3/20/2019
Investing Lessons From the Activist Playbook
Barron's (03/20/19) Root, Al
Carl Icahn, Paul Singer's Elliott Management, Jeff Smith's Starboard Value, and other investors frequently make the headlines, and activism appears to be setting records. In 2018, 131 activists engaged 228 companies, and activists won 161 board seats. The three main strategies in their playbook—sell the company, break it up, or block a deal—have been successful for these investors. Meanwhile, they have been accepted by the investment community, with big fund managers like T. Rowe Price Group (TROW) and Gamco Investors (GBL) more willing to cast their votes in favor of activist slates. However, activists are not generating above-average returns, with Hedge Fund Research reporting that activist hedge funds have trailed the market by about five percentage points a year since the end of the financial crisis and the broader hedge fund industry by about five percentage points a year since the end of 2016. Further, a research paper published in October, which looked at nearly 2,000 activist situations from 1994 to 2011, found that the biggest winners were concentrated in a few small firms. One of the study authors, University of Washington professor Ed deHann, says, "We are not saying activists do harm, we just couldn't identify long-term benefits." However, other research does show long-term benefits, and experts say small investors can benefit from activist hedge funds' experience and research. They add that activists often come up with new value-creation ideas that have not yet been exploited in the market, and are engaging in socially conscious activism.
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