Asset Portfolio Management

Allocating resources to their most productive use is a first principle of capitalism and essential for unlocking economic potential. For firms, this means continuously reviewing their portfolio of activities and making regular adjustments through acquisitions, disposals, and, when necessary, wind-downs.

Portfolio coherence does not occur by accident, and incoherence leads to inefficiencies. Maximizing the value of assets that differ in technology, business models, quality, or end markets is like running barefoot and blindfolded with hands tied behind the back and a heavy backpack.

Evidence supports portfolio changes through acquisitions. In a 2024 report, Bain determined that frequent acquirers have a 130% advantage in total shareholder returns over non-acquirers. Notably, the consultancy notes that the value creation advantage has doubled over the last decade compared to the previous one as companies professionalized their approach to due diligence and integration.

A significant constraint to acquisitions is chiefly the supply of targets. Specifically, for M&A to fulfill its contribution to the ‘invisible hand,’ the market needs more corporate sellers. Sadly, many companies suffer from strategic inertia, failing to ask themselves a fundamental question: ‘If I did not own this asset, would I want to acquire it and at this price?’ And yet, it is the ultimate test.

There are several reasons for this phenomenon. According to the ‘endowment effect’, economic actors overvalue what they already own. The resulting asymmetry between potential sellers and buyers creates a built-in bid–ask spread, which a control or pre-emption premium may not be able to bridge.

Other biases reinforce inertia: status quo comfort, escalation of commitment associated with an optimism bias, loss aversion, and fear that a smaller scope of operations signals diminished relevance.

Furthermore, firms are often subject to the perfectionist timing fallacy. They wait for the elusive alignment of macroeconomic, microeconomic, financial market, and company-specific factors to engage in a transaction – often ignoring that during the deal process, all these parameters move unpredictably.

Activists skillfully exploit these tendencies. According to a 2022 report reviewing over 4,000 campaigns, ‘[activists’] demands to sell all, or part, of the targeted firms earn especially sizable returns.’

I would expand portfolio sell-side inertia to another asset class: managers.

Like businesses, individuals are assets that must be allocated optimally within a firm and the broader economy. Thus, unsurprisingly, people management is distorted by the same biases: the inflated value of a known entity, a preference for the status quo, the blind confidence in the ability to improve a manager’s performance, the avoidance of loss, and, possibly, concerns about shrinking a team.

In a world increasingly rewarding agility, procrastination leads to a costly misallocation of resources for a firm and the broader economy. Underperforming or ‘non-core’ assets, whether businesses or managers, act like thick glue in cogs. Focus is lost. The implementation of value-enhancing initiatives is impeded.

For all assets, economic value creation is straightforward: make decisions quickly, exit early, acquire wisely, and integrate effectively.

To paraphrase a Lioness: ‘Turn biases off and the head back on.’