"The 55% of our capital in activist investments has produced more than 90% of our returns." – Bill Ackman (Trades, Portfolio), as quoted by Advisor Perspectives
Most investors don’t want to change the world or the corporations in it. They make no commitments to the companies in which they invest; they simply want to buy and sell shares as their analyses dictate.
But Bill Ackman (Trades, Portfolio) has chosen a road less traveled, making major commitments to long and short positions that get his attention. He’s best known for his long – and somewhat personal –battle with Herbalife (HLF, Financial), but he’s had other high-profile engagements as well.
The long situations that attract his attention are corporations whose shares sell at a discount, because boards and senior management have failed to make the most of the resources they control.
And the strategy has worked: Ackman’s Pershing Square Capital Management L.P. reported roughly $12.5 billion worth of assets in its 13-F filing for the year ended Dec. 31, 2016. That’s many multiples of growth beyond the $54 million with which the company started in 2004. This performance has earned Ackman third spot on the Guru Score Board, when returns are sorted by 10-year results.
In this article, we profile Ackman and Pershing Square Capital Management, to learn about the guru, and what investing lessons we might take from him and his eexperience.
This is the third article in a series focusing on the investing gurus. Previous articles profiled David Tepper and Prem Watsa, who scored the first and second spots on 10-year results.
Who is Bill Ackman?
Ackman, full name William Albert Ackman, was born in 1966 and grew up in Chappaqua, New York. His father was the chairman of a New York real estate financing firm. Harvard College awarded him a bachelor of arts degree magna cum laude in history in 1988, and later, an MBA. Forbes magazine reports that his current personal wealth amounts to $1.4 billion.
Starting out, though, Ackman and classmate David Berkowitz set up Gotham Partners with just $3 million in 1992. It grew quickly from that base and enjoyed investments from such names as Seth Klarman (Trades, Portfolio), Michael Steinhardt and Whitney Tilson (Trades, Portfolio) (a prominent shortseller and activist). But the company failed in 2002 when a judge blocked a proposed merger between Gotham’s golf courses unit and a real estate financing company.
In the wake of that, in 2003-2004, Ackman formed a long/short value hedge fund called Pershing Square Capital Management L.P. with $54 million of assets under management.
Unless otherwise noted, biographical details came from Wikipedia and Business Insider.
What is Pershing Square?
Pershing Square Capital Management is a privately held hedge fund based in New York City.
This chart, from the Annual Update Presentation on Jan. 26 and comparing Pershing Square’s performance with that of the Standard & Poor's 500 illustrates why Ackman is considered an investing guru:
Investors who place their capital with Ackman and Pershing Square should fasten their seatbelts, though (table by GuruFocus):
As a hedge fund, the firm’s investors will comprise high net-worth individuals and institutional investors such as pension, mutual and endowment funds.
Controversy has followed Ackman and Pershing Square. This list summarizes some of the long and short battles that they have fought since Gotham Partners’ days (list based on information at Wikipedia.org):
- MBIA (formerly Municipal Bond Insurance Association) (MBI, Financial).
- Hallwood Insurance (Ackman's first feud with Carl Icahn (Trades, Portfolio)).
- Wendy's International (now part of Restaurant Brands International [QSR]).
- Canadian Pacific Railway (CP, Financial).
- JCPenneyValeant Pharmaceuticals (JCP, Financial).
- Herbalife.
- Valeant Pharmaceuticals (VRX, Financial).
The play that has received much media attention recently is Valeant, which Ackman originally saw as a turnaround opportunity. But in the 2016 Annual Update (Jan. 26), Ackman/Pershing Square concedes, “Despite significant operational progress throughout the year creating the “New Valeant,” share price performance continues to disappoint.”
Disappoint may be the understatement of the year; as noted a couple of slides later in the presentation, “Valeant’s share price has declined 93% from our average cost at announcement through Jan. 20.” This slide, from the Annual Update, shows that collapse:
Ackman and Pershing Square have been nothing if not tilters at windmills. Rather than passively wait for companies to improve, they have taken long positions (and in some cases received seats on the board) and pushed for improvements. As observed, the results have been mixed.
Ackman’s investing philosophy
As the Wikipedia article notes, Ackman is known as a contrarian investor, but he likes to consider himself an investment activist. In other words, his strategy is to identify companies that can unlock more shareholder value by improving the way they operate and allocate capital.
GuruFocus says of Ackman’s investing philosophy, “Bill Ackman is an activist investor. He buys the common stocks of public companies and pushes for changes so that the market can realize the values of the companies. Ackman buys stocks trading at a discount, and sells when the companies reach their appraised value.”
An unnamed writer at ValueWalk says Ackman is not a corporate raider, someone who profits by gutting a dying company. Rather, Ackman invests enough in troubled companies to help them recover and then leaves after earning a one-time gain.
The ValueWalk article adds, “His investment philosophy is rather complex, something which cannot be categorized easily into any existing types of investors. From the analysis of his various investments, it is observed that he prefers middle-sized to large companies with low financial leverage and reserved sensitivity to economic changes.” Further, it says Ackman does not look for cheap prices alone; he does not invest in a company unless he has a large margin of safety.
In an interview with Advisor Perspectives, Ackman outlined his philosophy, strategy and execution perspectives. He stated, “We rely on concentrated research to identify great businesses that are trading at highly discounted valuations because investors have overreacted.”
What do those businesses look like? Ackman says, "We like simple, predictable, free-cash-flow generative, resilient and sustainable businesses with strong profit-growth opportunities and/or scarcity value. The type of business Warren Buffett (Trades, Portfolio) would say has a moat around it.”
One of those businesses in which everything came together in the way Ackman planned was Canadian Pacific Railway. He invested and then led a proxy battle aimed at unseating the CEO, which he ultimately achieved. The company then hired, on Ackman’s recommendation, the former CEO of Canadian National Railway (CNI, Financial), a Canadian Pacific competitor. The new CEO, Hunter Harrison, quickly turned around operations at CP; in just a couple of years it went from being one of North America’s least efficient railways to one of the most efficient. With that improvement came a dramatic improvement in the share price and significant capital gains for Pershing Square when it sold its holdings.
Ackman is a value investor and likely influenced, directly or indirectly, by Benjamin Graham. Unlike most other value investors, he’s proactive about earning capital gains. Rather than wait for management to eventually figure out what’s wrong and what’s to be done, he buys a significant stake in companies and actively pushes for improvements that will benefit shareholders.
What are the results?
This GuruFocus table shows a 12.8% average return over the past 10 years, but behind the average is a dose of volatility:
Follow that up with a review of quarterly results since Ackman and Pershing Square implemented their activist strategy:
For 2016, the Annual Update lines up the winners and losers; note the big loss suffered on Valeant.
As we’ve seen with other value investing gurus, there is uneven performance in the short term and outperformance in the long term. That includes outperforming the S&P 500 by an average of 5.5% per year for the past 10 years. As we see, investors need a decade for a strategy such as Ackman’s to fulfill itself.
What’s in Ackman’s portfolio now?
This graphic from the Annual Update shows the Pershing Capital equity holdings at year-end 2016:
Those companies are: Mondelez International Inc. (MDLZ, Financial), Air Products & Chemicals Inc. (APD, Financial), Restaurant Brands International, The Howard Hughes Corp. (HHC), Chipotle Mexican Grill Inc. (CMG, Financial), Fannie Mae (FNMA), Freddie Mac (FMCC), Valeant Pharmaceuticals, Platform Specialty Products Corp. (PAH, Financial) and Nomad Foods Ltd. (NOMD, Financial), as well as one short position, Herbalife. Since year end, Ackman has sold off all Valeant shares.
Note that 80% of the company’s capital is committed to just seven companies, all of which are described as "high-quality businesses" with some sort of catalyst in the wings.
Examples of catalysts include:
- Air Products: “Decades of underperformance, but shortfalls were fixable.”
- Chipotle Mexican Grill: “Despite recent events, we believe that all of the key drivers of Chipotle’s powerful economic moat and long-term success remain intact.”
- Restaurant Brands International: “Highly scalable and replicable operating strategy.”
A small number of names, considering the billions of dollars invested. That means every major position must be a conviction position for both the fund and its investors. In each case, Ackman has calculated that he has found an undervalued company, one that will become more profitable in the longer term.
Conclusion
Few investing gurus have as high a public profile as Ackman with his spectacular bets such as Herbalife and Valeant. He’s been both spectacularly wrong and spectacularly right on those bets.
Behind them lies a serious value investor with a well-honed investment philosophy and the ability to execute. He has the third-highest ranking among the GuruFocus investing gurus (on 10-year results) for good reasons.
Because he invests for the long term, an individual investor might be able to replicate his investing moves, assuming the ability to get in soon after he buys and to get out soon after he exits.
At the same time, investors who practice what Ackman preaches should be comfortable committing their capital for the long term and with suffering through shorter-term volatility.
Previous articles in this series are David Tepper Takes Big Risks for Big Rewards and Prem Watsa’s Place in the Benjamin Graham Universe.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.
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