As one of the protagonists in the Dupont story, Nelson Peltz has attracted abundant praise and criticism. More than one observer called the situation a watershed in activist investing. Another used it as an opportunity to slam his investment record, which a third then analyzed further.

Despite the extensive scrutiny, we don’t have insight into how he thinks about investing. Like his peer Carl Icahn, we couldn’t find any assessment of his investment approach. Earlier we dove into Icahn’s portfolio and activist strategy. We’ll leave the analysis of Peltz’s investment performance to others. Here we dive into his investment process, and see what other investors can learn.

Like Icahn, Peltz has a distinct approach, with a highly concentrated portfolio, industry emphasis, thorough research, and operational and structural perspective. For all the publicity about the proxy contest at Dupont, it’s only his third as a portfolio manager. Like Icahn, he settles with companies, for the BoD positions he values for his partners and himself. These allow him to pursue the operational and structural plan for a company.

From public company to hedge fund

Peltz works through his hedge fund Trian Partners. It succeeded a series of public company vehicles that he ran from 1983 through 2005. He founded Trian in 2005 with his long-time financial wizard Peter May, and his son-in-law Ed Garden.

Trian started small, with about $180 million in 2005. (At the time, Peltz made the Forbes 400 list with a little more than $1 billion.) It’s most recent SEC filing reports $9.4 billion AUM.

We want to know about investing strategy, and how Peltz thinks about activist investing. For this we turn to the invaluable SharkRepellent database. It identifies 17 activist projects at 16 companies in ten years (Peltz needed two tries at Wendy’s), so fewer than two per year.

Why so few?

Because each one takes a great deal of effort to pull off. That frequency makes sense when we see the type and size of company, and what Trian seeks to accomplish.

Peltz has focused on just a few industry segments:

1. ❖consumer packaged goods (Heinz, Kraft, Mondelez, PepsiCo, Dr. Pepper Snapple)
   

2. ❖financial services (CBRL, Legg Mason, State Street, BNY Mellon, Lazard)
   

3. ❖retaurants (Wendy’s, Cheesecake Factory)
   

4. ❖retail (Tiffany, Family Dollar).
   

We can’t think of two more different segments than consumer packaged goods and financial services. Restaurants and retail are slightly related, to each other and to consumer packaged goods. We find it a little funny that the two retailers are Tiffany and Family Dollar, at the opposite ends of the marketplace.

Dupont doesn’t really fit the industry profile. It most closely resembles Ingersoll-Rand, an equipment manufacturer. Chemtura was his only other direct chemical investment, predating Trian, and which ended poorly.

Peltz started small, and got bigger. For the first five years, the market cap of his activist investments averaged $5 billion, with companies as small as Cheesecake Factory ($1.5 billion). That average excludes Kraft, with a $56 billion market cap. Since then, the market cap of his activist investments averaged $52 billion, which includes PepsiCo at $125 billion.

He starts with smaller investments that he holds for awhile without any activist intent. He then adds to the position as the activist strategy takes shape. Dupont first showed up on Trian’s roster on June 30, 2013 with $300 million. He now has $1.8 billion in shares.

Trian has Form 13D filings on 8 of the 16 companies, so it eventually gets to at least 5% of outstanding shares. There, he has credibility with other shareholders, and influence with management. With almost $10 billion in assets, and the need to research and work on a limited number of companies, he invests in companies with an average market cap of $52 billion.

Peltz also keeps his activist investments awhile. Trian still owns  Wendy’s (2005), Legg Mason (2009),  Family Dollar (2010), Ingersoll-Rand (2012), Lazard (2012), Mondelez (2013), and PepsiCo (2013).

Peltz prides himself on a “constructivist” approach, which we consider elsewhere. His activist agenda seeks to improve company structure and business operations. Thus, he wants to break up PepsiCo and Dupont, and improve operations at most others. He does not emphasize outright sales or financial engineering, although a couple situations, such as Ingersoll-Rand, have generated share repurchases

This approach demands intense research. He specializes in detailed public white papers, which we explained before. Trian even has its own white paper website.

Corp gov strategy = BoD seats

What about corp gov? What does Peltz value? Above all, he wants BoD positions, for trusted independent directors, Ed Garden, and himself. Most of his activist situations result in one or more BoD seats. Dupont escalated to a proxy contest because the company refused to seat Peltz.

Why would Peltz insist on a BoD seat for himself? He doesn’t have special experience in chemicals, or financial services or restaurants (he does have it in consumer packaged goods, where he spent most of his time before Trian). We think it demonstrates his commitment to a portfolio company. His and his partners’ most valuable resource is time. Spending a few hundred hours each year on the BoD of a big, complicated company conveys to executives, other directors, other shareholders, and his LPs the importance of that stake.

Trian will innovate in its corp gov and proxy contest efforts. It has pushed targeted corp gov efforts at a small number of companies, such as State Street. It also sought a universal proxy card at Dupont, probably as a way to gain support from other shareholders.

Peltz does work with other investors on occasion (CalSTRS at Ingersoll-Rand, Sandell at Heinz and Wendy’s). The intense research and directed BoD strategy doesn’t lend itself to coordinating with other shareholders and sharing BoD seats. Instead, Trian will collaborate with ones who trust its preparation and knowledge of the industry segments and corp gov.

In the end, despite what one might think based on Dupont, Trian doesn’t pursue many proxy contests. Before Dupont, he did so only at Heinz and Wendy’s. Peltz would rather settle for one or two key BoD positions, and the vantage point that those positions provide.

Nelson Peltz concentrates on structural and operational improvements at a small number of big companies. It requires patience, exhaustive research and a singular goal of BoD seats. It delivers controversy like that at Dupont, and billions of dollars of AUM.