penalty shootout). The England coaching staff will prepare ahead of time for different scenarios – in the same way that we use stress testing in our portfolios ahead of time.

Outcomes aren’t predictable

The best team doesn’t always win. Sometimes the goals just don’t happen, sometimes the other team has a stroke of luck, or the referee misses something important. It’s why football is so interesting – if we knew that the best team would always win, we wouldn’t bother watching.

And that’s important to remember about investing too. Nothing is guaranteed; things can always go far better or far worse than you expect. Which is why we have to pay attention to our positions and our portfolios. We can’t always affect the outcome, but we might be able to learn a lesson for next time – as football teams do after every tournament.

Sentiment matters

The role of fans is an especially big talking point after a year of lockdown, but its always been important in football, and is part of the reason why playing at home gives a team a statistical advantage. Human psychology is a funny thing; being cheered on by total strangers from the same bit of land can make a real difference in a player’s performance – leading a weaker team to comprehensively outplay a stronger one (Iceland vs. England, Euro 2016, anyone?)

And the financial world isn’t immune to sentiment overruling fundamentals either – at least for short periods of time. Sometimes, we can take advantage of the wave of sentiment. Other times, it can overwhelm our fundamental analysis of an investment. But if we are at least aware of it, then at least we can try to adjust if needed – so we include a number of sentiment indicators in our modelling.

So, there we have it – football and investing aren’t worlds apart and in fact, I think, share a few key principles. And I’m as confident in England this year in the Euros tournament as I am in our tried and tested SAA. It’s coming home!

¹ Three weeks out of two years: 3/104 = 2.8%

Any reference to specific instruments within this article does not constitute an investment recommendation.