Move over Buffett, let the activists take over?
Last month at NYTimes.com, Anthony Scaramucci, founder of SkyBridge Capital laments that Warren Buffett “has lost a step with the times” and argues that the “replacement for the buy-and-hold strategy is the savvy corporate activist.” What? An icon from Omaha replaced by Icahn the raider/activist?
Scaramucci says that corporations need to be re-engineered and reinvigorated every 30 years or so and says activists are the ones for the job. But can we compare keeping corporate boards and management on their toes with the decades long mantle worn by Warren Buffett? Yes, we can and, in terms of cultivating a reputation, that should be the goal of any serious activist.
How did Buffett do it? How did a billionaire get Main Street to trust him and invest in him (or at least follow his moves in droves)? Much of what creates the aura of Buffett can be boiled down to three things: he keeps it simple — buying and holding, for the most part, companies that people can understand; he is consistent and true to his strategy through market ups and downs; and he is authentic — no art collections, celebrity poker tournaments or race horses.
Can a hedge fund take those pages from the playbook? Absolutely. The key is focusing on corporate governance, not just as tactic in a single campaign, but as the cornerstone of the fund’s identity. Good corporate governance is a simple idea and an idea that has mass appeal. To be sure, activists today know the power of the governance card, but no one has assumed leadership in terms of advocating for better governance throughout the system. The debates that occur are tactical, not strategic and I don’t think any manager is close to becoming a Buffet in the governance arena. The funds that generate the most headlines are too inconsistent in their message and tactics and the funds that have quietly won over boardroom after boardroom have done so in a way that is, well, too quiet to get recognized beyond a small circle of investors and industry watchers.
Why do it, you might ask? Why invest the time, effort and resources to aim to be as big as Buffett in terms of reputation? You do it because the payoff is enormous. The right reputation advances an activist agenda across the board: gathering assets, getting support from institutional investors to help affect change at corporations, and lowering the amount of resistance put up by the corporation.
The ability of certain funds to use the strength of their reputation and, at times, the media to speed to the investment thesis is just starting to become evident. Pension funds and mutual funds are beginning to line up behind certain activists: “We don’t have a house view, whether pro-activist or anti-activist,” said Glenn Booraem, controller of the Vanguard funds. “We’re pro long-term value creation.”
This means that the funds that can marshall this support most consistently will be the most effective. But to to sway the real money guys, the activist has to demonstrate a strategy and culture that is acceptable to the more conservative world of pension funds. The activist winners will have the brand built on reputation that a) pension funds feel comfortable supporting and b) enhance the pension fund’s (or mutual fund’s) own brand by affiliation.
The same holds true with board members. The previous post on this blog noted that it is more difficult for activists to recruit board candidates for proxy fights. A fund with a reputation for focusing on good governance and creating long-term value should find it easier not only to identify willing board members but also to have them elected.
Getting the right suppport and lowering the defenses of a corporation saves a fund millions in real dollars and opportunity cost. Consider the impact for Jeff Ubben’s Value Act when the fund was awarded a board seat at Microsoft after acquiring a stake of less than one percent.
Building the reputation to truly distinguish a fund in the crowded and vocal activist arena is not easy. A story in the May issue of Institutional Investor suggests that activist funds have been uneven at best in cultivating the reputation required for long term success: “These outsize personalities dominated the most recent phase of activist investing. But it’s an open question whether they will cast quite as long a shadow in the years to come…A highly visible campaign can quickly devolve into a publicity stunt.” As activism becomes more commonplace, activists have been accused of practicing in order to “entertain” themselves. “It is that entertainment aspect that might be threatened…because it often sits uneasily with other investors,” continues II.
Changing conditions might demand a change in the ways that activists go about their business and how they think about their role in the market. II writes that as the dividend and buyback strategy inevitably wanes, it “will put pressure on activists to engage boards and managers in more complex, longer term strategies.” Quoting a investment officer from CalSTRS, II concludes that “anyone with financial acumen can identify undervalued companies. But you have to find levers that extract what’s undervalued and communicate it to management. It takes very patient capital.”
Someone can be the Warren Buffett of activist investing. Even in that world of outsized personalities, ego and the heaps of publicity activists generate, the big prize is still there for the taking.