U.S. activist investors gain from index funds' passivity

NEW YORK Wed Nov 20, 2013 2:54pm EST

Barry Rosenstein lead partner of Jana leaves the Agrium annual general meeting in Calgary, Alberta, April 9, 2013. REUTERS/Todd Korol

Barry Rosenstein lead partner of Jana leaves the Agrium annual general meeting in Calgary, Alberta, April 9, 2013.

Credit: Reuters/Todd Korol

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NEW YORK (Reuters) - Activist investors, pushing for corporate change, have more influence because index funds and exchange traded funds are passive investors which own millions of shares of U.S. companies but rarely say much about how they should be run.

"One of the unintended consequences of the proliferation of index funds and exchange traded funds is that such a high percentage of share holdings are now driven by computer," said Jason Ader, founder of hedge fund Spring Owl, one of only a small number of dedicated activist investors. "And that is the million dollar question, the inertia that that has created."

These big investors are rarely holding "management accountable for underperformance and are not pressuring boards to hold management accountable for underperformance," Ader said at the Reuters Global Investment Summit.

Funds run by well known activists, including Jeff Ubben of ValueAct, Barry Rosenstein of Jana Partners, and Carl Icahn, have returned roughly 14 percent on average so far this year, twice the amount that the average hedge fund has delivered, partly because they cajole businesses into running their operations better, the activists say.

But with so many index and exchange traded funds crowding in, Ader said that activists often can't find another investor to compare notes with. "You would talk to the compliance department," he said.

Even though there are opportunities, Ader said, it is tough to become an activist because the strategy is often expensive and time consuming, requiring deep research on a company, trying to persuade management to interact and possibly running a proxy fight. Proxy fights often cost millions of dollars.

"There is nothing about activist investing that is easy," Ader said, adding "you can't run 15 proxy contests every year."

As for his own fund, which currently has about $350 million in assets, he said a desirable size might be to have $1 billion in assets.

Several activist funds, including Keith Meister's Corvex Capital Management, have closed their funds to new investors after having raised several billion dollars.

"You can't have 40 positions as an activist investor," Ader said, adding "that puts a limit on things and so you should limit your size.

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(Reporting by Svea Herbst-Bayliss; Editing by Phil Berlowitz)

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Comments (1)
Greenspan2 wrote:
So activist investors are doing more poorly than the S&P index fund? And this is an advantage how?

Nov 20, 2013 4:53pm EST  --  Report as abuse
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