More than half of respondents to a poll of European pension funds believe activist shareholding strategies have a role within institutional investment.
The question whether activism should become part of institutional investors’ strategies was posed to an audience of European pension funds during the last session of the 2014 IPE Conference & Awards in Vienna, by a panel moderated by Craig Stevenson, senior investment consultant at Towers Watson.
Pension funds attending the conference also agreed on the style of activist shareholding they would pursue, with most investors saying they preferred a mix of a collaborative and an aggressive style.
The majority of investors in the poll said they were ‘agnostic’ as to where their activist allocation should sit in their portfolio, as they believe it should not necessarily take one single, specific form – such as equity, hedge funds or private equity.
With regards to returns from activist shareholding strategies, most said they would expect them to add alpha to their portfolios to the tune of 3% or more.
This finding seems to represent a realistic expectation if compared with scientific evidence.
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 are 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.”
Tischendorf agreed that activism could help improve society as a whole: “If through being an activist investor you make companies more competitive, it is better for society.”
Anne Simpson, director of corporate governance and senior portfolio manager at CalPERS, US public-employee pension fund, said the fund had gradually developed an activist approach that now focused on several areas, from governance to gender issues.
Simpson, who manages a team of 20 people dedicated to monitoring corporate governance at the companies that the fund is a shareholder of, said: “CalPERS has moved to an integrated approach to active ownership, to make sure all our activist strategies are managed in an integrated way across the portfolio.”
Simpson added that, while CalPERS has worked with external “governance managers” in the past, the fund has now also trimmed that programme.
She said: “We are finding can be more effective working directly with companies. We’re being thoughtful about the role of this kind of manager.
“First, intermediation can dilute the conversations with the companies. Also, we have a long-term investment horizon, as we are simply a permanent investor in companies.”
Panellists, however, highlighted a set of challenges in activist ownership of shares.
Tischendorf said it was key for activist investors to make sure their strategy represented the long-term interests of all shareholders, and pointed out that that had not always been the case.
Franks also expressed concern about the costs of activist strategies.
He said: “Activism is quite expensive, at 1.5% to 2% performance bonus per year. Such high costs may be justified by the expenses paid by managers, but the question is, how can we make activist ownership less expensive?”