Disruption's coming home

Anyone with half an interest in the World Cup (plus the partners and families of those people) will know that as well as England making it through to Wednesday’s semi final, the traditional big hitters (think Argentina, Brazil and Germany) have all gone home early to rue what might have been. Is it too much of a stretch to say that the beautiful game itself is being disrupted, and if it is, are there any lessons to be learnt? The ‘giant killers’ theme could be transposed over many a field today from politics to retail, as the mighty fall and their usurpers gain momentum. Or perhaps it is simply what inevitably happens in any knockout tournament where there can only be one winner.

Psychology plays an increasingly important role in both sports and investment today. On the field of play it is not uncommon for elite sportspeople and teams to surround themselves with a team to exploit behavioural science to enhance the opportunity for individual and team success. This is how smaller teams can gain an edge, which when it works, gains momentum resulting in peak team performance when it counts most. We are told that Gareth Southgate doesn’t just make his players practice hundreds of penalties, he has them make the long walk out to the penalty spot to better visualise the reality of the situation.

The behavioural parallel with the field of investment is perhaps more subtle to the outside observer and manifests itself not so much in the investment teams as in the market, where herd behaviour has implications for both momentum and value styles of investing as investor flows distort valuations. Everyone thought Brazil and Germany were the teams to beat simply because they were Brazil and Germany. They were the most expensive teams to back at the start but far from the madding crowd the real value lay with Belgium.

Psychology also works against you and it is hard not to think that the amateur dramatics of certain players ultimately cost them more than they gained. In some ways the big teams have been a victim of football’s global success as the ultimate disruptive force – money – has poured into the game creating a handful of star players perhaps more interested in their own success than that of their country. Team success then becomes much harder to achieve. This is not dissimilar from the ‘star manager’ investment culture which these days is mostly eschewed by fund management houses who prefer to emphasise the team approach, something we both look for and practice in our external manager teams and internal investment team at Momentum. Extrapolating that theme through a different lens one could equate the highest football earners to the strategies pulling in the most assets – namely passive. Both work best when they are relatively simple, but attention to detail in execution is paramount (hence the need for VAR).

What we are seeing today is an evolving management style that seeks marginal outperformance from a number of different areas, the combination of which creates the edge. If you can put together a team that is aligned to a specific long term outcome, and couple that with a clearly defined and well executed strategy, then your probability of success will be greater. The obvious choices will always garner interest but there’s usually better value to be found elsewhere. Big is not always better.

Alex Harvey, CFA