By Mike Bishop
Shareholder activism has a high profile – money is flowing into activist strategies, particularly from US institutions, and there have been a number of high profile examples of activism at work recently.
Well-known brands such as Apple, Microsoft and UBS are all seeing their shareholders pushing for change. Institutional shareholders are becoming increasingly frustrated by those company boards that are “gaming” the system (a form of rent extraction). The Kay Review highlighted short-termism among equity market participants and encouraged investors to act as long-term stewards of more concentrated portfolios. This has very publicly put the boards of public companies ‘on notice’ to expect invetors to use their voice, either individually or collectively.
The London Business School recently published an international study of shareholder activism which identified two separate consequences of activism, measuring the share performance from 20 days before to 20 days after the events. First, when an activist’s stake was announced the average gain in Europe (including the UK) was 7.4%. In Europe, the average share price uplift on an outcome from activist driven events (board change, takeover, special dividend, etc.) was 13.3%. The average holding period for an activist in Europe was 25 months while the average stake was 7.1%.
The sweet spot in the UK-listed market for constructive activism is small and mid-cap companies, particularly those businesses poorly researched by the sellside with concentrated shareholder registers, accessible management and market capitalisations that enable us to build up meaningful holdings. The result is a high conviction concentrated portfolio of stocks where the superior insights and activist agendas give considerable scope for meaningful value creation.
Constructive activism starts with identifying an undervalued company and the addressable reasons for that, and then taking a sufficient stake to engage constructively with the board. It may involve working with other shareholders to provide greater leverage and support the agenda for change. This strategy requires investors to act as owners, address capital allocation and strategic issues, and so generate higher returns for shareholders.
This approach can be considered an alternative investment – a focus on creating alpha and absolute returns; capacity constrained portfolios; research and insight intensive. These are highly concentrated portfolios with low correlation to traditional asset classes and a long-term investment horizon. Activism requires a markedly different mind-set and skillset from that employed by the vast majority of fund managers. Activists see share price weakness as an opportunity where they can seek to influence. What sets activist investors apart from the ‘voters’ is the character and the quality of engagement. In a period of forecast prolonged low total returns, the alpha achievable from activism is significant.
Mike Bishop is chairman, advisory board, RWC Focus Funds
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