You know I love Wall Street soap operas and one just ended yesterday between the activist investor Nelson Peltz and the old-line chemical company, DuPont (ticker symbol: DD).
An activist investor is someone who buys a large stake in a publicly traded company and uses that ownership stake to force management to make major changes.
Being from St. Louis, Carl Icahn is the most famous activist investor in my mind (although he used to be called a corporate raider), but there are plenty of others these days including Bill Ackman, Dan Loeb and Paul Singer among others.
Almost two years ago, Peltz started a very public campaign against DuPont, arguing that it should be split into four companies to streamline their complex structure that would cut costs and bureaucracy which would both cut expenses and boost sales, and unlock real shareholder value.
He launched a proxy battle in October requesting that he and three of his pals be added to the board of directors so that he could force the changes that management isn’t making, but didn’t get enough votes to win any seats.
It’s an unusual loss for Peltz and for activists in general who have been very successful in recent years and are now targeting very large companies like DuPont, which has a $62.7 billion market capitalization.
While the drama is fun to watch, this particular battle is interesting because the three largest shareholders are all large index fund providers: Vanguard, BlackRock and State Street. Each company also manages actively managed portfolios, but yesterday’s events also highlight the power that index funds now have.
Even though index funds are passively managed, they take an active role in all kinds of corporate governance issues. Vanguard publishes their guidelines on proxy voting that you can find here and you can see that it covers board director elections, compensation matters and even social or environmental issues.
Acropolis also has to deal with proxy voting as you already know from your detailed reading of our proxy voting policy. We outsource the actual voting to a company dedicated to proxy voting, Glass Lewis.
We have authorized Glass Lewis to vote for the purpose of maximizing shareholder return. If you’re so inclined, you can review their 49-page 2015 Proxy Paper Guidelines for the US by clicking here.
If you did click through to read the document, you can see why we’ve outsourced it: it’s an incredibly complex process that’s extremely time-consuming and labor intensive. It’s still very important and the Securities and Exchange Commission (SEC) requires that we have a policy and disclose it to our clients.
Another interesting angle on the subject is a mutual fund that I wrote about some time ago which invests in stocks that activists are targeting. When an investor takes a five percent stake in a company, they have to disclose that stake within 10 days in what is called a 13D filing.
When the fund, known as the 13D Activist Fund, sees one of 20 or so activist investors take a stake in a company, they buy the stock in the fund. Although the fund is relatively new, the performance has been remarkably good. I ran it through our models to see what explains the performance and it looks like true alpha.
While I like the idea and watch the fund, I don’t think it will make it into our portfolio because it is very expensive at 1.75 percent and has been very tax-inefficient so far.
And even though there does appear to be (pre-tax) alpha, it could still be an aberration. A well-known academic, Jeffrey Sonnenfeld, of the Yale School of Management, wrote a recent opinion piece in the Wall Street Journal pointing out that performance has been poor among activist hedge funds. The index series that he uses is widely known to be troublesome, which makes it even more difficult to assess.
For now, I’m just going to keep watching the soaps play out in the paper each day and be thankful that I’m not the CEO of a targeted company. DuPont’s CEO surely had some campaign, but undoubtedly knows that the pressure is still on to deliver results or another activist investor will be back at the door again.