We mostly disappoint in forecasting even a few months out. Our preview from this time last year had a few hits and many more misses.

We like our hits, and don’t regret the misses. As with the year just past, activist investors should continue to succeed. We of course cannot assess just how well individual activist situations might do. We expect some interesting and important corp gov battles, and think the regulatory scene will remain quiet.

Fund Performance Under Scrutiny

Can activist investors continue to beat the market? We think so, but it becomes more challenging with each passing year.

As a group, Hedge Fund Research reports activist funds returned 2.2% in 2015, better than the -1.2% it reports for all equity hedge funds, and even better than the -6.6% for all event-driven hedge funds. Long term, activist funds returned 10.3% per year annualized for the past three years, much better than the 3.8% for all equity hedge funds, and than the 1.3% for all event-driven hedge funds.

It makes sense that returns will regress, at least a little, to the index. More funds form, and more PMs invest in the same undervalued, entrenched companies. And, as funds form, we reach further into the activist investing talent pool, with a little less experience each time. We would expect alpha of perhaps 300 basis points, consistent with and a little under the historic trends that academic research has found.

Activist Situations to Watch

We can’t forecast which activist investors will target which companies. We already know of a couple of situations worth following, with innovative ideas, contentious debates, and creative activist strategies and tactics.

1. ❖Yahoo: At this time last year we thought Yahoo would sort itself out, after Starboard Value pressure. It has become only messier, as Spring Owl, with guest activist and frequent Yahoo critic Eric Jackson, urges fundamental changes.
   

2. ❖Mondelez: With both Pershing Square and Trian agitating for change, CEO Irene Rosenfeld may confront conflicting agendas in which both investors agree only on the need for urgent change.
   

While large cap activist situations attract all the media attention, small cap represents a more attractive opportunity. Activist investing alpha meets small cap alpha, especially at this stage of the bull market.

SEC Remains Quiet

The SEC has many other priorities these days beyond corp gov. We can’t think of a significant regulatory initiative, besides finishing some exec comp regulations that date to Dodd-Frank, that remains a priority in an election year.

Two new commissioners need to come aboard, too. Everyone will have their hands full with other stuff.

Besides, lately shareholders do the job of improving regulation. Proxy access has become a reality for a number of S&P 500 companies, thanks in large part to the Boardroom Accountability Project of NY State Comptroller Scott Stringer. Otherwise, corp gov reforms at individual companies proceeds fitfully.

Comings and Goings

How about a bold prediction? Marty Lipton retires. He turns 85 years old in 2016. Clients increasingly prefer to settle instead of fight. Or, they just plain lose. His partners and associates need room to grow. He can’t possibly need the money. Time to let someone succeed him on the list of corporate flunkies.

Dates and Events in 2016

We know of two activist investing conferences on the calendar:

1. ❖Shareholder Activism on February 16 in New York City
   

2. ❖Active-Passive Investor Summit on April 16 in New York City
   

Of course, we’ll attend Invest For Kids on October 26 in Chicago.

As always, we look forward to working with our friends and colleagues in what could become another interesting year.