Technology was again the most popular sectors for new activist investments in the first quarter of 2022, according to recent 13F portfolio disclosures by U.S. focused funds. But as the market falls, most of those big tech bets have resulted in painful paper losers. Energy plays, by contrast, have so far proved a winner.

There was an overall slowdown in new investments in Q1 2022, with 122 new positions taken in the first quarter of the year, versus 174 the prior quarter, though up from 89 in the same quarter of 2021, according to Insightia data. The roughly $6 billion in money spent on new names was down slightly compared to prior quarters but was only half the amount spent on new names in the first quarter of 2021.

The caution looks justified. On average, the 20 largest new positions disclosed by primary and partial focused activists, representing around $4.4 billion in new investments, have lost around 17% of their value between the start of the second quarter on April 1 through June 10. Of those, the investments made in technology and the closely-related communications services sector (think Netflix), have lost over 30% on average.

Tech pain

The biggest new investment of the quarter, by Pershing Square in Netflix, highlights just how unkind the markets have been for investors in tech stocks this year. Bill Ackman took a $1.16 billion stake in the streaming company, calling it undervalued, yet sold the position within weeks following disappointing earnings report at an implied loss of roughly $400 million. Since April 1, the stock has lost around 50% of its value.

They are not alone in seeing technology bets lose money, at least on paper. Starboard Value’s new 6.8% stake in LivePerson, worth $156 million as of April 1, has since fallen over 45% as the activist continues to agitate for board seats. Jeff Smith’s larger stake in computer systems company Mercury Systems, worth around $230 million as of April 1, is down around 5%.

Sachem Head Capital Management looks to have been especially unlucky with its new tech investments made in the first quarter. Zendesk is down more than 45% since April 1 while Momentive Global is off over 30% and Salesforce is down 15%.

Technology isn’t the only sector giving activists trouble. Consumer stocks have taken a pounding since the start of Q2 amid rising inflation and supply chain problems. Mill Road Capital’s new holding in Big Lots is down over 30% on paper since April 1, while Engaged Capital is looking at a close to 60% paper loss on its BRC shares and Starboard a 23% loss on Kohl’s.

The one area of outperformance has been energy and utility investments. Suncor Energy, which saw new stakes taken by Third Point Partners and Elliott Management, is up around 20%. Corvex Management’s new stake in Constellation Energy is up around 10% while Third Point new Ovintiv position is up around 11%.

Rough sailing

Ongoing market volatility and economic uncertainty appear to have taken a toll on activist fund performance figures, at least in the short term.

“The start of 2022 has not been kind to the markets – or our portfolio,” wrote Connor Haley of Alta Fox in a recent investor letter. “The market (for good reason) is worried about rising interest rates, significant inflation, and slowing consumer demand, among other concerns.”

Alta Fox actually outperformed many other activists this year, down around 11% as of the end of May, according to a shareholder letter seen by Insightia. Haley noted that the firm does not have many investments in the software industry or other investments “predicated on a high revenue multiple valuation methodology.”

Despite its energy wins, Third Point Partners was down around 16% for the year as of May 31, according to fund documents, likely due in part to a 31% drop in value of its new Alcoa stake. Pershing Square was down 18.2% as of May 31, erasing some of the stellar 27% full-year gain in 2021.

The losses don’t appear to have dampened Bill Ackman’s optimism that greater opportunity will emerge from the recent market chaos. “We are in the midst of an opportunity rich environment for Pershing Square due to the dramatic shift in Federal Reserve policy, the highly inflationary environment, geopolitical uncertainty, and the resulting high degree of security price volatility,” he wrote in an April 20 letter to fund shareholders. “We therefore expect to find a good use for the Netflix proceeds.”