Asset manager wins with football strategy
Professional football teams the world over use the popular 4-4-2 formation when taking to the field. It’s a team structure that involves fielding four defensive players, four midfielders and two strikers. Managers tamper with player formations from time to time, depending on whether they want to play an attacking or defensive game, but for the most part the 4-4-2 formation works just fine.
When Sanlam Private Investments (SPI) heard South Africa had won the rights to hold the 2010 FIFA World Cup they decided to create a notional themed investment portfolio – the SPI World Cup portfolio. They identified a number of listed companies that were expected to outperform the All Share Index as the country geared up to host the international showcase. According to Alwyn van der Merwe, director at SPI, the idea received a lukewarm reception (internally) due to the poor track record of similar themed portfolios in the past. But the 11 shares ‘chosen’ on 1 September 2006 have since outperformed the JSE by some margin.
Don’t let any goals through
The world’s best football teams strike a balance between attack and defence. It doesn’t matter how many goals you score if you cannot prevent your opponent from putting one past your goalkeeper. The SPI World Cup portfolio thus included ultra-defensive SAB Miller as its goalkeeper. Beginning 1 September 2006 and ending 30 April 2010 the counter achieved a total non-annualised return of 41%. SPI included defensive companies such as British American Tobacco (+2%), Tiger Brands (+33%), City Lodge (+41%) and Distell (-1%) in its defensive four. Although the food producer and hotel chain performed admirably, the back line was let down by cigarette company BAT and liquor distributor Distell.
Midfielders form a vital link between a football team’s defence and attack. It’s their job to lay the foundation for spectacular goals by providing well-aimed and perfectly timed passes. SPI included four nimble companies with cyclical earnings in their midfield. These companies included fast food giant Famous Brands (+139%), construction companies Wilson Bayly Holmes (+105%) and Group Five (+19%) and hotel group Sun International (-34%). It seems the so-called ‘sin’ stock let SPI down once again. Gaming and hotel group Sun International was the only counter not pulling its weight in the midfield line. The company fell from grace after skipping its dividend in 2008/9, falling to as low as R60/share before recovering slightly to R85.
The strikers included MTN (+89%) and Naspers-N (+141%). These companies were included for their fantastic growth prospects, and didn’t disappoint. Naspers was included for its stake in DSTV (and the SuperSport brand), but surged on its investment in China’s Ten Cent instead.
Football portfolio beats all comers
“The team did a sterling job of picking a few stock equivalents of the ‘Messis’ and ‘Ronaldos’ of the modern game,” observes SPI. The portfolio achieved a total non-annualised return of 61.48%. This compares favourably to the 28.91% achieved by the All Share index over the same period – a relative out performance of some 32.56%. Some attribute the portfolio’s performance to lucky choices, but the truth is each of these companies was carefully assessed on the ‘good company at a reasonable price’ adage so often preached by investment guru Charlie Munger. SPI also got the sector spot on. Each of the 11 portfolio shares reside in the Industrial sector, which resoundingly outperformed financials and resources over the period.
Should you still consider invest in the 4-4-2 portfolio shares? Some of the counters are clearly overbought as investors and shareholders factor in unrealistic long-term earnings expectations. “Many shares have already experienced the benefits of the event,” observes SPI. “And it’s unwise to value shares on once-off profits.”
Editor’s thoughts: The trouble with investing in themes is analysts ignore economic fundamentals and traditional valuation techniques in favour of ‘bells and whistles’. Many investors learnt this the hard way in the years leading up to the dotcom bubble. When dotcoms fell out of favour the ‘theme’ proved to be worth nothing at all. What investment theme will replace the World Cup from August 2010? Add your comment below, or send it to [email protected]
