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It’s no secret that the growth in sports team values has been booming. But it’s been a lot tougher to translate the rise in franchise values into a winning investment for those of more modest means. Investment bank Morgan Stanley is the latest to try.
The bank two weeks ago announced a new sports stock index, the Parametric Custom Core Sports League strategy, which will allow clients to invest in a bank-curated list of equities with strong ties to the major sports leagues, according to a story on CNBC detailing the product. Morgan Stanley didn’t respond to a request for comment.
“We see the demand from our clients that are asking about ways to invest in sports,” Sandra Richards, managing director and head of the Morgan Stanley Global Sports and Entertainment division, told CNBC. “And it’s going to continue.”
It’s easy to see why: Sports teams are widely followed and easy to understand. People are increasingly aware of the recent gains in team values. According to the University of Michigan’s Ross-Arctos Sports Franchise index, which uses non-public data on team sales, franchises have gained 12% annualized over the past 20 years, outperforming groups including media and entertainment stocks, small caps and U.S. equities overall.
But a potential problem for a stock product is meeting investors’ expectation that they can get anywhere near the performance of a team owner. Sports may be highly valued by billionaires, but in the stock market, sports shares aren’t very good investments compared to other options.
Starting on July 31, 2020, when the Sportico Sports Stock Index debuted, the 40-stock basket of sports-teams and related investment has gained 35% as of Monday’s market close. In a vacuum, that’s a nice return of more than 8% annually, one that beats Treasury bonds. The problem is, other stock sectors do better. For instance, consumer staples—like Coca-Cola, Target and General Mills—are the worst sector of the S&P 500 over that same timeframe with a 44% gain. The best of the nine S&P sectors—technology stocks—are up 123% over the same period. Overall, the S&P 500 has outpaced Sportico’s index by nearly 50 points.
Still, compared to other sport-related indexes, the Sportico measure is the champion. The Roundhill Sports betting and iGaming ETF—known as its ticker BETZ—has gained 25% the past four-plus years. A sister ETF, the Pro Sports, Media and Apparel ETF (MVP) shut down from bad performance just a year after its 2021 launch. Another index, the Morningstar Sports Betting & iGaming Index, is down 6% from its peak attained shortly after being launched in December 2021. The Morningstar index, like the Michigan and Sportico indexes, aren’t available as investable products.
Some caveats: Past performance of sports stocks doesn’t mean the future will be as mediocre, and we have just a small history of sports stock performance (sports hasn’t been isolated as a stock sector continually until the Sportico launch). At times, sports stocks trounced the broader market: In early 2021 during the meme stock craze BETZ was nearly 100 percentage points better than the S&P, and in late 2021 the Sportico index was up 76% compared to the S&P gains of 44%. About a year later, both badly lagged the S&P, with BETZ down 17% from its mid-2020 level, while the Sportico Sports Stock Index hit the lowest it has been before or since its creation, with just a 1% profit.
One reason for the volatility of the Sportico, Roundhill and Morningstar indexes is they have relatively few component stocks in them, which makes them vulnerable to wilder swings: Sportico has 40, BETZ 33 and Morningstar 30. The Morgan Stanley index avoids the problems with high concentrations of holdings. The Core Sports League strategy will have between 250 and 400 large cap U.S. stocks in it, according to CNBC. But that brings two different problems.
One is the size of the holdings means Morgan Stanley arguably can’t reflect the state of the sports business. There aren’t a lot of pure-play sports stocks, and the Sportico Sports Stock Index contains just about all of them (excluding penny stocks). Even then, some decisions, like Sportico’s inclusion of Amazon.com, brought heated subscriber objections (you know who you are). The reasoning for including Amazon is its sports programming is a key facet of its growth strategy.
Additionally, the limitation by Morgan Stanley of stocks that are just large caps, meaning a market capitalization of $10 billion or more, will exclude many sports stocks. Knicks and Rangers parent Madison Square Garden Sports, Manchester United, Atlanta Braves, Sportradar, Genius Sports and UnderArmour are just some that won’t be in Morgan Stanley’s portfolio. The bank told CNBC its index will gain sports exposure by using Nielsen Sports data to focus on brands that get exposure through sports—like Coca-Cola, Target, General Mills, Apple and Microsoft.
The other problem is that by making its index so large, the Core Sports League portfolio essentially becomes a shadow S&P fund. Without diving into the intricacies of portfolio construction and performance, it’s a mathematical fact that the more stocks a portfolio holds, the closer it mimics performance of the broader stock market. That is, if you really want to try to beat the market, you should have a concentrated group of holdings small enough to outpace other equities, but large enough to avoid the risk of ruin from one or two bad holdings—so about three dozen.
What does that mean for Morgan Stanley’s offering? The odds of a portfolio of 400 large cap U.S. stocks performing notably better than the S&P 500 is statistically very low. It can happen, and Morgan Stanley is filled with many smart portfolio managers and its Parametric division is known for active indexing that can bring other benefits like tax-loss harvesting. But the high-net worth investors being targeted have trade-offs: You can pay Morgan Stanley its minimum of $875 a year on the $250,000 buy-in for the sports portfolio, or pay about a tenth of that to buy an S&P index fund. Both will probably perform about the same and provide as much sports exposure as the other.