Is Activist Investing Just a Fad?
|December 19th, 2014||
|Contributed by: Michael R. Levin, The Activist Investor|
|We’ve all heard this question with increasing frequency. It’s a logical and reasonable one, too, as assets pour into new and existing activist funds.|
Activist managers, big and small, new and old, have attracted significant new money in the past few months. Just this week ValueAct announced it would raise $1.5 billion, its first trip to investors in several years. All told, activist funds manage over $100 billion in assets, up significantly in the past couple of years.
Does the explosion in assets signify the next bubble in equity markets? Or have we just seen the start of a new era?
Above all, anything is possible. Without a doubt, soaring activist AUM since 2009 followed the soaring equity market. If (or perhaps when) equity markets pull back, they will likely pull activist investments with them. At least a few of the current activist funds that enjoy rising valuations and fund inflows would confront declining valuations and redemptions.
Yet, we think (surprise!) activist investing has staying power. Too many investors have seen meaningful, sustainable returns, and committed way too much, to retreat.
Around a long time
As fads go, activist investing has persisted for many years. Two eminences, Carl Icahn and Boone Pickens, pressured companies starting in the mid-1980s. Many others, such as Ralph Whitworth, Paul Singer, Warren Lichtenstein, and Mario Gabelli, joined the effort within a few years. Among the SharkWatch50 list of prominent activist investors, the average fund has worked on activist situations since 2001.
Look at it this way: since Graham and Dodd decades ago, value investors have searched for bargains. Impatient PMs among them have agitated for change at underperforming companies almost since then.
Done well, too
Not for nothing have these investors attracted over $100 billion in AUM. Various indices show that activist portfolios have outperformed other funds and the broad market (see charts).
In this latter analysis, we used Shark Repellent data to estimate the relative return for about 1,400 activist situations since 2006. Consistent returns like these suggest that activist investors have something to offer.
Activist investors have committed too much to turn away easily. These PMs have invested in regulations, resources, and relationships.
Regulation has favored investors lately. Proxy access, say-on-pay, and other changes that activist investors promoted have powered activism in new ways.
Activist investors now have a significant experience and expertise in pressuring underperforming companies. We have learned much about how to screen both for value and for potential value appreciation. We also know how and when to (and not to) pressure companies.
Finally, activist investors have invested in relationships with mainstream institutional investors. We have persuaded, after years of effort, mutual funds and other institutions that activism represents the legitimate exercise of an owner’s rights. The superior returns from activist investing more than compensate these institutions for whatever trouble we allegedly cause.
A matter of style
Over the years, we investors have seen many, many equity strategies. Fundamental, technical, momentum, high frequency; the list goes on. Eventually the alpha from a given equity strategy gets competed away. Someone designs a more robust model, builds a bigger database, or moves their trading floor a few miles closer to the exchange.
Yet, we will always have too many lazy, incompetent, or deceitful executive teams, and too few PMs with the determination and skill to rectify the situation.
Executives may wish activist investing is a fad, and not an enduring strategy. Too many shareholders have done well for a long time by thinking otherwise.
For Detailed Investor Profiles on these Investors, click below: