By Liz Hoffman And Timothy W. Martin
A boardroom battle last week at DuPont Co. exposed an emerging
split in how the nation's two biggest pensions agitate for change
inside corporate America.
The California State Teachers' Retirement System, No. 2 in the
U.S. by assets, supported an effort by activist investor Nelson
Peltz to break up the industrial giant and take four board seats.
Roughly a mile away in Sacramento, Calif., the largest U.S.
pension, the California Public Employees' Retirement System,
decided instead to side with DuPont management, which was able to
defeat the push by Mr. Peltz and his firm Trian Fund Management
LP.
The divided loyalties represent a reversal for the two
California retirement systems as they grapple with how much risk to
take to achieve promised returns. Together they manage nearly $500
billion, roughly one-fifth of all assets held by state pensions in
the U.S., but neither has enough to cover future obligations to
retirees.
Decades ago, Calpers became one of the first U.S. pensions
willing to publicly challenge companies' policies and performance
while Calstrs had little presence in the activist world. Those
roles flipped in recent years amid a new wave of investor activism.
Calpers kept its disagreements with companies mostly behind closed
doors while Calstrs publicly called for breakups, sales and other
operational changes sought by activist funds--and in some cases
invested side-by-side with them.
Since 2012, Calpers has voted against management's
recommendations in just 8% of corporate elections while Calstrs has
done so 45% of the time, according to Proxy Insight. They took
opposite sides of board battles at drug company Forest Laboratories
Inc. in 2012 and Griffin Land & Nurseries Inc. in 2014, with
Calpers backing management and Calstrs supporting the insurgents,
records show.
The two funds acknowledge their diverging views. "We want to
engage companies quietly behind the scenes," said Anne Simpson,
director of global governance at Calpers. Ms. Simpson's counterpart
at Calstrs, Anne Sheehan, said support for activist investors such
as Trian means "we're not limiting ourselves to one approach."
To be sure, both Calstrs and Calpers said they share a goal of
generating long-term shareholder value. Calstrs still engages
companies behind the scenes on issues such as executive pay or
board composition, and Calpers still has older investments in
activist funds.
Choosing to align with activist investors such as William Ackman
or Mr. Peltz carries reputational and political risks for any
public pension fund. Critics say activists often push for shake-ups
that can endanger jobs and leave companies weaker in the long
term.
"We get hurt twice," said Vonda Brunsting, director of the
Service Employees International Union's capital stewardship
program, who educates pension trustees on investment issues and is
critical of the activist approach in general. "There are more
questions than comfort" about activism's benefits, she added.
But activist funds have outperformed some rivals in recent years
as pension funds have struggled to erase losses incurred during the
2008 financial crisis. Overall, activist funds produced five-year
annualized returns of 8.5% through Jan. 31, versus 7.7% for all
hedge funds, according to data provider Preqin. That compares with
the S&P 500's 15.6%, including dividends. Many hedge funds say
they don't attempt to beat a strong stock-market rally.
Calstrs has tripled the size of its activist fund portfolio
since 2012 to roughly $5 billion, accounting for new commitments
and investment gains, as it joined shake-up campaigns at companies
including steel producer Timken Co. and fashion merchant Perry
Ellis International Inc.
It said its U.S. activist portfolio, which includes commitments
to funds run by Trian and Starboard Value LP, gained 132% between
2004 and 2014, versus 121% for the Russell 3000, its designated
benchmark index. Calstrs's foreign activist investments have
returned 16% since inception in 2008, versus a 3% loss for the
foreign benchmark.
At Calpers, a $2.8 billion activist portfolio almost completely
comprised by with commitments made before 2005 hasn't done as well.
It underperformed the fund's one-, three-, five- and 10-year
benchmarks by 6.4%, 2.2%, 0.85% and 1.3%, respectively, according
to internal reports. But in cases where Calpers adopted
less-hostile strategies, the performance of its portfolio companies
has beaten the one-, three- and five-year benchmarks, by 1.2%,
13.4% and 8.9%, respectively.
The move away from aggressive corporate activism is a drastic
shift for Calpers, which made waves in the early 2000s for
chastising its portfolio companies on everything from capital
structures to mergers. It committed billions to funds that agitated
for change at big companies and in one example, in 2004 publicly
joined a campaign led by activist Knight Vinke Asset Management
urging oil giant Royal Dutch Shell to buy back more stock.
"In the early years Calpers moved mountains in this area," said
Ted White, an early member of Calpers's activist team who worked at
the pension fund from 1999 to 2005 and later started an activist
hedge fund funded partly by Calstrs.
Calpers's retreat accelerated after the financial crisis as it
cut allocations to activist managers while becoming more friendly
to company management, according to advisers, consultants and
public records.
"Calpers is more prone to work with boards and management than
in the past," said Allan Emkin, a managing director at Pension
Consulting Alliance, who has consulted for Calpers and Calstrs
since the 1980s.
Access Investor Kit for E.I. du Pont de Nemours & Co.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2635341090
Access Investor Kit for Perry Ellis International, Inc.
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http://www.companyspotlight.com/partner?cp_code=P479&isin=US2888531041
Access Investor Kit for Griffin Land & Nurseries, Inc.
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http://www.companyspotlight.com/partner?cp_code=P479&isin=US3982311009
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