Ponting, Dhoni, And Asset AllocationBloombergQuintOpinion
Portfolios are like cricket teams. But for a few anchors, they are never constant, they go through a waxing and waning period, they bring about excitement and emotions, and everyone’s favourite star in the team is different. So, can a study of the sport of cricket, and its consistently strong teams, teach us a lesson or two about stronger, better asset allocation? See, I used to be a cricket aficionado, and still watch some. And like most of you, if not all, I still consider myself a better selector than the people who actually chose the players in the most successful cricket teams. It is with this disclaimer that I attempt to draw the following parallels between two of the most successful teams that I have seen in my times, and what a study of those can tell us about asset allocation and portfolio management.
The Leader Of An Ideal Squad
One of the best one-day international teams, in my time watching the game, was the Australian team led by Ricky Ponting, aka Punter. Balanced, with enough stars to win matches on their own and yet each individual having a defined role in the mix as well. A lot of other teams in the early- and mid-noughties had all-time greats too. Sachin Tendulkar in India, Brian Lara for the West Indies, the golden duo of Shaun Pollock and Allan Donald turning out for South Africa along with Jacques Kallis. However, for a one-day team to have a bowling line-up of Glenn McGrath, Jason Gillespie and Shane Warne; and Matthew Hayden, Adam Gilchrist, Ricky Ponting, and Michael Bevan turn out to bat meant that the probability of all of them doing poorly at the same time was much lower.
The selectors had put together a good mix. That is exactly what you as a selector of a portfolio need.
There need to be enough components in the mix to ensure that while some gallop ahead because of the risk-taking ability of the manager (you), some can stand up when the chips are down for the rest. 2020 has shown that portfolios need multiple stars to withstand sharp drawdowns, and as exciting as it is to ride the highs of a bull run, the falls can be catastrophic if the portfolio is not diversified well enough, especially for a retail investor whose total wealth can get eroded to dangerously low levels if the corrections are severe.
One important lesson from the transition of captaining the Australian one-day team from Steve Waugh to Ricky Ponting was that the past success of an asset should be viewed objectively and not emotionally, and if the times are changing, portfolio leaders should change too. Sticking to gold as a premier component or leader of the portfolio would have yielded terrific results from October 2008 to October 2012, when gold gave returns of over 150% as it rallied from $700 an ounce to nearly $1200 an ounce, much better than the nearly 75% absolute gain of the Sensex in the same period. But sticking to gold as the leader of the portfolio after October 2012 would have proven disastrous. Over the next six years, gold corrected over 30% in absolute terms, while the Sensex gave a return of over 80% in absolute terms over the same period.
Just as Australia re-evaluated the captaincy, people should re-evaluate portfolio leadership. Being in the right quadrant at the right time is crucial.
A Long, Stable Winning Record
The other team that I have great regard for is the ODI team that played under Mahendra Singh Dhoni, aka Captain Cool. The Indian team under Dhoni won all three major ICC limited-overs tournaments in a span of six years – the 2007 World T20, the 2011 ODI World Cup, and the 2013 Champions Trophy. Some players changed, but the nucleus was largely around young, budding talent with a mix of experience thrown in. If there was the Sachin-Sehwag combo at open and Yuvi in the middle order till 2012, the successful Champions Trophy campaign saw the equally impressive Dhawan-Rohit-Kohli trio rise to the top. The fact that the three remain the batting mainstay for India in ODIs seven years later shows that if the investment groundwork is correct, clear, and constant, the ability to pick good players (asset classes) will not be difficult.
Too often, people fall for mercurial ideas, akin to how the Pakistan or West Indies cricket teams perform.
Mercurial is alluring, promising, but not necessarily dependable. One can win a game or two with such portfolios, but not consistently bag top tournaments. And that is where I suspect the Indian selectors have found a successful approach—since maybe 2003, but certainly from 2007—consistently breeding good talent, having a talented skipper to nurture them and keeping a dash of stable, experienced players in the mix. You do that with your portfolio – avoid investing based on tips, have some stability in form of debt or gold, bank on winners in the form of allocating enough resources to stocks which can give strong returns, and voila – you could well be laughing your way to trophies (the bank).
The waxing and waning of these teams has parallels to the asset allocation backed performances in portfolios. If 2020 has shown something to the investing world, it is that your portfolios cannot be 100 percent in one asset class - be that equities, debt, or commodities. 2018-2020 has been a period of serious disruption for debt, and while gold is seen as a seemingly perennially rising asset, it has had its period of underperformance as well.
It need not be just cricket to use as a tool to think through your asset allocation. Do it with soccer, skydiving, or a mission to Mars, but find an analogy that helps you give serious thought to an asset allocation strategy. You will be doing a great disservice to yourself if you don’t. Be an Indian or Australian team selector, because those are the ones that picked squads and leaders that consistently won tournaments and entered record books. The rest is all gully cricket.
Niraj Shah is Markets Editor at BloombergQuint.