WALL STREET JOURNAL.
Activist Shareholders, Sluggish Performance
yield better results than most activist funds, despite all the
By JEFFREY SONNENFELD
April 1, 2015 7:13 p.m. ET
For all the talk about
activist shareholders—usually large hedge funds—getting seats on
company boards and pushing to make strategic, value-enhancing changes,
these activists haven’t fared especially well. Investing in index
funds would have yielded better returns over the past few years than
most activist funds.
How much better? In 2013
the HFR Activist index posted a total return of 16%, less than half
the S&P 500 Index’s total return of 32.4%. In 2014 the HFR Activist
Index saw returns of 4.8%, far below the S&P 500’s 13.7%.
Contrary to their
rhetoric, many activist investors lack the Midas touch. Their recent
returns may exceed the performance of other hedge funds, but they
still lag behind the broader market. Ironically, the major companies
targeted today, including Apple,
PepsiCo, Dell, Dow and
DuPont, generally deliver returns
that soar above that of activist funds.
Nelson Peltz, a member of the Trian Group, in 2006. PHOTO:
Some funds, such as Third
Point, Relational Investors, Starboard Value and TPG-Axon Capital,
have driven constructive outcomes at
Home Depot and
SandRidge Energy. Yet too often
activists pressure companies to cut costs, add debt, sell divisions
and increase share repurchases, rather than invest in jobs, R&D and
They do all this in the
name of creating shareholder value. But that value is often
short-lived and sometimes comes at the expense of long-term success,
if not survival. Despite
Carl Icahn’s successes—such as
Chesapeake Energy (Netflix and
Apple were great investments but they resisted his advice)—his
overlooked failures include TWA,
WCI Communities, Blockbuster and
Dynegy, all of which are either
out of business or have filed for bankruptcy.
Trian Fund Management and its activist assaults on the
Bank of New York, PepsiCo and
DuPont are an interesting case in point. Trian delivered only an 8.8%
return in 2014, nearly five percentage points below the S&P 500. In
2012 Trian was up a scant 0.9% while the S&P 500 was up 15.9%.
Clearly, this undermines Mr. Peltz’s argument that DuPont’s board
needs Trian and Mr. Peltz to drive better returns.
Five of the 11 companies
where Trian has a seat on the board underperformed the S&P 500 between
the time Trian got its seat and the end of last year—Wendy’s,
Legg Mason, Mondelez
International, Family Dollar and
Chemtura, which went bankrupt in
2009 after two years of Trian board involvement. Contrast these
companies with State Street, which rejected Trian’s breakup and
board-seat demands and has handsomely outperformed the S&P 500 (129.5%
to 80.5%) over the past four years—without Trian’s help.
Even better returns were
available to those who invested in companies that activists sought to
topple. Suppose on Jan. 1, 2010, you put $100 each in DuPont, an S&P
500 mutual fund and Trian. Your investment in DuPont would be worth
roughly $240 today. Your S&P 500 fund would be worth roughly $200. And
your investment in Trian would we worth roughly $190. DuPont’s returns
handily beat those of Trian in 2010, 2012 and 2014.
Mr. Peltz now is waging a
costly, distracting proxy battle to break up DuPont to deliver
short-term gains while demanding he personally have a seat on the
company’s board. This despite Trian’s poor showing versus DuPont and
the latter’s recent hiring of two new directors, Edward Breen and
James Gallogly, two former CEOs and tough industrialists whom Mr.
Peltz unsuccessfully solicited in 2014 to serve on Trian’s board of
Given DuPont CEO
Ellen Kullman’s success since
taking the reins in 2009, it’s not surprising that Trian’s assault has
been thwarted. Nevertheless, DuPont has offered to accept a current
Trian board nominee—other than Mr. Peltz—out of respect for Trian’s 3%
As Securities and Exchange
Mary Jo White said in a
March 19 speech at Tulane
University’s Corporate Law Institute: “Reflexively painting all
activism negatively is . . . using too broad a brush and indeed is
counterproductive.” Activists and their target companies, she said,
should “step away from gamesmanship and inflammatory rhetoric that can
harm companies and shareholders alike.”
But with activist funds
now boasting $120 billion under management—up 30% in the past
year—there is no harm in asking what their own investors are getting
back. The most aggressive activists court governance advocates and
state pension funds with costly media campaigns against target
companies that, paradoxically, outperform them. Perhaps they should be
more active in raising their own shareholder value.
Mr. Sonnenfeld is a
professor of management and senior associate dean of leadership
studies at the Yale School of Management.