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What happens when public pension funds go activist?
As activist investing continues to spread in popularity, we've begun seeing studies that attempt to gauge whether activism actually creates value for shareholders or not. Public pension funds are starting to get in on the action, now becoming a formidable force in the activist arena as Proxy Monitor found that this year nearly one-fifth of all the shareholder proposals brought to Fortune 250 companies were sponsored by them.
Now there's a new study that looks at whether public pension fund activism makes a difference or not. As it turns out, their activism and even ownership to some degree is correlated with lower stock returns.
Stock returns fall when public pension funds go activist
University of Tennessee Professor Tracie Woidtke analyzed the stock returns of companies that became the activist targets of public pension funds between 2006 and 2014. The Manhattan Institute's Proxy Monitor published her report on the topic as a companion to the regular Proxy Monitor report, and interestingly, she found a correlation between shareholder proposal activism by public pension funds and lower stock returns.
She examined Fortune 250 companies that were targeted by shareholder proposals from five of the biggest state and municipal pension funds and learned that, on average, the companies' stocks underperformed the S&P 500 Index by 0.9% in the year after the vote on the proposals. Just five big state or municipal pension funds dominate shareholder proposals:
Also the number of proposals introduced by those five funds has climbed steadily over the last few years:
The public pension fund's activist involvement that had the biggest negative impact on stock prices was CalPERS. The Manhattan Institute warned that the sample sizes for CalPERS, CalSTRS and the Florida fund were probably too small. However, they did have a big enough sample for the the New York State Common Retirement Fund, which also had a huge negative impact on share prices. Woidtke found that companies targeted by that fund saw their stock prices decline by 7.3% compared to the broader market.
Proposals on social issues not supported
Perhaps the main reason the New York State Common Retirement Fund's activist campaigns had such a huge negative impact on its targeted impact is because it began to aggressively push out proposals on social issues like political spending starting in 2010. As you can see from the graph, political spending or lobbying made up the lion's share of the fund's proposals over the last decade:
There's a marked difference in the strategy employed by the State fund and that used by New York City pension funds, which is more balanced: