Can Activism Survive A Down Market?

By Josh Black, Editor of Activist Insight


Davidoff Solomon is the Co-Director of Berkeley’s Center for Law, Business and the Economy. In January he wrote a column in “The New York Times” suggesting that 2016 would be the year activists met their match—not greater skepticism from institutional investors, or a new corporate governance framework, but the market itself. Davidoff Solomon’s argument can be summarized as follows: if a downturn in equity markets persists, the kinds of companies that activists target will be particularly hard-hit, leading to greater downside for the funds; M&A and spin-off opportunities will dry up, leaving a common mode of value-creation off the table; and the number of activists will be thinned-out by a Darwinian process of redemptions, or simply withdrawal from the game out of frustration.

Recent months have seen several commentators express the view that a downward-trending market will harm activist funds more than most. With 2016 now in full flow and the S&P 500 down 4% over two months, Activist Insight opted to look at whether the market has a major impact on activism.

To answer the question, Activist Insight undertook an analysis of its unique index of dedicated activist funds, the Activist Insight Index (full years: 2010-2015).

As detailed below, the Activist Insight Index outperformed the S&P 500 in months where the latter posted a negative return, but underperformed when the S&P 500 Index was positive at the month-end. The data set spanned all years for which Activist Insight had full coverage: 2009-2015.

Average performance in “up” months

Activist Insight Index (Net return) S&P 500 (Total return)
3.28% 3.58%

Average performance in “down” months

Activist Insight Index (Net return) S&P 500 (Total return)
(2.82%) (3.41%)

Annual performance

2009 24 48.60% 26.46
2010 27 20.70% 15.06
2011 29 (9.99)% 2.11
2012 33 17.02% 16.00
2013 37 28.83% 32.38
2014 36 6.82% 13.68
2015 27 1.64% 1.40

As the data make clear, the Activist Insight Index has outperformed during the seven-year upswing in the S&P 500 Index, which has not ended a year down since 2008. The data could lend credence to the argument that activist funds are better-hedged versions of the broader market

That may not be the full story, however. Activist Insight was able to identify performance data for 17 funds from 2008 – the year of the Global Financial Crisis and the last time the S&P 500 Index went into freefall – and the numbers are not pretty.

Average monthly returns from 2008

Activist Funds (Net return) S&P 500 (Total return)
(4.71%) (3.60%)

The above data may be explained by an argument used by critics of activist funds who cite the propensity of hedge funds to pile into activist-targeted stocks, thereby increasing volatility in the share price.

Commenting on the data, Activist Insight spokesman Josh Black said “While only covering a single cycle, the data is likely to embolden both supporters of activism who believe it outperforms passive indices, and critics, who say it is subject to greater volatility. Ultimately, the next few years will tell us a lot more about the robustness of the activist business model.”

Even Davidoff Solomon is not predicting the end of the activist investor. In a Bloomberg TV interview, he clarified his view, saying “They’re still going to have huge influence, don’t get me wrong. When they take a position in a company, the companies are still going to listen— they have to listen and the shareholders want them to listen.” That said, he predicts significantly less activity.

One of the things most onlookers will be watching for are heavy redemptions, since not all activists have ValueAct Capital Partners’ multi-year lock-ups, or Pershing Square’s permanent capital. The closure in February of Orange Capital, a roughly $1 billion hedge fund, is the most significant development yet. Yet other funds entered 2016 high on optimism, and the number of companies subjected to public demands has exceeded the first months of both 2014 and 2015 (according to Activist Insight’s data). Glenn Welling, CIO of three-year-old Engaged Capital, recently told Activist Insight that this year, “The market is not going to help, so you need to be good at catalyzing value.” Like many others, he sees names that have been on his watchlist for years suddenly becoming cheap enough to justify an investment. In this environment, “You need to do deep research,” he says. “That’s what my business is all about.”

These comments suggest that the environment for activist investing has changed such that activist investors themselves have to adapt their methods. Some will, some won’t – so it will be interesting to see if the same names top the rankings this year as they have over the last few years.



Notes: The Activist Insight Index is a non-weighted index of approximately 30 funds that dedicate their entire portfolios to activist investing. Said funds invest in a number of different markets, including Europe and Asia, as well as the US and Canada. While many of the same funds are represented in each year, the exact composition of the Index may vary. Each year contains a full set of performance figures from its constituent funds.



About Activist Insight

Since 2012, Activist Insight has provided its diverse range of clients with the most comprehensive information on activist investing worldwide. Regularly quoted in the financial press, Activist Insight is the trusted source for data in this ever-evolving space. Activist Insight offers two great products: Activist Insight Online and Activism Monthly Premium magazine, and counts many of the world’s leading investment banks, law firms, shareholder communications firms and institutional investors as its clients.