Activist Investors Display a Lighter Touch

Some investors who usually push aggressively for changes are taking more-passive stakes in certain firms

Wall Street Journal
By David Benoit
24 November 2015

 

Some of Wall Street’s most aggressive investors are taking on a gentler role: friend to companies in transition.

Activist hedge funds have made big bets on companies like General Electric Co., Mondelez International Inc. and 21st Century Fox Inc. that have recently changed course via breakups or major cost cutting.

Usually it is the activists who push for such changes in hopes of boosting a company’s stock. With these investments, however, they are trying to signal to the market that the companies are on the right track, while putting themselves in a position to nudge them back on course if discipline falters.

Trian Fund Management LP’s $2.5 billion GE stake is a case in point. Rather than a call for action, the fund sees the investment as a stamp of approval on the conglomerate’s decision to narrow its focus.

When Trian announced its stake in October, GE’s shares had barely budged in the six months since the company said it would shed most of GE Capital. But they have since topped $30 for the first time in seven years. Trian, which has a reputation for urging conglomerates to break up, believes the stock could be worth in the range of $45, including dividends.

“It’s somewhat counterintuitive, but companies that are in the early stages of a turnaround may actually enter a new window of vulnerability, ” said Kevin Daniels, head of Bank of America’s activism-defense practice.

GE has welcomed the activists and said it generally shares their outlook.

On Monday, Elliott Management Corp. disclosed a 6.4% stake in Alcoa Inc. after the company’s decision in September to split in two, separating its parts-making business from its raw-aluminum operations.

Elliott executives do believe Alcoa can improve margins further, but are supportive of the split, people familiar with the matter said.

Similarly, Mondelez had already been through a corporate breakup that separated the snacks company from a slowing grocery business at Kraft when William Ackman’s Pershing Square Capital Management LP disclosed a $5.5 billion stake in August.

The maker of Oreo cookies and Ritz crackers also had added Trian co-founder Nelson Peltz to its board a year and a half earlier and was in the process of dramatically cutting costs. Mr. Ackman urged more cost cuts and suggested the company consider a sale.

The timing of Mr. Ackman’s investment surprised Mondelez Chief Executive Irene Rosenfeld given the amount of work the company had already done, a person familiar with the matter said. Both sides said the talks have been cordial since his arrival.

Mondelez shares are up about 21% this year but down about 3% since Mr. Ackman disclosed his stake.

Activists do sometimes take completely passive stakes, more like a traditional hedge fund, but it is rare for them to make their biggest investments in companies they don’t intend to shake up.

Mondelez is the largest single bet in Pershing Square’s history, as GE is for Trian.

The investments may reflect the fact that activists have a lot more money to work with. Investors have poured around $130 billion into funds like Trian’s or those run by Pershing Square and ValueAct Capital Management LP, roughly double the war chests commanded by activists as recently as the end of 2012, according to hedge-fund researcher HFR.

Activist funds also tend to have concentrated portfolios, often with fewer than 10 positions, because of the cost and time required to research and plan a campaign. That means they need bigger targets to absorb all the dollars they have to invest.

Some investors question whether the fees they pay to put their money in activist funds are warranted if their managers are pushing less dramatic changes. Hedge funds typically charge investors a 2% fee on total assets and take 20% of profits.

“It really begs the question, as it relates to activism, what is the true portfolio purpose?” said Jonathan Grabel, chief investment officer of the Public Employees Retirement Association of New Mexico. “They need to articulate to investors what their role is as they go after different opportunities.”

An index of activist funds tracked by HFR is up 1.3% through October, trailing the S&P 500’s roughly 3% return but besting the average hedge fund’s slight decline. Still, the year is on pace to be the worst for activists since 2011.

Some activists, such as ValueAct, have long used a lighter touch with the companies they target.

ValueAct disclosed a sizable stake in 21st Century Fox in August 2014, about a year after the company spun off its less profitable newspaper and publishing assets, including The Wall Street Journal. Following its usual playbook, the fund didn’t make any public demands of the company.

The company nominated ValueAct Chief Executive Jeffrey Ubben to its board in September. Mr. Ubben supports 21st Century Fox’s new chief executive, James Murdoch, and the investor believes he can add value as a board member and adviser, people familiar with the matter said.

Shares of 21st Century Fox have fallen about 22% this year.

“There’s a lot of room for improvement in some of these companies,” said Marcos Verimis of Cambridge Associates LLC, which advises institutions and families on investments.