Bill Ackman (CANADIAN PRESS/Pawel Dwulit)
Do you sometimes wish you could invest like Carl Icahn or Bill Ackman? These tough hedge fund managers have made a career (and more than one fortune) out of buying a company’s stock, then wresting control of the business from its board. After effecting changes at what they perceive to be an undervalued operation, the stock price usually climbs and everyone goes home richer. Unfortunately, unless you’re wealthy and can buy into a hedge fund, it’s difficult to make money off these types of takeovers. At least until now.
At the end of March, Winnipeg-based portfolio manager Larry Sarbit planned to launch the IA Clarington Sarbit Activist Opportunities Class, a mutual fund that invests only in American companies where an activist investor has gotten involved. Over the years, Sarbit has held businesses where activist investors have barged in and improved stock prices. He thinks that by holding a number of these targets, he can boost his clients’ returns.
He hasn’t back-tested his fund, and there’s only one other mutual fund like this—a U.S.-based fund that launched a year ago and, according to its manager, made 21% in 2012—so it’s nearly impossible to know how something like this will perform, long term. However, there is research to indicate that chasing activist investors pays.
Last year, Kerry Pogue, managing director with London-based analysis firm Activist Insight, created an index to measure the performance of activist-led hedge funds. Between January and September of 2012 (Q4 data wasn’t out yet), the Activist Index was up 12.46% net of fees, compared to 10.89% for the MSCI World Index. Since 2008, the index was up 75%, while the MSCI World returned 46%.
The reason this works, says Pogue, is that activist investors often study companies for years before buying in. “They really do their homework,” he says. They typically purchase undervalued companies that, for some reason, can’t get back on track. The investor brings new ideas—and often a new board and management—in the hopes of extracting that latent value. For example, before Ackman’s Pershing Square Capital Management bought into CP Rail in late 2011, its stock price was floundering. It’s up 124% since the hedge fund manager got involved.
In 2010, Jonathan Cohn, assistant professor of finance at the University of Texas, looked at what impact a new shareholder-friendly law, which was being debated in Congress, had on companies with activist investors. The law, which wasn’t passed, would have made it easier for shareholders to nominate directors. He found that positive news around the law caused the returns of companies with activist investors to increase by half a percentage point over businesses without activist involvement. “Investors view more activism as a good thing,” he concluded.
Of course, activism doesn’t always work. Ackman also bought into J. C. Penney last year and its stock price sank 56% over the past 12 months. That’s why Sarbit will have about 22 stocks in his new fund, compared to 11 in his value-focused fund. “We want to spread our risk out a bit,” he says. Sarbit’s fund is not for everyone—it’s unusual and untested—but for investors who have longed to employ Ackman and Ichan’s tactics, evidence does suggest that a little cage-rattling can boost returns.
