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Unique Portfolio as a Source of Diversification

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Stockholm (HedgeNordic) – The investment industry has investors convinced that true portfolio diversification is achieved through exposure to a variety of asset classes. However, a differentiated stock picking approach can serve as another source of diversification. With one-fourth of its equity portfolio invested in the sports industry and 10 percent in public football clubs, stock picking represents a source of diversification for the Behavioral Fund of Spanish asset manager MAPFRE AM.

“We are really trying to find diversification and decorrelation with broader markets,” says Luis García Álvarez (pictured), the Portfolio Manager of the MAPFRE AM Behavioral Fund. “There are many funds in Europe that follow an investment philosophy similar to ours, but our portfolio is probably quite different from theirs,” he continues. “Our portfolio is a result of that search for decorrelation. We have 25 percent invested in the sports industry and 10 percent invested in football clubs. These are not the kind of stocks you often see in other fund managers’ portfolios.”

“We have 25 percent invested in the sports industry and 10 percent invested in football clubs. These are not the kind of stocks you often see in other fund managers’ portfolios.”

Philosophy

Luis García Álvarez.

“We define ourselves as value investors and that is not because we buy stocks at low multiples,” García Álvarez explains his team’s approach to investing. “Buying at low multiple is not value investing for us. We do not consider value as an accounting or a statistical factor,” he continues. “We consider value investing as a working or even as a living philosophy. We are patient investors who have a long-term investment horizon, we do not pay a lot of attention to short-term market movements, and our focus is more on understanding the businesses and having a long-term mindset as if we were the entrepreneurs looking at our own business.”

García Álvarez and his team predominantly look for three main characteristics when selecting stocks for the MAPFRE AM Behavioral Fund. “First, we look for good businesses that are simple enough that we can understand them,” starts García Álvarez. “By good businesses, we mean businesses that have the capacity to grow and can grow in a profitable manner,” he explains. “Second, we try to find companies with solid balance sheets. Most of the companies that we have in the portfolio have little net debt or even positive net debt.”

“We look for good businesses that are simple enough that we can understand them. By good businesses, we mean businesses that have the capacity to grow and can grow in a profitable manner.”

“We know that the financial literature and academia says that debt is probably good for the return of equity investors,” elaborates García Álvarez. “But given that we are long-term investors, we know that there will be good times and bad times in these longer periods. So we prefer to sleep well at night when the crisis comes,” he adds. “The third one is good people running the businesses,” says García Álvarez. “Not only good people from the ethical point of view, but also good capital allocators. We are looking for people with a track record of allocating capital well that can create value for their companies.”

Investing in Football Clubs

The MAPFRE AM Behavioral Fund, a European-focused equity fund with a bias towards small- and mid-cap stocks, has about 10 percent of its portfolio invested in three public football clubs: Olympique Lyonnais in France, AFC Ajax in the Netherlands, and Borussia Dortmund in Germany. “The substantial emotional component causes many analysts and investors to keep their distance from the football industry. However, in our opinion, they are missing out on the interesting historical changes taking place in this industry.”

“The substantial emotional component causes many analysts and investors to keep their distance from the football industry. In our opinion, they are missing out on the interesting historical changes taking place in this industry.”

“When you go to the data, one can see that the football industry nowadays is a profitable and lucrative industry. There was a clear game-changer in 2011, which was the introduction of Financial Fair Play Regulations by UEFA, the European association of clubs,” says García Álvarez. In 2011, European football clubs as a group lost about €1.7-1.8 billion, according to the fund manager. “From that year on, the industry began to self-regulate and then we came to a situation in 2017 and 2018 where European football clubs as a group were already making a positive net profit of €700 million. That was a complete game-changer.”

“When you go to the data, one can see that the football industry nowadays is a profitable and lucrative industry.”

The structural change in the football industry is not only reflected in the underlying numbers, argues García Álvarez, “but also in the kind of people approaching and entering the industry.” According to García Álvarez, “more sophisticated investors started investing into clubs, but there were also visible changes in the corporate requirements on the clubs.” He goes on to add that new professional profiles started joining football clubs across their management, finance and marketing teams, among others. “The industry is changing, but not many analysts and investors are paying attention.”

Counter-Cyclical Investment

Every football club has its own ever-evolving story, so each investment in this industry is a story-driven investment. “Each investment in football clubs is a story by itself, which means that we do not need the broader market to rally in the coming months or years to see positive returns in football clubs,” says García Álvarez. “Each investment is an ongoing, changing story. The intrinsic value of a football club is coming from a changing story,” he continues. “People tend to see the football industry as cyclical, but data shows the contrary. The industry is counter-cyclical.”

“Each investment in football clubs is a story by itself, which means that we do not need the broader market to rally in the coming months or years to see positive returns in football clubs.”

“In the last quarter of 2018, for instance, the STOXX Europe Football Index was up around 10 percent when the broader market was down about 30 percent,” recalls García Álvarez. “We have seen that football clubs are clearly decorrelated in these times of crisis and that investments in football clubs can do well when markets are down,” he adds. “Obviously excluding the last few months of the pandemic, revenues generated by football clubs have been growing for the last 30 years. We only have data for this period, so the industry mostly likely has been growing for the past 100 years.”

Careful Stock Selection

“We analyze football clubs like any other company: we look for a good business, a good management team and a healthy balance sheet,” explains Luis García Álvarez. From the pool of 22 public football clubs in Europe, including top clubs such as Manchester United and Juventus, the MAPFRE AM Behavioral Fund has only invested in Olympique Lyonnais, AFC Ajax, and Borussia Dortmund. “We struggle to see these characteristics in bigger clubs, which explains why we are not investing in tier one teams, but we are more inclined to invest in tier two teams.”

“We analyze football clubs like any other company: we look for a good business, a good management team and a healthy balance sheet.”

“When a team wins or loses a major tournament or its star player is injured, or when a new player is signed, the market often reacts very sharply,” says García Álvarez. “However, we make our investment decisions by applying a long term perspective. We try to filter out the short term noise, and we think this gives us a significant advantage when decisions are being made.” For that reason, García Álvarez and his team “are mostly looking at the capacity of football clubs to generate profits on a recurring basis.”

“The three clubs we have invested in make money in the transfer market over time, these clubs are able to buy talent cheaply and sell it more expensively on a recurring basis,” elaborates García Álvarez. “These clubs also have success in European competitions on a recurrent basis, but we do not worry about them having success on the pitch every single season,” he adds. “Many people tend to believe that if you focus on the financial side, then you forget about the fans and the sporting side. However, the financial and sporting side always go hand in hand.”

 

This article featured in HedgeNordic’s “Diversification” publication.

 

Photo by Waldemar Brandt on Unsplash.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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