‘Activist’ Label Probably Getting Overused A Bit

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Activist investing may start suffering from its own success. Pushed into the mainstream by outsized returns (and skepticism of management coming out of the financial crisis), now that more investors want to allocate money to activist funds it’s inevitable that funds will use the name whether it fits or not. Like shadow index funds that track the market while pretending to select stocks, investors will have to decide which funds really have the ability to influence a company’s trajectory.

Attiva Capital invests in Doral Financial ahead of major price drop

On recent example is Attiva Capital, which tweeted that it thought Puerto Rican bank Doral Financial Corp. (NYSE:DRL) was undervalued just hours before the bank announced that the FDIC was forcing it to revise its capital plan and that it might have to sell assets to raise enough Tier 1 capital (h/t David Benoit at The Wall Street Journal) causing it to drop 62%.

Attiva Capital said that it was putting more money into Doral Financial Corp. (NYSE:DRL) today, and that this is a long-term investment, which is fair enough. Plenty of investors are bullish on Puerto Rico. But the activist moniker seems out of place. The Attiva Capital site mentions two activist campaigns started by managing partner David Tomasello, a plan in defense of minority shareholders of RHI Entertainment and an attempt to persuade the Spanish Broadcasting System to spin off Mega TV, but neither of these campaigns went anywhere.

Attiva Capital may ultimately make good on its Doral Financial Corp. (NYSE:DRL) investment as a value play, but it’s hard to imagine the fund becoming directly involved in the direction of the bank. If everyone fund that sometimes contacts management calls itself an activist, the term won’t be particularly useful.

Activist funds need to act as catalysts to earn the name

The question isn’t so much whether a fund has good ideas for a company to take, or whether they’re willing to fight for those ideas. For an activist fund to be effective it really has to be the catalyst that unlocks shareholder value, as opposed to just identifying what that catalyst might be. Just compare Ackman’s decision to invest in Allergan, Inc. (NYSE:AGN) before approaching it with a buyout offer from Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX), which worked so well that it has made some people angry.

Just like investors need to look at a managers investment history before deciding whether or not they can trust him, they will also need to look at activist investors’ history instigating change before deciding they have earned the name.

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