By Alex Gavrish, Etalon Investment Research; author of "Wall Street Back To Basics" By following activist hedge funds and having a sound decision making framework in place investors can identify attractive investment opportunities With the amount of activist investments on the rise during the last few years, more and more media attention is given to activist investors and the companies they target. Targets you probably heard about are Apple Inc. ( AAPL) with Carl Icahn dining recently with Apple Inc. ( AAPL)'s CEO Tim Cook and pressing for increase of a buyback program, Daniel Loeb of Third Point pushing for corporate changes at Sothebys ( BID) and Sony Corporation ( SNE) TYO:6758, Bill Ackman and his huge position in struggling retailer J.C. Penney Company, Inc. ( JCP) which did not work out so well or could even be considered a total disaster as an investment, Jana Partners position in grocery operator Safeway Inc. ( SWY), and the list can be continued. Many investors follow activists and copy them by investing in same companies. There is even a mutual fund that offers investors exposure to shareholder activism as an investment strategy. Overall, target companies certainly provide an interesting area to focus on and one where attractive investment opportunities could be found. However, it might not be so easy to replicate activists and achieve similar performance. Even though in general the interests of activists and other shareholders are aligned, the field is not without conflicts of interest.
Performance of activist investors
Tracking the performance of activist investors is difficult, but many academic studies point to outperformance. For example, IRRC Institute's 2009 study of 120 companies - in which activist investors gained board seats during 2005 to 2008 - found that total shareholder returns were 19.1% to 16.6% higher than peers during a one-year period beginning from the proxy contest. Morgan Joseph & Co. tracked 94 campaigns over an 18-month period during 2005 to 2006, and found that excess returns for these stocks were 16% in the year following the first announcement of an activist shareholder's involvement. Other studies also report similarly positive results.
Activists engage different types of companies, across different industries, and of various capitalization sizes: from small-cap to large and even mega-cap businesses. The majority of companies that become targets of activists are considered value stocks. For example, it is rare to see activists initiate investments in high-growth companies.