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Funds warm to activist strategies

Almost three-quarters of attendees at IPE’s 2014 conference believe activist shareholding strategies have a role within institutional investment.

The question of whether activism should become part of institutional investors’ strategies was posed in a panel moderated by Craig Stevenson, senior investment consultant at Towers Watson.

Attendees also agreed on the style of activist shareholding they would pursue, with 64% saying they preferred a mix of a collaborative and an aggressive style.

Some 41% said they were agnostic as to where their activist allocation should sit in their portfolio; the remainder placed it within equity, hedge funds or private equity. 

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With regard to returns from activist shareholding strategies, 43% said they would expect them to add alpha to the tune of 3% or more.

Julian Franks, professor at the London Business School and academic director of the Centre for Economic Policy Research of the European Corporate Governance Institute, cited data from his several studies showing that activist strategies that are successful in bringing about change do deliver additional alpha returns for investors.

All panellists agreed that activism was compatible with the way institutional investors operated, but there was disagreement as to how institutional investors and other activist investors, such as activist hedge funds, should join forces to make an impact on company management strategy.

Franks pointed out that, while there has been a cultural change, and management is far more comfortable with activist ownership, that should not mean activist fund managers should disregard companies that do not show an immediate willingness to engage in a discussion.

He said: “You cannot walk away simply because the company’s management does not return your phone calls. That is not what I would call responsible ownership.”

Jens Tischendorf, partner and director of Cevian Capital, an activist hedge fund, explained that his fund’s strategy consisted of joining the boards of companies and changing management from the inside.

As a result, the fund spends a considerable amount of time studying individual investments before acting, and the fund’s portfolio is highly concentrated. 

Peter Borgdorff, director of Pensioenfonds Zorg & Welzijn (PFZW) and chairman of Eumedion, the Netherlands’ corporate governance forum, pointed out that a large pension fund such as PFZW, with equity stakes in hundreds of companies, cannot systematically follow a strategy consisting of putting representatives on the boards of companies.

However, he said PZWF did pursue an activist strategy, using its weight to influence companies – especially in order to rectify issues at companies, as observed by PZWF directly or raised by other shareholders and the public.

The fund uses proxy voting, as well as more direct dialogue, to have an impact on companies, on a case-by-case basis.

Borgdorff added: “For me, activism is more than just generating additional alpha. That should not be the goal in itself. Activism is about our responsibility to society. Through activism, you can create a better market. I can’t imagine investing without taking responsibility about the companies you invest in.”

Anne Simpson, director of corporate governance and senior portfolio manager at CalPERS, said the fund had gradually developed an activist approach focused on areas such as governance to gender issues. She said: “We are finding we can be more effective working directly with companies. We’re being thoughtful about the role of this kind of manager.”

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