U.S. pension fund group adds activists, finding common ground

BOSTON Fri May 30, 2014 2:56pm EDT

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BOSTON May 30 (Reuters) - The Council of Institutional Investors gained a pair of prominent activist firms as non-voting members this year, as big public-sector money managers find more common ground with the outspoken shareholders.

The changes are coming about as institutions invest more in activist funds, which showed healthy returns last year.

The two groups also are increasingly taking similar positions on corporate governance issues at the companies in which they invest, like executive pay and board accountability.

The new activist members of CII, an association of mostly big-money long-term investors like public pension funds, corporate funds, and endowments, include ValueAct Capital and Legion Partners.

Institutional investors have in the past dismissed activists as interested only in short-term gains, but now many recognize that activists hold company stocks for extended periods and share longer-term goals, new CII Chair Jay Chaudhuri said.

"Increasingly we're on the same wavelength. It's less like the Hatfields and McCoys," he said in a recent interview, referring to a famous family feud during the U.S. civil war.

The new activist members have no voting rights on council policies, but can offer input and help pick priority issues. Other non-voting activist members include Red Mountain Capital Partners, which joined in 2012, and Blue Harbour Group, which joined in 2011.

Legion Managing Director Ted White said the signups show how activist funds have learned to work with institutional investors: "The institutions are more supportive, because they look at what the activists have done," White said.

He cited cases in which activists and institutional investors have worked together recently, like Timken Co's spinoff of its steel production unit under pressure from the California State Teachers' Retirement System and Relational Investors LLC.

ValueAct partner Allison Bennington said it joined the council because it generally agrees with the group's goals like reforming corporate director elections. "If a lot of their policies were adopted across Corporate America, we would probably see better financial results," she said.

Tensions remain between activists and institutional investors, however. Late last year activist Carl Icahn urged Apple Inc to buy back $50 billion more stock than it had planned, setting off a backlash from CII members worried that an increase would benefit short-term investors looking to cash out.

In an interview this week, Icahn defended his approach and said his returns far exceed those of the pension funds. He also sent a list of his long-tem holdings including 11 companies owned for more than a decade such as American Railcar Industries Inc and Federal-Mogul Holdings Corp.

Compared to public fund managers, "I am less short-term than most of these guys," he said. (Reporting by Ross Kerber; Editing by Richard Valdmanis and Richard Chang)

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