Activist funds change tack to fill up board seats

Shareholder activists have targeted far fewer companies so far this year, yet they have won a record number of board seats as they focus more on changing companies from within, according to Lazard research.

Activist hedge funds, which include Bill Ackman's Pershing Square Holdings, Barry Rosenstein's Jana Partners and Daniel Loeb's Third Point, have targeted 103 companies so far this year, 13 per cent less than in the first nine months of 2015, data compiled by the New York bank showed. 

Nevertheless, activist shareholders have won 107 seats so far in 2016, one more than last year's annual record and a 22 per cent increase compared to same period in 2015, as they focused on targeting companies with a market value below $2bn, rather than larger ones. 

"Activists were more risk averse and launched fewer campaigns in the first half of 2016 due to market volatility in early 2016 and poor returns in 2015 that left many funds exposed to redemptions," Jim Rossman, a Lazard managing director who advises companies on preparing for and responding to activist investor campaigns.

"We believe that the increase in the number of activist-nominated directors sitting on the boards of major companies could in the long term fundamentally reshape boardroom decision-making, and the receptivity to shareholder arguments for change."

A Preqin survey published in August showed that institutional investors are increasingly unhappy with activist hedge funds, but there is little evidence that they plan to challenge them.  

Among the investors surveyed, 100 per cent said that activist strategies had fallen short of their expectations in the first half of this year but only 9 per cent of them plan to decrease their exposure to the strategy, Preqin's data showed.  

Activist strategies lost investors 5.6 per cent from July last year to this past June, according to Preqin. Their underperformance was driven by situations such as Valeant Pharmaceuticals, "a former activist favourite", whose shares have plummeted, Preqin said. 

Some high-profile activists have struggled. After generating a 37 per cent return in 2014, Bill Ackman's Pershing Square has dropped more than 15 per cent this year and last. 

Daniel Loeb's Third Point, by contrast, has generated 7.2 per cent this year through the end of September, on $16bn of assets.  

Mr Loeb said earlier this year that activism in 2016 was "more difficult in volatile markets", as it is "harder to have an impact in crisis", and economic headwinds can derail any plans for improvement.  

Overall, activist funds are now retrenching and mounting fewer campaigns against large-cap companies and are spending more time winning board seats on smaller companies, Lazard research shows.  

Some strategies have come under scrutiny, with Larry Fink, chief executive of BlackRock, the world's biggest asset manager, earlier this year railing against short-termism draining cash from companies.  

Pushing for more buybacks or dividends is one approach that has worked in the past. Billionaire activist investor Carl Icahn sold his multibillion-dollar position in Apple this year after successfully pushing the technology company to use its large cash holdings to give more money back to shareholders in dividends and share buybacks. Apple said at the time that it plans to spend a cumulative total of $250bn of cash in such operations by March 2018.

Copyright The Financial Times Limited 2016


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