Strange Bedfellows

With passive investing on the rise, activists are seeking partnerships with index funds.


In an unlikely marriage, activist investors are increasingly seeking to partner with index providers when they campaign for changes at public companies.

With index investors representing a growing portion of the market, activists need to combine with other shareholders to get management’s attention. At the same time, passive managers want to differentiate their offerings, which for the most part vary only by their price tags. State Street Global Advisors, one of the largest passive managers, is one.

“We take those calls all the time,” said Ronald O’Hanley, CEO of SSGA. SSGA is getting increasingly involved in governance issues ranging from public company policies on voting rights of shareholders, to board diversity, to climate change. The company has devoted more resources to analyzing environmental, social, and governance factors as it has grown in size, owning larger stakes in public companies. SSGA, BlackRock, and Vanguard, the three dominant index fund providers, together can often own 20 percent of a stock. “We are listening to good ideas,” said O’Hanley.

Passive managers like SSGA invest in all companies included in a specific benchmark, regardless of their future prospects. Activists, meanwhile, are the ultimate active manager. They buy stakes in companies and then push for changes in strategy, including spinning off profitable divisions or returning idle cash to shareholders. In contrast, few index funds get involved in any governance at all, said Alex Roepers, founder and CIO of activist investor Atlantic Investment Management.

But Roepers expressed interest in talking to SSGA. The firm, for its part, is responding to investors’ growing interest in using ESG criteria to assess whether to own certain stocks. O’Hanley said SSGA can be more influential than even active managers, which own stocks on average for nine to 18 months. Index funds, on the other hand, are a source of permanent capital, he explained. “You can’t turn the S&P500 into the S&P499,” he said. Although many activists seek changes that are long term in nature, many want companies to make moves that will result in a quick uptick in the stock price. SSGA would vote against activist proposals that work against long-term company goals. “We will vote against short-term people,” O’Hanley said.

Jeffrey Ubben, CEO and CIO of activist ValueAct Capital, agreed that SSGA and other passive managers’ governance efforts could help focus activists on the long term. Right now, he said, too many hedge funds execute activist strategies with money tied up for only a year when five years is a better time frame.

Ana Marshall, CIO of the William and Flora Hewlett Foundation, said she believes good policies could help index funds stand out. “There is an information opportunity for passive shops to say we do corporate governance,” she said. Her fund currently invests with a number of activists in part because index funds are increasingly dominant and plow money into stocks regardless of their fundamental advantages or disadvantages. “The more the market goes passive,” Marshall said, “the more important activism becomes.”