Constructive Activist Funds Seek to Avoid Proxy Battles

Terry Flanagan

Large institutional investors are choosing an eclectic mix of activist fund managers, some of which prefer to avoid doing battle with corporate boards, at least publicly.

Go Investment Partners, for example, which counts California State Teachers Retirement System (CalSTRS) and the Fourth Swedish National Pension Fund (AP4) among its investors, forgoes a “big stick” approach in favor of more gentle persuasion when it comes to influencing management. The style is suited to Europe and Japan, where Go Investment Partners operates.

“There are many activist funds in the North American market, but relatively few in Europe and Japan,” Steve Brown, Go Investment Partners’ founder and CEO, told Markets Media. “The primary reason is that the institutional cultural environment requires a different approach.”

Brown’s approach is to engage boards and management teams in order to focus on strategic governance changes that are necessary to deliver long-term value, and only as a last resort move to a public dispute. “That’s different from many other activist type strategies, but we believe it’s more productive in the environments in which we operate,” Brown said.

Teresa Barger, co-founder of Cartica Capital, another CalSTRS activist fund, which manages in excess of $2 billion, says that the firm focuses exclusively on being an active, engaged owner of emerging markets equities and working collaboratively with boards, management teams and controlling shareholders to enhance value.

“In the emerging markets, hostile tactics are impractical, since the vast majority of publicly-traded companies have controlling shareholders, so we look for situations where there’s a true ally for change,” Barger said. “We have found CalSTRS to be a great partner because they are steadfast in standing up for what is right in corporate governance, in our experience.”

Blue Harbour Group, which received its first investment from CalSTRS in 2011 and now manages about $400 million for the pension fund, looks for fundamentally strong North American companies that trade at a significant discount to their intrinsic value.

But that alone is not enough for it to invest: a company also must be led by a strong management team that’s open to new ideas for enhancing shareholder value and that embraces it as a lead shareholder, a spokesperson for Blue Harbour told Markets Media. “In our ten years as a firm, we never have engaged in a proxy fight or sued a company, because if our due diligence leads us to believe hostile tactics will be required in order to gain influence, we simply will not invest.”

Earlier this year, AP4 invested EUR75 million in the GO European Focus Fund, which is a constructive activist investment fund, set up in 2005, that seeks to add value by acting as a catalyst for corporate change in quoted small and mid-cap European companies.

AP4 also invested a further JPY7 billion (cEUR50m) in the TMAM-GO Japan Engagement Fund, doubling its initial investment in the Fund made when it was launched in March 2012. The JEF adopts a culturally effective “Japanese way” of engagement with small and mid-cap Japanese companies, to improve their valuation by addressing strategic, financial and governance issues.

“We’ve been building the operations of this business, initially in Europe abut more lately with the Japanese joint venture,” said Brown. “I’ve got 15 years of operating this type of strategy. It’s the credibility of your arguments that carries the day, and your ability to build a relationship and interact with a board over time to influence their thinking and direction of travel.”

Featured image via Brian Jackson/Dollar Photo Club

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