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A well-known and experienced firm takes an equity stake in a company and then publicly advocates for changes aimed at improving an underperforming share price. Should advisors follow along for higher returns?
Advisors are familiar with many activist investors and their firms, including Carl Icahn, Bill Ackman and Dan Loeb. Campaigners often push for changes to management and the board of directors, and suggest transactions designed to add value, such as selling non-core assets. Campaigns can differ in their degree of hostility, depending on management’s responsiveness. Should the company rebuff the activist proposals, a proxy fight might ensue.
Last year Elliott Investment Management, a leading U.S. activist firm, targeted Suncor. Elliott sought to replace Suncor’s CEO and half the board, return more cash to shareholders through dividends and buybacks, improve worker safety and sell the company’s Petro-Canada gas station network. (Elliott had successfully persuaded Marathon Oil to sell its retail network during a previous campaign.)
Activist firms can bear significant administrative costs during a campaign, especially if a proxy fight is involved, which implies the firms are fairly certain they can recoup those costs and more by driving for change. It would seem easy for an advisor to hop on the bandwagon once a campaign is announced and passively observe while the activist does the heavy lifting.
The Suncor campaign is ongoing — three directors appointed by Elliott sit on the energy company’s board — and some early returns are in to evaluate the campaign’s effectiveness. Suncor’s CEO resigned last July after another worker’s death; the company studied whether to sell the retail network but decided against doing so; the board increased the dividend; several initiatives were undertaken to improve worker safety; the company sold non-core assets, earmarked others and made more investments in the oilsands; and numerous other efficiency efforts were announced.
Despite all the moves, Suncor’s share price flatlined over the nine months that ended Jan. 31, significantly lagging its peers. The only gain for Elliott was the 12% jump in share price on the day they announced their activist campaign.
Given the cautionary tale of Suncor, advisors might consider a broader approach to leveraging activists. A significant amount of academic research examines the average returns of activist investors versus the market, with conclusions ranging from neutral to mildly positive results. Generally, the studies indicate some outperformance around the announcement of campaigns, but longer-term positive returns are far from conclusive.
Some products have put the strategy into action. Launched in late 2020, the LeaderShares Activist Leaders ETF (NYSE Arca: ACTV) is designed to hold securities that are the focus of shareholder activism. ACTV outperformed the S&P500 annually by more than 500 basis points, per Bloomberg, in the short period since it was created. Over a longer period, the 13D Activist Fund, a U.S. mutual fund, has underperformed the S&P500 by 125 basis points annually since late 2011. Both funds use a similar approach of relying on 13D filings, which must be filed to the SEC by investors holding more than 5% of a company’s shares and must denote any activist intentions.
Activists tend to target companies with underperforming share prices, which, intuitively, makes the stocks more likely to respond in the short term to catalysts such as management changes and asset sales. This is countered by research that shows only about 60% of campaigns are effective in bringing about changes. And then there are situations like Suncor, where the market remains unconvinced despite significant reforms.
Leveraging activist moves is not easy, and advisors are probably better off avoiding it as a primary approach. When share prices do react to activists, research shows that on average the high point is reached within days of the campaign announcement. This might mark the best time for an exit rather than an entry point.
by Mark Rosen, CFA, MBA, CFE. He heads ARC Research, providing independent equity research to investment advisors across Canada.