Access denied and insults; U.S. mutual funds get taste of activist life
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By Michael Flaherty
NEW YORK(Reuters) - Tensions between Ultratech, Inc (NASDAQ: UTEK) and one of its largest shareholders got so high that by the spring, the chief executive was calling the investor a "cockroach" and refusing to meet with him.
The target of the CEO's ire was not a brash activist investor seeking a quick shake-up but Benjamin Nahum, a portfolio manager at Neuberger Berman, the mutual fund company that had held stock of the tech industry supplier for over a decade.
Neuberger Berman, along with Franklin Resources, Artisan Partners and several other large mutual fund firms are part of a growing band of traditional U.S. money managers that are taking a page out of the activist investor playbook by publicly agitating for change at companies they believe can perform better.
In the past, so-called active fund managers that aim to pick the best stock and bond performers rather than passively follow an index, would have voiced concerns to CEOs in private, if they chose to speak up at all. Public agitation has normally been the realm of activist hedge funds and a cadre of smaller funds.
By voicing frustrations for all to see, large active fund managers open the door even further for other major shareholders to join the public fight and add pressure on CEOs and boards to address the proposed strategy shifts, leadership shuffles and other changes.
T. Rowe Price, historically the most outspoken of the big active managers, is currently pushing Oracle Corp (NYSE: ORCL) to improve its $9.3 billion offer for cloud storage company NetSuite Inc (NYSE: N), which expires on Friday. The fund, which manages $763 billion, has sent a detailed letter to each company and has said it will not tender its shares.
The mutual funds' public efforts to wring more value out of their holdings is in part a response to the rising competition from the low-fee index-tracking funds.
"You just can't follow the herd anymore. The idea of active means defending and enhancing your investment," said Nahum, the Neuberger portfolio manager.
The more aggressive approach seems to be working for T. Rowe Price, Franklin Resources and Neuberger Berman. Active equity funds of the first two have outperformed their active and passive peers this year, while Neuberger was just behind its rivals, according to data from Thomson Reuters Lipper (Graphic: http://tmsnrt.rs/2ej2ogj).
Shares of Ultratech have risen 35 percent since August 2015 when Nahum sent a private letter to CEO Arthur Zafiropoulo and his management team, which kicked off the fight over the company's stock performance and its executive compensation plan, filings show.
In April of this year, Neuberger, which oversees $255 billion in assets, informed the company it was nominating two board candidates. The fight was on.
A Zafiropoulo representative later met with Nahum to tell him that the CEO thought the portfolio manager was a "cockroach" who was disrupting the company and should back off, according to people familiar with the matter. Shareholders voted Neuberger's nominees onto the board at the July annual meeting.
Ultratech declined to comment on Neuberger Berman’s campaign and was unable to make Zafiropoulo available to comment on what transpired publicly or privately between him and the fund.
Investors have been moving away from active fund managers to index tracking funds that charge about eight times less than the active funds and yet have outperformed them by 149 basis points over the past five years, according to Thomson Reuters Lipper.
Speaking up in public risks alienating CEOs and their teams, but private dialogue, which mutual fund managers have preferred in the past, is easier to ignore than public protests.
Forced to compete both against their peers and passive investors, active funds are more willing to put their access to management on the line, according to Bruce Goldfarb, the founder of proxy advisory firm Okapi Partners.
"We're seeing more cases where active managers are putting their mouth where their money is," Goldfarb said.
Franklin Resources (NYSE: BEN), with assets of $771 billion, is a case in point.
In its September profile of activist investors, investment bank Lazard described Franklin as increasingly willing to take its discussions public. The fund pushed chemicals firm Axiall Corp to review its strategic options, which ultimately led to the company's $2.3 billion sale in June of this year to fellow chemical company Westlake Chemical Corp.
It also struck a deal with drug maker BioPharmX Inc in August, which resulted in an independent director being added to the board. Franklin declined to comment.
T. Rowe Price sent a detailed letter to NetSuite in Sept. opposing the offer price and the acquisition process. T. Rowe, NetSuite's second largest shareholder behind Oracle founder Larry Ellison, sent another letter to Oracle last week suggesting the company bump its offer to $133 per share from $109. The companies disclosed both letters.
T. Rowe said in its latest letter that NetSuite is refusing to meet with the fund. Oracle, which declined to comment for this story, has said it won't raise its offer.
NetSuite, whose shares closed at $94 on Thursday, did not return messages seeking comment. "Our one and only motivation in taking a stance like this is to meet our fiduciary responsibility to our clients," said T. Rowe Spokesman Edward Giltenan, adding that the fund interacted with management teams mostly in private. "We do consider taking a public stance when we deem it necessary to protect the interests of our clients."
(Editing by Carmel Crimmins and Tomasz Janowski)
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