NEW YORK (Reuters) - Institutional
investors, who used to shun activist investors and side with a company's
management on most controversial issues, are starting to change their
Aggressive shareholders such as Carl Icahn and Bill Ackman, who agitate
for change at companies they believe to be sub-par, are increasingly
getting a hearing with institutions ranging from the most staid mutual
fund to the state-run pension fund.
Philip Larrieu, an investment officer at the California State Teachers
Retirement System (CalSTRS), said activist investors have won more respect
as their research has improved and their campaigns succeeded.
"There are some that are very aggressive and people don't like them
because they are so aggressive, but then it turns out they might have a
point," Larrieu said in an interview, declining to give specifics.
Last November, CalSTRS teamed up with Ralph Whitworth's Relational
Investors LLC to urge for a breakup of diversified manufacturer Timken Co,
the first time the California pension plan has participated in this kind
February, T. Rowe Price Group Inc opposed a $24 billion buyout bid for
Dell Inc, one of only a handful of times in the past decade
that the Baltimore-based money manager has publicly rejected a financial
strategy endorsed by management.
Activist investors, proxy advisers and fund managers say institutional
support has emboldened some corporate gadflies to take on more and larger
companies than they would have in the past - to the extent that even the
likes of Apple Inc and Procter & Gamble Co have come under attack.
There were 241 activist campaigns in 2012 targeting a change in company
strategy or board, up from 187 in 2009, according to FactSet SharkWatch.
More than 20 percent of the campaigns last year targeted companies with at
least $1 billion in market value, up from 7 percent in 2009.
Data on institutional support for shareholder activism is hard to come by,
but mutual fund managers say their interest is driven in part by the
performance that activists have demonstrated in recent years. Increased
focus on corporate governance is another driving factor.
Dimensional Fund Advisors, the eighth largest U.S. mutual fund company
with $262 billion in assets at the end of 2012, said it rarely engaged
with activists before 2007 but formed a corporate governance group that
year and started meeting with activist investors a few years ago.
"We felt that we should be more proactive in gathering information and
being informed so we could vote our proxies better," said Joseph Chi,
co-head of portfolio management at the Austin, Texas-based DFA. "As a very
large shareholder in companies that are engaged in proxy contests, this is
a good opportunity to have our voice heard."
PRESSURE TO PERFORM
Activist investors focus on companies they believe can provide better
shareholder returns through a change in strategy or management. With the
economy in recovery mode, shareholders are putting more
pressure on underperformers - especially companies with cash on the
balance sheet that investors think can be put to better use, such as at
"Three or four years ago everyone was in crisis and everyone had to be
conservative and preserve cash but now you can see which companies aren't
recovering," said Donna Anderson, a corporate governance specialist at T.
think more investors have been successful with achieving their objectives,
whether it is to get a board seat or ultimately to lay out M&A," Anderson
The financial crisis also jolted some passive investors into placing more
emphasis on corporate governance.
"The climate has changed and people are very focused on changing corporate
conduct or more broadly around financial performance. If you are an
activist hedge fund, you have the wind at your back," said Chris Cernich,
executive director of
mergers and acquisitions and proxy contest research at
influential proxy advisor ISS.
think the financial crisis has contributed to this climate and I think
it's here to stay," Cernich said.
Relational's Whitworth, who pressured industrial conglomerate ITT Corp to
break up and last week was named interim chairman of Hewlett Packard Co,
said institutional investors have evolved from "accepting" to "inviting"
"We do get a lot of calls from institutional investors," Whitworth said.
"Institutional investors see the activity as beneficial and they're much
more likely to be supportive."
be sure, some fund managers and index funds remain wary of engaging too
closely with activist investors.
"Our question is what is the long-term case. We are going to be permanent
holders of the stock and it is not in our interest to support an
initiative that will result in a short-term pop in stock price that isn't
sustainable," said Glenn Booraem, controller of funds at the Vanguard
U.S. mutual funds and public pension plans together own 42 percent of all
stocks, according to Bogle Financial
Markets Research Center. Their willingness to listen to
activist investors has emboldened some activists to buy stakes as small as
1 percent in their targets, and seek support to drive change.
"More activists are spending more time with shareholders and research
analysts, and they are spending less time with the company," said one
industry banker, who wished to remain anonymous because he is not allowed
to speak to the media.
Over the past three years, activist
hedge funds have outperformed more traditional hedge funds,
according to Chicago-based Hedge Fund Research. Its activist index has
returned 3.80 percent on an annualized basis, compared to its global hedge
fund index, which has returned only 0.25 percent.
That has drawn the attention of investors. Activist funds' assets under
management doubled to more than $65 billion in 2012, from $32 billion in
2008, according to HFR.
"Activism is a new asset class that people track," said Chris Young, head
of contested situations at Credit Suisse Group. "Right now the view from
pension funds is that we can get outsized returns."
Last year, hedge fund TPG-Axon Capital urged oil and gas company
SandRidge Energy to consider selling itself and asked Chief
Executive Tom Ward to step down, marking only the second time the New
York-based fund has filed an activist proposal.
March, TPG struck a deal with SandRidge that placed four of the hedge
fund's nominees on the board.
"You've got funds that were not activists but that have been increasingly
willing to use that tool," Young said. "It is like a Pandora's box, once
you opened it and used that tool, you realize you can use the tool again."
(Reporting By Jessica Toonkel and Soyoung Kim in New York; Editing by
Tiffany Wu and Tim Dobbyn)
©2013 Thomson Reuters.