Searching for Higher Yield, OTPP Engages in Shareholder Activism

(August 4, 2011) — With a roughly 2.3% stake in McGraw-Hill, the Ontario Teachers’ Pension Plan is pressuring the information services company to implement changes that would increase its share price as the Canadian pension searches for higher yield.

OTPP is working with hedge fund Jana Partners to urge McGraw-Hill to possibly sell its education business. According to Bloomberg, the company’s units are worth about a third more when separated than they are under McGraw-Hill.

Jana and OTPP combined are now McGraw-Hill’s second-largest shareholder behind Capital World Investors, which has a 12.45% stake, CNNMoney reported. Individually, Jana now ranks seventh. OTPP ranks tenth.

In their filing with the Securities and Exchange Commission, Jana and OTPP said that the hedge fund has held talks with McGraw-Hill about “business, corporate structure, operations, management and board composition, strategy and future plans.” Jana also warned that it “may take other steps seeking to bring about changes to increase shareholder value.”

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The relationship investing unit, which is part of OTPP’s public equities business, is managed by William Royan, a former executive at Lehman Brothers Holdings Inc. and JPMorgan Chase & Co. He joined Teachers’ in 2008.

OTPP’s demonstration of shareholder activism jibes with a report published in November of last year that predicted that pension fund shareholder activism will be on the rise in 2011. A survey by the law firm of Schulte Roth & Zabel and research firm mergermarket.com showed that hedge funds, and, to a slightly lesser extent, pension plans are expected to drive an increase in shareholder activism. The findings in the Shareholder Activism Insight survey reflect a rising level of confidence in shareholder activism since 2008, when the interviews were last conducted.

“Activists should have a good sense of the various investor groups likely to increase their activist activity, and if they’re right then corporate executives are in for a surprise as to the source of increased investor activism — investor groups that formerly were reluctant to utilize activists tools are losing that reluctance,” Marc Weingarten, partner at Schulte Roth & Zabel, said in the report. Citing the Dodd-Frank Act, corporate respondents said the new regulation will not cause them to change their approach to executive pay structures, board composition, or public relations.

The sectors expected to experience the greatest increase in shareholder activism during the next year: financial services and energy. Additionally, the study showed that among the causes most likely to result in an increase in activism, 54% of corporate executives cited financial performance and 68% of shareholder activists cited excessive cash on balance sheets.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

(August 4, 2011) — Bill Gross of the Pacific Investment Management Co. (PIMCO) says the US economy is at the ‘tipping point’ of a recession.

In an interview with Bloomberg Television, he asserted: “We are at what we call a stall speed, in which corporate profits don’t grow, jobs aren’t created and therefore the economy sinks.” Additionally, Gross said that the debt-ceiling deal is a “Republican Tea Party victory,” following PIMCO co-CEO Mohamed El-Erian’s comments that a debt deal will only bring temporary relief.

“The key issue…is that we simply cannot generate enough growth to get us over all these issues,” El-Erian, PIMCO’s co-CEO, said in an interview with CNBC. “Therefore, we have these structural headwinds that continue to slow us down. Until we see structural solutions we’re going to be stuck on the bumpy road to a new normal.”

El-Erian asserted that in the near-term, the deal could avert a debt downgrade threatened by ratings agencies, such as Moody’s and Standard & Poor’s. Earlier this month, Moody’s cautioned that it would slash the US’ AAA credit rating if the government misses debt payments. It noted that because lawmakers have acted to increase the debt ceiling, it had not previously considered the situation high-risk.

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Earlier this week, Harvard University professor Martin Feldstein told Bloomberg that there is a 50% chance of a new recession. “This economy is really balanced on the edge,” he said.

In May, Gross asserted that in the face of rising inflation, investors should embrace local-currency emerging market debt. Expressing PIMCO’s belief in the strength of developing and emerging markets, Gross wrote, in his usual colorful language: “Bond – and stock – investors have been sailing on the ‘Good Ship Lollipop’ for over 30 years following the Volcker Revolution and the return of high real interest rates to investment markets. Now, however, with governments attempting to impose financial repression, bond investors should revolt.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742