Key Points:
Activist equity strategies offer the purest form of active, alpha-seeking investment management of all the fundamental-based qualitative equities strategies. While in the U.S. market (and increasingly in Europe and Japan), activist strategies have long been a mainstay, and some campaigns have garnered a lot of attention, the same cannot be said for the Australian market.
In Australia, there are only 8 domestic funds that form part of Foresight Analytics’ Activist Manager Universe. By this, we mean dedicated activists managers with portfolios largely comprising of companies subject to activist campaigns. This contrasts with ‘episodic’ activists or occasional ‘soft’ tactic activists whose total portfolios are only comprised of a relatively small percentage of activist campaigns (less than 30 percent of portfolio assets).
In Foresight Analytics’ view, the reason for a narrow universe in Australia is twofold – (1) effective activist investing is a very rare skill, and (2) activist investing is not well understood by domestic investors. That said, the success achieved by leading strategies in the U.S. has encouraged activists to go global. In recent years, we have seen activism grow from a principally U.S. trend to an increasingly global one, with activist-driven activity on the rise across Europe, Australia and Japan. Activism is clearly here to stay.
Activist equity strategies hold the similar appeal for investors as private equity (there are many similarities between the two). Returns are largely alpha-driven, total returns are heavily based on manager skill that is repeatable (persistent, pronounced and pervasive) and given relatively low market beta (market sensitivity) and high active orientation, such portfolios present idiosyncratic and uncorrelated return streams to traditional active, fundamental managers. Furthermore, with a distinct Value orientation yet a focus on fundamentally solid companies, the portfolios are generally characterised by a valuation led ‘margin of safety’. They typically exhibit materially lower downside capture ratios due to this ‘margin of safety’ buffer. Finally, and importantly, top activist managers have a track record of outperformance that can be forensically isolated to ‘stock selection effect’ or combination of ‘stock selection effect’ and ‘activist alpha’.
