February 27, 2019
By Svea Herbst-Bayliss
NEW YORK (Reuters) – Jeffrey Ubben’s ValueAct Spring Fund, which invests in companies aiming to address environmental and social problems, is making a bet on an academic-turned-hedge-fund-manager who picks stocks based on how effective companies are as employers.
The Spring Fund is buying a stake in Irrational Capital, a hedge fund launched three years ago by Duke University behavioral economist Dan Ariely and his business partner David van Adelsberg. Terms of the deal were not disclosed.
It is an unusual move for a hedge fund to back a smaller rival. But ValueAct, the $15 billion fund that last year launched the $350 million Spring Fund, is familiar with such an arrangement. It sold a stake in itself to Affiliated Managers Group more than a decade ago.
So far Spring Fund has mainly bought stakes in publicly listed companies, including power utility Hawaii Electric Industries Inc and gene-editing company Horizon Discovery Group Plc.
“Dan (Ariely’s) work makes the case for connecting positive workforce culture to performance,” Ubben said in an interview. He met the economist seven years ago through a connection at Duke University, where Ubben earned his undergraduate degree.
Ariely and Van Adelsberg have come up with a system to measure employee engagement, pride in their work and sense of purpose across the corporate world. Their data is funneled into a computer that churns out rankings of companies that Irrational Capital then invests in.
Irrational Capital has so far gathered information on over 1,000 companies through “any type of data we can get our hands on,” Ariely said, adding this includes 350 companies with market capitalizations of more then $1 billion. Ariely declined to name the companies, and Ubben said he doesn’t need to know Ariely’s picks.
“We don’t intervene in what the data show by saying something like this company scores highly but we don’t like the CEO. We are true to the data,” Ariely said in an interview.
Ariely, a 51-year old professor, researcher and author, views himself as an expert in understanding human behavior. He spent time in the hospital as a teenager recovering from burns received when a flare exploded during a celebration and said the opportunity to observe nurses at work built his skill.
Meanwhile, Ubben, 57, is fast becoming one of Wall Street’s biggest critics of corporate America’s short-termism. He is now trying to convince investors that positive workplace culture can drive above-average returns.
For nearly two decades, Ubben has staked a claim to bringing a long-term approach to activist investing. His playbook does not usually call for a fast return of capital to shareholders or a quick flip of a company to a seller.
Instead, ValueAct prefers to push for operational changes at companies such as Microsoft Corp and Citigroup Inc from behind the scenes. Two years ago, Ubben handed the chief investment officer role at ValueAct to Mason Morfit, but he remains the firm’s CEO and runs the Spring Fund.
Over ValueAct’s lifetime, the main fund has returned an average of nearly 15 percent a year, an investor said. Ubben declined to say how the new fund has done, citing regulations.
Pushing back against corporate greed has galvanized public opinion and politicians alike, and Ubben wants to convince mainstream investors that committing resources to employees’ well-being will not short-change shareholders.
“These hedge fund managers write letters and dictate what should be done by management and then they get their buddies to buy the stock and help hijack the company,” Ubben said of some of his competitors, declining to name them.
Ubben said he was particularly irked when Aramark Inc, the food services and facilities company he recently invested in, was punished by analysts for doing good. Management returned the roughly $100 million windfall the company received through the tax system overhaul to employees in the form of higher wages and by boosting the match to their retirement savings, Ubben said. But Goldman Sachs Group Inc downgraded its rating to neutral from buy, citing growing labor pressures in the sector.
Aramark did not immediately respond to a request for comment.
Data from Gallup Inc, known for its public opinion polls, also showed that organizations that are best in engaging their employees deliver earnings per share growth that is more than four times that of their competitors.
“This is the last mile and this is the hardest thing,” Ubben said of Irrational Capital. “We want to spread the word and introduce the concept and grow it so that a lot of people will invest in it.”
(Reporting by Svea Herbst-Bayliss; editing by Greg Roumeliotis and Cynthia Osterman)