As investment managers, our job is to craft portfolios that meet our clients’ needs, remain suitable for current market conditions, and be relatively resilient to bouts of extreme market volatility. But what if I told you that constructing the perfect portfolio is strikingly similar to a football manager picking the best squad or lineup for the 2024 Euros?
Like in football, where the best teams boast a diverse range of top-quality players across various positions, the most robust portfolios broadly diversify top-quality funds across different asset classes, geographies and styles.
Diversification: The key to a winning strategy
Imagine a football team composed entirely of strikers. While it might be thrilling to watch, the lack of defenders and midfielders would quickly lead to chaos on the pitch. Similarly, a multi-asset portfolio (risk appetite dependant) exhibiting concentration risk within a single asset class, geography or style—no matter how strong—lacks the balance needed to navigate the complexities of the financial markets.
Like the best football squads, the best portfolios feature a mix of low-correlating assets that can play different roles under varying conditions. Equities provide growth, bonds offer stability, real estate/infrastructure adds tangibility, and commodities like gold serve as a hedge against inflation.
Similarly, individual investment styles, regions or assets can suffer prolonged periods of underperformance. For example, “Lost Decade” saw the S&P 500 between 2000 and 2010 produced an annualised return of -0.95%. However, over the same period, we saw other equities perform well, with emerging markets annualising a return of 9.78%, highlighting the need to remain diversified as long-term investors. This starkly contrasts with the decade that followed, but the risks remain the same when overly concentrated.
Current form versus underlying fundamentals
This leads us to form versus fundamentals. When selecting players for a tournament, a football manager faces a crucial decision: should they choose based on current form or underlying talent?
Gareth Southgate faced this dilemma pre-tournament, leaving out players such as Marcus Rashford and Jack Grealish. Both have undeniable underlying talent; however, their recent form over the season has been below average. This is akin to our dilemma of picking funds based on recent performance versus their fundamental strengths.
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Recency bias can lead us to favour players—or funds—performing well recently. However, this approach can be misleading, often leading retail investors down a dangerous path. Just as a player might hit a temporary hot streak, a fund might enjoy a short-term surge that isn’t sustainable. Instead, focusing on the fundamentals—such as a fund’s management team, investment philosophy, processes and historical performance- provides a solid foundation for long-term success.
In football, a player’s past performance can be both a blessing and a curse. It can demonstrate experience and proven capability but also create unrealistic expectations. Take the current situation, mid-tournament, with Harry Kane, for example. Does Gareth leave him in the team based on historic performances and his fundamental underlying abilities, or does he make a change to suit the team structure and current conditions they are facing? The same is true in portfolio construction. Past performance is a helpful metric, but it should not be the sole criterion for selection.
Navigating the current market environment
As we head into the summer of 2024, and with the Euros now underway, the financial landscape is shaped by various factors: inflationary pressures, geopolitical tensions, and global elections, to name a few.
In this environment, the best portfolios can adapt and thrive. Just like the teams likely to perform best in Euro 2024 will be those with a well-rounded squad capable of adjusting their tactics based on the opposition and match conditions.
Diversification remains crucial. Investing in equities from different regions, sectors, and styles can capture growth opportunities while mitigating idiosyncratic risks. Commodities, such as gold, may serve as a hedge against inflation, geopolitical and economic uncertainty. Bonds, particularly those with shorter durations, can provide a buffer against interest rate fluctuations.
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We are currently particularly interested in the fixed-income space at the moment, as we believe the opportunities for investors in this sector are more significant than they have been for some time. The sector might not always grab headlines like a dependable defender or a tireless midfielder.
However, their consistent performance, particularly in certain volatile market conditions, can be invaluable to the overall stability of a portfolio and mitigate drawdowns. The eventual winner of the Euros will likely have one or two of these types of players in their squads, for example Declan Rice or Ngolo Kante for France. The best teams always have those players who aren’t bold and brash but quietly get on with their jobs to the team’s benefit.
Predicting the winner
If we were to predict the winner of Euro 2024 based on squad composition alone, we’d likely favour a team with a strong defence, a creative midfield, and a potent attack.
Similarly, in the investment world, a well-diversified portfolio holding a range of growth and defensive assets has the best chance of succeeding in the current market environment and over the longer term.
Consider the role of under-the-radar players—or less popular asset classes. Just as a relatively unknown player can have a standout tournament, some sectors, which may not always perform consistently, can sometimes shine and contribute significantly to the portfolio’s overall success.
Ultimately, both football and investment managers strive for the same goal: success through careful selection and strategic planning. By building a well-diversified portfolio, we can navigate the ups and downs of the market just as a balanced football team can adapt to the ebbs and flows of a tournament.
So, as we cheer on our favourite teams in Euro 2024, let’s also take a moment to appreciate our profession’s parallels. The beautiful game of portfolio management is about balance, diversification, and strategic thinking. Here is to building winning portfolios that stand the test of time—just like the champions on the pitch.
Jack Roberts is an investment analyst at Iboss
