In praise of the activists

Activist campaigns should be seen as healthy, writes David Prosser.

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Activist investors come with a reputation. They’re invariably regarded as troublemakers out to make a quick buck. Board members at companies targeted by activists don’t like them because they make life more difficult; other shareholders are encouraged not to show them support.

Here’s the thing though. Activist investors can and do drive material benefits for all investors. By pushing the board of a company to contemplate measures that might increase shareholder value, they can be a force for good, even if there are some bumps along the way.

For this reason, investment trust shareholders should not be alarmed by the presence of activists on the registers of so many funds at the moment. Not everyone in the industry will appreciate hearing it, but the truth is that the activists could prove key to unlocking value.

“Activist investors can and do drive material benefits for all investors. By pushing the board of a company to contemplate measures that might increase shareholder value, they can be a force for good, even if there are some bumps along the way.”

David Prosser

David Prosser

We’ve seen lots of examples of this in recent years. Most strikingly, the unprecedented share buyback programme – likely to be worth as much as £1bn – unveiled earlier this year by Scottish Mortgage was partly a response to a campaign led by activist investor Elliott Management. The initiative has already seen a significant reduction in the discount at which Scottish Mortgage shares trade relative to the value of its underlying assets. Elliott, by the way, is best known for its confrontation a few years ago with another industry stalwart, Alliance Trust, that led to major changes to the way Alliance was managed – and an upturn in its performance.

Other campaigns are ongoing, with activist investors having built stakes in a number of investment trusts this year, particularly in the emerging markets space. Examples include Templeton Emerging Markets, Fidelity Emerging Markets, abrdn Asia Focus and Utilico Emerging Markets. Several funds managed by Baillie Gifford, whose value style of investment has fallen from favour, are also being targeted.

What all these funds have in common is the perception that investors are not currently getting the value they should be. Activists might propose all sorts of remedies for that – share buybacks, changes of manager, a board shake-up, mergers with other trusts, or even an outright wind-up – but their goal is always to move the fund closer to fulfilling its potential.

The arguments are not always straightforward. Activists typically have relatively short-term horizons. They’re looking to get into a fund, agitate for change, bank the value and then move on to the next opportunity. There may be times when investors feel the activist’s proposals are not in the longer-term interests of the fund. Directors will certainly try to make this point.

Overall, however, the interests of the activist will be more closely aligned to those of other shareholders than the board. Everyone benefits from improved share price performance – however it is achieved.

Indeed, the presence of an activist investor on an investment trust’s share register can even help in and of itself. Demand for the trust may increase as investors scent an opportunity to unlock value.

One final point. Activist shareholders are only able to target investment trusts because of the unique nature of these collective funds. An investment trust is an independent company, with shares listed on a recognised exchange, and faces the same governance rules as every other company alongside which it trades. Above all, the directors of the trust have legally-binding duties to act in the interests of shareholders – not themselves – and not in the interests of the fund manager in charge of investing the assets. 

In that sense, activist campaigns should be seen as a healthy thing. They show the investment company structure is working as it should. Life may get uncomfortable for the board and the management team, but in the end, shareholders’ interests are all that really matter.