Driehaus Capital, an event-driven specialist manager which has sided against the proposed Towers Watson-Willis merger (see separate report), has produced a guide to this murky asset class. The ‘event’ space has changed, Driehaus says, and big super funds should take notice.
Event-related activity has boomed this year, as it did through most of last year. There are several reasons for this, as outlined in a Driehaus Capital paper, but for super funds, the crucial question is: ‘how to capitalise on this potential alpha source’.
Driehaus says in the recent paper: “M&A, strategic divestitures, splits, spins, dividend hikes and stock buyback activity have all been occurring at a frenetic pace. For the most part, this activity has been well received by shareholders seeking EPS growth or a return of capital. A glut of cash on corporate balance sheets, historically low interest rates, diminished top-line growth opportunities, and a narrower scope for cost-cutting have created an environment where these trends are likely to continue through the remainder of the year.”
There are no Australian-based specialist event managers to invest with, just as there are no specialist activist managers, nor are there any predominantly short equity managers. In a world where, we are told, alpha will be more important for the next little while, Australian fiduciary investors have to go offshore for several of their potential alpha sources.
An interesting aspect with the current environment for event-driven strategies is that acquiring companies have been rewarded by the market for the first part of this year. Normally, a lot of event-driven managers use a benchmark which is “sell the acquirer and buy the target stock”. That has not paid off in many cases this year.
The Driehaus paper, overseen by portfolio manager K.C. Nelson, says: “We believe that we’re likely to stay in a heated environment for event-driven activity for some time to come. To best take advantage of these opportunities, we believe investors should:
> Evaluate when/if the traditional risk arbitrage structure is appropriate, and when outright long positions offer a better risk/reward opportunity;
> Target well-positioned acquirers that are likely to continue to be rewarded by the market for smart capital allocation decisions; and
> Utilise the entire capital structure to express an investment idea, rather than solely relying on common stock for exposure.”