Funds see room for change at companies
April 18, 2007
NEW YORK — High-profile investors like Carl Icahn have helped define the image of activist shareholders by storming into companies and pushing for change. A less visible type of activism exists among some mutual funds, one that employs quiet diplomacy to press for change and boost a stock.
With the number of global investment opportunities only growing, many fund managers might simply pass by a stock they consider a fixer-upper. Others see opportunity beyond some blemishes.
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"Our approach is we try to think and act like long-term owners," said David Winters, chief executive of Wintergreen Advisers. "So much of the activism today is getting an event to happen, making some money and selling."
Winters prefers trying to nudge management in a certain direction rather than going to battle over changes.
"I've done it the other way, and we can do it, but we've found if we can be a long-term constructive partner of the company, we really like that approach," he said.
In one such example, he has pushed Consolidated-Tomoka Land Co., a Florida real-estate developer, to reconsider the sale of some land near Daytona Beach, Fla., and instead hold on to some properties to capture rising values. He contends that by pushing for change and sticking with companies that are open to suggestions, he is more likely to boost the return of the Wintergreen Fund, which has assets of about $721 million.
"If a company has good management, oftentimes they're receptive to good ideas. We're conscious of the time value of money, but we really like to find situations where time is our friend," he said.
Some funds mainly focus on companies in need of makeovers.
"We're looking for undervalued companies with solid balance sheets and free cash flow that may have stumbled," said Eric Heyman, co-portfolio manager of the Olstein Strategic Opportunities Fund, which began in November.
He said the fund looks for small companies whose shareholders could benefit, for example, from stock buybacks, payment of one-time dividends or the sale of assets that aren't an integral part of the business.
"A lot of companies hit these stumbling blocks along the way," Heyman said, referring to the growth of small companies. "We work with management in a cooperative way to trigger changes that will unlock shareholder value. I would say most of the time management or the board is very willing to take in our criticism and move in the way we want to go."
Heyman said shareholder activism doesn't always require investors resort to proxy fights and other high-profile means.
While some of the more pitched battles for control of a company attract attention, the dustups can some lead mutual fund managers to look for other stocks. In recent years, Icahn took part in a well-publicized battle for control of Time Warner Inc., while investor Kirk Kerkorian has been trying to wrest control of DaimlerChrysler AG's Chrysler unit.
Many mutual fund managers are too busy to bother trying to bring change to a company and can simply move on, said Jeff Tjornehoj, an analyst at Lipper Inc., which tracks funds.
"It's difficult for a manager with 20 to 50 stocks under his purview to spend a great deal of time to battle a CEO over a compensation deal," he said.
"Selling is their first option and much further down the list is to be an activist shareholder and in some ways act as a gadfly on steroids because they do wield a lot of influence," Tjornehoj said.
Some funds hold stakes in companies that meet specific investment requirements and then push for changes at companies that don't pass muster.
The six-month-old Blue Large Cap Fund and Blue Small Cap Fund invest alongside ideals often associated with liberal political views, measuring companies by 10 criteria such as their environmental stewardship and the gap between pay of top executives and employees. The funds, which respectively invest in the stocks of Standard & Poor's 500 index and the Russell 2000 index of smaller companies, together own about 450 stocks.
The omission of the other stocks in the S&P 500 and Russell 2000 means those companies don't meet the fund's standards, said Daniel Adamson, chief executive of the Blue Fund. But instead of ignoring them, the fund has helped sponsor petitions to push for changes at those companies. Should sufficient changes occur, Adamson said, the funds would be permitted to invest in them.
"I think you can saber rattle in any number of ways. We've sponsored petitions signed by thousands of people who pledge not to invest in companies with poor track records," he said.
Adamson said measures like petitions don't distract the Blue Fund from its investment goals nor does it create significant expenses.
"Activist shareholder resolutions don't need to pass in order to affect corporate behavior."
