Mainstream investors get behind activism

Jul 13, 2007

Ipreo study finds that activist funds are viewed as a positive and growing trend

What do mainstream investors think of shareholder activists in general and swashbuckling hedge funds in particular? That's what Ipreo, the market intelligence firm that owns Bigdough, set out to discover in a perception study of portfolio managers and buy-side analysts. The results, which Ipreo is preparing to distribute to clients, may come as a shock.

'It's going to surprise some companies that most regular investors don't consider activists to be evil, attacking companies willy-nilly,' says Bill Sherman, Ipreo's global head of data strategy and analytics.

While survey respondents couch their opinions in a measured, case-by-case approach, it's clear they view activism as good for business. Only 5 percent say activism is not helpful in unlocking shareholder value, and nearly 45 percent say it's beneficial for an activist shareholder to have a seat on a target company's board.

Interestingly, the majority of buy-siders monitor the shareholder base of securities they hold, and nearly 50 percent say the arrival of an activist would affect their investment decisions. But the study reveals no clear sign that mainstream investors are jumping on the coattails of activists by increasing their existing investments in targeted companies. Perhaps Ipreo will next look to trading data to analyze how mainstream investors behave when an activist turns up in a stock.

A huge number of respondents - 86 percent - believe activism will keep growing. 'I noticed that a more recent trend is institutions like large mutual funds becoming more vocal and more active. I see that growing more and more in the near future,' says one buy-side analyst.

The current cause célèbre is definitely executive compensation, with around two thirds saying it was the most important issue raised during the last proxy season, and 85 percent agreeing that investors should have a 'say on pay'.

Ipreo's advice? 'When an activist investor gets involved in your stock, avoid a knee-jerk defensive reaction,' Sherman says. 'Sometimes a company's natural reaction is to have an us versus them mentality, with us including most of their traditional investors. Our analysis shows they must take a more measured approach.'

Nicole Maselli, Ipreo's director of analytics, adds that it's important to learn all you can about an activist investor. 'Be educated about who they are,' she says. 'Some are serial activists and seen as nuisances, so maybe they could be safely ignored. But find out who they are first and prepare for a conversation.'

by Neil Stewart