SNATCHING DEFEAT FROM THE JAWS OF VICTORY

SNATCHING DEFEAT FROM THE JAWS OF VICTORY The finish of Super Bowl XLIX will go down as one of the greatest in history, as Malcolm Butler of the New England Patriots intercepted a potential title-winning pass by Russell Wilson of the Seattle Seahawks with 20 seconds left to seal a 28-24 Patriots victory. Pete Carroll s specious play call for a pass in lieu of a run resulted in our second consecutive incorrect Super Bowl pick. As was made abundantly clear after Wes Welker s infamous drop in Super Bowl XLVI, our predictions do not take into account the effects of glaring human error and alleged doctored footballs. Despite this setback, we are still 9-3 with our selections dating back to our seminal analysis in 2004. We hope that the golden anniversary of the game will also commemorate an end to our two-game losing streak as swiftly and resoundingly as NFL owners voting to return the Rams to their rightful home in Los Angeles. #WestCoastBias In Roman numeral-less Super Bowl 50 (formerly known as L) the top seeds from each conference are pitted against one another: the Carolina Panthers and the Denver Broncos. Will it be probable league MVP Cam Newton capping off a dream season or Peyton Manning potentially ending a great career with one last Lombardi Trophy? This, and many other questions will hopefully be answered in the analysis that follows, and ultimately on February 7 th in San Francisco Santa Clara. INTO THE WEEDS Our annual Super Bowl selection is predicated upon the investment return of each NFL team relative to sports wagering market expectations throughout the regular season. This year, we thought it might be a useful exercise to break down precisely how this investment return is calculated. A fitting case study will be our very own Los Angeles Rams. Non-descript bettor Stan has $16 and heads to Las Vegas for each of the Rams 16 regular season games. Seconds before the kickoff of each game, Stan places a $1 bet that the Rams will win (colloquially, a money line wager). If the Rams lose, Stan loses $1. At the end of Stan s 16- game marathon in Las Vegas, he adds up his profit/loss from his 16 $1 wagers and determines his average return on investment (ROI). The result of this rather

simple calculation is the Rams NFL Alpha, and luckily, his calculation is not staying in Las Vegas. We repeat this same exercise for each of the other 31 NFL teams, creating the foundation for our analysis. PURPLE REIGN, BROWN IN THE DUMPS Spoiler alert, the Carolina Panthers ended the 2015-2016 season with the highest NFL Alpha at 61.5% (Table 1). This was predictable for two reasons: the Panthers had a much better record (15-1) than any other team in the NFL, and perhaps more importantly, the Panthers weren t supposed to have a much better record than any other team in the NFL. An arguably more illustrative NFL Alpha example comes from this season s runner-up: the Minnesota Vikings at 31.9% (Chart 1). The Vikings were one of the great stories of the season, finishing with an 11-5 record (13-3 against the point spread) and dethroning the Green Bay Packers as NFC North champions. After suffering a head-scratching loss to a remarkably inept Colin Kaepernick and his Santa Clara 49ers to start the season, the Vikings set bettor expectations to a deserved minimum. However, the Vikings were able to right the ship thereafter, literally and figuratively. Despite being underdogs in the majority of their remaining fifteen games, they won eleven and became a very profitable investment. But as all loyal Vikings fans know, good times don t last forever. Despite all their legwork to make the playoffs, they suffered a heartbreaking loss to the Seahawks when kicker Blair Walsh missed a potential game-winning 27-yard field goal in frigid Minneapolis. Look on the bright side, Minnesotans at least your new stadium opens later this year, and it will be indoors. At the opposite end of the spectrum were the infamously hard luck Cleveland Browns. The team finished with a 3-13 record and a league-worst -57.6% NFL Alpha (Chart 1). Despite being a literal dog for most of the season, only one of their three victories came as an underdog, which considerably damaged their ability to reward persistent investors. As if that weren t bad enough, they had to endure another season with the Johnny Football circus. Quarterback Johnny Manziel appeared lost on the field and was wishing he was lost off the field, as he culminated the year by skipping a mandatory concussion check-up to party in Vegas wearing a disguise. In typical NFL fashion, the team addressed this issue by firing both the head coach and general manager, and hired one of Major League Baseball s foremost proponents of statistical analysis, Paul DePodesta known to be an architect of Moneyball. As a quantitative manager, we inherently applaud the move but temper our excitement by Chart 1 CUMULATIVE ALPHAS: Minnesota Vikings vs. Cleveland Browns % ALPHA 50 25 0-25 -50-75 -100 Minnesota Vikings 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 remembering that we re discussing the Browns here. There is a silver lining though: for the second consecutive year, the team with the lowest NFL Alpha ended up with the 2 nd overall pick in the draft. Here s a hint to our fellow quants: the Titans are right in front of you with the #1 pick and they don t need a QB. ANALYTIC INVESTORS NFL ALPHAS 2015-2016 3 GAMES Cleveland Browns

Table 1 ALPHAS FOR ALL 32 NFL TEAMS A L P H A 2 0 1 5-2 0 1 6 Team 2015-2016 2014-2015 Alpha Change Record Favorite/ Underdog Carolina Panthers 61.5% 8.1% 53.4% 15-1 14-2 Minnesota Vikings 31.9% -9.5% 41.4% 11-5 8-8 Denver Broncos 31.9% 3.6% 28.3% 12-4 12-4 Washington Redskins 31.5% -31.2% 62.7% 9-7 2-14 Arizona Cardinals 28.6% 41.6% -12.9% 13-3 15-1 Houston Texans 25.9% 5.0% 20.9% 9-7 6-10 Chicago Bears 23.4% -27.4% 50.8% 6-10 2-14 Cincinnati Bengals 20.4% 41.6% -21.2% 12-4 12-4 St Louis Rams 16.4% 14.2% 2.2% 7-9 7-9 Pittsburgh Steelers 13.8% 29.3% -15.5% 10-6 8-8 New York Jets 12.7% -41.5% 54.2% 10-6 13-3 Kansas City Chiefs 12.6% 13.4% -0.8% 11-5 12-4 Tampa Bay Buccaneers 11.6% -56.1% 67.7% 6-10 5-11 Oakland Raiders 9.4% -30.9% 40.3% 7-9 5-11 Atlanta Falcons 8.0% -20.8% 28.8% 8-8 9-7 New Orleans Saints 6.3% -27.2% 33.5% 7-9 7-9 Indianapolis Colts 5.8% 3.9% 1.9% 8-8 8-8 New England Patriots 5.7% 28.2% -22.4% 12-4 15-1 Philadelphia Eagles 2.1% 10.3% -8.3% 7-9 10-6 Detroit Lions 0.8% 12.8% -12.0% 7-9 6-10 Buffalo Bills -0.7% 30.2% -30.9% 8-8 7-9 Seattle Seahawks -3.4% 9.9% -13.2% 10-6 13-3 Green Bay Packers -4.6% 8.2% -12.8% 10-6 15-1 Miami Dolphins -6.0% -10.6% 4.6% 6-10 6-10 San Francisco 49ers -6.2% -12.2% 6.0% 5-11 0-16 Baltimore Ravens -15.6% 3.5% -19.1% 5-11 8-8 Jacksonville Jaguars -26.6% -57.8% 31.2% 5-11 5-11 New York Giants -28.3% -21.7% -6.6% 6-10 8-8 Dallas Cowboys -44.2% 55.5% -99.6% 4-12 5-11 San Diego Chargers -50.1% 10.2% -60.2% 4-12 6-10 Tennessee Titans -52.0% -74.6% 22.5% 3-13 3-13 Cleveland Browns -57.5% -6.0% -51.5% 3-13 4-12 ANALYTIC INVESTORS NFL ALPHAS 2015-2016 4

A TALE OF TWO NFC NORTH ALPHAS When is a 6-10 team a better investment than a 10-6 one? When you examine NFL Alphas in the league s Black & Blue Division (Chart 2). Although the Green Bay Packers finished 10-6 on the season, they managed a rather pedestrian NFL Alpha of - 4.6%. The primary drivers of this perceived underperformance lie in the fact that they were favored in 15 of their 16 contests, and they had no upset victories. At least Packers QB Aaron Rodgers gave us some great television moments not those ubiquitous insurance commercials, but two last-second Hail Mary touchdown passes that defied logic. On the flip side, the Chicago Bears were Monsters of the Midway when it came to wagering. Despite being underdogs in 14 of their 16 games, the Bears exceeded expectations and shook off a 0-3 start, earning an NFL Alpha of 23.4%. New head coach John Fox may not have been good enough for Peyton Manning in Denver, but he had a noticeable effect on the notoriously disappointing Bears and their much maligned QB; Jay Cutler. Three impressive wins on the road against the Kansas City Chiefs, the (former) St. Louis Rams, and the underachieving Packers only served to sweeten the pot for loyal Bears investors. Chart 2 CUMULATIVE ALPHAS: Green Bay Packers vs. Chicago Bears % ALPHA 60 40 20 0-20 -40-60 -80-100 Chicago Bears Green Bay Packers 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 GAMES CAN A CHANGE IN QB AFFECT ALPHA? In the 21 st century NFL, a team s fate is for better or worse a function of its quarterback caliber. Not surprisingly, we see this shake out in our NFL Alphas as well. When comparing the best year-over-year changes in Alphas, a trend emerges: the three most improved teams made a prudent quarterback change in 2015. We use the passer rating as a benchmark, which is a statistic that measures a QB s efficiency based on passing yards, touchdowns, attempts, completions, and interceptions. This metric is also used by the NFL to rank its passing leaders. The teams with the three most positive changes in NFL Alpha the Tampa Bay Buccaneers (67.7%), Washington Redskins (62.7%), and New York Jets (54.2%) all clearly made the correct switch at QB (Table 2). The Buccaneers change was a result of the team drafting QB Jameis Winston with the #1 pick, while the Redskins started Kirk Cousins in favor of the oft-injured and seldom effective Robert Griffin III. The Jets? They may have had one of the more unusual reasons for a QB shakeup in modern history. Last season s starter, Geno Smith, suffered a ANALYTIC INVESTORS NFL ALPHAS 2015-2016 5

broken jaw in August after being sucker punched by a teammate over a $600 debt. Whether savvy or opportune, these QB changes proved good investments for teams and investors alike. Yet, how did the Bucs reward head coach Lovie Smith for outperforming expectations in this manner? By firing him, of course. Apparently our research does not resonate in Tampa. Table 2 HIGHEST ALPHA CHANGE Team Alpha Change 2015-2016 QB 2015-2016 Passer Rating* Q U A R T E R B A C K 2014-2015 QB 2014-2015 Passer Rating* Rating Change Tampa Bay Buccaneers 67.7% Jameis Winston 84.2 Josh McCown 70.5 13.7 Washington Redskins 62.7% Kirk Cousins 101.6 Robert Griffin III 86.9 14.7 New York Jets 54.2% Ryan Fitzpatrick 88.0 Geno Smith 77.5 10.5 *Source: NFL.com WHO SAYS PLAYING THE LOTTERY DOESN T PAY? As we ve written about in a number of academic research papers, we utilize an investment approach that is based on the tenet that low risk equities tend to outperform their higher-risk counterparts within asset classes. This anomaly is not limited to equity markets; in fact, it s not even limited to investable securities in general. Prior research at Analytic and beyond has demonstrated that this can be applied to sports wagering and can be referred to as the favorite - longshot bias. Empirically, the bias addresses the fact that bets placed on big favorites with lower payouts those with less risk typically outperform riskier ones on heavy underdogs that pay out significantly more. This was the case in 2014 and in many of the previous 10 years, but 2015 has flipped the script. Low risk bets returned -15.3%, while high risk ones returned a whopping 46.7% (Chart 3). As it turns out, this is primarily attributable to a disproportionate amount of 9-to 11-point underdogs pulling off upsets. Does this mean gamblers should enter into Powerball-like office pools in the hopes of hitting the NFL s version of the lottery? Not necessarily. This is the first time in the last decade that such a swing has happened in favor of a positive risk premium, with the last being the 2006 regular season (Chart 4). Ironically, that was also the year that Peyton Manning won his lone Super Bowl ring. Furthermore, favorites covered the spread 44% of the time this season, the lowest rate since you guessed it 2006 (43%). There are plenty of potential reasons for this: more parity in the league, a rash of injuries to teams top players, or perhaps this was just one of those outlier years. While the low volatility anomaly admittedly had an off-year in NFL wagering markets, we are proud to report that low risk outperformed high risk by 17.6% in 2015 (VMS from within the Russell 1000 Index). ANALYTIC INVESTORS NFL ALPHAS 2015-2016 6

Chart 3 LOW VOLATILITY ANALYSIS 2015-2016 SEASON AVG RETURN TO MONEY LINE WAGER 50% 40% 30% 20% 10% 0% -10% -20% -9 and below/low -3.5 to -8.5/Fair -3 to +3/Average +3.5 to +8.5/ Moderate +9 and above/ High LINE/VOLATILITY Chart 4 YEARLY PAYOUTS BY RISK LEVEL ANALYTIC INVESTORS NFL ALPHAS 2015-2016 7

Admittedly, it s fun for us to examine the season s notable NFL Alpha stories to see how they correlate with other newsworthy events in the league. However, it s not all fun and games. An interesting byproduct - and the underlying focus of this article is our finding that these NFL Alphas have a tendency to mean-revert across subsequent seasons. In other words, we expect the teams that have outperformed (underperformed) expectations in the 2015 season to underperform (outperform) expectations in the 2016 season. Our research has also shown that this mean-reversion takes place between the regular season and playoffs, effectively treating the playoffs as a new season. What this means is that we expect the higher alpha teams in the regular season to be over-valued in comparison to the lower alpha teams in each matchup, thus our decision rule is to pick the lower alpha team in each matchup to beat the point-spread. In the 2016 post-season, this strategy had a 50% success rate, going 4-4-2 (Table 3). This is significantly lower than the 63% success rate over the past 12 postseasons. We will also note that for the twelfth consecutive year, this figure has not fallen below 50% in any one season. Table 3 POSTSEASON ANALYSIS (4-4-2 RECORD) Higher Alpha Team Alpha Lower Alpha Team (Analytic s Pick) Alpha Favorite Result WIN Houston Texans 25.9% Kansas City Chiefs 12.6% Chiefs by 3 Chiefs 30-0 ü Cincinnati Bengals 20.4% Pittsburgh Steelers 13.8% Steelers by 2 Steelers 18-16 T Minnesota Vikings 31.9% Seattle Seahawks -3.4% Seahawks by 4 Seahawks 10-9 Washington Redskins 31.5% Green Bay Packers -4.6% Redskins by 2 Packers 35-18 ü Kansas City Chiefs 12.6% New England Patriots 5.7% Patriots by 6 Patriots 27-20 ü Arizona Cardinals 28.6% Green Bay Packers -4.6% Cardinals by 7 Cardinals 26-20 ü Carolina Panthers 61.5% Seattle Seahawks -3.4% Panthers by 2.5 Panthers 31-24 Denver Broncos 31.9% Pittsburgh Steelers 13.8% Broncos by 7 Broncos 23-16 T Denver Broncos 31.9% New England Patriots 5.7% Patriots by 2.5 Broncos 20-18 Carolina Panthers 61.5% Arizona Cardinals 28.6% Panthers by 3 Panthers 49-15 SUPER BOWL 50 In keeping with the theme of this season being an unusual one, Super Bowl 50 features two of the three highest NFL Alpha teams of the season: the third-ranked Denver Broncos (31.9%) against the top-ranked Carolina Panthers (61.5%) (Table 4). Coincidentally, the last time two such overachieving teams faced off was when we published our first paper in 2004, and we correctly predicted the Panthers to cover against the favored Patriots. This go-around, the higher-alpha Panthers are the favorite, with odds makers estimating that the Panthers will win by 6 points. Our model would suggest that 6 points is too many, and that the lower-alpha Broncos will cover this point spread. To put it differently, we think the underdog Broncos will lose by less than two field goals, if not win the game outright this selection is not based on sentimentality for Peyton Manning, but on the fact that Denver is undervalued from our model s perspective. ANALYTIC INVESTORS NFL ALPHAS 2015-2016 8

Table 4 SUPER BOWL RESULTS SUPER BOWL XXXVII I Date 2/1/2004 XXXIX 2/6/2005 XL 2/5/2006 XLI 2/4/2007 XLII 2/3/2008 XLIII 2/1/2009 XLIV 2/7/2010 XLV 2/6/2011 XLVI 2/5/2012 XLVII 2/3/2013 XLVIII 2/2/2014 XLIX 2/1/2015 50 2/7/2016 Higher Alpha Team New England Patriots (67.0%) New England Patriots (33.5%) Seattle Seahawks (25.0%) Chicago Bears (17.8%) New England Patriots (22.9%) Pittsburgh Steelers (33.6%) Indianapolis Colts (37.6%) Pittsburgh Steelers (28.6%) New York Giants (32.8%) San Francisco 49ers (23.1%) Seattle Seahawks (13.7%) New England Patriots (28.2%) Carolina Panthers (61.5%) Lower Alpha Team (Analytic s Pick) Carolina Panthers (39.0%) Philadelphia Eagles (12.6%) Pittsburgh Steelers (11.4%) Indianapolis Colts (14.5%) New York Giants (14.6%) Arizona Cardinals (-6.4%) New Orleans Saints (12.8%) Green Bay Packers (1.3%) New England Patriots (15.8%) Baltimore Ravens (2.2%) Denver Broncos (4.6%) Seattle Seahawks (9.9%) Denver Broncos (31.9%) Favorite Result Prediction Correct Patriots by 7 Patriots 32-29* ü Patriots by 7 Patriots 24-21* ü Steelers by 4 Steelers 21-10 ü Colts by 6.5 Colts 29-17 ü Patriots by 12.5 Giants 17-14 ü Steelers by 6.5 Steelers 27-23* ü Colts by 4.5 Saints 31-17 ü Packers by 3 Packers 31-25 ü Patriots by 3 Giants 21-17 49ers by 4.5 Ravens 34-31 ü Broncos by 2 Seahawks 43-8 Patriots by 1.5 Patriots 28-24 Panthers by 6?? *While in these games lower-alpha teams did lose to the higher-alpha teams, the predictions are correct because of the lower-alpha teams covered their respective point spreads. The opinions expressed herein are those of Analytic Investors and are subject to change without notice. The research is prepared for general circulation and is circulated for general information only. It does not have regard to specific investment objectives, the financial situation and the particular needs of any specific person who may receive this report. NFL and Super Bowl are registered trademarks of the National Football League. 555 West Fifth Street, 50 th Floor Los Angeles, California 90013 213.688.3015 www.aninvestor.com ANALYTIC INVESTORS NFL ALPHAS 2015-2016 9