Fund Activism Said to be Growing
October 11, 1999
Several largely unrelated factors are causing mutual funds and the firms that advise them to become more active in the corporate affairs of the companies in which the funds invest.
At least five factors are contributing to mutual funds' collective increased activism, according to fund executives and industry observers. They include:
* The $6 trillion fund industry's size, a factor which collectively gives funds more leverage in pressing for change;
* The role activism can play in improving fund performance by forcing company management to take steps that help increase the price of the company's stock;
* The increased prominence of socially-responsible funds that are investing and voting proxies based on the business and employment practices of the companies in which the funds invest;
* The growing number of concentrated or so-called focus funds - funds that invest all of their assets in perhaps 25 or fewer stocks, an approach which gives larger focus funds more leverage and makes individual investments more important to fund investment performance; and
* Depressed values for public companies in certain sectors of the stock market.
An increase in fund activism will not be particularly difficult to achieve. In past years, funds almost invariably sold out of a company's stock quietly when portfolio managers were unhappy with company management. Selling remains the overwhelming choice today for funds and fund companies that own only a small percentage of a company's outstanding stock, executives said.
Nevertheless, the tendency to sell rather than try to persuade management to make changes appears to be moderating somewhat, according to executives and industry observers. For example, on Sept. 30, Franklin Mutual Advisers LLC of Short Hills, N.J. filed a preliminary proxy statement saying the firm intended to wage a proxy campaign to have two of its nominees elected as independent directors to the board of Commercial Federal Corporation of Omaha, a bank holding company.
Franklin Mutual - which says it is the largest shareholder, owning approximately 7.9 percent of the company's stock - wants Commercial Federal management to sell or merge the company, according to the proxy statement. Franklin Mutual executives were not available for comment. Commercial Federal management believes that the company's stock largely has outperformed its peers and that the company's current business is creating long-term growth and value, a company spokesperson said in a statement.
A public fight with company management is not new for Franklin which, under the stewardship of Michael Price until last year, built its reputation by identifying hidden value in companies, taking a big position in their stocks and on occasion agitating for changes to increase the price of companies' stock.
A public fight, however, is a new tactic for Harris Associates LP of Chicago, which went public with its dissatisfaction with management practices at Dun & Bradstreet Corp. of Murray Hill, N.J. in an SEC filing Sept. 21. Harris, adviser to the Oakmark Funds, filed with the SEC a copy of a letter dated Sept. 21 it sent to Volney Taylor, chairman and CEO of Dun & Bradstreet, calling on the company to put itself up for sale.
"It's a first for us," said William Nygren, a partner at Harris and portfolio manager of the Oakmark Select Fund, of the public fight with Dun & Bradstreet management. "If the situation was right, we'd do it again."
Oakmark owned about 12.6 percent of Dun & Bradstreet stock at the time it sent the letter, according to the SEC filing. A Dun & Bradstreet spokesperson did not return a call seeking comment.
More public fights for funds are possible, Nygren said. The market values of many small- and mid-capitalization stocks are depressed, he said. Meanwhile, the acquisition value of many of those same small- and mid-cap companies has tended to be much higher than their market value, Nygren said. The inconsistency in the public versus the private values of companies increases the possibility that funds will press for change at public companies that have become chronically undervalued, Nygren said.
"I think the current market environment does create more reason for activism," Nygren said.
In some cases, today's activism simply represents an increase in a well-established practice. At the $267 billion mutual fund and annuity manager Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF) of New York, for example, executives have a tradition of pressing companies to change their corporate governance. The level of activism at TIAA-CREF has increased this year, said Kenneth Bertsch, director of corporate governance for TIAA-CREF. TIAA-CREF has raised issues relating to the independence of boards of directors, executive compensation and anti-takeover provisions in corporate charters, Bertsch said.