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Quantified Strategy
Decreased uncertainty, improved decisions
Global Advisors is a leader in defining quantified strategies, decreasing uncertainty, improving decisions and achieving measureable results.
We specialise in providing highly-analytical data-driven recommendations in the face of significant uncertainty.
We utilise advanced predictive analytics to build robust strategies and enable our clients to make calculated decisions.
We support implementation of adaptive capability and capacity.
Our latest
Thoughts
Global Advisors’ Thoughts: Outperforming through the downturn AND the cost of ignoring full potential
Press drew attention last year to a slew of JSE-listed companies whose share prices had collapsed over the past few years. Some were previous investor darlings. Analysis pointed to a toxic combination of decreasing earnings growth and increased leverage. While this might be a warning to investors of a company in trouble, what fundamentals drive this combination?
In our analysis, company expansion driven by the need to compensate for poor performance in their core business is a typical driver of exactly this outcome.
This article was written in January 2020 but publication was delayed due to the outbreak of Covid-19. Five months after South Africa’s first case, we update our analysis and show that core-based companies outperformed diverse peers by 29% over the period.
Management should always seek to reach full potential in their core business. Attempts to expand should be to a clearly logical set of adjacencies to which they can apply their capabilities using a repeatable business model.
In the article “Steinhoff, Tongaat, Omnia… Here’s the dead giveaway that you should have avoided these companies, says an asset manager,” (Business Insider SA, Jun 11, 2019) Helena Wasserman lists a number of Johannesburg Stock Exchange (JSE) listed shares that have plummeted in recent years.
In many cases these companies’ corresponding sectors have been declining. However, in most of the sectors there is at least one company that has outperformed the rest. What is it about these outperformers that distinguishes them from the rest?
The outperformers have typically shown strong financial performance – be that Growth, ROE, ROA, RONA or Asset Turnover – and varying degrees of leverage. However, performance against these metrics is by no means consistent – see our analysis.
What is consistent is that the outperformers all show clearly delineated core businesses and ongoing growth towards full potential in these businesses alongside growth into clear adjacencies that protect, enhance and leverage the core. In some cases, the core may have been or is currently being redefined, typically through gradual, step-wise extension along logical adjacencies. Redefinition is particularly important in light of the digital transformation seen in many industries. The outperformers are very seldom diversified across unrelated business segments – although isolated examples such as Bidvest clearly exist in other sectors.
Analysis of the over- and underperformers in the sectors highlighted in the article shows that those following a clear core-based strategy have typically outperformed peers through the initial months of the downturn caused by the Covid-19 outbreak.
Strategy Tools
PODCAST: Effective Transfer Pricing
Our Spotify podcast discusses how to get transfer pricing right.
We discuss effective transfer pricing within organizations, highlighting the prevalent challenges and proposing solutions. The core issue is that poorly implemented internal pricing leads to suboptimal economic decisions, resource allocation problems, and interdepartmental conflict. The hosts advocate for market-based pricing over cost recovery, emphasizing the importance of clear price signals for efficient resource allocation and accurate decision-making. They stress the need for service level agreements, fair cost allocation, and a comprehensive process to manage the political and emotional aspects of internal pricing, ultimately aiming for improved organizational performance and profitability. The podcast includes case studies illustrating successful implementations and the authors’ expertise in this field.
Read more from the original article.
Fast Facts
Fast Fact: Great returns aren’t enough
Key insights
It’s not enough to just have great returns – top-line growth is just as critical.
In fact, S&P 500 investors rewarded high-growth companies more than high-ROIC companies over the past decade.
While the distinction was less clear on the JSE, what is clear is that getting a balance of growth and returns is critical.
Strong and consistent ROIC or RONA performers provide investors with a steady flow of discounted cash flows – without growth effectively a fixed-income instrument.
Improvements in ROIC through margin improvements, efficiencies and working-capital optimisation provide point-in-time uplifts to share price.
Top-line growth presents a compounding mechanism – ROIC (and improvements) are compounded each year leading to on-going increases in share price.
However, without acceptable levels of ROIC, the benefits of compounding will be subdued and share price appreciation will be depressed – and when ROIC is below WACC value will be destroyed.
Maintaining high levels of growth is not as sustainable as maintaining high levels of ROIC – while both typically decline as industries mature, growth is usually more affected.
Getting the right balance between ROIC and growth is critical to optimising shareholder value.
Selected News
Term: The VIX
VIX is the ticker symbol and popular name for the CBOE Volatility Index, a popular measure of the stock market’s expectation of volatility based on S&P 500 index options. It is calculated and disseminated on a real-time basis by the CBOE, and is often referred to as the fear index. – The VIX
**The VIX, or CBOE Volatility Index (ticker symbol ^VIX), measures the market’s expectation of *30-day forward-looking volatility* for the S&P 500 Index, calculated in real-time from the weighted prices of S&P 500 (SPX) call and put options across a wide range of strike prices.** Often dubbed the “fear index”, it quantifies implied volatility as a percentage, reflecting investor uncertainty and anticipated price swings—higher values signal greater expected turbulence, while lower values indicate calm markets.1,2,3,4,5
Key Characteristics and Interpretation
- Calculation method: The VIX derives from the midpoints of real-time bid/ask prices for near-term SPX options (typically first and second expirations). It aggregates variances, interpolates to a constant 30-day horizon, takes the square root for standard deviation, and multiplies by 100 to express annualised implied volatility at a 68% confidence interval. For instance, a VIX of 13.77% implies the S&P 500 is expected to move no more than ±13.77% over the next year (or scaled equivalents for shorter periods like 30 days) with 68% probability.1,3
- Market signal: It inversely correlates with the S&P 500—rising during stress (e.g., >30 signals extreme swings; peaked at 85% in 2008 crisis) and falling in stability. Long-term average is ~18.47%; below 20% suggests moderate risk, while <15% may hint at complacency.1,2,4
- Uses: Traders gauge sentiment, hedge positions, or trade VIX futures/options/products. It reflects option premiums as “insurance” costs, not historical volatility.1,2,5
Historical Context and Levels
| VIX Range | Interpretation | Example Context |
|---|---|---|
| 0-15 | Optimism, low volatility | Normal bull markets2 |
| 15-25 | Moderate volatility | Typical conditions2 |
| 25-30 | Turbulence, waning confidence | Pre-crisis jitters2 |
| 30+ | High fear, extreme swings | 2008 crisis (>50%)1 |
Extreme spikes are short-lived as traders adjust exposures.1,4
Best Related Strategy Theorist: Sheldon Natenberg
Sheldon Natenberg stands out as the premier theorist linking volatility strategies to indices like the VIX, through his seminal work Option Volatility and Pricing (first published 1988, McGraw-Hill; updated editions ongoing), a cornerstone for professionals trading volatility via options—the core input for VIX calculation.1,3
Biography: Born in the US, Natenberg began as a pit trader on the Chicago Board Options Exchange (CBOE) floor in the 1970s-1980s, during the explosive growth of listed options post-1973 CBOE founding. He traded equity and index options, honing expertise in volatility dynamics amid early market innovations. By the late 1980s, he distilled decades of floor experience into his book, which demystifies implied volatility surfaces, vega (volatility sensitivity), volatility skew, and strategies like straddles/strangles—directly underpinning VIX methodology introduced in 1993.3 Post-trading, Natenberg became a senior lecturer at the Options Institute (CBOE’s education arm), training thousands of traders until retiring around 2010. He consults and speaks globally, influencing modern vol trading.
Relationship to VIX: Natenberg’s framework predates and informs VIX computation, emphasising how option prices embed forward volatility expectations—precisely what the VIX aggregates from SPX options. His models for pricing under volatility regimes (e.g., mean-reverting processes) guide VIX interpretation and trading (e.g., volatility arbitrage). Traders rely on his “vol cone” and skew analysis to contextualise VIX spikes, making his work indispensable for “fear index” strategies. No other theorist matches his practical CBOE-rooted fusion of volatility theory and VIX-applied tactics.1,2,3,4
References
2. https://www.nerdwallet.com/investing/learn/vix
3. https://www.td.com/ca/en/investing/direct-investing/articles/understanding-vix
4. https://www.ig.com/en/indices/what-is-vix-how-do-you-trade-it
5. https://www.cboe.com/tradable-products/vix/
6. https://www.fidelity.com.sg/beginners/what-is-volatility/volatility-index
7. https://www.youtube.com/watch?v=InDSxrD4ZSM
8. https://www.spglobal.com/spdji/en/education-a-practitioners-guide-to-reading-vix.pdf
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