How To Make Activist Investors Work For You

November 23, 2016

How To Make Activist Investors Work For You

  • We’ll analyze the scientific data that explains how activists effect returns.
  • Activism increases returns, but you can increase your returns without paying the 2/20 fees.
  • There is enough time from the first activist announcement to actual fundamentals improving to carefully analyze the investment and make an appropriate decision.

Activist Investors

Activists open a position in a company that is large enough to enable putting pressure on management, more often than not in a public way. They put pressure on management because they believe that the company is mismanaged and value can be unlocked through changes in corporate policies, acquisitions, divestments, better use of cash, larger dividends, cost-cutting, better financing options, etc.

In the 1980s, when the likes of T. Boone Pickens and Carl Icahn had many public battles with corporate boards, activists were mostly viewed as corporate raiders, while these days activist intervention is seen as leading to best practices. Even the title “corporate raider,” often given to Icahn, has transformed into the phrase “Icahn Lift” to describe a situation where share values increase due to increased buying around Icahn’s activity.

The main evidence of increased activist popularity comes from assets under management which increased from $12 billion in 2003 to $116 billion in 2016. With more assets, the number of activist campaigns is also increasing.

Figure 1: Number of activist campaigns. Source: FACTSET.

More campaigns lead to more competition and, according to The Wall Street Journal, funds are searching for and finding interesting investment opportunities abroad with Australia becoming the third country on the list of highest activist activity after the U.S. and Canada.

As there are many activists and various goals, we’ll first turn to science to analyze activist performance.

Activist Performance

Swanson and Young recently published a paper analyzing the effect of activists on various factors. The first finding was that activists create abnormal returns in the short term.

Figure 2: Cumulative abnormal returns in days prior and after activist announcement. Source: Swanson and Young.

If activists demand a sale of a portion of the company or the whole company, abnormal returns are even higher.

Figure 3: Activist announcement that requires sale of a company. Source: Swanson and Young.

As activists get involved, analysts’ recommendations improve including more buy recommendations.

Figure 4: Buy recommendations around activist involvement. Source: Swanson and Young.

What’s also interesting from the above chart is the fact that activists enter a position only after analysts start withdrawing their positive recommendations. As analysts usually change recommendations in hindsight, the stock price is already much lower than it previously has been. Timing is certainly something to be learned from activists.

Shorts start closing their positions when activists get involved.

Figure 5: Total Short Interest over the Long-Event Window. Source: Swanson and Young.

A fundamental analysis included the following indicators: return on assets, change in return on assets, cash flow from operations, accruals, change in leverage, change in liquidity, seasoned equity offering indicator, change in gross margin, and change in sales turnover is measured through the F-score. It shows that activists improve fundamentals after their involvement while deteriorating fundamentals is their entry ticket.

Figure 6: Fundamentals before and after activist involvement. Source: Swanson and Young.

By shaking management, improving fundamentals, and making analysts happy, activists have beaten the market in the period from 2004 to 2015 by returning 12.6% (without fees), compared to the S&P 500’s 7.6%.

Figure 7: Aggregate activist investor performance 2004-2015. Source: Novus.

All of the above is derived from data that spans from the mid-1980s to the present and is the average of what happened in the past. Even if activists have beaten the market both in the short term and in the long term by improved fundamentals, we shouldn’t just give our money to them. There is a better way.

Invest Like An Activist But Without Paying Excessive Fees

Bill Ackman announced a 9.9% stake in Chipotle Mexican Grill, Inc (NYSE: CMG) on September 6, 2016. This sent the stock price up 5.6% to $441 which is congruent with the above analysis, but the stock has since fallen to a low of $353 only to bounce back to the current $411.

Figure 8: Chipotle Mexican Grill, Inc. in the last 6 months. Source: Nasdaq.

What’s interesting is that the stock reacted well to activist involvement in the very short term, but soon returned to its normal trading path as investors forgot about it. However, from the above scientific analysis we know that Ackman will probably improve fundamentals in the long term and consequently increase CMG’s stock price.

This time discrepancy between the announcement and the actual implementation of changes that improve fundamentals is the best time to buy into activist campaigns without having to pay 2/20 fees.


Activist campaigns sometimes go wrong. Bill Ackman also had a 9.9% stake in Valeant in 2015, but the results weren’t that good.

Figure 9: Valeant stock in the last two years. Source: Nasdaq.

The problem is that when you are an activist investor, that is your job and you stick to it. But sticking to your job, sector or strategy and consistently doing the same things over and over isn’t always the best strategy in investing as companies and markets are constantly changing.

Therefore, as there are many activists that publicly announce their investments, you can be the cool head in the deal and invest in the company only if you like what you see. Investing just because someone else is doing so doesn’t make much sense, even if the long term returns are abnormal.