SOURCE: Boston Consulting Group

Boston Consulting Group

October 25, 2016 00:01 ET

Savvy Portfolio Management an Important Key to Superior Value Creation

Leading Value Creators Use Active Portfolio Management to Achieve and Sustain Top Performance, According to the 2016 Value Creators Report from The Boston Consulting Group

BOSTON, MA--(Marketwired - Oct 25, 2016) -  As difficult as it is for a company to become one of the world's top value creators, it is even more difficult to sustain top performance over time. However, companies can "beat the fade" to average performance by actively managing the corporate portfolio, according to the 2016 Value Creators report published recently by The Boston Consulting Group (BCG).

2016 Value Creators Rankings

The report, Creating Value Through Active Portfolio Management, includes BCG's annual rankings of the top ten value creators wordwide and in 28 industry sectors, measured by total shareholder return (TSR) during the five years from 2011 through 2015. (A preliminary version of these rankings was published by BCG in May 2016.)

TSR measures the combination of share price gains and dividend yield for a company's stock over a given period. It is the most comprehensive metric for performance in shareholder value creation. Average annual TSR is the amount of TSR that a company delivers, on average, each of the five years in our analysis.

For the second year in a row, biopharma companies lead the global large-cap rankings, taking four of the ten slots, including the top three. The number one large-cap value creator was Regeneron Pharmaceuticals, which delivered an average annual TSR of 75.3%, more than 30 percentage points greater than that of the number two company, Allergan. Gilead Sciences comes in at number three, and Biogen rounds out the group of biopharma companies in the top ten, at number six. (See exhibit 1.)

Top Performance: Hard to Achieve, Even Harder to Sustain

The report also includes a longitudinal analysis of the 89 companies that have appeared in the large-cap top ten since BCG began publishing its annual Value Creators rankings in 1999. Of that select group of companies, more than half -- a total of 46 companies -- have appeared on the list in a single five-year period. In other words, they broke into the top ten only to disappear from it in subsequent years. Only 19 companies (roughly 21% of the total) have appeared in the top-ten rankings for three years or more.

Why is it so difficult to maintain top performance? "Over time, companies tend to 'fade' to average market performance," said Jeffrey Kotzen, BCG senior partner and global leader of the firm's Shareholder Value practice, and a coauthor of the report. "To become a top value creator -- the kind that wins a place in our top-ten rankings -- a company must massively exceed investors' expectations. I don't mean simply beating earnings estimates by a point or two in a single quarter. I mean delivering results that fundamentally transform the trajectory of the business. And to stay on the list, it needs to do so over and over again."

It's not impossible for a company to "beat the fade" to average performance, but it is a high-wire act that is difficult to sustain. "It's in the nature of capital markets to continually reset a company's starting point," said Frank Plaschke, a partner in BCG's Munich office and a coauthor of the report. "As investor expectations for future performance get baked in to a company's current stock price, a company needs to find new ways to exceed, not just meet, those expectations."

Active Portfolio Management: A Key to Sustainable Value Creation

One way to sustain high performance is through the active reshaping of the corporate portfolio. The report goes on to describe how, in an environment increasingly characterized by pressures from activist investors, companies can use active portfolio management to optimize the value creation potential of their businesses and the company as a whole. And it includes a detailed case study of how senior management at leading biopharma value creator Bristol-Myers Squibb has transformed BMS from a diversified health care company into a biopharma pure play by systematically reshaping the company's business and R&D portfolios.

A copy of the 2016 Value Creators report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 85 offices in 48 countries. For more information, please visit bcg.com.

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