Activism Skyrockets, But Investors Are Selling Fast

Investor activism is here to stay, but it will be spearheaded by hedge funds rather than pension investors, according to a survey from law firm Schulte Roth & Zabel (SRZ).

The study found a staggering 98% of US activist and corporate respondents said they expect activism to increase over the next 12 to 24 months, 48% of whom said the bump would be substantial.

“As long as activists can continue to deliver alpha returns, there is no reason to expect this trend to recede,” said Marc Weingarten and David Rosewater, co-heads of SRZ’s activism practice.

“If it takes less time for the companies to respond to activist demands with appropriate changes… logically, holding periods would fall in response.”—David Rosewater, SRZAbout 60% of respondents said hedge funds would lead activist campaigns over the next 12 months while only 10% voted pension funds would see an increase.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

In the US, activist shareholders said they were mainly driven by financial performance, acquisition announcements, and management/board changes. Some 70% stated their preference for passive approach such as open dialogues and negotiations with management and shareholder resolutions in achieving their goals.

Unlike high profile activist operations the likes of Carl Icahn with eBay and Dan Loeb with auction house Sotheby’s, only 4% said they believed publicity campaigns were effective.

SRZ’s study also found investment holding periods have shortened since last year, possibly due to activists’ rising success at a faster pace.

According to the survey, only 36% of US activists said they have an average holding period of at least 12 months, significantly lower than the 60% recorded in 2013. About 50% of respondents said they hold investments for an average of six to 12 months.

“If it takes less time for the companies to respond to activist demands with appropriate changes and those changes then are reflected more quickly in the stock price, logically, holding periods would fall in response,” Rosewater said.

But a surge in activism popularity may come at a cost to profits. The survey found investors lowered their target returns on activist investments significantly since last year.

Eighty percent of respondents said they expected returns of 10% to 20% while only 20% said they projected a 20% to 30% yield. Two years ago, the results were roughly split down the middle.

More than 50% of this year’s respondents also said they expect “overcrowding” in activist activity that would limit the number of opportunities.

Related Content: Activists Post Strong Returns, But at a Price

1geoeconomica2014 (Source: GeoEconomica)Governance and transparency standards at some of the world’s largest sovereign wealth funds (SWFs) are still falling below agreed levels, according to a study.

Geneva-based political risk consultancy GeoEconomica found that only nine of 31 SWFs surveyed had complied with a “good governance and financial disclosure standards” agreement laid out in 2008, known as the Santiago Principles. This is up only slightly from the 2013 study, which found six funds in compliance with the principles. Funds run by Gulf countries were particularly criticised in the latest report.

Compliant funds included Australia’s Future Fund, the New Zealand Superannuation Fund, Norway’s Government Pension Fund Global, and the Alaska Permanent Fund, which were all rated A or A-, along with SWFs from Chile, East Timor, and Trinidad & Tobago. The SWFs in the study represented total assets of about $4 trillion.

Another nine sovereign funds—including the Korea Investment Corporation and Singapore’s Temasek Holdings—were considered broadly compliant.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

However, four of the five largest funds in the world—the China Investment Corporation, the Abu Dhabi Investment Authority, the Kuwait Investment Authority, and Singapore’s GIC—were identified as only partially compliant.

“Partially compliant funds do not disclose robust financial information, such as an audited income statement and balance sheet, conclusive information about funding, and withdrawal arrangements, rates of returns, or performance benchmarks,” the report said.

According to GeoEconomica, funds in the Middle East were especially opaque and fell significantly behind their peers in public disclosure policies. This is cause for concern, the firm argued, as they represent a sizeable chunk of the world’s sovereign funds with combined assets under management of about $1.3 trillion.

“Arab SWFs have demonstrated neither their managements’ operational independence nor their economic and financial orientation, and therefore have not contributed to building confidence in the SWF industry in line with principles’ aspiration,” the report said.

Furthermore, the consultancy named the $304 billion Qatar Investment Authority as the only fund that was non-compliant with the Santiago Principles and said it “has yet to take any meaningful steps to meet some of the principles’ basic disclosure standards.”

QIA ranked second to last in 2013’s rankings with a 31% overall compliance ratio.

The report also highlighted most sovereign wealth funds have trouble coordinating between fund management and government “driven by fear that disclosure would compromise their overall reputation and compliance with the principles.”