Chart of the Week #52: An Unconventional Beta Factor for Asset Allocation

We have been thinking more about risk management and asset allocation for allocators and long-term investors exploring the sports investment landscape.

One big takeaway from the Ross-Arctos Sports Franchise Index (RASFI) – our Big 4 sports franchise index launched in partnership with the 美国密歇根大学 - 罗斯商学院 – that we’ve explored before is that the sports asset cycle has been significantly milder and different (i.e., non-correlated) from the overall business cycle.

One can visualize this using simple trailing return averages – we use five-year rolling averages in the above charts. That is, each line depicts the average returns to that point in time, looking backwards over five years. We also deduct the 3-month Treasury Bill rate to look at excess returns – the return premium that investors receive above and beyond the “risk-free” asset.

Macroeconomic impacts on the overall market historically have not immediately impacted sports fundamentals or valuations in quite the same way as normal businesses, due to sports’ sticky relationships with their customers and highly contracted revenue base. Instead, valuations appear to be more impacted by large, step function changes in high-quality revenue, the most prominent being new national media contracts. In the late 90s, all four Big 4 leagues received significant new TV contracts that reflected the height of “cable-is-king” TV era; the NBA and NHL each received ~2.5x+ AAV step-ups (in 1997 and 1998, respectively). In the mid-2010s and beyond, the “streaming-is-king” era has seen another wave of meaningful TV deals, only interrupted briefly by the pandemic – visible in the data as a decline in asset growth in 2020.

The result – as is clear from the charts – is a kind of cycle in performance, but one that has little to do with cycles in any other alternative or traditional asset class.

The result – as is clear from the charts – is a kind of cycle in performance, but one that has little to do with cycles in any other alternative or traditional asset class. For example, in Q1 2000, at the height of the tech bubble, Venture’s trailing five-year excess return was a whopping 52.0% (per year!). Sports was a respectable, but lower 11.0%. Fast forward to Q3 2005: Venture experienced a decline of -23.7% (per year!) over the previous five years vs. Sports at 5.1%. The S&P 500 saw two meaningful drops – post-tech bubble and post-GFC – that did not affect sports valuations at all, according to RASFI. Buyout and Real Assets (including Real Estate and Infrastructure) have gone through much sharper booms and busts relative to sports. Correlations to these asset classes are near zero or even slightly negative.

We believe this has implications for allocators. As an unconventional “beta factor”, even simple asset allocation and risk models would likely assign a significant weight to sports as a return factor in an optimal, well-diversified portfolio. We plan to explore this topic more.