As well-known activist investor Gregg Hymowitz, managing partner Entrust, raised $600 million in 2013 to allocate towards activist investors, the activist trend is moving across the Atlantic Ocean – and staid European companies are growing concerned.
Last week one of the more aggressive US activist hedge funds, Elliot Associates, made it public they were building a stake in UK grocer Wm Morrison, pushing for a shake-up in its property portfolio. (It was also revealed today that Elliot Management is also making an aggressive move towards Juniper Networks.) About one month ago, US hedge fund Sandell Asset Management entered the fray to “encourage” UK transportation company FirstGroup plc (LON:FGP) to shed US business units, including Greyhound bus lines. Activist hedge fund manager Bill Ackman, founder of Pershing Square, who is currently embroiled in a fight with fellow hedge fund executive Carl Ichan over Herbalife Ltd. (NYSE:HLF), just set up a new fund in London. Among Mr. Ackman’s insights is that Europe is a decade behind the US in terms of activist hedge fund investing, which points to the industry growth. “Demand for returns to meet pension obligations will make shareholders inherently more active and unaccepting of underperformance,” Mr. Ackman was quoted as saying. Other activist hedge funds will follow, warn UK law firms, and if the EU wants to avoid American dominance they will need to set up early warning systems and defense plans, according to a report. There have been just 24 instances of activist investing in the EU since 2012, just eight in the UK.
Performance drives activist investing success
Activist hedge fund strategies were the best performing category segment in 2013, up 15% and nearly matching the gains from the previous year. It is among the most popular investment categories with record inflows 2013.
The general impression of the activist hedge fund is one of confrontation with management, forcing them to streamline production, reduce costs, shed assets, but in the US activist hedge funds also receive a welcome from the board of directors. Safeway stores agreed to Jana Partners’ request to shed underperforming stores when the activist hedge fund came calling. Likewise, oil and gas explorer QEP Resources Inc (NYSE:QEP) agreed to split itself in half at the request of Jana Partners after the hedge fund took a stake in the firm.
In 2013, 68% of proxy fights for board representation have been positive, according to Institutional Shareholder Services, up from 43% the previous year. And this may be undercounting activist success rates, as the 68% does not include the times the board agreed to activist requests without a fight.
What activist funds should receive allocations?
What are some of the best funds in which to invest? Entrust’s fund of funds is investing in money managers Jeffrey Ubben and Nelson Peltz as well as hedge funds such as Ubben’s ValueAct, Peltz’s Trian Fund Management LP,and Cliff Robbins’s Blue Harbour Group LP., according to a report in Bloomberg Brief. “What we have seen in the institutional world is continued disenchantment with the traditional long-only” managers, Hymowitz was quoted as saying. “Activism from an academic and real return perspective has proven its worth.”