As markets continue to digest a year of historic uncertainty, event driven investing is becoming of greater interest to investors. We sit down with Ancora’s Head of Alternatives, Jim Chadwick, to discuss the concept of active shareholder ownership.
Q: Many investors are familiar with the concept of active versus passive management, but can you please talk about the concept of active ownership when investing?
A: The core of an active ownership strategy is to effectively engage directly with company management teams and boards of portfolio companies. This is something most active investors do as well, but unlike other active investors, the active ownership investor will both identify appreciation catalysts (events) while also trying to impact the timing or occurrence of these events. This provides greater control, in our opinion, over the potential outcome of an investment.
Just how involved the active ownership gets (i.e., engaging in public discourse, seeking board representation, or just working behind the scenes) all depends on the investor and the company’s willingness to engage. Ancora’s active ownership investing strategy seeks to maintain a constructive dialogue with portfolio management teams and boards. Our goal is to create a win/win environment for the shareholders and the management team, and to convince management that a specific course of action is in everyone’s best interests.
Q: What is your philosophy as a shareholder when engaging in active ownership with companies?
A: Our goal is that the investment and agenda we are pursuing be in the best interests of all shareholders. I believe we are defending the interests of all minority investors. Ultimately, shareholders own the company and should have the opportunity to decide on their own the merits of the investment case and future direction of the company. It’s a highly democratic strategy and my philosophy is that we always remain on the side of the shareholder.
Q: How do capital markets and shareholders benefit over the long term, in your opinion, from active shareholder ownership?
A: I started my career in active shareholder ownership strategies with Relational Investors, LLC, based in San Diego, CA. Relational was one of the first such strategies in the country and the name itself is derived from the concept of relationship-based investing being hands on, longer-term, value-added and mutually beneficial relationships between management and shareholders.
Relational’s largest client was a large public pension, and their philosophy surrounding why they were allocating to Relational was based on the concept of a “rising tide lifts all boats”. They knew that, generally speaking, active ownership opportunities would be less prevalent in a universe of well run, shareholder-focused companies, but the need for large asset owners like themselves to hold management teams and boards accountable for their fiduciary responsibilities would make everyone better in the long run. Looking at the evolution of the approach to active ownership, I believe that is still true today.
Q: What role do you believe active ownership investment strategies can play in a traditionally constructed portfolio?
A: In my opinion, investors can benefit from adding alternative investments to a traditional two asset class stock and bond portfolio. I think this is especially true in a lower forward-looking return environment where event driven strategies, such as active ownership, can potentially drive positive outcomes, perhaps even in compressed time periods, rather than relying on general market movements to lift returns.
Q: What are the most common misperceptions, in your view, about active shareholder ownership?
A: I think the most common misperception is that somehow shareholders who pursue an active ownership philosophy are compensated in some different manner than other shareholders. I believe there is a stigma to activism going back to the corporate raiders of the ‘80s who were engaging in hostile takeovers and other activity that, at times, benefited themselves more than other investors. The reality is that most active ownership focused investors, and this certainly applies to us, only earn a return if all shareholders are earning a return as well. Granted, everyone may have a different history in terms of how they became shareholders, but our incentives are aligned with the other shareholders in the company.