In today’s Exponential Investor

  • Managers come and go, but stocks always go up
  • Manchester United, on and off the pitch
  • Re-thinking GDP

All sorts of news can move markets.

A company’s financial results, for example. Or a government’s budget announcement.

But sometimes, non-financial news can have an impact, too.

When US markets opened yesterday, one company’s value rose by $81.65 million… all because a football manager was sacked.

That’s right, Manchester United Football Club is publicly listed. You can buy and sell its shares like any other blue-chip stock.

It’s amazing when you think about it, the relationship at play here: a football manager gets sacked, and a stock goes up.

Investing is about numbers, and numbers are driven by company performance. But in the case of Manchester United, how do we measure performance?

If they lose 4-1 to Watford on Saturday but the club’s shirt sales in Asia are up 10% on Sunday, has it been a bad weekend for the company?

Put another way, what do shareholders care about more: Manchester United’s performance on the pitch or in the shops?

Well, the fact that shares have risen 3.2% on the news that the much-liked but underperforming manager, Ole Gunnar Solskjær, has been sacked suggests that shareholders believe two things.

One, that on pitch performances matter to the future profitability of the company (“club”).

Two, that without this particular man serving as manager, then footballing performances are likely to improve.

But the story of Manchester United over the last decade has been one of disappointment. Whilst the club’s business has continued to grow across the world, on the pitch Manchester United has failed to relive its previous days of footballing glory.

Source: Koyfin 

The share price has reflected both truths – that the club is a commercial success but a footballing disappointment – at different times.

It had one good run in that time, between early 2016 and September 2018. Those dates, interestingly, correlate almost perfectly with the volatile tenure of Portuguese manager José Mourinho.

In the previous season (2017/18) Mourinho had taken Manchester United to a second-place finish in the league, behind champions Manchester City, while amassing more points than in any other season since the great Sir Alex Ferguson had left the club at the start of the decade.

He has since been ridiculed for claiming that finishing in second place that year is one of his greatest achievements as a manager.

But investors appeared to agree with Mourinho’s statement.

During the 2017/18 season, and into the start of the next, they drove it to its highest price of the last decade.

The following season, results started to drop off and Mourinho was sacked in December, a couple of months after the stock had peaked.

But, to me, the interesting thing is that the share price has gone nowhere in the last nine years.

Revenues grew from $421 million to $796 million between 2012 and 2019 . But at the same time, the club has gone a full decade without a Premier League title, and delivered some of its worst performances on the pitch in decades.

So it’s almost as though investors have given Manchester United’s football and the financial performance equal weighting, balancing each other out. When the club finally showed promise under Mourinho, the shares did respond.

With an unbelievable wealth of talent in the squad, and some genuinely good managerial candidates knocking about (such as Zinedine Zidane or Erik ten Hag), could this be an opportunity to load up on an undervalued growth stock with a captive customer base, huge television rights deals, and the biggest influencer on earth in Cristiano Ronaldo?

Well a 3% rise isn’t much in the grand scheme of things, but it suggests that at least a few people think so.

Measuring GDP, and GDP as a measure

Manchester United sales figures factor into the national GDP figure.

But what is Manchester United really worth? Is it really just numbers?

If we want to understand the value of a football club, is quantitative analysis enough?

To most of its loyal, ground-visiting fans, it is the financial side of the game that is the only negative.

To them, football is about emotion, passion and loyalty.

So it’s odd that our chosen metric of national progress, gross domestic product (GDP – the sum of consumption, government spending, investment and net exports), captures the very worst aspects of a football club: the money.

Shouldn’t a qualitative factor be included? Is GDP really the best way to measure how a country is doing?

It’s a similar question faced by investors in Manchester United – which results matter more, those on or off the pitch?

Well, some people are looking for ways to broaden how we think about national progress.

Not only should we once again be careful to use per capita GDP (Japan’s population is declining, so why compare it to the United States’, which is rising?).

But there are also other things at stake, which GDP fails (badly) to capture.

Education, air quality, the natural environment, the quality and availability of healthcare, and the performances of Manchester United.

One person who has helped pioneer this kind of thinking is Hazel Henderson, lifelong champion of a kinder and more sustainable economic model.

She shares my view that the Covid-19 pandemic has challenged traditional, cash-flow focused measures of progress.

This is a view that touches on issues at the heart of the current sustainability revolution, with companies and countries under pressure to properly account for the long-term non-financial impacts of their activities.

We don’t charge for carbon, but that doesn’t mean it doesn’t have a cost.

As Henderson argues:

Uncounted social and environmental costs that accounting protocols allowed companies and government agencies to “externalize“ from their balance-sheets and pass on to the public, were hiding the buildup of pollution and environmental threats to our future. [After the pandemic] Economic formulas were finally challenged by real world physical risks measured by scientific data.

One alternative is to focus on something called the SDGs – 17 Sustainable Development Goals that were ratified by the 193 countries of the United Nations in 2015.

These include targets such as ending poverty and hunger, securing sustainably clean water supplies, reducing air pollution, cleaning up the energy system and the natural environment, and providing good education and jobs.

The SDGs offer a more thoughtful and sustainable way of viewing and targeting national development.

I believe that every sector and industry in the world is moving in a more sustainable direction, as we begin to understand the true cost of our current extractive and destructive systems.

Re-thinking GDP, and what it does and doesn’t measure, is an important part of this transformation. And investors would do well to take note of the changing accounting orthodoxy around sustainability.

All the best,

Kit Winder
Co-editor, Exponential Investor