What can the Rugby World Cup teach us about investing?

This weekend sees the culmination of nearly two months of fierce competition between the world’s biggest rugby nations as New Zealand and South Africa battle it out in Paris in the final of the Rugby World Cup.

It goes without saying that the best teams have made it this far. Both have navigated a multitude of obstacles through a display of skill, power, and endurance. Now ultimate success will come from balancing the strengths of all team members into a cohesive unit prepared to tackle any challenge the opposition throws at them.

Having played rugby throughout school and university and then more sporadically in my previous career in the British Army, I’ve been able to observe the characteristics of both good and bad teams. As I reflect on my experiences, it strikes me how the art of team management shares uncanny similarities with the delicate task of portfolio construction.

Both require careful consideration of specific roles, diversity, collaboration, adaptability, and leadership.

Investors looking to construct a diversified equity portfolio capable of delivering both real growth of income and attractive capital returns can learn a great deal from the world class manager assembling teams for the Rugby World Cup. A successful portfolio (team) will rely on the manager selecting the best combination of companies (players).

The forwards - high dividend yield companies

Forwards in rugby are typically known for their strength and stability in the scrum, providing a solid foundation for the team. Similarly, high dividend yield stocks are usually associated with established, financially stable companies that have a track record of consistently distributing a significant portion of their profits as dividends to shareholders.

These companies are often found in mature industries and may have a history of generating steady cash flows. Investing in high dividend stocks can provide investors with a reliable stream of income and contribute to the stability of a diversified portfolio.

High dividend yield companies and rugby forwards also share defensive qualities. Forwards provide solidity and help to protect the team from large losses. During periods of market volatility or economic downturns, defensive companies tend to be more resilient compared to their growth-oriented counterparts.

Their stable cash flows and dividend payments can provide a buffer against market fluctuations and help protect the value of an investment portfolio.

The backs - lower yield but higher growth companies

The backs are known for their speed and agility, which allows them to manoeuvre through the defence and create scoring opportunities. Equally, lower yielding growth companies are often characterised by their potential for above-average growth.

These companies may be in their early stages of development or operate in industries with significant growth prospects. They may reinvest a large portion of their earnings back into the business to fund expansion, research and development, or acquisitions.

As a result, these companies may offer lower dividend yields compared to more established companies but have the potential for higher capital appreciation.

Backs in rugby take calculated risks to outmanoeuvre the opposition and score tries. Likewise, investing in lower yielding growth companies involves taking on a certain level of risk. These companies may face challenges such as increased competition, regulatory changes, or technological disruptions. However, if successful, their growth trajectory can lead to substantial returns for investors.

Backs are often the star players, grabbing the headlines by scoring the important tries that win games. For this reason, the best backs are highly sought after, demanding the highest salaries. Similarly, the best growth companies will trade at higher valuations as more investors seek exposure to the future earnings of these exciting companies.

It is paramount that managers don’t get carried away amongst the excitement and euphoria associated with high growth companies. The best portfolio managers maintain a disciplined approach to valuations, knowing that overpaying for even the best company can have disastrous effects on the wider portfolio.

The substitutions – important sources of diversification

Rugby matches can be intense and unpredictable, with momentum swinging from one team to another. Equally, equity markets can be volatile, experiencing periods of extended growth and dramatic crashes. Diversification is the key to managing this unpredictability, it helps to soften the effects of volatility by spreading risk across many assets in different areas.

In rugby, having squad depth means having a strong bench of players who can step in and perform when needed, reducing the impact of injuries or fatigue on the overall team's performance. Similarly, when investing, having a deep and diverse portfolio provides a level of resilience and flexibility to navigate market fluctuations and unexpected events.

Just as a rugby team diversifies its squad by having players with different skills and positions, investors can manage risk by diversifying their portfolio across sector, market capitalisation and region. A rugby team's depth and diversity contribute to its resilience and ability to overcome challenges on the field, a well-diversified investment portfolio helps a portfolio manager navigate headwinds in the market.

Form is temporary, class is permanent

The best rugby managers closely monitor the performance and fitness of their players, adjusting the squad when necessary. Likewise, investors should regularly review and monitor their portfolio to ensure it remains aligned with their investment objectives.

This involves assessing the underlying fundamentals of portfolio companies, considering changes in market conditions, and adjusting as needed. By actively managing their portfolio, investors can respond to evolving market dynamics and optimise their risk management strategies.

The best rugby managers understand that players will inevitably have bad games, but ability shouldn’t be assessed in the short-term, as form is temporary. Likewise, successful portfolio managers look beyond near-term earnings and maintain a long-term view of a company's earnings potential, as well as assessing the quality and quantity of said earnings.

It is by taking this long-term approach that investors can filter out the market noise and find the long-term winners.