Reversion therapy - Whether it be football or finance, neither good nor bad times last forever


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

Anyone who values job security would be well advised to give football management a miss. According to the league managers association, the 92 clubs across English football’s top four divisions saw a total of 63 changes of manager over the course of the 2012/13 season, with 20 resignations and no fewer than 43 sackings.

That being the case, one might reasonably assume football clubs can point to some pretty solid evidence that sacking a manager is a sure-fire way to improve results. but one would assume wrong – as a recent article on the BBC website does it make statistical sense to sack a football manager? makes abundantly clear.

The article flags up the research of a Dutch economist who analysed managerial turnover in the eredivisie, the Dutch premier division, between 1986 and 2004. Dr Bas Ter Weel tracked the subsequent fortunes not only of clubs that sacked their managers after a poor run of form but also the clubs that chose to stand by their managers after a similar slump.

Obviously this is not a wholly scientific analysis because we can never know what would have happened should a club have made the opposite decision but Ter Weel’s findings are still interesting. Put simply, those clubs that sacked their managers enjoyed an upturn in fortunes and those clubs that stood by their managers … also enjoyed an upturn in fortunes.

Such an apparently curious outcome is of course made possible by that perennial value investing favourite – mean reversion. A football manager may be fired after a series of below-average matches played by his team and then results will revert to the mean – as they will where a club decides to stand by its manager.

The reason we draw this all to your attention on The Value Perspective is that reversion to the mean informs a lot of our thinking. As value managers, we look for companies with poor recent track records as that suggests they have the potential to improve. Many people are reluctant ever to think beyond the current environment but, in finance as in football, neither good nor bad times last forever.


Kevin Murphy

Kevin Murphy

Fund Manager, Equity Value

I joined Schroders in 2000 as an equity analyst with a focus on construction and building materials.  In 2006, Nick Kirrage and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Nick and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.

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