Do Activists Investors Create Value?

Analysing the Performance of Activist Investors

November 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Shareholder activism has not grown from a campaign or AUM perspective recently
  • Activist funds have not generated attractive returns
  • The lack of outperformance is challenging to explain

INTRODUCTION

Active fund managers today are like deer caught in the headlights of oncoming traffic as the exchange-traded fund (ETF) industry is expanding its product range to all investment strategies and grabbing more and more market share from the mutual fund sector. In an important milestone, in August 2019, passive US equity funds surpassed their active counterparts in assets under management (AUM).

Active fund managers know they can’t compete with ETFs on cost. And achieving alpha in an increasingly competitive industry through fundamental analysis and other traditional tools is a prospect that grows dimmer with each passing day (read Hedge Fund ETFs).

But active fund managers hold one trump card over the index funds, quants, and artificial intelligence (AI): They know company and industry fundamentals better than anyone. And that’s especially true of the sector specialists who have spent years debating strategy with management, touring company assets, learning about customers, and studying supply chains.

This knowledge may not be that useful in forecasting asset prices, but what if these managers applied it as activist investors? To be sure, not every fund manager can transform themselves into an activist investor. But some may possess the requisite skillsets to make the leap. And whatever the odds, it beats watching ETFs continually erode their market share.

Of course, activist investing isn’t a new phenomenon, so fund managers may want to explore its track record before embarking on this path.

TRENDS IN SHAREHOLDER ACTIVISM

Carl Icahn, Bill Ackman, Paul Singer, and other activist investors have become almost household names. The battles Ackman fought against Herbalife (and Icahn) or Singer against Argentina are the stuff of legend. Finance doesn’t get any more colorful than a company compiling secret dossiers on an activist investor or a hedge fund “seizing” a warship off th