(FROM THE WALL STREET JOURNAL 11/27/15) 
   By David Benoit 

Some of Wall Street's most aggressive investors are taking on a gentler role: friend to companies in transition.

Activist hedge funds have made big bets on companies such as General Electric Co., Mondelez International Inc. and 21st Century Fox Inc. that have recently changed course via breakups or major cost cutting.

Usually, it is the activists who push for such changes in hopes of boosting a company's stock. With these investments, however, they are trying to signal to the market that the companies are on the right track, while putting themselves in a position to nudge them back on course if discipline falters.

This week, Elliott Management Corp. disclosed a 6.4% stake in Alcoa Inc. after the company's decision in September to split in two, separating its parts-making business from its raw-aluminum operations.

Elliott executives believe Alcoa can improve margins further, but are supportive of the split, people familiar with the matter said.

Some investors question whether the fees they pay to put their money in activist funds are warranted if their managers are pushing less significant changes. Hedge funds typically charge investors a 2% fee on total assets and take 20% of profits.

"It really begs the question, as it relates to activism, what is the true portfolio purpose?" said Jonathan Grabel, chief investment officer of the Public Employees Retirement Association of New Mexico. "They need to articulate to investors what their role is as they go after different opportunities."

In October, Trian Fund Management LP said it had taken a $2.5 billion stake in GE. Rather than a call for action, the fund sees the investment as a stamp of approval on the conglomerate's decision to narrow its focus.

When Trian announced the stake, GE's shares had barely budged in the six months since the company said it would shed most of GE Capital. But they have since topped $30 for the first time in seven years. Trian, which has a reputation for urging conglomerates to break up, believes the stock could be valued in the range of $45, including dividends.

"It's somewhat counterintuitive, but companies that are in the early stages of a turnaround may actually enter a new window of vulnerability," said Kevin Daniels, head of Bank of America's activism-defense practice.

GE has welcomed the activists and said it generally shares their outlook.

Mondelez had already been through a corporate breakup that separated the snacks company from a slowing grocery business at Kraft when William Ackman's Pershing Square Capital Management LP disclosed a $5.5 billion stake in August.

The maker of Oreo cookies and Ritz crackers also had added Trian co-founder Nelson Peltz to its board a year and a half earlier and was in the process of cutting costs. Mr. Ackman urged more cost cuts and suggested that the company consider a sale.

The timing of Mr. Ackman's investment surprised Mondelez Chief Executive Officer Irene Rosenfeld given the amount of work the company had already done, a person familiar with the matter said. Both sides said the talks have been cordial since his arrival.

Mondelez shares are up about 21% this year but down about 3% since Mr. Ackman disclosed his stake.

Activists do sometimes take completely passive stakes, more like a traditional hedge fund, but it is rare for them to make their biggest investments in companies they don't intend to shake up.

Mondelez is the largest single bet in Pershing Square's history, as GE is for Trian.

The investments may reflect the fact that activists have a lot more money to work with. Investors have poured around $130 billion into funds such as Trian's or those run by Pershing Square and ValueAct Capital Management LP, roughly double the war chests commanded by activists as recently as the end of 2012, according to hedge-fund researcher HFR.

Activist funds also tend to have concentrated portfolios, often with fewer than 10 positions, because of the cost and time required to research and plan a campaign.

Some activists have long used a lighter touch with the companies they target.

ValueAct disclosed a sizable stake in 21st Century Fox in August 2014, about a year after the company spun off its less profitable newspaper and publishing assets, including The Wall Street Journal. Following its usual playbook, the fund didn't make any public demands of the company.

The company nominated ValueAct CEO Jeffrey Ubben to its board in September. Mr. Ubben supports 21st Century Fox's new chief executive, James Murdoch, and the investor believes he can add value as a board member and adviser, people familiar with the matter said. Shares of 21st Century Fox have fallen about 22% this year.

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John W. Miller contributed to this article.

 

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(END) Dow Jones Newswires

November 27, 2015 02:47 ET (07:47 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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