Is LeBron’s Consistency Undervalued?

Is Lebron's Consistency UndervaluedThere are many parallels between sports and investing, and we have even contributed to that on occasion. Our recent blog raised the question as to whether LeBron James has lost focus since joining the Lakers and his comments about his team’s need to be more consistent. The blog raised some good questions about fund managers (e.g., do managers with historically good performance get a pass on future underperformance, etc.) and made us wonder if LeBron’s on-court performance has been consistent with year’s past. In fact, LeBron’s play this season has been right in line with historical performance.

Using a simple method (Z-Score) to check how LeBron’s current year compares to his previous years shows he is performing in line with most of the selected metrics. However, two measures standout as “not normal”: Rebounds (1.57) and Steals (-1.02); both metrics could be considered measurements of “hustle” (see Table 1 in appendix). With one measure being above normal and another being below, they probably cancel each other out this year. It would be hard for anyone to argue that LeBron is not performing as expected this year. Post-game comments and locker room banter may invite questions, but statistically, he is still LeBron.

Another thing that stands out about LeBron is his yearly consistency. Without running an exhaustive study (turn to fivethirtyeight for that kind of work), we will quickly look at how LeBron compares to some of the recent “greats” and a couple of other players who have had long careers (this analysis is filled with survivorship bias).

*All data from NBA; season with less than 30 games played were excluded from a player’s statistics; PIE data for Jordan is not available; calculations by 361 Capital.

The tables above show the yearly average, standard deviation, and standard deviation as a percent of the player’s average[1] for 8 players across 10 different metrics. Five of the eight players are, or will be, Hall of Famers and the other three players (Aldridge, Conley and Ellis) have had long careers in the NBA. Again, this is not a fair comparison as we are comparing LeBron to other “great” players and not the entirety of the League. However, even within this comparison group LeBron’s consistency stands out. He ranks as the most consistent (using standard deviation as a percent of average) in 5 out of 10 metrics. The next most consistent player across all the metrics could be Iverson or Conley (depending on how you want to measure: average rank, number of times the most consistent, etc.).

Finding an investment manager/strategy that is as good and as consistent as LeBron might be very difficult. Unfortunately, in the investment world, longer-term outperformance (alpha) is not as consistent; even if you know the manager/strategy produced alpha after the fact.

Consistency in the world of investing is much harder to identify. In order to answer our own question whether managers with historically good performance get a pass, we looked at select Morningstar data for active managers in the small cap blend universe (of which 361 Capital’s small cap strategy is a part).[2] To go along with our LeBron versus other great players, we then reduced our peer group to funds ranked either four or five stars by Morningstar.

Within this group over the last 10 years, consistency of returns has no relation to alpha. Higher alpha does not appear to be generated from the least volatile funds. The scatterplot below plots the rank of 10-year alpha vs. the rank of standard deviation for each of the funds. The points look random with an R-squared of 0.0018.

Source: Morningstar, 361 Capital.

This is not to say you need volatile returns to generate positive alpha. Of the top 10 funds within this already select group (those to the right of 11 on the x-axis), two also are ranked in the top 10 in terms of lowest standard deviation and another is ranked 11th.

Consistency in investing, as a means to longer term success, should not only be looked at in terms of returns but the manager’s process and methodology. In the definition of consistent it says, “constantly adhering to the same principles, course, form, etc.” This might be harder to judge from only return data, so finding consistency in approach takes more diligence and time. Adhering to a systematic process promotes consistency in the type of portfolio that exhibits the characteristics to which the manager looks to have exposure.

Comparing an individual athlete playing a team sport to a fund is not exactly apples to apples, but we hope this exercise helps you look at consistency in the proper context. From an investment management perspective, you need to understand where you want to see consistency, in the process (inputs) and in the returns (outputs). Secondly, time frame matters. Investment managers and athletes alike all experience fluctuations in their results. True winners stand out over time.

By the way, if there is still any doubt as to LeBron’s consistency, a LeBron-led team has been to the Finals in nine of his 15 seasons (60%). Where LeBron ranks in the all-time greats, we will leave up to you…

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