A Concise Guide to Activist Investing
Introduction (Via Michael Levin)
This guide is intended for investors of all types (fund managers, institutions, and individuals) that seek to improve the performance of individual equity holdings in their diversified portfolios.
Why investor activism?
In recent years, investors have expressed their views more and more vocally about how executives of firms in their portfolios invest and manage investor capital. These investors typically do this when a portfolio firm underperforms peers to that firm, or perhaps the overall market.
Frequently, investors become active when they find, unexpectedly, that a firm in their portfolio has underperformed. Rather than merely selling the investment, investors seek constructive change in how management runs the business. These investors cannot or choose not to exit for a number of reasons:
• Their portfolio requires them to continue to hold the firm, say in the instance of an index fund that must hold a firm in order to replicate an index.
• Their investment represents a sufficiently large proportion of outstanding shares, so exiting would depress the share price.
• The cost of becoming active is small relative to the potential increase in value.
A few investors look for underperforming firms for their portfolio, seeking to increase the value of the investment through an activist approach. These full-time activists thus adopt something of an extreme version of value investing. Rather than waiting for a portfolio firm to naturally or organically achieve a target value, the investor participates actively in that firm’s management.
Occasionally, one investor learns that another investor, say a full-time activist, has targeted a firm in the investor’s portfolio. Then the question becomes, how does the investor respond? Should the investor support the activist effort, and if so how?
Either as an accidental or deliberate activist, an investor has a range of strategies and tactics
available to rectify that underperformance, which constitutes the remainder of this discussion.
The activism that I have in mind here differs from the activism of takeover investors. Certain investors agitate for change (mostly related to governance) so they may acquire control of a firm. I do not address this discussion to these investors (although they may find it interesting and useful). If instead you are an investor that has an underperforming firm in your portfolio, or are a value investor that would rather not wait for management or market cycles to increase the value of your investment, or are an investor with a portfolio firm targeted by a full-time activist investor, this discussion is for you.