The proxy season has triggered a gold rush of activist institutional investors challenging companies. But this swell in corporate governance activity could strain investors' resources, especially related to executive pay issues and shareholder engagements.
Shareholders have been bolstered by recent investment returns in companies in which activists have been involved, said Patrick McGurn, special counsel, Institutional Shareholder Services Inc., Rockville, Md. ISS is a corporate governance and proxy-voting advisory firm.
Activist hedge funds outperformed other hedge fund strategies in 2013, raising the attractiveness of the strategy for new funds and assets, Mr. McGurn said. But hedge fund returns generally lagged the Standard & Poor's 500, he said.
Event-driven activist hedge fund strategies returned 19.1% for the 12 months ended Dec. 31. For the same period, long/short equity hedge-fund strategies returned 16.1%; distressed, 14%; event-driven, which includes the event-driven activist subset, 12.8%; and multistrategy, 7.6%, according to eVestment LLC, Marietta, Ga. The S&P 500 total return, including dividends reinvested, was 32.36% last year.
Michael P. McCauley, senior officer, investment programs and governance at the $174 billion Florida State Board of Administration, Tallahassee, said activism is growing, whether hedge funds or traditional equity portfolios.
“The evidence has really started to accumulate that those types of (activist hedge fund) investment strategies are very effective” for shareholders, Mr. McCauley said.
“The performance record and effectiveness ... have no doubt attracted assets because (the group of activist hedge fund strategies) has done so well. I think the market has responded by creating more funds.”
“It's very clear these types of strategies have really delivered alpha. That's a reflection on the move to increase shareholder rights.”
“It's certainly higher risk with concentrated portfolios,” compared to traditional equity portfolios, Mr. McCauley said.
Activist funds are challenging companies on a number of issues, including balance-sheet matters, business strategy and leadership, Mr. McGurn said.
He expects activists to file contests for board seats at some 35 companies, about the same as last year. He thinks activists could challenge more companies, but reach settlements before proposals are filed.