Football clubs offer an open goal for investing suggests MAPFRE fund manager

Nicholas Earl, 01/07/2021

Football clubs can provide investors with an early opportunity to enter a well-managed sector with a high potential for growth, suggests Luis Garcia Alvarez, manager of MAPFRE AM Behaviour Fund.

His product, which is available to both retail and institutional investors, has a 10 percent exposure to three listed European football clubs.

Speaking exclusively to Fundeye, Mr Alvarez outlines that European football clubs are in a strong financial shape, have proven resilient to economic turmoil, and have significant potential for expanding revenues.

While the underlying strategy of the fund is behavioural economics, a concept popularised by Robert Shiller, Daniel Kahneman and Richard Faber that applies psychological insights into human behaviour to explain economic decision-making, the reality is Mr Alvarez’s focus is on mispriced and untapped opportunities in the market and looking to benefit from them ahead of potential competitors. 

Commenting on the addition of football clubs to the portfolio, he says: “When I first went to my boss and said that I wanted to buy a stake in a European football club he was looking at me like I was crazy. It happens the same way with investors. That's the nice thing about the opportunity, because this is what is making prices so cheap. The moment everyone knows it is a great investment opportunity, it will no longer be such a bargain.”

In the case of football clubs, Mr Alvarez believes they are as well run as some of the leading assets selected by behavioural funds. This is because the clubs have benefitted from the implementation of Financial Fair Play, a system designed to limit to loss-making potential of football clubs and encourage responsible management through several financial penalties and competitive sanctions. 

Prior to its introduction in 2011, European clubs on aggregate were losing approximately EUR 1.7 bilion euros. By the 2017-18 financial year, they were making a positive net profit of around EUR 100 million. 

While its future is uncertain, with rules surrounding the system relaxed during the pandemic and continued criticisms about its anti-competitive nature, the reality remains it has resolved serious debt issues within the game and encourage prudence to the benefit of investors.

He says: “There is no story in any other sector like European football, where the financial situation has completely changed, but investors and analysts are still not paying attention to it.”

As a consequence of this observation, Mr Alvarez has selected three football clubs from the list of 22 across Europe available to public investors – Borussia Dortmund (BVB) in Germany, Ajax in Netherlands and Olympique Lyonnais (OL) in France. The three clubs make up 5.5 percent, 2.5 percent and 2 percent of the portfolio respectfully.

BVB, Ajax and OL all fit a similar, attractive profile for the fund. Rather than competing for the biggest names in the transfer window, these three historically significant names operate with a different model. 

They are financially conscious, avoiding significant debt, and adopt a strategy of investing in young players for low fees with high potential, selling them on to super clubs for often exorbitant totals before restarting the process. 

Recent examples include Premier League transfers such as the freshly acquired Jadon Sancho from BVB to Manchester United, Hakim Ziyech’s move from Ajax to Chelsea, and OL’s Tanguy N’Dombele to Tottenham Hotspur. It is no surprise that despite the pandemic and empty stadiums, BVB continue to benefit from zero net debt, while Ajax have net cash.

The three clubs have large followings with renovated or brand-new stadiums. They are able to win trophies and maintain relevancy, but aren’t consistent late-stage contenders for the European Cup. in the case of BVB and OL, the clubs are not even regular winners of their own domestic leagues. What they are however, is sustainable. Their attractiveness is based on long-term fundamentals, and any fallout from underperformance is a short-term matter like with any stock and the best response to the patience.

Mr Alvarez explains: “We don't need them to get to the Champions League, every single year, which is something that we do not assume when we do our numbers. What we need them is to do well on a recurrent basis. There is a lot of noise in the market and the moment that one of these clubs don't qualify for the Champions League or they get eliminated in the group round, their stock falls 10-20 percent. This is volatility, this is noise, this is short of them. We know that they are not going to win the league and the Champions League every single year.”

Comparing it to more conventional stock picks, he adds: “When we invest in an infrastructure company, we know that they are not going to win every single contract they bid for. Maybe there are years where the backlog is lower and other years where the backlog is higher. So, this is similar to the performance on the field of the football teams.”

This perspective is vindicated by the performance of the fund, which is generating a return of approximately 60 percent. Since, its inception in September 2018, the 35-stock fund has beaten its benchmark, STOXX Europe 600 Net Return, with a net margin of 3.24 percent and has grown to EUR 65.2 million in size.

He also suggests his outlook is reflected by the performance of European clubs generally during the pandemic. Mr Alvarez believes that if the pandemic had happened 10 years ago, that 99 percent of the of the football clubs would have been in deep trouble, to the point that many could have been closed down. By contrast, the current financial position of European football clubs is “the best in history”.

The fund manager argues: “The European football industry as a whole had been has been doing its homework for the last 10 years in terms of financials, and this is why the industry has hasn't been able to survive the worse possible a stress test scenario that we could imagine. This is a pandemic with no fans in the stadium, lower rights and marketing contracts.”

Meanwhile, none of the three clubs in his fund has sought to enter the failed Super League, which was desperately pushed for by mismanaged elite clubs such as Real Madrid and Barcelona that have significant financial pressures placed on them through heavy expenditure over the past decade.

Mr Alvarez notes: “The majority of clubs in Spain are in a good financial situation. They are making money, even during the pandemic. But some clubs that are very big are losing money and taking on huge debts. When you see the whole picture, you see the numbers. It seems like clubs are losing a lot of money, but actually half of the losses are by a couple of clubs.”

Alongside the rigorous financial reforms enveloping the game, Mr Alvarez believes that a burgeoning story of growth will begin to define European football. Financial Fair Play might have resolved management issues, he anticipates more clubs will decide to get listed, with clubs and looking at the public equity market as a way to grow further and reach their potential.

For instance, European football clubs can renovate, rebuild or acquire stadiums fit for the next generation. This does not just mean an increase in brand value, but increases in revenue from corporate hospitality and also the chance to copy the US approach of turning stadiums into multi-purpose arenas in the same fashion Wembley is used to host boxing and pop concerts, and Tottenham Hotspur’s to host NFL games. While TV rights have reached a plateau in domestic European markets, the overseas markets in Asia and North America continue to grow while there is also chance to reform rights to provide more direct access to data to tailor fan experiences.

Mr Alvarez says: “One thing that clubs talk about is access to the data of the customers and the fans. This is something that they need to improve. Part of the data is in the hands of the organiser of the competitions, or with TV companies with the rights. So, I think that there are many things here that could be discussed.”

Patience might be a key aspect of the fund’s success when it comes to selecting stocks and waiting for the eventual returns, but the flip side of that is Mr Alvarez is perfectly prepared to move on from a stock once its value has been discovered by the rest of the market. In the long term, he recognises markets become efficient. While he wants investors to realise the opportunity football clubs present, he expects that eventually, some way down the pipeline, there will be a time to sell.

He concludes: “When it comes to the point where it is crazy and there is a lot of money coming into European football, and then prices get even above conveyancing values, that would be a moment to sell. This one will obviously take some time. We are quite far from that.”

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