Whenever activist investors like Carl Icahn or Bill Ackman take a stake in a company, usually the company’s stock goes nuts because investors expect fabulous things from their involvement. But a new study indicates that some companies are actually adopting activist-like strategies even when no activist investors are involved. This not only validates traditional activist strategies but also drives outperformance at the companies that do this.
Activist mindset drives outperformance
The S&P Global Market Intelligence team tracked the S&P 1500 for the years 2004 to 2015 and examined trends pertaining to return on invested capital, activist ownership, share repurchases and capital markets activities, and one- and five-year stock returns. In a recent report, they said they found that activist investing, which slaps a premium on efficiently allocating capital, is now an important driver of value for shareholders in companies of all three sizes (small-, mid-, and large-caps)
They learned that the annual return on invested capital rates was positively correlated with rates of return that were higher than the market. Further, the biggest the annual improvement in return on invested capital, the more the company’s stock outperformed.
Relying On Old-Fashioned Stock Picking, Lee Ainslie Reports His “Strongest Quarter” Ever
Lee Ainslie's Maverick Fund USA enjoyed its "strongest quarter in the fund's history" during the three months to the end of June. According to a copy of the firm's second-quarter letter to investors, which ValueWalk has been able to review, Maverick Fund USA gained 18% in the second quarter. Following this performance, the fund was Read More
As a result, they postulated that the companies that do the best in terms of allocating their capital toward profitable investments also outperform over both one- and five-year timeframes.
Activist investor presence improves performance even more
The S&P Global Market Intelligence team also reports that when an activist investor actually holds a stake in a company and that company improves its return on invested capital, returns were also above the market. Unsurprisingly, the stocks of the companies with the greatest improvements on their return on investment capital combined with an activist investor holding a stake significantly outperformed the rest of the market.
Interestingly though, as mentioned above, companies that employed aggressive capital allocation strategies like those commonly pushed for by activists also saw their stocks outperform, even if no activist investor held a stake.
S&P Global’s research highlights also that there’s a shift in corporate governance strategies going on as well. In fact, the firm’s researchers found that activist investing is actually becoming a management style as some companies are now almost acting like activist investors even though there aren’t any involved with them.
Activist investors and “short termism”
There is one key difference between companies that behave like activists and those that are being influenced by them, however. The researchers also looked at the average length of time activist investors hold a stake of a significant size in the companies they target and compared that with the tenure of senior management at the companies. They discovered that activists tend to stay in for a much shorter length of time than the amount of time senior management is leading the companies in question.
They define a “significant” position as being at least 5% of a company’s outstanding shares or 10% of the activist’s total portfolio. S&P found that 40% of activist stakes are reduced or even sometimes exited fully in the quarter after the significant position was identified.
However, they add that despite this high percentage, not all activist investors are focused on the short term. They report that 6.6% of the large activist stakes they examined were in place for at least three years. The longer an activist remained in a company, the more likely they were to stay in for more than a year. S&P found that looking at large activist stakes lasting at least a year, this statistic rises to 25%.
Because of this, they suggest that activist investors’ interests may not match those of senior management or other long-term shareholders.
Alphabet attracted at least 20 activists
S&P Global Market Intelligence also put together this chart of companies with significant levels of activist interest:
The firm’s data also indicates that Carl Icahn leads the way in terms of activist holdings: