A bold new Internet fund may take shareholder activism to a new level. The Allied Owners Action Fund sponsored by Privateer Asset Management, a start-up investment adviser in New York, is set to be introduced, pending SEC approval.
While other online mutual fund sponsors have paved the way for investor involvement in funds' investment processes, Allied Owners takes the idea one step further.
The fund will take stakes of up to five percent in small to medium-sized companies that the fund manager believes could benefit from shareholder activism. Companies that are judged to have lax management, excessive inventory, underused assets or passive boards of directors will become candidates for the portfolio.
Once the fund has reached its desired equity stake, it will post its holdings online at a special website now being created at www.eRaider.com. eRaider is an affiliate of Privateer Asset Management.
Then, Allied Owners fund's shareholders, as well as shareholders of the companies the fund invests in, will be invited to visit the website and converse via online message boards. According to the fund's prospectus, the goal is to "improve (the) communication of ideas and strategies between company management and shareholders as a result of the message board, resulting in (the) increased value of the purchased company's stock..."
Allied Owners fund's management is expecting to pressure management of the companies it buys to make changes it believes will improve the companies' stock prices. The fund itself will not comment on board messages.
The fund's eRaider site is not yet available for public viewing, but the company gave a reporter access to the site. The preview revealed that eRaider is prepared to challenge the management of beleaguered public companies.
"Our goal?" states the website. "To compel the best possible financial performance - by friendly persuasion if possible, by unfriendly action if necessary." According to the site, the mission is to "open deaf management's ear." The site will have paid moderators to keep discussions on track, according to the prospectus. Moreover, the site is designed to spot and evict anyone who might try to talk up a stock to make a quick profit, the prospectus said.
Aaron Brown, co-founder of Privateer, will be responsible for the selection of individual stocks. Brown is an instructor at Yeshiva University in New York and writes an online investing column for the Sage mutual fund site of America OnLine. Brown previously managed $24 million in private money with his wife, Deborah Pastor. Pastor will serve as the fund's portfolio manager.
The idea of corporate activism through online message board discussions began with Martin Stoller, a professor at the Kellogg Graduate School of Management at Northwestern University in Evanston, Ill. Stoller, co-founder of the eRaider site, posted a message on a Yahoo! bulletin board when a company he had invested in filed for bankruptcy protection earlier this year, shortly after it filed a statement of financial health. He rallied support from other online shareholders of the firm who joined forces to try to influence management. Stoller suggested a similar approach for a mutual fund, said Brown.
According to Dave Nadig, portfolio manager of the MetaMarkets Open Fund, the four-month-old mutual fund that publishes its daily fund trades and welcomes investor discussion, the Internet will forever change the investment process.
"This is an inevitable extension of the revolutionary flag we tried to plant," said Nadig of the Allied Owners fund initiative. Public message boards definitely capture the attention of many, including the management of public companies who routinely scout out sites to gauge investor sentiment, he said.
Even the Allied Owners fund's board of directors will become part of the online fund revolution. The fund's four independent board members have been assigned their own areas of special oversight and will maintain online information pages related to their specialty. Furthermore, board members may freely respond to investor communications posted to the eRaider site. While the board members will not give opinions on specific stocks, they will comment on issues such as accounting, fund fees and fund management.
The idea of board members interacting online with fund shareholders grew out of the idea of launching a hedge fund whose management knows all of its investors, said Brown. The Allied Owners fund's board members will have a means of gauging what is on the minds of fund shareholders, he said.
"Board members should understand the shareholders and shareholders should understand the board," Brown said.
But, the Allied Owners Acton Fund does not just want investors to understand its board. The fund's prospectus suggests that in the future, outspoken board trustees are likely to be chosen directly from among online investors.
Privateer will absorb all of the fund's expenses including brokerage fees.