October 8, 2014 6:26 pm

Capital Group raps activists for pushing share buybacks

By Stephen Foley in New York

One of the world’s largest fund managers has hit out at activist investors for pressuring companies to buy back shares at the expense of long-term investment.

In an interview with the Financial Times, Tim Armour, chairman of Capital Group’s management committee and one of the company’s most senior investment managers, expressed scepticism at the wave of share buybacks that has pushed up share prices since the financial crisis.

“We think companies should be run for the long-term, and do not think forced steps should be taken to maximise short-term profit at the expense of having thriving enterprise,” he said.

Capital Group, which manages $1.4tn in assets around the globe, is the latest in a string of large shareholders to voice concern about the rise of activist hedge funds.

S&P 500 companies bought back $533bn of their own shares in the 12 months to June 30, according to S&P Dow Jones Indices, including $159bn in the first three months of 2014 alone, the second-highest quarterly number after the third quarter in 2007.

After declining in the second quarter of this year, buybacks rebounded in the three months to the end of September, said Howard Silverblatt, an analyst at S&P Dow Jones. Final figures will be available after the earnings reporting season.

Ultra-low interest rates have encouraged companies to take on debt to fund buybacks and dividends.

Capital Group prefers higher dividends to share buybacks, Mr Armour said, because companies are expected to maintain dividends and dividend increases therefore “impose discipline on management”.

Activist investors, such as high-profile hedge fund managers Carl Icahn, Bill Ackman and David Einhorn, as well as a proliferating number of smaller players, take stakes in companies and demand strategic or management changes aimed at improving the share price.

After strong returns, money has poured into this sector of the hedge fund market, giving them still more clout. Activists returned 19.2 per cent last year, according to eVestment, the research group, compared to 10.4 per cent for the hedge fund industry as a whole, and are outpacing the industry by 5.2 per cent to 2.9 per cent so far this year.

Mr Armour said activists can sometimes act as a catalyst for improving underperforming corporate boards and had attracted support from Capital in some cases. But he said, “much of what occurs out there I do not agree with”.

He said: “Much of it is short-term oriented, and that is not great for the development of corporations and for having thriving organisations that employ people and generate revenues and taxes and other things for society.”

Mr Armour’s concerns echo those expressed earlier this year by Larry Fink, chief executive of the largest fund management company, BlackRock, which manages more than $4tn of assets. Capital and BlackRock are often listed among the top 10 shareholders of public companies, and therefore have a powerful voice in the boardroom.

Mr Fink wrote to the chief executives of all the S&P 500 companies earlier this year in response to the upsurge in hedge fund activism, saying he thought companies were too focused on the short term.