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Rupert Hargreaves
Rupert Hargreaves
Articles (689)  | Author's Website |

Bill Ackman and the Benefit of Sticking to a Strategy

The activist investor has made an impressive comeback

November 21, 2018 | About:

No matter what you think of activist investors, you have to give it to Bill Ackman (Trades, Portfolio).

At this time last year, it was widely believed his time in the sun was over. After becoming entangled in several high-profile activist campaigns, none of which produced desirable results, investors were fleeing his funds and it was widely believed that he would never be able to make back the money he's lost over the last several years.

Trouble brewing

His troubles began when Canadian pharmaceutical company Valeant almost collapsed after a debt-funded acquisition binge. The near failure of this company blew a hole in his portfolio and reputation as it was, at the time of the near-collapse, one of his most significant positions.

Ackman's fund, Pershing Square, had a return of -4% in 2017, -13.5% in 2016 and -20.5% in 2015. Over the same period, net assets under management fell from more than $20 billion to $8.4 billion.

Ultimately, Valeant ended up costing the firm $4 billion. He lost another $1 billion betting against multi-level marketing company Herbalife (NYSE:HLF).

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Toward the end of 2017, Ackman, the former Wall Street star, set out to restore his reputation and improve returns for his investors. He relocated his fund's office and slashed staff levels. He also told investors he would be lowering his media profile, spending less time talking to the cameras and more time researching investments and pushing for change at the companies he decided to target.

As we near the end of 2018, it looks as if these efforts have paid off for the billionaire fund manager. According to Pershing Square Holding's October monthly performance update, the fund was up 6% net at the end of October. Unfortunately, volatility in October hit returns hard, though virtually every other hedge fund in the industry has suffered a similar fate. In October, Pershing Square Holdings lost 8.5% net. Heading into the month, the firm was sitting on year-to-date gains of 15.8%.

Staying the course

Ackman's persistence is, in my opinion, the main reason why he has been able to make a comeback this year. Although his efforts to spark change at fast-food business Chipotle Mexican Grill (NYSE:CMG) and Automatic Data Processing (NASDAQ:ADP) have not produced the returns he might have initially expected, the portfolio as a whole has produced a positive return for the year.

He made around $100 million by buying Nike (NYSE:NKE) in October last year, but sold out at the beginning of 2018.

In the past several months, Ackman has been reducing his firm's holdings in Chipotle and Automatic Data Processing, while simultaneously increasing his bet on Lowe's (NYSE:LOW), where it seems Ackman believes he has a better opportunity of extracting value and generating a positive return for himself and his investors.

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Another position he has been adding is United Technologies (NYSE:UTX). Here he believes the company would be able to generate more value for investors by splitting itself apart and letting individual divisions build their own reputation.

A strong comeback

Only time will tell if Ackman's recovery is here to stay, or if it is just a one-year blip. Regardless, I I think it is a great case study of what investors can achieve when they stick with their strategy.

In the years leading up to 2015, when Pershing blew up, Ackman had almost quadrupled the S&P 500's return since the fund's inception. A few mistakes wiped out a considerable portion of these gains, but even after the losses of 2015 and 2016, Pershing Square had returned 503% net since inception to its investors as of the end of 2016, outperforming the S&P 500's 163.4% return over the same period.

By going back to the basics and persevering through the bad times, Ackman has started to rebuild his reputation. It will be interesting to see how he fares over the next several years.

Disclosure: The author owns no stocks mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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