We’ve seen the term more lately, and wondered what it means, who does it, and why.

It’s come up in a few different places:

1. ❖Trian calls its work “constructivism”
   

2. ❖Relational Investors “presents detailed recommendations for constructive change.”
   

3. ❖Atlantic Investment Management undertakes “constructive activist” strategies.
   

4. ❖Spring Owl “will pursue activist and constructivist-based investment strategies’”
   

5. ❖The Discovery Group “maintain[s] an active and constructive dialogue” with portfolio company leadership.
   

Sounds like a twentieth-century art movement, not an investment strategy, no?

Others don’t use the exact words, but embrace the idea. Blue Harbour “won't invest in a company unless its management appears receptive to [its] ideas”.

Yet, all activist investing is by definition constructive. In contrast to short positions like Pershing Square’s in Herbalife, activist shareholders seek appreciation in their positions. They accomplish this through useful, productive engagement with portfolio company leadership. (Useful and productive to shareholders, perhaps not as much for entrenched executives.) In other words, they want to construct a thriving, profitable investment, by influencing the underlying company.

Constructivist investing feels like a form of activist investing. So, what do “constructivist” investors do?

Some appear to act privately. They avoid news releases, fight letters, and public white papers. Yet, some have a very prominent public profile in their investments, including Trian and Relational Investors. Since 2006, Blue Harbour filed 28 Form 13Ds on ten different companies. So, there appear to be limits to investing quietly.

They seek to collaborate with company leadership on designing and implementing business improvements. They may or may not need, want, or gain BoD representation, like any other activist investor. With or without, some claim they will not force companies to embrace their preferred strategies and tactics.

They promote operational improvements, rather than dreaded “financial engineering” that restructures the balance sheet and, specifically, returns surplus cash to investors. Improving operations, though, demands an intimate knowledge of the industry and the company not available from just securities filings and retired executives. It comes from that collaboration with company leadership.

So, constructivist investing seems to want to improve a company through quiet consulting with executives on business process improvement. In our experience, relatively few CEOs welcome that kind of input from an investor that owns at most 5-10% of the shares. It’s great work if you can get it, but hard to build an investment strategy and portfolio around the idea.

Why do it, then? Constructivist investing appears to avoid the controversial reputation that a number of activist investors have earned, such as Carl Icahn and Bill Ackman. Maybe some want to garner praise from Marty Lipton.

We have two concerns, though. First, private, collaborative interaction with minimal potential for escalation invites portfolio companies to ignore investor input and preferences.

Second, balance sheet restructuring and return of surplus cash represent worthwhile goals for a portfolio company. Sure, we want them to improve operations. Yet, as investors well know, companies also allocate capital poorly and hold way too much cash. We want portfolio companies to do all things well, and would advocate for anything and everything - balance sheet and income statement, cash and operations - and in any way - public or private, collaborative or confrontational - that gets us there.