What Alan Shearer has to teach us about inflation

Schroder fund manager Andrew Evans

So, who are the world’s three biggest spenders on defence these days? That’s right – the US, China and … Manchester City. And that’s before we even mention transfers in Europe, with news breaking over the past few days that Neymar is set to swap Catalonian beaches for Parisian chic with a move from Barcelona to Paris Saint-Germain for an eye-watering €222 million.

Back in the UK, we may still be a fortnight away from the start of the 2017/18 English Premier League season, but of course it has been generating back-page headlines for weeks now thanks to the multi-million-pound transfer fees that appear to grow ever more incredible with each passing year.

None have – yet – surpassed the £90 million odd Manchester United paid for Paul Pogba this time last year, but the club has again led the way, shelling out £75 million for Romelu Lukaku.

Other eye-catching deals include Alvaro Morata (£58 million) to Chelsea, Alexandre Lacazette (£46.5 million) to Arsenal, as well as Benjamin Mendy (£52 million), Kyle Walker (£50 million) and Bernardo Silva (£43 million) – all to Manchester City.

Madness?

On one level, no question about it – but being value managers, we pride ourselves on being contrarian, so let’s look to make the argument there is some method in that madness.

What we have here, you see, is ‘money illusion’ – where people compare amounts of money over time without taking into account inflation – so let’s do just that with transfers where an English Premier League club has been the buyer.

According to Wikipedia, the record price paid by an English club progressed quickly in the early years from the £3.6 million move Alan Shearer made from Southampton to Blackburn Rovers in 1992/93, to the £8.5 million transfer of Stan Collymore from Nottingham Forest to Liverpool in June 1995 to the £28.1 million paid by Manchester United for Juan Sebastián Verónin 2001.

What about inflation?

Even when adjusted for inflation, these figures seem almost small compared with what players are deemed to be worth today.

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The £6 million inflation-adjusted price-tag of the 1992/93-vintage Shearer, for example, is still less than half that of the most expensive uncapped English players – currently Jordan Pickford (£25 million, paid by Everton), Harry Maguire (£17 million, Leicester City) and Jordon Ibe (£15 million, Bournemouth).

The special ingredient so far missing from this analysis, however, is Premier League television rights.

In the same way London house prices have increased significantly faster over the last 25 years or so than the headline inflation numbers would suggest, so have the amounts television companies have been willing to fork out for the right to show Premier League matches.

TV rights inflation

So, while, adjusted for headline inflation, the £38 million Sky paid for Premier League TV rights in 1992/93 would roughly equate to £75 million today, Sky and BT are currently stumping up £1.72 billion a season. That means what we might say ‘TV rights inflation’ – which is of course the increase in revenue the clubs have received – has been 16.4 per cent a year.

Adjusting for that, rather than headline inflation, we find the 1992/93 Blackburn purchase of Shearer to be worth £162 million – and, as the following table shows, that is not even expensive enough to find him among the top five transfer fees paid by Premier League clubs, adjusted for ‘TV rights’ inflation.

There are a number of investment lessons to take from this.

Lesson 1

The most obvious, perhaps, is that the impact of growing something by a set amount each year for a long time – an idea known as ‘compounding’ – is a surprisingly powerful force.

Lesson 2

Another is that, while it may not be in the same league as its ‘TV rights’ counterpart, common or garden inflation still has the capacity to make a serious dent in your savings.

Data going back to 1964, for example, shows the average real performance of stocks – that is, once the erosive effects of inflation are taken into consideration – is about seven per cent a year.

The equivalent figure for cash over the same period is roughly two per cent a year – and of course that two per cent is an average: at times when interest rates are below inflation rates, the real return on cash is negative.

Investing in cash to beat inflation?

These days cash accounts are paying all but nothing while inflation currently stands at 2.6 per cent, delivering a strongly negative result for cash investments.

That makes it remarkable that, according to HM Revenue & Customs, four times as many people subscribed to cash ISAs in the 2015/16 tax year as to stock and shares ones.

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At the same time, two-thirds of all Junior ISAs subscribed for were cash ones. With Junior ISAs the beneficiary can only redeem their investment when 18.

This kind of long-term investment horizon is exactly the kind of timeframe suited to stockmarket investment, so why are 66 per cent investing in cash? Forget Manchester City’s summer spending – to our minds, that really is incredible.

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