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How baseball and investment managers measure talent isn’t all that different


“We are born again, there is new grass on the ground…”
John Fogerty– Center field

The date that pitchers and catchers report to spring training is a defining moment for baseball fans. After a long winter, it’s always something to look forward to, when thoughts turn to spring and optimism reigns. It heralds the start of baseball season and sunny days or warm evenings spent at the ballpark watching the game we love. It takes us back to our youth – the smells of freshly cut grass and glove oil or the sound of a bat cracking and a fastball hopping into a catcher’s glove evoke nostalgia for earlier times. simple. We remember going to games as kids and now cherish the days spent making new memories at the stadium with our friends and family.

However, even the casual fan knows that baseball is not as simple a game as we remember from childhood. It’s a wonderful combination of strategy and action, the thinking man’s game. The game is loaded with stats and becomes a constant chess game for players and managers.

With everything 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 eagerly awaited the resolution of the MLB lockout and made contingency plans to watch college, high school, or even little league baseball in its place. Rather than debating sabermetrics and advanced stats of professional gamblers, we decided to have a little fun comparing some of the financial metrics of portfolio management to the American pastime.

WAR against Alpha

A player’s batting average is perhaps the most familiar statistic in baseball for all fans and is a basic way to measure skill at the plate, much like Morningstar’s batting average measures the percentage of months during which a coach has exceeded their respective benchmark over a period of time. . When your portfolio manager enters the batting box, how often does he outperform the competition? In the early days of Moneyball, wins greater than replacement (WAR) became a popular stat – how many more wins a particular player added to his team’s total compared to an average “replacement player”. Slugging percentage also measures the number of bases a player wins with each hit. These two statistics can be thought of as the Alpha generated by an investment manager, which is the extra return that a manager’s skill adds to above-market returns, measured by an index or index of reference.

Percentage savings vs drop capture rate

Moving to the Defensive Side of the Field – Recorded defensive runs calibrate the number of runs a particular player is saving or preventing, such as how Sortino’s ratio measures risk-adjusted returns using the fund’s downside spread to instead of the total standard deviation of positive and negative returns.

While offense and home runs sell tickets, purists prefer to see a well-launched game. With this in mind, the percentage savings can be compared to the downside capture rate. While this metric may be more common for gauging closes in MLB, a fund’s weaker downside capture shows managers’ ability to navigate markets when the trend is down, thus preventing the fund from lose additional capital.

As opening day approaches, clients take the opportunity to question whether the portfolio managers to whom they entrust their capital are performing. Turbulent markets have a way of exposing those who are just riding the tailwinds of beta, namely rising stock markets or persistently falling 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.