The MAPFRE AM Behavioral Fund is a different kind of investment fund. Managed by Luis García and Michael Morosi, it has the explicit aim of “exploiting pricing inefficiencies in European equities caused by the behaviour of market participants”. Their quest for market inefficiencies has led García and Morosi to look farther afield than most investors, including the football industry, a sector many institutional investors have avoided – irrationally, in the fund managers’ opinion. Investments in football clubs compose nearly 10% of the Behavioral Fund’s assets, including the Dutch club AFC Ajax and the French club Olympique Lyonnais.

García sat down with World Football Summit to explain their unique approach to investing in football.

Q. Firstly, can you give us an initial explanation behind the desire to invest in football clubs?
A. In the MAPFRE AM Behavioral Fund, we can invest in all industries. We are generalist. We apply the same criteria for all of the companies that we analyse, including football clubs. When we apply these criteria to football clubs, the result is quite surprising. There are many interesting options, although you have to choose well, just as you would in any other industry. We found that in the football industry you can invest in good companies at a huge discount. And one reason that they are so cheap is there is a psychological component. It is psychologically hard to invest in football clubs. That depresses the price and creates a value opportunity. You can pay a price that is much lower than the real value of the company.

Q. What exactly do you mean by it being psychologically hard to invest in football clubs?
A. It is psychologically hard to invest in football clubs for three main reasons. One is that the short-term noise that makes investors behave irrationally in the stock market is multiplied when it comes to football clubs. The impact of news, like match results, is usually higher and it comes out very frequently. Secondly, to invest in this industry you need to be willing to start analysing it from zero, deconstructing the idea that most of us built into our minds a couple of decades ago, when the clubs were significantly mismanaged. And not many people are able to do this, even if they are really smart. Thirdly, it is psychologically very demanding to invest in this industry because no one else is doing so. The human brain is wired to follow the herd, not to leave the group. But, taking a contrarian approach is the only way to beat the market. As the legendary fund manager Seth Klarman said, ‘you don’t become a value investor for the group hugs’.

Q. Is the investment in AFC Ajax still at the top of the entire portfolio?
A. Yes, AFC Ajax right now is around five percent of the total management of the portfolio and Olympique Lyonnais is the second largest position and it’s around 4.5 percent of the portfolio. This is not very common! I think we are almost the only mutual fund that has two football clubs within the top two positions of the fund.

“One point that is very important about the Olympique Lyonnais stadium is that they can use it almost 365 days per year”

Q. Why are those two specific clubs, AFC Ajax and Olympique Lyonnais, attractive to you as an investor?
A. You need to do your work and you need to choose the right clubs. This has many components, the first of which is that you need to choose the right management. This is important in every single industry, but I must say it is even more important in football. Maybe it’s because the percentage of people managing European football in a professional way is still quite limited, even if it is increasing. Then, I think the opportunity is larger in, let’s call them, tier two or tier three clubs, meaning that they are clubs that sell players for an amount of money that is higher than the amount of money they pay to replace these players. AFC Ajax and Olympique Lyonnais are both very good at that. Also, you need clubs that either play in large leagues or have access to European competitions because the audiovisual rights are higher then. Finally, we prefer clubs that own their own stadium. Looking at what has happened with US sports franchises in the past, there was a point when they started building their own stadiums and getting all the income that you can get from managing your own stadium in the right way. And that was a game-changer. I think we are in the process of seeing that in European football.

Q. Are you seeing the benefits of maximising stadium revenue with the clubs you already invest in?
A. In this sense, Olympique Lyonnais has been well advanced compared to the rest of the industry. In 2016, they built their own stadium. They made quite a significant investment there, but the truth is that now they are getting significant income and I think they can even increase that. One point that is very important about the Olympique Lyonnais stadium is that they can use it almost 365 days per year. They can also do other things like hold other sporting events, hold concerts, host workshops for companies… Everything you can imagine in order to get income from such an important asset.

Q. How much do you look at how fruitful a club’s academy is?
A. The academy is one of the main components. There was actually a statistic that was very shocking to me when I first saw it. I already knew that AFC Ajax had a great academy, but I was not as familiar with the academy of Olympique Lyonnais and there is a nice stat that says Olympique Lyonnais is the second-top club in Europe for producing players who then play in the top five leagues in Europe, just below Real Madrid and even ahead of Barcelona. Olympique Lyonnais has been in the top four of this ranking for the past seven years. That was very shocking.

“Spain is the only one of the major European leagues that doesn’t have a team that is listed on the stock exchange. I really think that this is going to change in the future and one of the main drivers is going to be the stadiums”

Q. What about Spanish clubs? LaLiga is one of the fastest growing leagues commercially and its clubs are growing their revenues too. Would investing in Spanish football be an attractive proposition?
A. Sure, I really think so. The thing is that our fund can only invest in companies that are listed in the stock exchanges. I have mentioned clubs in Italy, UK, Portugal, France and Germany because you have listed companies that manage the clubs in all these countries. In Spain, it’s the only one of the major European leagues that doesn’t have a team that is listed on the stock exchange. I really think that this is going to change in the future, and one of the main drivers is going to be the stadiums.

Q. Why because of the stadiums?
A. There is going to be a very big difference in terms of economics between clubs that own a stadium and clubs that do not own a stadium. If you want to build a new stadium, this is quite a significant investment. Some years before you could ask for a lot of debt, but now the financial control is higher so you cannot do that. Of course, there are wealthy guys in the US or Asia or wherever that can invest in some of the stadiums, but this has its limits, so you need to find additional or alternative sources of funding. Why not by going public and listing yourself in the stock exchange so that more funds like the one that I manage with my colleague Michael Morosi can invest in them? I think there are already some clubs in Spain that if they were public and we were able to buy the shares then these would be interesting opportunities. Of course, it all depends on the price you pay.

Q. There are several clubs in Spain right now overseeing some interesting projects with their stadiums. Which clubs and projects stand out to you as an investor?
A. You have many examples. Real Sociedad is a club that is doing things quite well in terms of managing the stadium better and also their digital content and media and everything that is growing around the club. You also have Atlético Madrid going from the Vicente Calderón Stadium to the Wanda Metropolitano Stadium because it offers other possibilities. You have Real Madrid investing a lot of money in refurbishing the Bernabéu. You have Barcelona with a huge project, too. You have teams that are negotiating with the public authorities to try to get either some land to build a new stadium or maybe to buy the stadium that they’re already in. You have examples like Real Valladolid or Celta Vigo. You even have a club that is a very good example of what is happening in the industry of football and that is RCD Mallorca. They’re trying to apply all of the techniques that they already know from the US in RCD Mallorca, and one of the things that they are doing is looking at alternatives to make a better use of the stadium.

Q. What about the English Premier League, currently the richest league in the world. Is that an attractive league for investors? Or is it almost too big?
A. I think that probably in every single league in Europe there are opportunities. The Premier League has some advantages over other leagues, like for example being the first mover into some markets like Asia and then having a very clear competitive advantage in the US that is the language. So for sure there can be interesting opportunities there. Then, you have to look for some of the components I already mentioned, like clubs that make a recurring net operating profit from selling players, clubs that own their own stadium, clubs that are managed by a good board of directors, clubs that have a solid balance sheet. Then, when you mix all of that and find a club, then what makes the difference between being a bad investment or a good investment, as with any other company, is the price you pay.

“The Premier League has some advantages over other leagues, like for example being the first mover into some markets like Asia and then having a very clear competitive advantage in the US that is the language”

Q.Does the uncertainty over Brexit impact the attractiveness of investing in British football right now?
A. Well, you never know. Not only with football but with many other companies that we have in the portfolio, we have been struggling to estimate the impact of Brexit. I tend to think, not only for football clubs but for any other global company, that Brexit is not likely to have a positive impact. For other companies, for example, we own companies that are really domestic in the UK, for those companies maybe there is some kind of positive impact. In terms of football, we would need to have more information about how the final agreement impacts the way that players can go into the UK or back to other European clubs. I think it’s still to early to say what the final impact will be.

Q. You have to think long-term, but most people in the world of football are thinking about the short-term a lot more, right?
A. We have two very recent examples, of AFC Ajax getting eliminated from the Champions League and also Memphis Depay, the striker of Olympique Lyonnais, getting injured. Both pieces of news had a short-term impact on the price of the stock. Then the price recovered. And I’m pretty sure that it will continue to occur in the future, and that’s one reason we invest there. It’s very important to stay away from this short-term noise. For example, the day AFC Ajax was eliminated I received a lot of phone calls from journalists or peers asking about this. I was like ‘no guys, this is not about winning or losing one game’. It’s more about the longer term and the economic fundamentals. The same with Olympique Lyonnais.

Q. If you have a long-term outlook when you invest then you must have considered the possibility that there could be a European Super League in a few years’ time. How scared or excited are you at the prospect of a European Super League?
A. This is both a risk and an opportunity. First of all, the two clubs we invest in have a pretty good chance of getting into the league if it is finally created. I still struggle to see that we’ll finally get to that, at least in the terms that are being negotiated right now. We’ll probably get to an intermediate solution. If we do that, AFC Ajax and Olympique Lyonnais have a pretty good chance of getting there. And even if they don’t, there is a potential positive impact, which is that transfer market inflation continues. If clubs are going to the European Super League and getting more income, then these clubs are going to pay more for the players of AFC Ajax and Olympique Lyonnais. So that could increase the revenues from selling players to the clubs that would be in the European Super League. So, I see it as a risk. A controlled risk, let’s say. But, it also has a possibility of being something that could have a positive impact.

Q. Finally, what are some of the differences and intricacies of investing in football that most investors wouldn’t be aware of?
A. It’s exactly the same as any other industry. The only thing is that it’s psychologically more difficult. This has many components. One of them is with the short-term, as you really need to forget about it and maintain a long-term focus. The other thing is that it’s an industry you need to learn about, as in any other industry where you invest. But, I think that in sports there are some singularities. For example, many money managers already have an idea in their minds about how the sports business works and how the football industry works. They think it’s still managed as it was 20 years ago. This is not the case, as it has changed a lot. The other thing is that, surprisingly, it’s a relatively new industry. Football has been around as a sport for more than 150 years, but football as an industry is just beginning right now.