A rallying cry at superannuation conferences is for sharper shareholder engagement with investee companies, aimed at unlocking more value for members. But strangely, the investment managers dedicated to this pursuit – activists – are largely absent from the domestic market. This is despite the wealth of underperforming target companies, and the good track record established by overseas activists in generating absolute returns by galvanising shareholder campaigns. SIMON MUMME reports.
For an industry pushing for better shareholder returns and corporate governance from portfolio companies, the lack of pressure from Australian super funds and their investment managers on businesses is striking. A clear indicator of an investment industry serious about catalysing better returns and corporate governance from companies would be the presence of strong activist funds backed by institutions. Investors know that corporations do not always act in the best interests of shareholders, and that shareholders are often kept powerless by barriers to collective action, conflicts of interest and reluctance to face the public glare of legal action. Activist managers, with large shareholdings and an understanding of legal and corporate governance methodology, bring the heads of companies into contact with their shareholders.
The success of offshore activists Laxey Partners, Weiss and Carousel Capital in local listed funds throughout 2008 shone a light on the low-hanging fruit in corporate Australia available to investors with the ability to unlock value from underperforming businesses, says Stephen Mayne, business journalist and shareholder activist. “I’m still amazed there is not an Australia-based activist fund of scale, considering the big profits made by large offshore funds,” Mayne says. “The culture of Australian managers is largely to sell rather than roll up their sleeves and do some work. There is a culture of ‘don’t rock the boat,’ extending from the retail industry, to elements of the media and right through to institutions that amounts to a prevailing endorsement of the status quo.” Was it the long equity bull market that satisfied institutional investors with traditional investment strategies, or is it the lack of established activist investors in Australia that prevents institutions from allocating to the high-conviction, hands-on managers?
In a 2008 research note, Mercer Investment Consulting pointed to studies outlining the consistent, long-term outperformance of activist hedge funds in the US. One study, by April Klein and Emmanuel Zur, which studied 194 Securities and Exchange Commission 13D filings, found that activists’ target companies generated an average return 10.3 per cent ahead of untargeted companies between January 2003 and December 2005. Tony Cole, business leader for Mercer Investment Consulting in the Asia-Pacific region, says some traditional managers, such as Peter Morgan of 452 Capital, Elizabeth Bryan (formerly State Super and now chair of UniSuper’s investment committee) and Paul Fiani of Integrity Investment Management, have engaged companies on behalf of investors to remedy bad corporate behaviour. But he also sees the value that activist managers have delivered to institutional investors in the US and European markets.