But strategic campaigns – aimed at selling a company, divesting it of particular assets or changing its corporate strategy – have historically generated the biggest payoffs for activists, but also meet the most resistance from executives, whose usual tendency is to pursue growth at all costs. Cole says genuine activist managers have concentrated portfolios, holding between six and 10 targets. Their tracking error is high, and because they are catalysing change within companies, any payoffs will emerge over a long timeframe. “A genuine activist manager might take three or four years to turn a company around, and in the interim, there’s chaos at the company, so it can be a J-curve-type effect. “It’s a lot of trouble to invest a very small part of your fund – and if you do well it won’t make an enormous difference to your returns.” Activist strategies are typically implemented through private engagement, rather than “shouting through the newspapers” to publicly strike at companies, Cole says.
Mayne also supports engagement – a “tread softly but carry a big stick” approach – rather than hostile power struggles. “You should always engage, and encourage a company to move ultimately down a sensible road, because resolutions worth considering should come after a period of determined engagement. “I don’t telegraph my punches before an AGM [annual general meeting]. But I’m a retail investor and I’m trying to shine a light on situations. When you’re doing it as a substantial shareholder and trying to achieve a specific outcome, engagement is more effective given human nature and ego.” Getting active The major barrier to the growth of activist funds in the Australia institutional market is investors’ reluctance to embrace the strategy.
This is mainly because emerging activist managers can’t point to a substantial track record. “The biggest challenge is inertia,” Radzyminski says. Mayne says the reliance on a threeyear track record by institutional asset allocators and gatekeepers is unfortunate. “It’s a chicken-and-egg problem. They are unlikely to back a principal without a track record.” According to Cole, the story was different in the US, where emerging activist managers received seed capital from big pension funds, including the US$176 billion Californian Public Employees retirement System (CalPERS). “There are quite a lot of activist managers in the US, and you find that their history is tied to CalPERS, who was a cornerstone investor and nurtured them, and was a significant contributor to getting activist investors to work hard at improving the corporate governance at companies. “We haven’t had significant funds prepared to sponsor such a development.”