High Hopes
We’ve been managing low-volatility equity strategies for about as long as we’ve been picking Super Bowl winners. Since 2004, the team has been running portfolios based on our award-winning research into the low-volatility anomaly: the idea that low-risk stocks generally outperform their high-risk counterparts over time. Over the past handful of years, we’ve been documenting a similar effect when it comes to the NFL: Less risky, lower-payout wagers on teams that are large favorites tend to outperform riskier ones placed on large-payout, heavy-underdog teams (commonly referred to as “lottery tickets”).
Recently, markets have been bucking this long-term trend as higher-risk stocks have been outperforming lower-risk stocks over the past few years. This is consistent with what we’ve seen in the betting markets: The trend we saw in 2019 and 2020 continued in 2021. Low-risk wagers returned -8.3% while the long shot, high-risk ones returned 42.8%: a 50.5% spread (Chart 3). If history gives us any insight, the payoff to these high-risk wagers, like the returns on the high-risk stocks we like to short, will see some reversion to the mean.
Don’t Stop Believin’
Our research has found that NFL teams tend to revert back to their average longer-term success ratios: Teams that outperform expectations in one season tend to underperform expectations in the next (and vice versa). We’ve also observed that this trend is apparent as soon as a season’s playoffs. More specifically, teams with higher NFL Alphas usually have underperformed in the postseason, thus making the team with the lower Alpha the better selection to cover the point spread.
We looked pretty good after the divisional week (having gone 5-1), but the “most exciting two weeks in NFL history” were a bit more challenging as the model went 3-3, ending the playoffs with a still-respectable 8-4 record (Table 2) to take the NFL Alphas’ all-time playoff record to 116-72, a 62% success rate.
I Love L.A.
This is the fourth time a local team has played in the Super Bowl. (While Palo Alto is not San Francisco and Pasadena is not Los Angeles, they are within Uber range, which is good enough for this narrative.) Home teams have won two out of three, including a win by Tom and friends last year. The one and only local team to lose the Super Bowl? Why, it was the 1980 Los Angeles Rams’ loss to the Pittsburgh Steelers at the Rose Bowl in Super Bowl XIV. Thirty-two years later, the Cincinnati Bengals (seventh-best Alpha of 24.1%) will face the Los Angeles Rams (Alpha of 8.6%). Since we expect higher-alpha teams to underperform, our pick for Super Bowl LVI is the Los Angeles Rams (Table 3). If Los Angeles covers the spread this weekend (current consensus is Rams by four points), the NFL Alphas will improve to 14-5, and while this may not qualify our model as the GOAT, it will likely be good enough for Rams fans everywhere. (Everywhere but St. Louis.)
Matt Robinson, CFA, is a portfolio analyst for Allspring Global Investments.