A still from a Just Eat advert. Cat Rock Capital in Connecticut, a long-short equity fund, is pushing the British food delivery company to consider putting itself up for sale

If a corporate board member or executive realises the activist investors Carl Icahn or Bill Ackman have bought into the company’s stock and is not curious about their motive, “you’re pretty dumb”, quipped Leo Strine, chief justice of the Delaware Supreme Court, at a deals conference this month. 

While that may still hold true, the advice is a bit outdated. Mr Icahn, Mr Ackman and their activist investing peers are no longer the only shareholders management has to be vigilant about showing up in the share register, after a recent spate of campaigns by first-time activists.

Many are large asset managers who not long ago were loath to speak publicly about a portfolio company, preferring to lobby behind the scenes or stay quiet. 

“I literally have this conversation three times a week” with clients now, said Kai Liekefett, head of the shareholder activism practice at the law firm Sidley Austin. 

“This is the new normal in corporate America. In the past your major shareholders were important to engage with to make sure they wouldn’t side with an activist,” he said. “Nowadays you need to engage with them to be sure they don’t become an activist.” 

In the highest profile example of late, Wellington Management rocked the deals industry by publishing a letter late last month saying it would vote against Bristol-Myers Squibb’s planned acquisition of Celgene for $90bn. It was the asset manager’s first foray into activism, and its public stance was quickly followed by longtime activist Starboard Value. Dodge & Cox, a mutual fund provider that is also a large holder of BMS shares, is also reportedly opposed to the merger. 

There was also a rare foray into activism earlier this week by the UK fund manager M&G, which nominated four candidates for the board of Methanex, a Canadian chemicals company, in the hope of dislodging some of the company’s long-tenured directors and forcing a change in strategy. It is the first time the $350bn asset manager, owned by UK insurer Prudential, has launched such a proxy fight. 

M&G has taken issue with the company’s plans for another methanol plant, which it argues is risky and overleveraged and puts dividends and share buybacks at risk. 

A fund manager at M&G who oversees the stake, Stuart Rhodes, wrote a letter to the company’s shareholders on Monday, saying that nominating directors was a decision “not undertaken lightly” but “we feel we have no other choice”. 

The arrival of traditional fund managers helped swell the number of first-time activists to a record 40 last year, up from 23 in 2017, according to data compiled by Lazard. Last year smashed records for the volume of activist activity, from the number of campaigns to the amount of money deployed. 

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In the hedge fund space, first-time activists included credit-focused King Street Capital, which recently threatened a proxy fight at Toshiba, and Cat Rock Capital in Connecticut, a long-short equity fund, which is pushing the British food delivery company Just Eat to consider putting itself up for sale.

“This is a movement of activism well beyond a few specialist hedge funds into the growth of activism as a tactic,” said Jim Rossman, the head of shareholder advisory at Lazard. The result is that shareholders and the directors elected to represent them now have a lot more power. 

“Board members used to be viewed more as a passive consulting organisation for the C-suite. Now, given all the board seats that have changed hands and the role of the board as critical to oversight of management, their power has grown.” 

Advisers say there are a couple of factors in the rise in activism among traditional asset managers. These firms are under pressure from clients to put more of a focus on environmental, social and governance issues — known as ESG — and speaking up about a portfolio company allows them to fulfil that obligation.

But more than anything else, asset managers are trying to prove their worth after a lengthy bull market drove investors towards cheaper index funds that were often performing just as well.

“We have a shift in corporate America, there’s an enormous shift from actively managed funds to passive funds or index funds,” said Mr Liekefett. “For active funds to continue to remain relevant, they need to do something.”  

Traditional investors like GBL, Janus Henderson, Artisan Partners, T Rowe Price, Neuberger Berman and AllianceBernstein have all become more vocal in campaigns launched by activist hedge funds. Even the index funds have been flexing their muscles more behind the scenes, advisers said. 

“What you have going on with BlackRock and Vanguard and State Street, they’re very active and they’re very vocal about governance-related issues,” said Craig Wadler, a managing director at the boutique investment bank Moelis. “So what was once seen as the quietest voice, the passive money, the fact is they aren’t passive any more.” 

The trend of asset managers speaking up is likely to continue, Mr Liekefett predicted, and in contrast with activist hedge funds, companies currently see them as the “lesser of two evils”, he said.

“With these situations, you have to figure out, are they your friend, your enemy or your frenemy? Our advice often is to clients that if one of these actively managed funds gets in contact, then listen closely, that way you can turn them from an enemy into the friend.”

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