Nelson Peltz has an impressive history of picking winning stocks. His ability to buy the winners and sell the losers has built a hedge-fund empire and a personal net worth nearing $2 billion.
Trian Fund Management, the activist hedge fund Peltz co-founded, manages about $8.9 billion, a sizable portion of which is today held in stock of Bank of New York Mellon (NYSE:BK), the fund recently disclosed.
For shareholders in the bank, that can mean only one thing: Change is coming.
Proxy fight avoided
Trian first began building its position in the bank during the third quarter of last year. The fund bought more shares in the 2015 first quarter, growing its position by 52% at that time.
As of the fund's last regulatory filing, its investment stands at $1.3 billion. That makes the bank the fund's fourth largest holding, at nearly 15% of total assets under management. Trian owns about 2.6% of the bank's outstanding shares.
As Trian grew its position, the hedge fund made it clear to BNY Mellon that the fund believed in the bank's future prospects, but that changes were necessary. Instead of taking on the fund in a proxy battle, BNY Mellon agreed to expand its board of directors and appoint Trian's chief investment officer, Edward Garden, as a new board member.
Trian is known as an activist hedge fund, meaning it builds large ownership positions in companies and then uses that power to push for corporate changes to unlock shareholder value. Trian recently lost a similar proxy battle with DuPont.
What should BNY Mellon shareholders expect next?
It's too early to know exactly what changes Peltz and Trian will push for at BNY Mellon, but generally the fund seeks to sell off undervalued assets or business units, or find new areas where the company can cut costs.
For example, Trian argued that DuPont had become bloated and, as a result, was leaving huge profits on the table. DuPont owns a theater, a hotel, and a country club, assets that Peltz pointed to as symbols of inefficiency, a lack of focus, and an opportunity to improve performance.
Trian proposed breaking DuPont up into three parts. The analysis indicated that the sum of the values for the three separate parts could jump 87% by 2017 over the value of the conglomerate as it's structured today.
Ultimately, DuPont's shareholders voted with the current management team and denied Peltz the board seats he sought. BNY Mellon controls a large stake in DuPont and, ironically, voted its shares with management and against Trian.
The plan for BNY Mellon could take a similar form
BNY Mellon is primarily a custodial bank, meaning it holds huge sums of money for various entities from around the world. Those funds are meant to be safeguarded, meaning they're mostly held as cash or highly safe investments such as U.S. Treasuries. While this business gives the bank huge assets under its control, it's far from the most profitable business in money management.
As such, the custodial part of the overall firm is growing more slowly and with lower profit margins than the bank's other asset-management businesses. Splitting the bank into two parts along these lines would be a classic activist tactic that could unlock hidden value from the higher-growth asset-management side of the business.
Change without antagonism
Whatever ends up happening, Peltz seems happy with the management team already in place at BNY Mellon. Earlier this year, another activist fund called for the ouster of the bank's CEO, Gerald Hassell. Trian eschewed that conflict and opted to back Hassell.
A source close to the company told Fox Business that Peltz and Trian consider replacing Hassell as "the dumbest thing they can do." That differs from the recent battle with DuPont, where Peltz called the DuPont team "insular" and wasteful.
The market has responded positively to the direction Trian, the board of directors, and management are taking the bank. It certainly helps that all the interested parties are working together and avoiding a distracting and potentially expensive proxy battle.
Over the past year, BNY Mellon's shares have increased over 23%, beating the S&P 500's 6.7% increase.
With Nelson Peltz and Trian Fund Management in the mix, you can bet that change is coming. And if history is any indicator, then there's a good chance shareholders will be better off when it does. The only question that remains is what that change will eventually look like and how long we'll have to wait to see the end result.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.