Due Diligence
Your due diligence is probably wrongGlobal Advisors: a consulting leader in defining quantified strategy, decreasing uncertainty, improving decisions, achieving measureable results.
Our latest perspective - What's behind under-performing listed companies?
Outperform through the downturn
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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.
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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
Quote: Stephen Schwartzman – Blackstone Founder
“Finance is not about math… To figure out what the right assumptions are is the whole game.” – Steve Schwartzman -Blackstone CEO
While mathematics underpins financial models, Schwarzman emphasises that lasting success in investing comes not from the calculations themselves, but from understanding which inputs actually reflect reality, and which assumptions withstand scrutiny through market cycles. This mindset has been central to Schwarzman’s career and Blackstone’s sustained outperformance through complex, shifting economic environments.
Schwarzman’s insight emerges from decades of experience at the highest levels of global finance. Having worked as a young managing director at Lehman Brothers before co-founding Blackstone in 1985, he observed that spreadsheet models are only as robust as their underlying assumptions. The art, as he sees it, is to discern which variables are truly fundamental, and which are wishful thinking. This view became especially pertinent as Blackstone led major buyouts, navigated financial crises, and managed risk across economic cycles.
Profile: Steve Schwarzman
Stephen A. Schwarzman (b. 1947) is the co-founder, chairman, and CEO of Blackstone, recognised as one of the most influential figures in alternative asset management. Blackstone—founded in 1985—has become the world’s largest alternative investment manager, with over $1.2 trillion in assets as of mid-2025, spanning private equity, real estate, credit, infrastructure, hedge funds, and life sciences investing.
Schwarzman’s leadership style is defined by:
- Pragmatism and Vision: Recognising trends early—such as the rise of private equity and alternative assets—and positioning Blackstone ahead of the curve.
- Rigorous Analysis: Insisting on thorough diligence and challenge in every investment decision, with a culture that values robust debate and open communication.
- Long-Term Value Creation: Prioritising sustainable value and resilience over chasing temporary market fads.
Beyond finance, Schwarzman is a noted philanthropist, supporting educational causes worldwide, including transformative gifts to Yale, Oxford, and MIT. He holds a BA from Yale and an MBA from Harvard Business School, and has served in advisory roles at both institutions.
Theoretical Foundations: The Role of Assumptions in Finance
Schwarzman’s quote aligns with a lineage of thinkers who reposition the foundations of finance away from pure mathematics and towards decision theory, uncertainty, and behavioural judgement. Leading theorists include:
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John Maynard Keynes: Emphasised the irreducible uncertainty in economics. Keynes argued that decision-makers must operate with ‘animal spirits’, as no mathematical model can capture all contingencies. His critique of excessive reliance on quantitative models underpins modern scepticism of overconfidence in financial projections.
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Harry Markowitz: Developed modern portfolio theory, which mathematically models diversification, yet his work presumes rational assumptions about returns, risks, and correlations—assumptions that investors must continually revisit.
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Daniel Kahneman & Amos Tversky: Founded behavioural finance, highlighting the systematic ways in which human judgement deviates from mathematical rationality. They demonstrated that cognitive biases and framing dramatically influence financial decisions, making the process of setting ‘the right assumptions’ inescapably psychological.
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Robert Merton & Myron Scholes: Advanced mathematical finance (notably the Black-Scholes model), but their work’s practical impact depends on the soundness of model assumptions—such as volatility and risk-free rates—demonstrating that mathematical sophistication is only as robust as its inputs.
These theorists consistently reveal that while mathematics structures finance, judgement about assumptions determines outcomes. Schwarzman’s observation mirrors the practical wisdom of top investors: the difference between success and failure is not in the formulae, but in the insight to know where the numbers truly matter.
Strategic Implications
Schwarzman’s remark is a call for intellectual humility and rigorous inquiry in finance. The most sophisticated models can collapse under faulty premises. Persistent outperformance, as demonstrated by Blackstone, is achieved by relentless scrutiny of underlying assumptions, the courage to challenge comfortable narratives, and the discipline to act only when conviction aligns with reality. This remains the enduring game in global financial leadership.
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