When you think about usually mild-mannered value investors, your initial reaction is probably that they are nothing like activists. Value investors typically don’t make a public spectacle of their investments, while many activist investors (although not all) turn their investments into a public campaign everyone on Wall Street knows about.
If you take a look at the styles employed by the two investor classes, however, one similarity can be found, but it is the differences between them that set up a stark contrast.
Choice Equities Fund generated a net return of 29.2% for the 1Q 2021 resulting in annualized returns of 31.7% per year since inception of January 2017. Q1 2021 hedge fund letters, conferences and more Choice Equities Fund, LP Overview Choice Equities Fund (“CEF” or the “Fund”) is an investment partnership that seeks to generate market-beating Read More
Activism on the rise
Last year was an immense one for activists, and this year will likely still see this practice becoming more and more popular, according to Marc Weingarten and Eleazer Klein of Schulte Roth and Zabel. They told Activist Insight that there's no end in sight for activism as investors dumped more and more of their assets into activist firms and the practice set new records.
In 2015, the number of companies that faced public demands from activists increased 16% to 551. Activist Insight also reports that the number of activists making public demands climbed 32% from 2014 to 397. Further, the number of activists who were active in 2015 increased 38% from 2013 to 2015.
Also some firms that haven't historically been activist in nature are beginning to take a stand to affect change at the companies they invest in. The publication found that all across the board, shareholders in general are just becoming more engaged with the companies they invest in.
Value investors on the same mission as activists
This increased shareholder engagement across all types is particularly interesting as Georgeson Corporate Advisory CEO Cas Sydorowitz argues in the latest issue of Activist Insight that the value investors and activist investors are similar or even the same. He notes that most company CEOs would probably prefer to have a value investor invest in them rather than an activist but adds that it may be a compliment for a company to attract an activist.
He also points out that both value and activist investors are seeking the same thing: companies that are worth more than what they are currently trading at. He also believes that like activists, value investors are also seeking a company that's sort of a fixer upper because it is becoming increasingly difficult to pinpoint undervalued companies.
How they are different
Sydorowitz also points out a number of differences between the two strategies. One of the more noticeable difference is the concentration of the portfolio. Most activists have holdings in between seven and 15 companies, whereas value investors often have hundreds. Bill Ackman is a classic example of this as his Pershing Square Capital Management usually keeps quite a concentrated portfolio. He said the reason for this high concentration in just a few stocks is because activists must be laser-focused on the companies they invest in so that they can keep up on their due diligence and be extremely informed on them.
He adds also that because of the way activists are paid, which is usually "based on the 2% of assets under management and 20% of profits model," which is standard in the hedge fund industry. As a result, it's in their best interest to see returns as quickly as possible. Many investors have blasted this type of short-term activism, pushing instead for long-term involvement.
So it seems that the only thing value and activist investors have in common is their mission of identifying undervalued companies. Their methods are quite different—so different in fact that it hardly seems plausible to lump them together. After all, the goal of every investor type is to pick up stocks they believe will increase in value, but it is always their stock-picking methods and the ways they derive value that classifies them.