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Friday June 22, 2018
[commentary of Josh Black, editor]
Active but not
activist, passive investing but not passive governance, highly engaged
shareowner. Does anything have its own name any more?
Earlier this week, our neighbor across the Avenue of the Americas
AllianceBernstein (AB) published an article by Chief Investment
Officer Sharon Fay on the power of large, actively managed funds to
engage with their portfolio companies.
Entitled “The
megaphone effect,” its argument is explicitly positioned as a
response to the rising influence of passive index funds and activist
investors. “In our view, active equity managers are best positioned to
stimulate change, to promote corporate improvements—and to increase
the power of activist investing in the future,” Fay writes.
“Passive investing often doesn’t have the teeth that active investors
have,” Ali Dibadj, a senior equity research analyst at AB told me in
an interview this week. “It is very good for engagement at the broad
level – the macro – but implementing changes at the micro level can be
even more beneficial to investors.”
AB is putting its money where its mouth is, seeding an incubated fund
– AB Concentrated Engagement – for Dibadj to test the benefits of
working with management teams to unlock value. “The fund engages very
deeply to improve [environmental, social, and governance
characteristics], capital allocation, and operational performance for
the long-term,” he explains. “We invite our portfolio companies to
engage with us openly; we believe we can help them make better
decisions with our research. It’s free consulting from experts.”
“The megaphone effect” does not name names, even when giving examples
of AB’s purported achievements. But Dibadj says there is already an
effort to systematize and spread engagement experience across the
firm, allowing managers of other portfolios to draw on the tool, as
well as in-house analysts and, on occasion, outside consultants.
Coming a week after T. Rowe Price set out its
approach to engagement, AB’s intervention is part of a more vocal
stance from the “active but not activist” community. Faced with
brutal outflows from active funds and apparently into passive
ones, attention-grabbing letters from index fund CEOs, and greater
all-round interest in ESG issues, active managers are being pushed
into the limelight. A few, such as the smaller Neuberger Berman, have
even run proxy fights.
“The passives have dominated the conversation to date and the large
actively managed funds are looking for a greater voice,” says
CamberView Partners’ Head of Activism Defense Derek Zaba.
Importantly, however, AB like T. Rowe Price does not believe activists
should have to do its dirty work. “We don’t really do requests for
activists,” Dibadj adds. “Even if we disagree, we have good
relationships with our management teams, and have great research, so I
don’t think we need to.”
AB’s efforts will no doubt meet with some skepticism. While active
managers can and should play a significant role – AB, T. Rowe,
Fidelity and Neuberger Berman collectively own $1.6 trillion in U.S.
equities – their impact has been limited by the perceived strength of
passive inflows and the dispersion of influence between portfolio
managers. Given active managers can sell stocks, issuers might drag
out engagements in the hope of avoiding the problem. Hence the need
for active managers to point out that they aren’t so unreasonable but
won’t be a pushover either.
Inevitably, performance will be the bottom line. But Zaba points to
another dynamic worth watching that will help the larger funds.
Activists will continue to court both active and passive institutions
as a means of effecting change, and companies will have to seek
support from the same quarters. “As the market has consolidated,” he
says, “the views of the more concentrated active players will matter
even more.”
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