Poor governance may have been catapulted into the headlines in recent years, but to-date few asset managers in Europe have been trying to make money through activist strategies. One that does, as part of its range of products, is London’s RWC. In 2013, RWC’s assets under management grew from $5bn (€3.7bn) to $7.5bn, which its CEO Dan Mannix attributes to “a normalisation of opportunities within the equity markets” and a general improvement in investor sentiment.
“Investors have gravitated towards the organisations that have been able to navigate the last seven years effectively and those that are positioned to benefit from a more positive equity environment,” he says. “Investors are reticent to invest with funds that might not be able to sustain their investment processes through difficult periods. The pressures for sub-scale businesses in difficult times can make them behave in a way that undermines the proposition when opportunities start presenting themselves again.”
RWC’s activist strategy seeks to generate excess returns through active ownership of a small number of fundamentally-sound listed companies that are not valued to their full potential. RWC’s activist investment team believes shareholders can act as a catalyst for the changes required to unlock value by constructively engaging with stakeholders. RWC’s own aim is to maintain competitiveness by presenting a sustainable value proposition to today’s investors.
“In short, we believe in the stability and longevity of the organisation,” says Mannix. “We are purely focused on active fund management and accept that active managers are cyclical in nature and in their delivery of alpha. We believe RWC’s long-term strength comes from having investment teams who have autonomy and who are complementary by managing money in different ways. Our activist team is one of these and we have a fundamental belief that activism can create alpha.”
In 2012, 80-strong RWC acquired the Focus funds and their teams from Hermes Fund Managers and restructured them to make them more accessible to international investors. The Focus funds consists of three strategies – Japan, UK and Pan-Europe – running about $1bn in portfolios of 10-15 stocks each.
The European Focus fund generated a return of 19% in 2013. The annualised return since the current team took over the fund in 2009 is 23% net of fees, which equates to a total return of 176.4%. Meanwhile, the Japan Stewardship fund produced a return of 62% and the Specialist UK Focus fund returned 16.8% in 2013.
RWC has a 13-year track record in unconstrained active investment strategies, which Mannix says has become reinforcing in recent years as institutional investors began to search for alpha and not just a return relative to an index. “One of the discussions in the current low-yield environment has been around how short-term investors have become,” says Mannix. “But we are seeing increasing interest in funds and strategies that take a long-term approach to investments. The average holding period, for example in the activist funds, is between three and five years and in the recently launched global equity fund, it is between five and seven years. That really captures the moment, as investors are becoming more of an owner of equity rather than a rentier.”
Activist strategies in general have been seeing a great deal of inflows, he says, mainly from US institutions. The European Focus fund raised $500m in 2013, all of which has come from US investors. “There is a real difference at the moment between the risk appetite from US investors, such as pension funds, endowments and charities, versus the appetite from DB pensions schemes, particularly in the UK, but also more broadly in Europe,” says Mannix.
“In short, the US institutions are genuinely risk-seeking and gravitate towards concentrated portfolios and to a certain extent constructive activist approaches, whereas UK DB schemes continue to de-risk.”
In addition, he believes that US investors look at the value proposition being offered by activist strategies rather than the level of fees, which are often alleged to be too high. Mannix does not expect a significant increase in demand from European pension funds until the DC markets become more sophisticated; however, due to recommendations, for example those coming from the John Kay’s review of the UK equity market, there is an increasing focus on fund managers having a duty to be good stewards and engage with the companies they invest in, which will increase the interest in pure-play activist managers.
“The regulatory uncertainties relating to, for example, the Alternative Investment Fund Managers Directive have left European investors hesitant to look to alternative strategies,” Mannix says. “But we believe that will change.”
In addition, activism has historically had some negative connotations, which Mannix attributes to the aggressive tactics used by some investors, particularly in the US, where market dynamics support a more explicitly aggressive behaviour.
“There is an additional perceived risk within Europe to activism, a headline risk associated with an aggressive activist taking a position in a company and calling it to account,” he says. “However, we believe the persistency of our strategy comes from positive engagement with firms rather than headline-grabbing tactics.”
RWC’s activist approach is to identify companies that offer good value but where constructive engagement with those companies can enhance long-term returns to shareholders.
The fund manager is very averse to taking on companies and situations where the process of engaging with the company and the stakeholders will be a long, protracted battle. Instead, it wants to engage with companies that are open-minded and see involvement from progressive shareholders as being a positive rather than a negative.
“What we offer our clients is not to be a corporate governance policeman but the opportunity to invest in good companies that, through our involvement, will benefit from an improvement in their long-term ability to create shareholder value,” says Mannix. “Our role is not as a governance specialist but as a fund manager who offers alpha creation.
“By taking concentrated positions we have to assume risk and that is something we take on,” says Mannix. “But to mitigate the unintended risk, we take a small position in the firm to start with as we get to know them and assess how responsive they are to engagement. It is crucial that we size our position according to our level of conviction. As our conviction goes up, we tend to increase it. Furthermore, we need to be very disciplined about our exit strategy.
“When it becomes apparent that either the thesis is wrong or we may become entrenched in a protracted corporate governance battle, we have to be objective about remembering that we are not there to win a corporate governance battle for the sake of it. We are there to meet the expectations of our investors and make sure that we engage with firms that have a genuine interest in long-term shareholder value.”
Aside from the Focus Funds, RWC has begun to increasingly cater to institutions, for example through its global equity fund, which comes with a five-year performance fee structure.