Can activist investors be a positive force for shareholders?

Is the investment company sector about to see a wave of campaigns from activist investors? Reports over the past week reveal US investor Boaz Weinstein, who runs the Saba hedge fund, has invested in several UK-listed investment companies. That has prompted speculation he will launch campaigns for corporate action at these funds – and that other activist investors will follow suit.

Not surprisingly, investment company managers and boards regard activist investors with a degree of hostility. After all, no-one enjoys a third party telling them how to do their job. Activists typically target businesses where they think the board should be pursuing a new direction or acting more forcefully to drive value for shareholders. In the case of investment companies, they tend to focus on funds where the shares are trading at significant discounts to the value of the underlying portfolio; then they push the company hard to take action to bring the discount down.

In extreme cases, activists have even demanded that funds move to wind themselves up – to sell their portfolios so that investors can realise the full net asset value of the investment company, rather than being stuck with shares that only offer some of that value.

You can see why those running investment companies are wary. Managers and boards often argue that activists are looking to make a quick turn – to exploit a valuation anomaly, rather than to focus on the long-term value that the fund aims to deliver for its shareholders. It will be interesting to see how Saba’s relationship develops with the funds in which it has invested.

Still, leaving aside bruised egos and the debate about value versus opportunism, there is something quite edifying about activist campaigns against investment company management teams. They are a striking reminder that a closed-ended fund is a publicly listed company with a legally binding duty to put the interests of its shareholders first.

There will always be disagreements about the best way to safeguard those interests, but public companies ultimately leave it to their shareholders to settle the question definitively. If an activist can’t persuade management to pursue the course of action it wants, it can put resolutions to the rest of the shareholder base to force through change. The bottom line is that investment company management teams are accountable to a far greater extent that those who run other types of collective investment fund. Ultimately, shareholders even have power to shut the funds.

A different question here might be whether an activist would be right to argue that investment companies aren’t doing enough for shareholders. It is worth noting that when it comes to equity-focused investment companies, shares in the average fund now trade at a discount to the underlying asset value of 11.3%. Funds with holdings in alternative investments are on wider discounts, but these more illiquid asset classes often come with greater uncertainty over the valuation that forms the basis for that discount.

In which case, activist investment campaigns in the sector may struggle to gain traction. There has already been a concerted effort at many funds to bring discounts down – through share buyback programmes, for example.

Still, the broader point here is that while activist campaigns can feel uncomfortable for investment company managers, we should see them as a sign that the investment company structure is a healthy one. It provides investors – of all shapes and sizes – with a means to challenge the stewards of their money. That is to be welcomed.