The more media coverage an activist hedge fund gets, the more negative it becomes. That’s the key finding in my study of activists in the press.
Value Act, Jana Partners and Blue Harbour Group are the funds which score highest in terms of positive media sentiment. Their high scores for reputation are tempered, however, by the low volume of media coverage they receive. That said, these funds are well regarded in the press for their success in using constructive and typically non-confrontational approaches to engaging with management and boards.
The biggest names in the business (Pershing Square, Third Point, Elliott Management, Icahn and Trian) are on the other end of the spectrum. They receive enormous media attention but the sentiment in that coverage is much more negative. With greater attention comes greater scrutiny and the media are compelled to come up with new story lines about these funds. Tactics are questioned, managers’ personalities become news, wealth becomes a focus. Even when they score a victory the media coverage will often include reference to a past failure. The bigger the target or the bigger the campaign the greater the risk for negative publicity. Elliott’s fight with the Argentine government, Pershing Square’s campaigns on Allergan and Herbalife and Trian’s fight with Dupont have each been damaging to the managers’ reputation.
In studying the media coverage activist managers’ preference for letting their campaign records do the talking become clear. Most managers do not directly engage with the press, but use letters to shareholders and CEOs/boards as proxies for media relations. Of course some managers do make the rounds on TV, do live events with reporters in attendance and even sit with journalists for in depth interviews. But for the most part, the activist industry wants their record to define them. This is a mistake and the activist scorecard is insufficient to build a consistent, positive reputation. Look at Starboard Value, a fund that has become more active in recent years and received more press, as a result. Their record in terms of wins and losses has been highly positive, yet, the sentiment in the media is more or less neutral.
That is because reputation has to be about more than wins and losses. The previous post in this blog focused on whether activism is good for our financial system. That is the big question and the fact that activists have been winning a lot more than they have been losing doesn’t provide the answer.
The research shows that certain funds would probably benefit from greater media exposure and that the name brand funds would benefit from picking their public battles more carefully and calibrating campaigns based on the associated reputational risk.
From the research one can also conclude that if the activists which get the largest share of voice in the media are viewed negatively, it creates a risk for the entire sector. The case still has to be made for activism: how activists improve corporate governance, accelerate corporate performance and advance the interests of other investors. Until that happens, the activist sector itself faces the risk that the media, the market and even regulators will decide that they are part of the problem rather than part of the solution.
No better time than the present (even if it’s already March) for a review of the year that was in the world of hedge fund media. Three story lines were recurring and continue to be extremely relevant this year: activist funds taking on “big game” in the form of global corporations; whether or not “real money” asset managers will stay on the sidelines or join forces with activists; and, the ongoing saga involving Herbalife.
Trend #1: 2013 was the year that activist funds upped the ante and consistently turned up the heat on global corporations. Hess, Apple, Sony, and Pepsi were/are targets of a who’s who of activist investing: Elliott Management, Greenlight Capital, Third Point, and Trian, respectively. Elliott won board seats at Hess, Apple started a share buyback plan and increased its dividend, Third Point has lost money on Sony buy continues to call for the company to make “difficult decisions” and spin off parts of the company, and Trian is still arguing for Pepsi to spin off its beverage business and bulk up in snack foods. Not a bad track record, given size of these corporations.
Expect more of this big game hunting by activist funds. Indeed, investment banks and the largest law firms are increasingly advising corporate clients on how to cope with, and better yet, avert activist attention. It remains to be seen how corporations can begin to think like an activist (in attempts to avoid being targeted). If they do, it should result in higher profits, sharper strategy and better governance. According to a Conference Board Report, as of September 2013, hedge funds were “somewhat victorious” in 19 of 24 proxy contests initiated to that point last year, suggesting that shareholders are also starting to think like an activist.
Trend #2: Pension funds and other traditional asset managers are beginning to engage more with corporate boards and activists. Called “sleeping giants” by this blog, pension funds are where the muscle is. The enduring question is do they have the stomach to advocate forcefully for change aimed and boosting share prices. Calpers and Calstrs have long focused on good corporate governance and evidence is mounting that other pension funds are ready to be more proactive with corporate boards. Nell Minow, the co-founder of the governance advisory firm GMI Ratings, says there has been “a shift in tactics” among big pension funds “from shareholder proposals to engagement and director replacement.”
The newly-formed Shareholder-Director Exchange is a group comprised of corporations and asset mangers that developed a “protocol” for institutional investors and board members to follow when either side wants to talk to the other. While the SDX operates within the traditional realm of corporation-shareholder relations, pension funds want more engagement and presumably more accountability from boards. Activists are not part of the SDX, but if I were an activist, I would view this as promising for my strategies (more on this next time).
Trend #3: What is going on with Herbalife? Herbalife was the biggest headline getter in 2013 and it produced an almost a non-stop series of tabloid quality story lines that included the likes of Pershing Square, George Soros, Third Point, Perry Capital and others. The saga continues and now the government is investigating Herbalife (chalk one up for Pershing Square). Net net, no one really knows what’s the deal with Herbalife. The longs won out in 2013, but it’s a new year.
The stock market is at new highs, but, ironically, shareholder activism also appears to be be peaking. High profile activist campaigns involve iconic American brands like Hess, Apple and Dell and smaller companies like Herbalife.
Media love a good fight, so, when hedge funds come out swinging, the newswires light up. This reality is a double edge sword for hedge funds. On one hand, it is usually easy for the activist to corner a corporate target. Typically, the corporation is a sitting duck for criticism and is predictable in its response. However, the media machine must be fed and sometimes it can bite the activist hand that feeds it juicy, controversial stories.
Recently, hedge funds’ tactics have come into question for distorting the information balance that creates an efficient market for a company’s stock. I’d be curious to see a large sample of how stocks perform after appearing in activists’ crosshairs. Stephen Taub, writing for Institutional Investor’s Alpha looks at some recent examples and concludes that “the so-called smart money set may be able to influence a stock’s performance or direction for a day or two or week. But, over a longer period of time the company’s fundamentals…determine a stock’s direction.”
A potentially more ominous story in the New York Times looks at the actors in the Herbalife contest. “The arrival of the hedge fund billionaires — William A. Ackman, Daniel S. Loeb and Carl C. Icahn — spawned a media circus. And at times, some investors acted as if they were the stars of a reality-TV show,” commented the Deal Professor column. The column goes on to say that after playing their cards, Greenlight Capital and Third Point took their winnings and went home, but Pershing Square and Carl Icahn remain at the table engaged in a high-stakes, heads-up death match over Herbalife. The story suggests that things have gotten personal between the two hedge funds and hints that the apparent stand off is no longer about Herbalife, but about ego.
This could be raising the eyebrows of investors and should be a significant concern to Pershing Square and Icahn. If it begins to appear that either remains involved in Herbalife for any reason other than its investment thesis, it could be extremely damaging. Above all, a hedge fund needs to be perceived as rational and must apply an objective, analytic investment process to its strategy in order to deliver on the “hedge fund promise” (a fund’s ability to use all the arrows in Wall Street’s quiver without taking on significantly more risk than the market as a whole to deliver alpha).
This episode illustrates a fact that most activist hedge funds don’t fully grasp: executing the worlds best media program in connection with a shareholder campaign is not a strategy that builds your reputation. It is a tactic that supports a single investment decision. Think about the New York Yankees. Baseball is simple, right? “Sometimes you win, sometimes you lose, sometime it rains.” But the what the Yankees stand for is far bigger than their record. Activists cannot pin their reputation solely to their record because sometimes you lose and sometimes it rains.
Firms must define the bigger picture, the context in which they operate and use the media to tell that story to LPs, prospective investors and corporations (after all, a fund’s reputation alone can be sufficient to deter corporate resistance). This gives the media a larger narrative with which to work and can define the intricacy and nuance of the hedge fund’s game much more than the scorecard. Funds that don’t look inward to find what makes them tick can find themselves winning many battles, but losing in the larger fight to establish and preserve a reputation around which investors want to congregate.