For ages, institutional investors like mutual funds and pension funds were content to take stakes in public companies, trust their managements and bet on long-term gains. Companies trusted that these investors would be passive shareholders and not rock the boat.
The abrupt rise and increasing success of activist investors, however, are forcing big money managers like BlackRock, T. Rowe Price and Vanguard to question these long-held assumptions.
Mutual funds and other big money managers, which now control a record share of public company stock, are working with activist hedge funds behind the scenes, pressing for change at underperforming companies in their portfolios and lending their support to calls for management shake-ups. In some cases, the institutional investors are even stepping out from the shadows to pick their own fights.
"This is the biggest shift in the battle for corporate control since private equity was invented in the 1980s," said James Rossman, head of corporate preparedness at Lazard. "Activists realize they can influence this concentrated shareholder base at many companies, and they're tapping into the desires of shareholders to see change take place."
It is now common to see institutional investors support activist campaigns. T. Rowe Price backed Carl C. Icahn's opposition to the leveraged buyout of Dell last year. Southeastern Asset Management, which worked with Mr. Icahn on a rival bid for Dell, also quietly supported the Barington Capital Group's campaign for change at the retailer Dillard's.
But traditional investors are not simply supporting activists once a campaign has begun. They are constantly discussing a variety of companies, and in some cases, the institutional investors are even giving ideas to the activists.
"Periodically, we are approached by large institutions who are disappointed with the performance of companies they are invested in to see if we would be interested in playing an active role in effectuating change," said William A. Ackman, founder of the $13 billion hedge fund Pershing Square Capital, who is best known for his positions on J.C. Penney and Herbalife. Institutional investors even have an informal term for this: R.F.A., or request for activist.
Several factors are contributing to the more robust dialogue between traditional investors and activists. Many activist hedge funds have outperformed traditional index funds in recent years, emboldening activists and causing traditional money managers to take note.
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Rishi Bajaj of Altai Capital, a hedge fund that oversees $400 million, pointed to his firm's work at SunEdison, a solar power company. Altai took a board seat in late 2012 and began working more closely with management. Since the hedge fund first became involved in mid-2012, shares of SunEdison have jumped 970 percent, and the company now has a market value of $4.9 billion.
Though data tracking the success of activist campaigns is imprecise, hedge funds that pursued a proxy fight to its conclusion won 20.7 percent of the time last year, according to FactSet. That is up from 9.5 percent in 2012 and 7.4 percent in 2011.
Activists may have also done themselves a favor by cleaning up their image. Many prominent agitators no longer issue the management-bashing poison-pen letters that once characterized the industry. Even Daniel S. Loeb, who made eviscerating company executives by letter into something of an art form, has been more sparing in his use of the tactic. He repeatedly had kind words for Sony when he sought to persuade it to partly spin off its entertainment arm, avoiding an all-out brawl.
"I think activists in a lot of ways have been given a bad rap because some used to lob insults from afar," Mr. Bajaj said. "I do think activism is becoming more and more intelligent."