Shorting Shareholder Activism

The field is crowded and opportunities have grown more scarce.

Should the likes of Carl Icahn and Bill Ackman be worried? 

According to Rob Kindler, Morgan Stanley's global head of M&A, the answer is yes. Shareholder activism as an investment strategy "absolutely has peaked and I would short the class completely," Kindler said Tuesday in an interview on CNBC.

A Crowded Field

The record funds dedicated to shareholder activism has made implementing the strategy more complicated.

Source: Hedge Fund Research Inc.

For one, it's getting harder to make a unique wager. Kindler cited the bet Ackman's Pershing Square Holdings made last year on Mondelez, which came more than two years after Nelson Peltz's Trian Fund Management took its stake in the Oreo cookie maker. "It looks like the opportunities are so limited that he had to pile on, on top of Nelson Peltz. If the big guys like Pershing can’t find opportunities, I just think it’s a very tough asset class," Kindler said. 

It's gotten to where some activists have found themselves doubling up. Consider Barington Capital and Starboard Value's involvement with Darden Restaurants, Icahn and Greenlight Capital's dalliance with Apple and Elliott Management and Jana Partners's efforts at Juniper Networks.

And some recent investments these firms have made are more akin to stock-picking than the kind of traditional activism where a fund manager takes a position in a company and pushes for changes to its structure,  management or strategy. Ackman's stake in Valeant Pharmaceuticals is a case in point, Kindler said. (And it's a losing one, at that.)

Data from Hedge Fund Research suggests that activists -- as measured by the HFRI Activist Index,  which tracks 76 funds -- have indeed lost some of their mojo lately:  

Trending Down

While shareholder activism has increased in prevalence, returns have declined.

Source: Hedge Fund Research Inc.

That said, the index's 1.5 percent return in 2015 did beat the S&P 500, which ended the year down 0.7 percent.

Another indicator, the 13D Activist Fund's net asset value, has already slipped 7.1 percent in 2016, according to data compiled by Bloomberg. The fund, which takes stakes in U.S. companies that are targets of shareholder activism, soared 32.9 percent in 2013 and gained 9.1 percent in 2014, but fell 10.9 percent in 2015.

The Downslope

A fund focused on U.S. companies targeted by shareholder activists hasn't outperformed the broader market.

Source: Bloomberg

Activist funds managed around $122 billion as of Sept. 30, according to Hedge Fund Research, roughly four times the $32.3 billion that was allocated to the asset class at the end of 2008. While the pool of capital has grown, the number of targets arguably declined, in part due to a continued rally in the broader stock market but also because as individual funds grow larger, the payoff from winning activist campaigns against small and mid-size companies has a smaller impact on their overall return. 

Meanwhile, some companies -- wary of becoming activist targets --  are taking proactive shareholder-friendly actions like operational improvements that lift profits, and undertaking strategic reviews that may lead to tax-free spins, break-ups, asset sales, stock buybacks or buyouts. 

It's too soon to tell if mediocre returns are here to stay, or whether they'll spark an exodus out these funds 1 . But with more dollars chasing fewer opportunities to squeeze out meaningful returns, the heyday appears to be over. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. The average return in 2015 was likely weighed down by funds like Pershing Square and Greenlight Capital which each lost around 20 percent, according to Reuters

To contact the author of this story:
Gillian Tan in New York at

To contact the editor responsible for this story:
Beth Williams at

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