Luis García Álvarez, CFA. Equity Portfolio Manager, MAPFRE AM
The Champions League final was held on Sunday, in which Bayern Munich beat Paris Saint-Germain to be crowned champions of this unusual edition of the competition. On its way to victory, the German team triumphed in the semifinals over Olympique Lyonnais, a French club whose shares are listed on the Stock Exchange and form part of the MAPFRE AM Behavioral Fund portfolio. The strategy for this MAPFRE AM mutual fund is based on the study of behavioral finance, which uses psychological concepts to better understand and predict behaviors when it comes to making decisions about our money. gy for this MAPFRE AM mutual fund is based on the study of behavioral finance, which uses psychological concepts to better understand and predict behaviors when it comes to making decisions about our money.
It is important to clarify that this means long-term participation in the French club’s shareholding, based on an in-depth analysis of both its good business management in recent years and the positive dynamic of the soccer industry, even in spite of the undeniable impact of the pandemic. Our investment does not depend on the outcome of a match or on performance across one or two seasons. That is for sports betting houses. We made this point a few months ago, when we saw our shares in Ajax fall after its elimination from this year’s Champions League, and we reiterate it now that we are benefitting from the success of Lyon reaching the semifinals.
Fans’ fleeting joy or disappointment does not usually have a significant effect on a club’s value, nor does it change our long-term investment thesis. However, there are often major swings in share prices based on results, signings or injuries suffered by their stars. In the financial market, which sometimes sees irrational behavior, emotions have a greater influence on decision making in an industry such as soccer, where it is almost impossible to block out the noise. This means that many fund managers do not want to consider soccer as an investment opportunity, and may miss out as a result. Behavioral finance can help us understand why, by studying cognitive biases.
Bandwagon effect: This is the tendency to accept the reasoning or ideas of the majority without analyzing whether they are correct from a logical point of view. In this context, there is widespread belief that soccer clubs are playthings for millionaires. They are thought to be money-losing machines that are not capable of generating an investment return. However, although this was the situation in the industry a few years ago, several factors have radically turned the tide, the approval of the Financial Fair Play Regulations being an example of this. It is an objective fact that major European league clubs have left their structural deficits behind and have started recording profits at an aggregate level in recent seasons.
Availability bias: This is a mental shortcut that leads us to evaluate the probability of something happening depending on how easily we can think of similar examples. Again, this mental trap can lead to errors. In the world of soccer, mismanagement scandals come to mind most easily, as they make the headlines and we hear a lot about them. However, today, the opposite is true in a significant number of cases. The industry is starting to attract brilliant managers, who manage to combine economic profitability with sporting successes, but this does not receive as much attention in the media.
Risk-averse bias: Investors take a long time to incorporate good news into their expectations and this is reflected in moderate price increases. At this point, we can return to the example of Lyon’s success in this year’s Champions League. The team earned 22.5 million euros for reaching the quarterfinals and semifinals, less taxes and bonuses. In addition to this, its players’ valuations improved as their performances helped them to stand out in the biggest soccer showcase in the world. However, the club’s market cap only increased by five million euros in the same time frame. Surely that’s not enough.
Loss aversion: Unlike good news, events with a negative impact quickly become embedded in investors’ minds. In fact, several studies estimate that the pain incurred from a loss is more than twice the pleasure experienced from a gain of the same amount. In this year’s Champions League, although Lyon only saw moderate increases in its share prices from its wins, the eliminations of other publicly traded clubs, such as Ajax and Juventus, resulted in severe falls of close to double digits in the financial markets. Our brains hate losing more than they like to win.
Richard Thaler, Nobel Prize winner in Economics, is considered the father of behavioral finance. This month, it became known that Thaler will be part of the management team for a new investment vehicle, led by RedBird Capital alongside Billy Beane, the forefather of data analysis in the world of baseball, whose story inspired the book Moneyball and its subsequent movie adaptation. The curious thing about this news is that the group aims to acquire one of Europe’s leading soccer clubs. Behavioral finance and the soccer industry meet again. Coincidence or a unique investment opportunity for those who can overcome their prejudices?