The Missing Links in Investment Analysis

A portfolio management strategy to make investments work

Confronted with tighter profit margins and greater risks, executives are under more pressure than ever to deliver higher returns from their business portfolios. In response, most companies are now weighing investments aimed at improving their performance.

In the first half of this year alone, companies announced 19,932 mergers and acquisitions worth $1.8 trillion – the highest value since the first half of 2007, according to Dealogic.

But there is a real risk that the acquiring companies could end up worse off, unless they take a fundamentally different tack to evaluating investments. Standard investment opportunity assessment tools that are based on hurdle rates determined by weight-adjusted costs of capital are proving to be flawed for several reasons: First, non‑financial risks, such as regulatory and strategic risks, are typically not captured in such cost of capital allocations, even though they can dramatically affect business performance. Second, there is a tendency for companies to make capital allocation decisions on a stand-alone basis, as opposed to examining their impact on their entire portfolio of businesses. Third, many firms lack the capability to evaluate their future corporate portfolio’s performance under a range of market and strategic scenarios.

The Missing Links in Investment Analysis