Investing in an Alternative Sector: Publicly Traded Professional Sports Teams ~ market folly

Thursday, June 12, 2008

Investing in an Alternative Sector: Publicly Traded Professional Sports Teams

As investors, we're always looking to diversify across various industries and markets, especially internationally. And, this post is a result of combining two of my passions: investing and sports. In particular, I'm talking about investing in publicly traded football (soccer) teams. Now, I've probably lost my audience already haha, seeing how soccer is not exactly the most popular sport in America. But bear with me! Its the most popular sport practically everywhere else in the world. And, especially in the UK. So, we can capitalize on that.

First, let me address the rising secular trend in this segment that I have noticed over the years: increasing foreign ownership. Specifically, in the Barclays English Premier League (England's top football/soccer division), numerous American and various other foreign owners have taken clubs private. Previously, many of these teams were actually traded on public exchanges. Today, there are only a handful left that trade on exchanges. Football clubs that have been taken private by American owners include: Manchester United by Malcolm Glazer (he also owns the Tampa Bay Buccaneers), Aston Villa by Randy Lerner (he also owns the Cleveland Browns), Liverpool by Tom Hicks & George Gillett (Hicks is the American and he owns the Texas Rangers and Dallas Stars). Additionally, you've got Stan Kroenke who has slowly but surely been building up a stake in already privately held Arsenal (he also owns the Denver Nuggets, Colorado Avalanche, and US soccer team Colorado Rapids, among other things). And, this is just covering the American owners side of things. Recent developments have seen numerous other nations trying to get involved, including Dubai International Capital (DIC), who are trying to acquire Liverpool from either Hicks or Gillett. And, a few years back, billionaire Roman Abramovich bought out Chelsea and took them private. There are even more, but those are the major ones I wanted to touch on. The point is that there are only 20 teams allowed to compete in this prestigious league, and I'm fairly confident all the rest of them will be bought out over the years.

Basically, the trend here is increasing foreign ownership of English Premier League teams. And, with only a few publicly traded teams left, now is the time to act. The main investment thesis here would be to buy a stake in a successful Premier League team on public exchanges and hope it receives a bid to be taken private, thus allowing your shares to appreciate in anticipation of this bid, or outright selling your shares to the new hopeful private owners. Now, this presents a problem in that you don't want to be investing in something *solely* with the hope of a buyout. So, there's got to be another reason to own the stock. And, luckily we've found one: team performance. These club's shares typically trade on team performance and club happenings (signings, player transfers, etc). While financials obviously still matter, these stocks trade differently than typical equities. So, the investment thesis here is more macro in nature as you seek to capitalize on increasing interest in the Barclays Premier League by investors wishing to take sole ownership of the club. But, at the same time, you will need to invest in a team who realistically has a shot of performing well in the league. And, this is where my sports passion/knowledge comes in.

By following the Premier League for years now, I've been able to really get a feel for the league in terms of successful clubs vs unsuccessful clubs. I've used this knowledge as my research in order to highlight potential investing opportunities. Again, this is mainly an event driven pick based on a rising secular trend. The caveat here is that you could be waiting a long while for the catalyst to occur. However, the trend seems to be slowly building up as investors realize the investment potential in the English Premier League. Tune in tomorrow morning for the follow-up post presenting an investment idea. Click here for the follow up post.


6 comments:

TraderMark said...

Question on your earlier post re: absolute returns.

Would you consider a year the markets were up 17% and you were up say 11% a success? Since you are still getting 11%, and hence a good absolute return, but lagged on a relative basis.

j. / marketfolly said...

see that's hard to gauge because if the absolute return of the things i was investing in was 11%, then the year would be a success if i did indeed achieve absolute return. i think the main thing here is that i wouldn't be comparing the performance to the markets in the first place, since thats relative return. so its technically a non-issue because i wouldn't even be focusing on that. my focus would be on achieving the maximum gain out of the investments i am making.

i think trying to make that comparison in the example you've set doesn't work because absolute return isn't about comparison like relative is. as an absolute return seeker, i'm simply seeking the best possible return out of the investments i am making. end of. i wouldn't be focused on what the s&p does at all. even though, of course, i would consciously know what was going on with the index.

i think you're getting into comparing absolute returns on a relative basis which a) doesn't make sense to me and b) would be quite difficult to deem successful/unsuccessful

it is interesting food for thought though

TraderMark said...

No my point is someone could set out a goal of 12% annual returns for next 15 years. Thats an absolute return. In some of those years the NASDAQ (say 99%) could return 50%

This persons investor base would calm him a complete disaster since he missed where the money was to be made. But the investor would think he is a success since he made his goal... or say he made 17%. He beat his goal. Investors would not care and flood out of his fund, running to Heebner. (note Heebner did awful in 98 and 99 and looked "dumb")

Food for thought.

j. / marketfolly said...

well if that person ran an absolute return fund and the investor got upset because they underperformed an index then that investor would be an idiot who didnt understand what kind of fund he was invested in. absolute return funds are typically hedge funds/advanced strategy funds who could care less about the indexes and their under/overperformance compared to them. they aren't judged on their relative performance, they're judged on their absolute performance.

if the investor was in a mutual fund and they underperformed, then he would be right to take his money out because they didn't achieve their goal, which was relative return.

i guess i'm saying investors in absolute return funds should know that the fund they are in doesnt care about the indexes. if they were trying to compare an absolute return fund on a relative basis, then that investor would be an idiot who didn't understand what kind of fund they were in to begin with haha.

hopefully you get what i'm trying to say. absolute return funds shouldnt be looked at on a relative basis because that's not their goal.

if an absolute return fund manager is scrutinized for underperforming an index, then those people in the fund don't know what an absolute return fund is in the first place, because they would know the funds goal is not outperformance of the s&p.

relative return funds (mutual funds) need to be judged on a relative basis. absolute return funds (hedge funds) need to be judged on an absolute basis. otherwise, its like comparing x performance to y index and y performance to x index... it doesn't match up.

TraderMark said...

So then being a pretend absolute manager what have you promised your pretend investors as your pretend absolute return measure and since you are a pretend absolute manager you have to deal with tamping volatility because at first sign of a +/- 3% month they will want to pull money out (I have a post coming out on that tomorrow)

So what have you promised in return and what have you promised in terms of never exceeding +/- in any 1 month?

j. / marketfolly said...

well i think its safe to say you wouldn't "promise" anything because thats just setting yourself up for disaster.

in terms of volatility and investors wanting to bail. typically, investors in those sorts of funds would be locked in for x initial time period... 1 year, 3 years, 5 years.. whatever it may be. so, you've got a good timestamp to smooth out the volatility or at least dampen it with solid returns.

as far as prospectus/goals go, you'd outline to them that it is an absolute return fund that seeks to achieve a positive absolute return regardless if the market is up or down. you could state that you're seeking low correlation to the financial markets performance. and, you will do this through use of effective long/short positioning, raising short term cash, using derivatives/options, etc. just depends if you're a long/short fund, long only, short only, market neutral, etc.

whether or not the portfolio actually delivers an absolute return is dependent obviously on the manager. so, investors would have to gauge that manager's absolute return record and his historical correlation (or lack thereof) to the markets.

so you're not going to "promise" to beat the markets, that'd be insane haha... "i GUARANTEE we will make 20% a year or your money back" sounds like some cheap commercial hah. you'd just outline that the *goal* is to seek positive returns no matter the market environment. you're going to outline your goals and the expect correlation of the fund but provide explicit disclaimers regarding the risky nature of the investment and the amount of volatility expected based on the manager's past. using exact numbers though in the predictions is setting yourself up for disaster though, unless the person's track record is so precise you can peg it to a range.