While some question how it reflects on the English game as a whole, Leicester City’s victorious Premier League campaign has tugged at the heart strings of the majority of football fans – which is understandable given the bookies thought the Foxes being more than 3 points clear at the top of the table today a less likely outcome than Elvis Presley being found alive and well. 
Of course, Claudio Ranieri and co wrapped it all up a few weeks ago, but this weekend marks the official end of one of the most dramatic seasons in modern footballing history – including the fall of Jose Mourinho’s Chelsea, a major case of the yips from the North London rivals, the final demise of Aston Villa but also (and even more worryingly) the emergence of a young, talented and in form England team just a month or so before a major tournament…
Now, as you might have realised, FE Trustnet is not a go-to option for football news and views. Nevertheless, if there is ever any link to be made (no matter how tenuous) between the world of fund management and the ‘beautiful game’, then we will certainly give it go.
Luckily, we are not alone.
Since Tottenham Hotpur’s 2-2 draw at Chelsea two weeks ago (which meant Leicester were uncatchable on 77 points), many fund groups have made some reference to the Foxes’ first ever league title in an attempt to gain further coverage.
Some have been pretty dire, but a useful example is from Stuart Podmore, investment propositions director at Schroders, who argues comparisons can be drawn between Leicester City’s victory and basic investment rules.
“Perhaps more admirable than winning the Premier League while defeating those wealthier, stronger clubs, is the stark fact that in spite of the temptation to limit their play and consolidate their gains, Leicester City collectively defeated the behavioural bias of loss aversion,” Podmore said.
“It was the equivalent of avoiding the fund manager’s temptation to lock in gains too soon and become overly protective, or an advisory client’s counter-productive desire to avoid losses at all costs without understanding risk as manifested by volatility.”
“It raises the question of how they have done it and what might we learn.”
As such, in this article he highlights the three lessons that investors can learn from Leicester City’s 5000-1 feat.
1. Predictably unpredictable
First and foremost, Podmore points out that Leicester City’s triumph supports the most commonly used phase in the world of retail investment – the past is no guide to the future.
“Let’s start with the manager, Claudio Ranieri,” Podmore said.
“This is his first title as a manager in his 28 year career and many pundits predicted he would be a failure at Leicester. Those pundits forgot that the world is unpredictable. Markets and economies ebb and flow, and are often at the mercy of sentiment.”
Though predicting the future is impossible, Podmore points out that there are ways in which investors can help themselves to outperform over the longer term. For example, he says by focusing on value (i.e. buying inexpensive areas of the market) investors have a greater margin of safety then owning assets trading well above the going rate.
He added: “Our Schroders value team believes that the price you pay, more than the growth you get, is the biggest driver of future returns.”
2. Value seeking and anchoring
Indeed, Podmore points out that Leicester City’s approach highlights the attractiveness of taking a value strategy to the equity market.
“Which takes us to price. Leicester’s whole squad cost less than one of the players at Manchester City. Leicester’s most-used starting eleven cost £23 million; in comparison, Chelsea’s most-used starting eleven cost £200 million,” Podmore said.
“It’s fair to say that most Premier League clubs are anchored to high prices and a cascade of rising prices has created a herding effect. When a relevant value (an anchor) is available, people make estimates by starting from that value and adjusting to yield the final answer.”
He notes that investors, like football clubs, often fail to adjust sufficiently from anchors, which impairs investment decisions.
“Leicester City managed to seek out the value in non-league clubs and abroad. They weren’t chasing the glamorous and expensive names that were over-analysed by the market. From our value perspective, we too look for genuine, cheap names that deliver strong returns over time.”
Now, this link may be the most tenuous out there.
As FE Trustnet has written on number of occasions how value (as an investment style) has severely underperformed growth over the past few years as macroeconomic forces have meant the market has rewarded defensive but increasingly expensive companies.
However, that trend has started to reverse as value has started to outperform again from a relative perspective.
Relative performance of indices over 1yr
Source: FE Analytics
Interestingly, as the graph above shows, the day in which value stocks started to outperform again was the first trading day after Leicester City overtook Arsenal as league leaders – a position they have maintained ever since.
Take from that what you will…
3. High conviction and concentration
Finally, Podmore says investors can learn from the dynamics of the Leicester City players.
“And the Leicester squad is an interesting collective observation. This is a smaller, more concentrated group of players, about whom Claudio has great conviction,” he said.
“The low turnover in the squad represents value investing over time. We buy our stocks and play the long game. It’s worth also mentioning that there is no space for misplaced egos in an unemotional appraisal of risk and return.”
He added: “And finally, what does the future hold? Leicester’s odds to win next year’s Premier League have come in from 5000-1 to 33-1. In some respects, this is where the work really starts and when loss aversion might really take hold.”