• / Free eNewsletters & Magazine
  • / My Account
Home>Research & Insights>Investment Insights>Shareholder Activism, Mutual Fund Style

Related Content

  1. Videos
  2. Articles
  1. Bogle: Yield Seekers Shouldn't Go Out on a Limb

    Investors may need to stretch for a bit more yield, but to get entirely out of a very safe bond index fund and into riskier fare should be unacceptable, says the Vanguard founder.

  2. 4 Hidden Risk Factors in Bond Funds Today

    Investors should dig into their bond portfolios to understand all the places their managers are hunting for yield, says Morningstar's Eric Jacobson.

  3. 401(k) Pros and Cons

    These plans offer investors many benefits in saving for retirement, but they also have their drawbacks.

  4. Rising-Rate Concerns Push Investors to Noncore Assets

    May flows data show investors are putting money to work in nontraditional fixed-income holdings, as well as emerging-markets equities, for perceived better returns.

Shareholder Activism, Mutual Fund Style

A path rarely taken--for good reason.

Gregg Wolper, 05/28/2013

The battle over the future of Dell DELL has appeared prominently in the financial media lately. Founder and CEO Michael Dell wants to take the company private in partnership with a private equity firm, while some major shareholders oppose the deal.

When investors clash with company managements, mutual fund advisors typically aren't among the players. By and large, these dramas feature hedge fund chieftains such as Daniel Loeb and Bill Ackman. But in the Dell saga, Southeastern Asset Management, advisor to the Longleaf funds, has been a leading participant. In mid-May, Southeastern teamed up with investment heavyweight Carl Icahn, going so far as to publicly propose an entirely new deal as an alternative to the plan presented to Dell shareholders by Michael Dell and the Dell board of directors.

While this level of shareholder activism is rare for mutual fund advisors, it's not unheard of. Moreover, recent features in the New York Times and Wall Street Journal highlighted how some big mutual fund shops have increased their attention to corporate-governance issues of the companies held in their funds' portfolios, albeit in less contentious or public ways.

All this talk may have roused some fund investors' curiosity. What is activism? Why do mutual funds adopt this tactic? Why don't more do so? What are the arguments for and against?

What is Shareholder Activism?
In a formal sense, activism could be defined as the time when an investment firm files a document with the SEC that officially changes its status from a "passive" shareholder to an "active" one. That often means it will actually play a role in critical company management decisions such as whether to divest an important unit or accept a takeover bid for the whole firm.

But the concept can be interpreted much more broadly, too. An investor can agitate for change without taking this formal step; for example, by suggesting in private talks with top executives that they consider selling a division or ramping up overseas expansion. That said, when one thinks of "shareholder activism," it does tend to mean more than just siding for or against management in a regularly scheduled proxy vote or passing along advice in a friendly meeting with the CEO.

Good Reasons Not to Become a Shareholder Activist
The disadvantages are numerous, so let's cite those first. Most notably, becoming a shareholder activist can take an enormous amount of time and energy. Even some of the more prominent mutual funds have compact investment staffs, and the portfolio managers may judge the time and effort required to be far out of proportion to the potential gains. That's particularly true if the holding in question makes up a tiny part of a much broader fund portfolio. The potential for distraction from the rest of the job is a clear risk.

Another argument against going activist is that it can limit investment flexibility. When a fund passes a certain point at which it can be deemed privy to inside information, or simply wants to avoid the appearance of trading on such, it must stop buying or selling any shares of the company in question. Needless to say, fund managers don't like having their hands tied for an extended period, especially with a controversial stock whose price might be fluctuating wildly.

Gregg Wolper is an editorial director and senior mutual-fund analyst at Morningstar.

©2017 Morningstar Advisor. All right reserved.