WALL STREET JOURNAL.
Mutual Fund Managers Try a New Role: Activist Investor
Portfolio managers increasingly are taking on corporate executives
with their demands for change
Investors like Neuberger went public with their demands 60 times
this year and in 79 instances in 2017 PHOTO: RICHARD B. LEVINE/NEWSCOM/ZUMA
Justin Baer and
Dec. 30, 2018 9:41 a.m. ET
Benjamin Nahum’s letters
to corporate executives don’t set off alarm bells like those from
billionaire investors like Carl Icahn or Dan Loeb.
Make no mistake, though, the Neuberger Berman Group LLC portfolio
manager is increasingly borrowing a page or two from their playbook: He’s
willing to scrap with the chief executives and board members of the small-cap
companies whose shares his firm owns.
“When you get into one bar fight and you win,” Mr. Nahum said,
“the next time you show up you get an even more serious audience.”
In the mutual-fund industry’s heyday, proxy fights and other
activist tactics were considered unseemly, and often pointless. If a manager
disapproved of managements’ actions, he or she would just sell the stock.
Today, they are taking on executives more frequently. Investors
like Neuberger went public with their demands 60 times this year and in 79
instances in 2017, according to data tracked by Activist Insight Online. There
were just 40 such public demands in 2014. Mr. Nahum launched one of Neuberger’s
first major public brawls about three years ago, criticizing pay at UltraTech
Inc. and calling for a shareholder vote that switched out some board directors.
These portfolio managers are also even more likely to push
quietly for changes. They are asking companies to alter the makeup of their
boards, run more environmentally friendly businesses or return more capital to
shareholders, investors say.
A more confrontational tone with management is just one of many
tactics active managers have tried to prove to their clients they’re worth their
higher fees. As billions of dollars continue leave stock pickers for low-cost
index funds, the industry finds itself in the fight for its future. To stem the
tide, active managers are turning to strategies ranging from novel
performance-fee funds to so-called alternatives such as private debt
Stock pickers aren’t the only ones taking on management. The
index-fund managers are trying to use their clout, too.
In his annual letter to fellow chief executives,
BlackRock Inc.’s Laurence Fink said his
firm would be more proactive. “The time has come for a new model of shareholder
engagement,” he wrote. Ten months earlier, fellow passive juggernaut State
Street Global Advisors launched a push to persuade companies to add more women
to their boards.
These index heavyweights’ approach
is different in several ways.
Active managers have teams of analysts who specialize in discrete
industries, and can identify specific weaknesses holding back a company’s
shares. Index investors instead prioritize a handful of issues and adhere to
codes on how to effect change over the long haul. Bound by the indexes’ makeup,
they can’t punish companies by dumping stock.
The large passive giants have also made a louder sales pitch.
“If Larry Fink is making statements saying companies have to
operate in a certain way and index funds are becoming more vocal, active
managers risk looking like the most passive money,” said Craig Wadler, a
managing director who advises companies on activist shareholders at investment
Moelis & Co.
Even if they don’t succeed at enacting change from companies, the
index- fund managers succeed if they can erode a core reason clients were still
willing to pay higher fees for active firms.
“I see the quants, the passives, the activists, hedge funds and
private equity all raiding my client base,” said Mr. Nahum, who manages
Neuberger’s U.S. Small Cap Intrinsic Value Fund. “We’re under attack and losing
Sweeping changes to the securities industry have altered the way
companies interact with their shareholders, said Jim Rossman, head of
shareholder advisory at
Lazard Ltd. Electronic trading and the
relentless concentration of stocks in the hands of fewer large shareholders
minimized Wall Street’s role as gatekeepers to the corporate world, he said.
There are now fewer active managers holding sizable stakes in
many companies. That’s made it harder for companies to freeze out those more
critical of management.
“It took some time, but many of these active owners woke up to
the fact that if they wanted to realize more value from their investments,
they’d have to become more active owners,” Mr. Rossman said.
Lucian Bebchuk, a Harvard Law School professor, said it is still
rare for a traditional manager to be openly critical of companies. “Like index
funds, most of the major mutual fund families that focus on active funds display
a deferential attitude toward corporate managers in their stewardship choices
and activities,” he said.
There can still be consequences for rocking the boat. Managers
don’t like to draw attention to investments that haven’t fared well, and that
can happen when they tell the outside world a stock they’ve held for years is
And while the Securities and Exchange Commission’s Regulation FD
rules ban companies from doling out information selectively, managers might
still get a cold shoulder from executives if they are too critical.
“You bear the mark of a troublemaker,” Mr. Nahum said. “You might
get shut out of small group meetings.”
Mr. Nahum said that happened to him earlier this year we he tried
to join an investor trip to software firm
Verint Systems Inc. Verint had appointed a
director proposed by Neuberger in early 2017. Mr. Nahum said he signed up for
the outing with the Wall Street firm that had arranged it; later, he was bumped;
the company wanted to give his spot to a newer investor. Verint officials did
reach out, and within two weeks Mr. Nahum said he had a one-on-one meeting with
A call to Verint’s investor-relations office wasn’t returned.
Justin Baer at
email@example.com and Dawn Lim at