There are good reasons for tracking activists. For one, research supports the view that stocks the subject of activist campaigns can generate significant above market returns, on the filing and, importantly, in the subsequent year. Recent industry research by Ken Squire, manager of the 13D Activist Fund Class A (MUTF:DDDAX), finds an average outperformance of 16% over the subsequent 15 months for companies larger than $1 billion in market cap:
Ken Squire is founder and principal of 13D Monitor, a research service that tracks activist investing and has data on Icahn-led activist situations since 1994, when the investor targeted Samsonite Corp. The average return of the 85 positions since then was 18.7% (measured until he closed the position, if at all), compared to 12.7% for the Standard & Poor’s 500 over comparable time frames.
Yet this impressive-seeming average outperformance should be viewed in the context of a general tendency of stocks to outperform once they have attracted the intense interest of known activist investors. In other words, this doesn’t apply to Icahn alone.
Squire calculates that, following a 13D filing, the shares of companies larger than $1 billion in market value have historically outperformed the S&P 500 (INDEXSP:.INX) by an average of 16 percentage points over the subsequent 15 months. A separate study of nearly 300 activist actions by hedge funds between April 2006 and September 2012 found a similarly strong record of success. Squire runs the relatively new (and so-far small) 13D Activist Fund Class A (MUTF:DDDAX), which chooses stocks from among ongoing activist situations and beat the S&P 500 by 5.27% in 2012, after fees.
Squire takes into account the past record of specific activist investors when considering fund holdings. Hedge fund JANA Partners, for example, has a strong success rate in its arm-twisting maneuvers on corporate executives it deems lacking. One of its prominent targets currently is Canadian fertilizer giant Agrium Inc. (NYSE:AGU).
Squire’s research accords with earlier studies on this site, most notably these two:
- In Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors, April Klein and Emanuel Zur examined recent “confrontational activism campaigns” by “entrepreneurial shareholder activists” and concluded that such strategies generate “significantly positive market reaction for the target firm around the initial Schedule 13D filing date” and “significantly positive returns over the subsequent year.” The authors find that the filing of a 13D notice by an activist hedge fund is a catalytic event for a firm that heralds substantial positive returns in the stock. Klien and Zur found that “hedge fund targets earn 10.2% average abnormal stock returns during the period surrounding the initial Schedule 13D. Other activist targets experience a significantly positive average abnormal return of 5.1% around the SEC filing window. These findings suggest that, on average, the market believes activism creates shareholder value. … Furthermore, our target abnormal returns do not dissipate in the 1-year period following the initial Schedule 13D. Instead, hedge fund targets earn an additional 11.4% abnormal return during the subsequent year, and other activist targets realize a 17.8% abnormal return over the year following the activists’ interventions.”
- In Hedge Fund Activism, Corporate Governance, and Firm Performance, authors Brav, Jiang, Thomas and Partnoy found that the “market reacts favorably to hedge fund activism, as the abnormal return upon announcement of potential activism is in the range of [7%] seven percent, with no return reversal during the subsequent year.” Further, the paper “provides important new evidence on the mechanisms and effects of informed shareholder monitoring.”