The New Alpha: Activism

As the investment business gets more and more competitive, and as the smarter firms realize just how hard it is to add value through traditional public-market stock-picking, a handful of firms have begun pursuing alpha through a new investment strategy: shareholder activism. 

Instead of trying to predict how a company will perform and how the market will react to this performance (in most cases, a loser's game, given the intense competition), these investors are increasingly taking matters into their own hands.  Specifically, they are buying companies, instead of stocks, and then forcing management to run the companies differently.  (Or at least announcing that they're going to force change, which often produces the same pop in the stock price.) 

When activist investors are successful, they and their clients benefit from not only the positive changes, which produce a higher stock price, but reduced transaction costs and taxes. In contrast to the typical passive ownership-style of most U.S. institutions, moreover, the U.S. economy benefits.  The strategy obviously doesn't work in all cases--sometimes managements successfully resist the onslaught, sometimes the investors' ideas are harebrained--but the change in attitude, from money managers to shareholders, is a positive one.

In the latest example, from the NYT, a group composed of OppenheimerFunds, SAC Capital, Tudor, and D.E. Shaw are trying to dump the board and CEO of Take Two Interactive, the video game company responsible for the mega-hit Grand Theft Auto:

The slate of rival nominees [at the annual meeting] is expected to include Strauss Zelnick, the former BMG executive, who intends to request authority to remove Take Two’s chief executive.  In its regulatory filing, the group gave little indication why they wanted to sweep out the boardroom and send the chief executive packing. But Take Two’s recent troubles are obvious...

Comments

[Dylan]

Kiplinger’s Personal Finance profiled one of these funds in the April issue, the Olstein Strategic Opportunities Fund (OFSCX). It’s a new fund (I assume without a lot of assets) and charges 2.35%. This does not appear to be a recipe for success to me. Could a small fund add that much value through activism? The article’s authors suggest that the manager’s past track record (an all-cap value fund beating the S&P 500 over the last 10 years…go figure!?!) makes it worth the high fee.

I think such models are well meaning but that does not make them good investments. Even if the fund’s efforts do lead to change, there is no guarantee it will have a positive result.