Activism, an investment strategy more prevalent among US funds, has been gaining traction in Europe.
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Dave Pope, S&P |
Some 64 European companies had been publicly subject to demands by activist investors by the end of the first half of 2016, setting the stage for a potentially record-breaking year.
Research from Activist Insight expects that number to reach almost 100 before the year-end. Last year 67 companies were targeted in total, and in 2014 there were 51 European companies targeted.
Among the European activist stories of this year have been Amber Capital’s intervention in Hitachi’s buyout of Italian train signalling group Ansaldo STS, and Oceanwood Capital Management’s call for the chairman of Spain’s NH Hotel Group to temporarily stand down.
It’s not just in Europe, however, that the strategy is increasing in popularity. Activist Insight says that activist investors targeted 650 companies in 2015, while in the first half alone of this year that figure was already 494 globally.
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Dave Pope, managing director of quantitative research at Standard & Poor’s Global Market Intelligence, says that could be for several reasons.
“The most likely are that people are chasing returns, and until a year ago activist funds always had positive years, and there has been a lot of media attention around activism,” he says. “There are a lot of personalities involved.” Another reason, Pope suggests, may be because an increasing number of investors are focusing on socially responsible investments – and activism is perceived to be a positive for society.
Misleading
This latter point, Pope says, is misleading. Research by Standard & Poor’s at the end of last year showed that firms targeted by activists did not see their financials improve. Rather, leverage increased while shareholder payouts also went up.
“The perception is different than the reality,” says Pope. “If anything, the companies actually seemed to be weaker post-activist intervention.”
A study by the University of Houston on activism earlier this year went as far as to say that activism appears to do more harm to society than good. The research went against S&P’s findings to say that target firms did tend to benefit from activist involvement, however it found that competing firms fare far worse as a result.
When an activist situation occurs within an industry, competitors generally are forced to cut their own prices and costs to maintain market share – cuts which may affect investment in research and development, and ultimately the innovation required to maintain market share, says Professor Praveen Kumar, who conducted the study. That in turn hurts investors in competitors, such as pension funds and mutual funds.
Activist investors disagree. Pershing Square CEO Bill Ackman told shareholders in his annual letter that activist funds provide a much-needed counterbalance to the growth of index funds, which are putting corporate America at risk because they focus on assets under management rather than encouraging good corporate governance among their shareholdings.
So far in Europe, activism has been most dominant in the UK. The value of activist investments in FTSE250 stocks was £3.4 billion in September versus £2.6 billion in January. Germany and Italy rank second for activist engagement this year.
Josh Black, editor at Activist Insight, said of its report: “Activist investing has been revived as a force in Europe, strengthening the perception that underperforming companies will soon have to be as wary of it as their American peers are today.” He also adds that greater activity seems to have taken place since the Brexit vote.
If Standard & Poor’s research is right then that is bad news for European companies that are struggling to see their stock price rise. The DAX is flat year-to-date, and the CAC40 is down on the year.
But European activist managers defend their roles, claiming there is a difference in their strategies compared to those of their US peers.
“We’re definitely less aggressive,” says one European activist hedge fund, who says he prefers to be called an ‘active’ investor. “It’s more about engagement, and less about ousting management and making a quick dollar.”
Gentle exercise
Indeed activist investors in Europe tend to have much longer-term engagement, remain removed from the media, and take a gentler approach.
Take Cevian Capital, run by Christer Gardell, one of the largest activist investors in Europe. The Swedish hedge fund manager does not engage in proxy battles or write letters to management demanding change. His firm also tends to be an investor for four to five years.
Legal and regulatory environments also sometimes restrict European activists from being too gung ho.
By contrast Pope says US activist investors have become more predatory as the sector has attracted more entrants.
“They’re going after CEO or board changes rather than trying to influence management through a proxy vote,” he says.
Unfortunately that tactic leads to short-term volatility because other investors tend to flock in when they hear a US activist is involved, and then unwind quickly to cash in on gains. Several activists were caught out last year on Valeant.
Performance data this year indicates that a lighter touch by European activists may work better. According to data from eVestment, European activist funds returned 13.9% up to the end of September, while US-based funds returned 5%.
European funds dedicated to activism are still a small total of all funds, however, managing around $27.5 billion of the total $163 billion globally.
