The Next Financial Crisis Is Unfolding Right Now

Social Activism in the Market

There is a new and highly impactful move for certain billionaire and institutional investors to focus on areas that have little to do with rational investing strategies, and instead to make a political or social statement by moving money into funds focused on areas such as green energy development, or withholding money from a company or fund that has relations with Israel. This type of investing may make one feel noble or allow large players to express a certain political orientation, but they also distort the financial markets and affect the people who depend on the revenue sources that are being manipulated.

Wall Street's disastrous week was appropriately capped by another megamerger by two companies that were forced into each other's arms because they can't generate domestic growth and were too afraid to tell activist investors to go take a hike. Dow Chemical Co. (NYSE: DOW) and DuPont Co. (NYSE: DD) announced a $120 billion merger on Friday that was heralded by The Wall Street Journal in one of the most inane articles ever to appear in the financial press (which is saying something in light of what passes for financial journalism these days).

The article welcomed the arrival of a “new era of activist investing.” DuPont had been pressured by activist firm Trian Fund Management LP, headed by Nelson Peltz. And Dow was similarly under the gun from Dan Loeb's Third Point LLC.

Bowing to the alleged influence of these investors forced another late-cycle deal that will lead to tens of thousands of layoffs, lower capital expenditures and high executive payouts. Yet it accomplishes nothing productive in a bear market. The Journal was too busy licking the boots of billionaires to leave out one key fact: both activist funds are losing money in 2015 and have significantly trailed to S&P 500 (their presumed benchmark) in recent years…

If this is the new age of activist investors, it is an ice age. Their nominal returns are poor and their risk-adjusted returns are terrible. Investors who pay two percent management fees and twenty percent performance fees to invest in large cap companies are fools.

The fact that these socially conscious companies are not especially profitable may be of little import to the billionaires who invest in them, but the reality is that such a strategy starves the more rationally “worthy” companies of funding, leading to upheavals, unemployment, and a dysfunctional economy. As the U.S. continues to struggle to grow back the economy and build a more vibrant and active jobs machine, social investing is looking more and more like drag on the system, for which we all pay a price.




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