How Big a Year Was 2018 for Shareholder Activists? Very

The stock market gave investors a wild ride in 2018, but the most energetic investment action of all came from shareholder activists, who targeted a record number of companies last year.

Activists stormed the barricades of 226 companies in 2018, versus 188 the year before, according to a study by investment firm Lazard. And despite a volatile stock market in the last quarter, which might have given these investors pause lest their actions damage targets’ value, this period was the most active of any fourth quarter in history, the research showed.

With proxy season coming up, there are few signs that these dramas will abate anytime soon.

By Lazard’s count, the most prolific activist last year was Elliott Management, with 22 new campaigns launched. Founded 42 years ago by Paul Singer (Elliott is his middle name), the firm showed a good success record.

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Displeased with Sempra Energy’s performance, for instance, Elliott and ally Bluescape won two board seats. Elliott pressured Athenahealth into putting itself up for sale. And it forced Hyundai into a restructuring plan and a share buyback (although the activist firm still remained unsatisfied).

Another veteran of the activist world, Carl Icahn, also was busy. He and another activist, Darwin Deeson, took control of Xerox’s board. In the process, a merger they opposed with Fujifilm was scuttled. Icahn didn’t win everything, though: He tried to block Cigna’s acquisition of Express Scripts, but later went along.

Meanwhile, Daniel Loeb’s Third Point Management launched an assault on family-controlled Campbell Soup, and succeeded in winning two board seats and a say on the new CEO.

M&A was the biggest factor in attracting activists, Lazard found: One-third of the campaigns begun last year were driven by mergers and acquisitions, with pushing for a company sale the biggest goal. Deep-sixing or sweetening existing deals was the next objective, followed by breaking up a company or forcing it to divest businesses.

Some more fun facts from 2018 illustrate how serious these folks are: Nine of the top 10 activists invested more than $1 billion. Overall, activists deployed $65 billion in capital, compared to $62.4 billion in 2017. And the activist field is growing: a record 131 investors were at it, with 40 first-timers versus 23 the year before.

And as Icahn once described the lot of an activist investor: “You learn in this business that if you want a friend, get a dog.”

Tags: Carl Icahn, Lazard, M&A, shareholder activist

Smaller endowments and foundations may lack the heft of their multi-billion dollar peers, but sometimes that may be their biggest advantage. And the big guys may be wise to take note.

These smaller organizations take less-risky approaches due to the nature of their size, and are less eager to try alternative investments, particularly hedge funds, according to Eric Bailey, principal and financial adviser at Captrust, the wealth management firm.

“In the environment that we’ve been in for some time, smaller allocation to alternatives certainly helped those smaller organizations,” he told CIO. They have been “a little bit more of a drag in terms of overall performance.”

According to HFR, hedge funds are down 4.49% year to date. This is due to 2018’s high volatility and the Federal Reserve’s tightening of monetary policy, which led to losses, closures or layoffs. Rather than invest in the hedge world, the smaller organizations turned to real estate, private investments, and infrastructure.

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“This big shift toward real heavy hedging-type strategies [from] so many years ago hasn’t necessarily translated into excess returns or diminished risk,” he said, which is why “so many of the smaller organizations have outperformed.” He added that large-scale asset owners could adopt these policies that their $10 million to $100 million endowment and foundation peers use.

Agile tactical shifts in response to market conditions have been another plus for the more modest-sized players. “It’s possible that smaller organizations are acting more nimble, and that’s something that their larger peers can benefit from,” Bailey said.

Of the respondents, 46% of investors employ tactical asset allocation in their portfolios. That’s where managers shift portfolios to ride upcoming trends.

A trend that mirrors the asset owner community across the smaller endowments and foundations is the growing need for environmental, social, and governance —or ESG— investments. Although the interest in the space has increased, especially for good governance practices, a considerable amount of survey respondents are undecided when it comes to taking the plunge. This is similar to the ESG landscape for heavyweights in the corporate and public pension world, who are split on the space’s legitimacy.

“There’s so many different definitions of socially responsible. That may be what’s being tossed around in a board room on the corporate side,” said Bailey. “One person might think it’s ‘no guns,’ [but] the other person might love guns, so you have some political differences which spawn into social responsibility and different variations of that and it’s hard to generate a consensus on that.”

Mission-based organizations, such as churches and universities, were found to be more open to ESG investing, according to the Captrust survey.

Tags: Captrust, Endowments, Eric Bailey, Foundations