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How Baseball and Investment Managers Measure Talent Is Not So Different

Comparing the financial metrics of portfolio management to America’s pastime.

“We’re born again, there’s new grass on the field …” 
John Fogerty – Centerfield

The date pitchers and catchers report to spring training is a seminal moment for baseball fans. After a long winter, it is always something to look forward to, when thoughts turn to spring and optimism reigns. It heralds the beginning of the baseball season and sunny days or warm evenings spent at the ballpark, watching the game we love. It brings us back to our youth—the smells of fresh-cut grass and glove oil or the sound of a crack of the bat and a fastball popping into a catcher’s mitt evoke the nostalgia of simpler times. We remember going to games as kids and now cherish the days spent making new memories at the ballpark with friends and family.

However, even the casual fan knows baseball isn’t as simple a game as from our childhood memories. It is a wonderful combination of strategy and action—the thinking man’s game. The game is riddled with stats and becomes a constant chess match for players and managers. 

With everything else going on in the world—rising interest rates, high commodity prices, war in Ukraine and a lingering pandemic—we are really looking forward to the start of this season. We anxiously awaited the resolution of the MLB lockout and made contingency plans to watch college, high school or even little league baseball in its stead. Rather than debating sabermetrics and advanced statistics of professional players, we decided to have a little fun comparing some of the financial metrics of portfolio management to America’s pastime. 

WAR vs. Alpha

A player’s batting average may be the most familiar statistic in baseball to all fans and is a basic way to measure their competency at the plate, just as Morningstar’s batting average measures the percentage of months a manager has outperformed their respective benchmark over a period of time. When your portfolio manager steps into the batter’s box, how often are they outhitting the competition? In the early days of Moneyball, wins above replacement (WAR) became a popular statistic—how many more wins a particular player added to their team’s total compared with an average “replacement player.” Slugging percentage also measures how many bases a player gains from each hit. These two stats can be akin to the alpha an investment manager generates—how much additional return a manager’s skill adds to returns above the market as measured by an index or benchmark. 

Save Percentage vs. Downside Capture Ratio

Turning to the defensive side of the field—defensive runs saved calibrates how many runs a particular player saves or prevents, like how the Sortino ratio measures risk-adjusted returns by utilizing the downside deviation of the fund instead of the total standard deviation of positive and negative returns.

While offense and home runs sell tickets, purists would rather see a well-pitched game. With that in mind, save percentage can be compared with the downside capture ratio. Even though this metric may be more common to gauge closers in the MLB, a lower downside capture of a fund displays the ability of managers to navigate markets when things are trending downward, saving the fund from losing additional capital.

As opening day approaches, clients are taking this opportunity to ask themselves if the portfolio managers they entrust their capital to are performing well. Turbulent markets have a way of exposing those who are just riding beta tailwinds—rising equity markets or persistently declining interest rates. Now is the time to reassess whether to keep them or cut them.

Jeffrey Rosenkranz is a portfolio manager for the Shelton Tactical Credit Fund and Kyle Johnson, CFA, is a fund analyst at Shelton.

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