Premier league investment management: applying attack and defence tactics

This article was written by Richard Champion and originally published by CGWM.

How can your portfolio benefit from the right combination of attack and defensive assets?

On 13 May 2018, with their final winning goal, Manchester City Football Club ended a remarkable season with 100 points – the highest total achieved since the English Premier League started. Arguably, this Man City side was the most complete combination of attack and defence ever seen in the League’s history. With great consistency, they kept a clean sheet in almost half their games, whether at home or away, and it was only in two games when they let in more than a quarter of all the goals they conceded.

So, why does our article about how we position your investment portfolio start with such praise for Man City’s team of six years ago? Let’s explain.

There are times when you want your investment portfolio to defend your wealth against market uncertainty, and there are times when you want it to be more aggressive or, in football jargon, you want to attack.

Right now, we believe we are in the first period for many years when we want to do both.

What is the case for an attacking outlook?

This is a good time for an attacking outlook because of:

• Decelerating economic activity in the US
• Falling inflation across the developed world, allowing central banks the freedom to cut rates.

If you combine these macro factors with reasonable valuations in both bonds and equities (apart from Artificial Intelligence (AI) stocks), and positive momentum in corporate earnings, we think there are some great investment opportunities out there.

Further, while interest rates on cash savings rose quickly in 2022 and early 2023, other asset classes struggled, so we think there’s a good chance of the reverse happening later in 2024 and into 2025.

What is the case for a defensive outlook?

On the other hand, the case for the defence is based on:

• Pockets of high valuation, especially in AI and the so-called ‘magnificent seven’ technology titans that make up 20% of world equity market value
• The possibility that inflation rears its ugly head again later in the year and derails hoped-for interest rate cuts
• A particularly difficult geopolitical backdrop in Ukraine, Gaza and the Red Sea, as well as between China and Taiwan
• Political uncertainty, with the UK likely to have a general election later this year and, even more importantly, a re-run of the 2020 US presidential election between Biden and Trump.

How do we combine the right attacking and defensive stocks in investment portfolios?

Typically, we would expect our defence (which looks for diversification, low volatility and steadiness) to come from bonds, whereas our attack (which requires focus, volatility and growth) is led by equities.

And rather like managing a football team, our core investment management philosophy is to find defenders who can score goals alongside attacking midfielders who can help us defend. The winning Man City side saw 40% of their goals scored by midfielders and defenders, who also ‘set up’ a further 55%. That’s what we want in our investment portfolios.

Scouting for the right team of investments

We continue to explore ways to invest in higher yielding parts of the bond market, offsetting this higher risk by favouring bonds that mature earlier than the average. This helps us to identify equity-like return streams, but with less risk, and is what we mean by having defenders who can score goals.

In equities, although we have a mix of some more defensive themes, like infrastructure or healthcare (which we also expect to get on the score sheet later this year), in the main we are looking for attackers who can defend. We seek to do this by applying a ‘quality bias’ to our selections, which means having a large part of the portfolio exposed to companies that:

• Enjoy strong and sustainable profitability compared with their peers – typically having a protective ‘wall’ that prevents competitors taking away their profits, either via robust market positions, brand portfolios, or intellectual property
• Have relatively low debt, strong free cash flows, and the ability to reinvest those cash flows back into their high-return businesses, compounding their high returns over time.

Crucially, we seek to pay a reasonable, not excessive, price for these companies.

Companies like this generally outperform analyst expectations over time as they see earnings upgrades (because of the compounding effect of their profitability) and, importantly, are often the strongest and best-known companies in the world. This can be a reassuring factor if, and when, they lag behind broader market indices for a period (which does happen, but not persistently).

Shaping our team strategy

By combining a bond portfolio with slightly higher than average risk, as described above, with a slightly lower-risk equity portfolio, relative to its asset class, we believe we can generate positive returns for clients. Crucially, we are aiming for the whole team to contribute to returns with lower risk, better diversification and lower falls in value when markets are stressed.

We want our defenders and midfielders to contribute goals and assists to our portfolios, and we want to see our attackers also blocking shots on our goal. We can’t guarantee the near perfection of the Man City side, but we do think our strategy of defence with attack will be a title race contender for client portfolios in the coming months and years.

Any questions?

If you have any questions about the current market and economic environment or your asset allocation within your portfolio, please get in touch with us...

For further information on any of the terms used in this article please see our glossary of investment terms.

Investment Outlook August 2024

Read our latest Investment Outlook to discover if election fever will help or hinder investment opportunities?

Read more

You may also be interested in:

• Spring webinar: Can current economic 'deceleration' actually accelerate investment portfolios
• Opportunities in investment trusts

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.

This is not a recommendation to invest or disinvest in any of the companies, themes or sectors mentioned. They are included for illustrative purposes only.

The information contained herein is based on materials and sources deemed to be reliable; however, Adam & Company makes no representation or warranty, either express or implied, to the accuracy, completeness or reliability of this information. Adam & Company is not liable for the content and accuracy of the opinions and information provided by external contributors. All stated opinions and estimates in this article are subject to change without notice and Adam & Company is under no obligation to update the information.