What investors can learn from boxers… and vice versa

Preparation is key when it comes to a boxing match. Whether it is achieved by using advanced facilities and training equipment, or by going ‘back to basics’ and chopping wood or pounding meat carcasses, getting physically and mentally ready is paramount. Boxers need to know their own strengths and weaknesses as much as they need to know those of the opposition.

We look at how some of the lessons learned in (and out) of the boxing ring, can also apply to the world of investing.

1. Consider all possible scenarios: Anthony Joshua vs. Carlos Takam, 28 Oct 2017

Joshua’s initial opponent, Kubrat Pulev, withdrew from the fight with a shoulder injury. Having trained to box a specific opponent, Joshua found himself suddenly preparing to meet a different fighter – with more experience and four inches less height than he had planned. Time was not on Joshua’s side, but his meticulous training regime stood him in good stead.

Trying to second guess central bankers, politicians and the direction of stock markets is difficult, if not impossible. It’s why most fund managers say they are ‘bottom-up’ and not ‘top down’: they will be cognisant of what is going on in the wider economy and world but they will concentrate instead on finding a good company. There are two Elite Rated funds in particular, whose managers spend a lot of time analysing how different stocks could behave in different scenarios:

• Premier Defensive Growth seeks to deliver a consistent positive return in all market conditions by investing in a portfolio of assets that offer a predictable return over a defined period of time. This approach helps insulate the portfolio from changes in market conditions – the strategy has been thoroughly tested in a wide range of scenarios and has continued to deliver – and enables the manager to estimate future returns.
• The managers of JOHCM Asia ex Japan have experience of past crises and are not afraid to go against the grain in their selection. They like companies that can do well in all market conditions and use a four-step process to identify good investments: a quality screen; an eight-year historical exploration of the company financials; a subjective company analysis, alongside a financials forecast and scenario analysis; and then finally a valuation stage, where consistency of returns is key.

2. Learn from your mistakes: Joe Louis vs. Max Schmeling, 22 June 1938

In this particular bout, the stage was set well before the fight itself. Two years prior, when the pair first met in the ring, Shmeling had studied videos of Louis’s technique, and used a weakness he saw to win via a surprise knockout. This time, however, Louis came out better prepared and the fight last just 124 seconds, as he reclaimed his title.

• James Thomson, manager of Rathbone Global Opportunities, is not afraid to admit his weaknesses or past errors, a refreshingly honest approach, which allows him to concentrate on his core strengths. He doesn’t invest in companies from emerging markets as he says his skill set (and resources available to him) is stronger in developed markets. After the financial crisis in 2008 he also added a defensive bucket of stocks that are less economically sensitive, with slower and steadier growth prospects, for risk management purposes.
• Ben Whitmore, manager of Jupiter UK Special Situations, set about analysing the ‘sell discipline’ on his funds. He found the team was tending to hold on to stocks for too long (a human behavioural issue to which we are all susceptible). The team tweaked the process and now review the investment case for each stock more regularly, as well as having stricter parameters to help them divest in a more timely manner.

3. Are skills transferable? Floyd Mayweather vs. McGregor, 26 Aug 2017

This was a widely anticipated bout, firstly because McGregor enticed Mayweather out of retirement, but also because this was McGregor’s first ever professional boxing match. Could he successfully transfer his skills from the cage of the Ultimate Fighting Championship arena to the boxing ring? In this case, it would appear not. The rookie did well, lasting ten rounds, but was outclassed in the end. It remains to be seen if he will try again.

Fund managers, like us all, change jobs from time to time. But there are always questions as to whether they will be able to repeat their success at another company, and it is something we talk to them about in detail at meetings.

• Investec UK Alpha’s Simon Brazier, is a great example of a manager who moved from one company to another successfully. The fund retains the same philosophy and process as the manager’s previous fund, which he ran successfully at Threadneedle and when he joined Investec, he was joined by many of his old team.
• But there can be pressure to deliver. Ken Nicholson, manager of Mirabaud Equities Europe ex UK Small and Mid, admitted to this recently when he came to our offices for an update. While his fund was first quartile in its peer group in the 12 months after he moved to Mirabaud from Standard Life Investments, he says he wasn’t happy with the decision-making process. He has since improved his process – including a new detailed checklist – and Is making sure he and team focus more on the basics.

4. Returns are important, but consistency more so: Mike Tyson vs. Buster Douglas, 11 February 1990

Underdog Douglas pulled off one of the greatest upsets in boxing history by knocking out the then undefeated, undisputed heavyweight champion Mike Tyson in Tokyo. It wasn’t just a lucky punch; Douglas had prepared well and was in the best fighting-shape of his life, taking everything Tyson threw at him and handing it straight back. Unfortunately his time at the top was brief and within a year he was totally out of shape and was knocked out in the third round of his first title defence fight. He retired shortly after. In contrast, Muhammad Ali’s boxing record was incredible. Over a period of almost two decades he had 56 wins, 5 losses and 37 knock-outs to his name.

• Church House Tenax Absolute Return Strategies is a fund that aims to provide modest but positive returns in any market environment. They have achieved this in an astonishing 97% of rolling 12-month periods over the past five years.
• City of London Investment Trust is another great example of long-term consistency and a ‘dividend hero’. It has raised its dividend each year for the past 50 years.

Of course, this consistency of fund manager skill is at the very heart of the Elite Rating process. Our proprietary quantitative screening tool, AlphaQuest strips out the impact of market movements to identify the returns attributable to manager skill and then estimates how likely a manager is to continue to deliver superior returns in the future. It uses weekly data over 10 years (or the life of the fund or tenure of a manager if shorter) to see how consistent this skill actually is – effectively eliminating the simply ‘lucky’ for those with real and repeatable talent.