What is the greatest underdog sporting story of all time? Wimbledon FC beating the mighty Liverpool in the FA Cup final? Boris Becker winning Wimbledon as a 17 year old unseeded player? Buster Douglas beating Mike Tyson in his prime? West Ham winning any trophy? (In our house we are still in shock!) Of course, the correct answer is Leicester City winning the premier League in the 2015/16 season. This is an underdog story that will, in all probability, never be surpassed.
In 2014 Leicester City were promoted to Premier League, but like most newly promoted clubs it looked like they were bound for relegation in their first season, and with nine games to go they were bottom of the table. Yet somehow, they won seven of the last nine games and miraculously escaped relegation.
Despite keeping the team up, their manager Nigel Pearson was sacked after a controversial preseason tour of Thailand. Who would have thought that Thai nightlife and English footballers would have been a bad combination?! Anyway, at the start of the next season in comes a new manager, the Italian gent, Claudio Ranieri. Although very well-liked, Ranieri had never won a title anywhere in 29 years of management, and his appointment was ridiculed. Journalists and pundits consigned them to relegation. The bookmakers agreed, and they gave odds of 5,000-1 for Leicester to win the Premier League title. To put these odds in perspective, the biggest ever winner in horse racing in the UK had odds of 250-1, and Eddie the Eagle was priced at 2,500-1 to win the gold medal at the winter Olympics in 1988. So, 5,000-1 was the betting equivalent of throwing your money down the drain, right?
What The Fuchs?
Well, as you probably know, those odds were very, very wrong, and Leicester confounded everyone to win the league. They finished 10 points clear at the top of the table and only lost THREE games in the whole season. So how the Fuchs did they do it? And what lessons can be learnt from this unlikely triumph?
There were a number of factors that helped Leicester win the league. For different reasons, the big clubs who have historically dominated the Premier League all underperformed during the 15/16 season, and it was a relatively open race. Leicester also had a remarkably injury-free season, and were able to field the same starting XI most weeks. This gave the team great momentum, which in turn created a fantastic team spirit and chemistry within the club.
Leicester also scouted unbelievably well. They realized they didn’t have the money to compete with the big clubs, so they assembled a team of players who could play high-velocity counter-attacking football. They built a team using the classic techniques of diversification and value investing.
In the same way players are bought and sold in the transfer market based on their perceived value and ability to perform, we endeavour to analyse investments in much the same way.
Our objective is to build a portfolio that can perform well in any prevailing market conditions, so we diversify our portfolio with investments that have different characteristics. Leicester diversified by combining older players with experience and leadership qualities with younger players who had pace and energy.
The combined cost of Leicester City’s starting XI in the 15/16 Premier League winning season was just £28.8m, or in today’s market, TWO months of Cristiano Ronaldo’s salary.
source: Transfermarkt
Of course, ‘cheap’ doesn’t always mean ‘value’. But Leicester managed to find some hidden gems. Jamie Vardy was playing in the fifth tier of English football just four years earlier, but had pace, finishing ability and a point to prove. N’Golo Kante had an insatiable desire to hunt down the ball and win it back to allow the team to counter-attack. Riyad Mahrez was an absolute steal at £450,000, he had trickery and guile, but was overlooked by most clubs who considered him not physical enough for the Premier League. Mahrez was sold for £60m to Manchester City a mere four years later. This is the kind of investment return we can all hope for.
We are also seeking good value in our portfolios. If we can identify sectors and asset classes that appear undervalued and overlooked, this will provide us with an attractive entry point to make strong returns. For example, we initiated a position in a gold miners fund in January this year when all the market cared about was high growth AI related shares. At the time, gold miners were trading at a 40 year low and were pretty unloved. This investment is now up nearly 30% since then, but we think it has potential to go much higher.
The Tinkermen
Its hard not to love Claudio Ranieri, everyone’s favourite football uncle. He became known as the ‘Tinkerman’ for constantly tinkering with the lineups at previous clubs, yet his success with Leicester was quite the opposite. The team made a strong start to the 2015/16 season and Ranieri tended to keep faith with the same players. He went with the momentum.
Knowing whether to make changes or maintain your current positioning is part and parcel of being an investor. Sometimes it pays to be active and make changes. At other times, sitting on your hands is a valid strategy. For example, in 2017 virtually all asset classes made solid returns and there was hardly any volatility in the market. It was a smooth ride from start to finish, and the best strategy was to do nothing.
Over the last 12 months markets have been fairly volatile, with investor expectations about inflation, interest rates and the probability of a recession constantly changing. In this type of market it has felt appropriate to ‘tinker’ and adjust our portfolios to benefit from the changing landscape. We have been the ‘Tinkermen’ over the last year. As demonstrated by this lovely chart.
Get warmed up, you’re coming on
The investments held in our portfolios are selected from our approved list of researched investments, but not every fund on the list makes it in to our portfolios. We have a subs bench of investment we like, and are ready to ‘call them up’ when things change. For the last 11 months our exposure to bonds has been predominately short dated, as we didn’t feel that interest rates were coming down too fast, but have been ready to make a change when we had some clarity. Now it seems likely that there will be interest rates cuts coming we have brought a fund off the subs bench which has greater sensitivity to cuts.
As the 15/16 season progressed the dream of Leicester winning the league started to become a possibility, so the club brought in more players to boost the depth of squad, to give the manager some additional options. Leicester showed us that whether it is managing a portfolio or a football team, having the widest set of tools at your disposal and the ability to act quickly can make all the difference.
There is no doubt that luck played a role in Leicester’s story, but it doesn’t make the achievement any less remarkable, and there are some valuable lessons we can learn from this wonderful underdog story.
- Always look for value
- Diversify your portfolio
- Have a strong subs bench
- Use momentum when things are working
- Don’t be afraid to tinker if things change.
And if bookies ever offer you 5,000-1 on a sports team, stick a fiver on!
