Art Lipson isn't your everyday activist investor.
Rather than plush offices in New York or Greenwich, Connecticut, Lipson prefers to work from his house in Salt Lake City. When he builds slide decks to support his case against a company's management, he writes most of them himself. He even makes his own photocopies and drives to the post office.
But perhaps more unusual is his approach to taking companies to task: He is willing to work for returns that the likes of William Ackman and Carl Icahn would unlikely bother with.
"I have a saying about Wall Street guys," said the 71-year-old Lipson. "They're driving Mercedes convertibles, lighting cigarettes made out of $100 bills, while I'm on the sidewalk picking up quarters out of a puddle."
The latest quarters Lipson is chasing are arguably more like pennies. His target is Anworth Mortgage Asset Corporation, a so-called mortgage real estate investment trust. Mortgage REITs like Anworth essentially buy government-backed securities and employ tremendous amounts of leverage to generate a juicy yield.
The trouble with Anworth, and what made it attractive to Lipson, is that it trades at a discount to the market value of the securities it owns. In fact, most major mortgage REITs trade at a discount because of concerns that rising interest rates will cause a decline in the value of their securities portfolios.
But last December, when Lipson's fund began buying shares in earnest, Anworth was trading at a steeper discount than most mortgage REITs. At the time, the stock was trading at about 75 percent of the book value of its securities portfolio, according to Steve DeLaney, an analyst with JMP Securities.
Over the next few months, Lipson's Western Investment continued to purchase Anworth stock, accumulating a roughly 4 percent position. In early April, Western also nominated a slate of directors to Anworth's board for election at its annual meeting on May 22. The fund argued that Anworth's stock had performed poorly over the last decade. Lipson said Anworth's securities portfolio could be managed better and, if it came to it, the investments could be liquidated to unlock value.
Regardless of the merits of Lipson's arguments, it's clear his investment in Anworth has succeeded. Since the start of the year, Anworth's stock has risen 26 percent versus a mere 2 percent rise in the . Indeed, Anworth now trades at about 85 percent of book value versus an average of 91 percent for a group of comparables, DeLaney said.
Despite Anworth's relatively small discount to the group, Lipson is fighting on. One strategy he wants to pursue is continued share repurchases. With the company trading below book value, there's an opportunity to sell securities at market prices and use the proceeds to purchase stock.
While Anworth had a repurchase program in place before Lipson appeared (and has subsequently increased the size of it), Lipson argues that the company's managers are more interested in hording assets to maximize management fees. The company has said its management structure is consistent with the industry standard and its fees are below average. An Anworth spokesman declined to comment beyond the statements the company has already made.
Lipson also argues that his directors could choose a management team that would be better at selecting securities, possibly diversifying into instruments beyond pure government-backed debt that could deliver better returns.
But barring a drastic change in Anworth's strategy, there probably isn't too much more upside form here. Delaney estimates that if Anworth's portfolio were liquidated, the proceeds would probably be worth about 95 percent of book value after expenses.
And realistically, Lipson's campaign now looks like a long shot. On May 9, proxy advisory firm ISS recommended that shareholders elect all six of the company's own nominees rather than those proposed by Lipson's fund. ISS tends to have a big influence over board nominations because many investors prefer to take its advice rather than spend their own time evaluating board nominees.
Even so, Lipson is standing his ground. "I'll continue to preach that the company is ill-equipped to manage this kind of money," he said.
How can Lipson's strategy make economic sense? After all, his fund's roughly $29 million investment in Anworth looks too small to mean much if the stock moves by a few more percentage points.
According to Lipson, Western has managed to minimize expenses such as staff and rent well enough to make such investments worthwhile. "I have an entirely different cost structure," Lipson said. "We don't have all that formal structure you would have in New York."
Lipson, who started working on Wall Street in New York in 1968, said his background in fixed income taught him to seek out opportunities for relatively small gains. After founding Western in 1995, he focused on investing in closed-end bond funds that traded at a discount to book value. Just as with Anworth, he has often urged companies to liquidate assets and make repurchases to drive valuations closer to book value.
One of Lipson's presentation slides shows a list of 38 such situations. While Lipson quite often achieved a positive outcome, his gain may only have amounted to a couple of percentage points. Not surprisingly, such campaigns received little public attention. "I work in areas that people don't pay attention to," he said.
Lipson's focus on modest returns may not always be so unusual. Wall Street saw a surge in activism in 2009, when investors identified plenty of bubble-era excesses like inflated cost structures that needed to be fixed.
But much of that low-hanging fruit has probably been picked. The number of proxy contests at major U.S. companies has risen steadily over the last few years. Some 24 have been launched already in 2014, compared with just nine in the first six months of 2011, according to ISS.
The median market capitalization has also swelled, reaching $449 million, ISS said. Arguably, it's harder to move the needle at giant companies like Procter & Gamble, which was a target of Ackman's Pershing Square last year. While Ackman made a number of aggressive arguments against P&G, he sold down most of his stake within several months.
As for Lipson, he doesn't mind being known for less-flashy deals. "If the guys on Wall Street are Saks Fifth Avenue, I'll be Wal-Mart," he said. "OK, I'll be Costco."