What is Event Driven Investing?
As the name suggests managers in this asset class seek to invest in opportunities that arise around corporate events and change. This can include mergers/acquisitions, bankruptcies, spin-offs and restructurings. Categorised as an alternative strategy, managers can invest both long and short in equities with some managers also taking credit positions dependent on their expertise.
ESG considerations form part of our manager selection process at Redington and as the chart above demonstrates, it was disappointing that 64% of managers we met with in our recent event driven preferred list research do not integrate ESG factors into their investment process. However, we were not entirely surprised by these results; alternatives managers may claim to be ahead of the curve when it comes to spotting new investment themes but they continue to show that they are behind the curve when realising the increased importance of ESG to many of their investors.
What Relevance does ESG have to Event Driven Investing?
|Merger Arbitrage (Hard Catalyst)||Blended Event
soft catalyst situations, e.g. management change)
|< 6 months||3 months – 2 years||Variable|
|ESG Relevance||Low → Moderate||Moderate||High|
In manager research we talk about ESG in the context of both the investment process and engagement with firms after investments are made.
As the table above shows, engagement on ESG issues in event driven investing is dependent on the style of the manager. Blended approaches, where managers exploit both soft and hard catalyst situations, tend to have longer average holding periods. This gives the manager more opportunity to engage with management of the stocks they hold. Activist managers who explicitly look to drive change at companies which they hold, (in many cases by taking seats on the board), have the ultimate ability to favourably influence corporate decisions related to ESG factors.
The above is the theory! The managers we met with demonstrated little evidence of engagement with companies in ESG matters, though for strategic reasons we carried out limited research on pure activist managers. What we did find was that there is a minority of blended event driven managers who are able to demonstrate that ESG factors influence their investment decisions. One manager highlighted how they had uncovered governance concerns at a firm. This led them to successfully shorting the stock which was ultimately found to have committed accounting fraud.
What about managers we selected?
We ultimately selected merger arbitrage managers for our preferred list. These managers – who focus only on buying companies that are being taken over – have limited ability to engage with firms given their short average holding period ( < 6 months). Our research did however uncover that it is possible for these managers to factor in ESG into their deal analysis. For example, some managers consider the potential for shareholders to vote against a merger of two firms with noticeably different attitudes to climate change. In this instance, where the two merging firms are potentially badly matched, the downside risk, i.e. likelihood of the deal failing, would be higher and would cause the manager to hold either reduced or no exposure to the deal.
At face value the fact that only 1/3rd of managers actually consider ESG as part of their investment process is disappointing. However, when one digs deeper there are some legitimate excuses for at least a subset of the event driven manager universe. Nonetheless we do feel managers can be more active in their consideration of ESG risk. As some managers demonstrated there is reward from spending time on ESG and therefore we do expect this element of managers’ investment processes to be more thoroughly thought out going forward.