MARCH 15, 2019 / 6:13 AM
Mutual funds start to
put their mouth where their money is
(Reuters) - Corporate America’s biggest
shareholders have traditionally been content with sharing their views on a
company’s strategy privately with management.
FILE PHOTO: Logo of global
biopharmaceutical company Bristol-Myers Squibb is pictured at the
headquarters in Le Passage, near Agen, France March 29, 2018.
REUTERS/Regis Duvignau/File Photo
But now some mutual funds are beginning to
rethink their stance, amid pressure from investors for them to justify the
fees they charge and a push to boost the performance of their holdings.
Wellington Management Company LLP’s decision
last month to speak out against drug maker Bristol-Myers Squibb Co’s
proposed $74 billion acquisition of Celgene Corp, calling what would be
the largest-ever pharmaceutical takeover too risky and expensive, sent
ripples across the investment world.
This is because these tactics have typically
been the purview of activist hedge funds like Starboard Value LP and
Elliott Management Corp, not a large institutional money manager like
Wellington, with $1 trillion in assets under management.
But in the case of Bristol-Myers, Starboard
spoke out publicly against the deal one day after Wellington unveiled its
Wellington’s vocal opposition to the deal is
the culmination of some mutual funds gradually feeling more emboldened to
publicly challenge a company’s strategy, asset management executives and
corporate governance experts say.
“There has been a growing chorus among
investors who want these firms to speak up. With Wellington speaking up,
it is going to put pressure on the others to do the same,” said Lawrence
Glazer, managing partner at Mayflower Advisors, which invests with
In January, chemicals company Ashland Global
Holdings Inc agreed to changes to its board after pressure from asset
manager Neuberger Berman Group LLC, which has about $300 billion in assets
T. Rowe Price Group Inc, which manages close
to $1 trillion in assets, has opposed several acquisitions, including
Michael Dell’s offer to take his eponymous computer maker private, because
it felt the proposed deal undervalued the company.
Spurring on these funds to challenge
companies publicly is the need to show their worth as so-called active
money managers, picking stocks rather than just betting on indexes.
At a time their performance has been
lackluster and many have struggled to keep up with their benchmark index,
they are under pressure from index-tracking funds who are gaining more
market share in asset management. These “passive” money managers charge
investors far less, in part because they do not need the army of analysts
and portfolio managers to make investments.
“More funds are willing to agitate in search
of returns,” Mark Shafir, Citigroup Inc’s co-head of global mergers and
acquisitions, said on Thursday at the corporate law institute conference
organized in New Orleans by the Tulane School of Law.
RAMPING UP PRESSURE
Despite their deep pockets, taking a public
stance on corporate strategy does not come easily to many of these funds,
in part because they are unaccustomed to readying the kind of
presentations aimed at swaying other shareholders.
For example, Wellington’s statement on
Bristol-Myers Squibb’s Celgene deal was just four sentences long. By
contrast, Bristol-Myers published a 46-page document defending its deal.
The world’s biggest active mutual fund
managers, including Fidelity Investments and Capital Group, have preferred
to use their influence discretely, taking advantage of their access to
management to gain insight into a company’s strategy and offer feedback
behind closed doors.
To stay on good terms with corporate
management, large mutual funds have often been happy letting activist
hedge funds agitate over a company’s perceived problems.
To be sure, even passive investors have
started to pressure companies behind the scenes, especially on social,
governance or climate change issues that a younger generation of investors
cares more about.
example, BlackRock Inc and Vanguard
Group voted against management at oil major Exxon Mobil Corp in 2017 over
its reluctance to disclose the risks it faced from climate change, and
pressured weapons manufacturer Sturm Ruger last year over its refusal to
publish a report about the safety of its products.
“Corporate America had better take note
because the folks who actually pick stocks have finally decided to flex
their muscles,” wrote Don Bilson, head of Event Driven Research at Gordon
Haskett Research Advisors.
Reporting by Svea Herbst-Bayliss in New Orleans; Additional reporting by
Ross Kerber in Boston and Mike Erman in New York; Editing by Greg
Roumeliotis and Matthew Lewis
© 2019 Reuters.