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The stocks and sectors quality growth managers disagree on: Football clubs

30 June 2022

Stonehage Fleming’s Gerrit Smit and Lindsell Train’s James Bullock debate whether football clubs represent a scoring opportunity or an own goal for investors.

By Anthony Luzio,

Editor, Trustnet Magazine

It is said that the only way to make a small fortune from owning a football club is to start with a large one, and this certainly appears to be the consensus among quality growth managers, most of whom steer well clear of the sector.

Stephen Yiu, manager of the LF Blue Whale Growth fund, summed up the views of many of his peers when he said: “No one will ever make any money out of them, apart from the players, the coaches and the people who sell you the merchandise. The shareholders won’t.”

Meanwhile, Gerrit Smit (pictured), manager of the Stonehage Fleming Global Best Ideas Equity fund, said the return on invested capital that football clubs deliver is often low or even negative, with high volatility and little net cashflow support.

“This leads to volatile share price performance and necessitates longer holding periods to earn fair returns, with little conviction of a good outcome,” he said.

“Our main concern therefore is the high risk an investor has to accept without a compensating good return.”

Yet Lindsell Train portfolio manager James Bullock takes a different view, holding Juventus and Celtic in the Lindsell Train IT. Despite the misgivings of managers such as Smit and Yiu, he said the motivation for buying into football clubs was the same as for more commonly held quality stocks, such as Nintendo, Disney or Pepsi.

“This is a unique distillation of the idea that if you’ve got the heritage, you own the content which is genuinely differentiated, and your customer base is loyal, that can be very powerful and long lasting,” he explained.

“It's pretty obvious with Pepsi, because you can put up a nice long-term real return chart to show that. But you have to be slightly more imaginative with football clubs and that's because they tend to be smaller, and if you look at them on a shorter-term basis, the revenues depend on how the team is doing.”

He added: “But in the longer term, you've got a very loyal fanbase who are ultimately customers, and it is globalising pretty rapidly, so you've got a nice tailwind.”

Bullock admitted Smit was right about the volatility, particularly in the short term. However, he said football clubs’ business models were starting to stabilise as revenues become less dependent on performance, for example by qualifying for competitions such as the Champions League.

“It is more about monetising the brand through sponsorship – we've seen this with Juventus over the past 10 years,” he added.

Yet it is the other football club in Lindsell Train IT that automatically raises questions – Celtic. Regardless of how well run this club is, as an investment it can’t help but draw comparisons with its Old Firm rival Glasgow Rangers, which entered administration in 2012.

Bullock said that he spoke to Rangers when they were trying to raise money to re-launch, but ultimately passed on the opportunity. He said this simply highlighted the importance of being selective, rather than taking a blanket approach to a sector with a tailwind behind it.

“If you're getting involved with a family-owned company – and actually quite a lot of them are, including Juventus – you want to understand the long-term perspective at the business.

“They can be thinking on a generational time horizon and maybe they don't have the same kind of pressures as slightly more professional managers might. But you want to understand what's going on.”

Bullock (pictured) said he has probably had more meetings with the management at Juventus than any other company in his portfolio, as it is one of the few holdings with debt on its balance sheet.

He said the problem with debt is that when there is a once-in-10-year shock, there is a greater chance of the company getting in trouble. However, he pointed out it was difficult to think of a harder test than Covid-19, when it missed out on a major source of cashflows for two years.

In an article published on Trustnet last year, Luis Garcia Alvarez, manager of the MAPFRE AM Behavioral fund, said football clubs had become much better run businesses in recent years, and were trading on attractive valuations compared with sports franchises in the US.

Yet Smit remained unconvinced, saying investors should always consider any proposition against the alternatives, and pointing out there were plenty of other opportunities with a better risk/reward profile than football clubs.

“Even the MSCI World index and especially the S&P 500 index delivered higher returns than all the five largest football clubs over the past five years, at meaningfully lower risk,” he said.

“The better way of supporting one’s football club is to rather invest in strongly cash generative businesses that can indefinitely finance your season ticket and some of its merchandise.”

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