When once asked to describe his evolution as an investor, he encapsulated his journey over 22 years in four versions.
Version 1: Classic value investing, which entailed investing in statistically cheap securities.
Version 2: Recognising the difference between businesses of different quality and developing an appreciation for the value of a quality business.
Version 3: Understanding the impact of activism.
Version 4: Understanding that if you can find a great business, and if you can switch out a mediocre management team for a great one, you can create a lot of value.
In an interview with Value Investor Insight, he explained his investment strategy in much more detail.
He casts his lot with concentrated but well researched bets – anywhere between 8 and 12. According to Bloomberg, his latest portfolio holds just 9 stocks and 2 short positions.
He is of the opinion that to be successful, one must have the conviction that they are right and the rest of the world is wrong. He cites the example of General Growth Properties which dropped from $63 to 35 cents a share. He picked up 25% of the company then. He thought the upside was high enough and likely enough that he was willing to take the risk of the stock going to $0.
He focuses on identifying great businesses that are trading at high discounted valuations because investors have overreacted to negative macro or company-specific events. He calls this the “time arbitrage” part of the strategy where he takes advantage of the market reacting to short-term factors that have little impact on long-term intrinsic values.
He defines a great business as one that is predictable, free cash flow generative, resilient and sustainable with strong profit growth opportunities and/or scarcity value.
“When you’re putting 8%, 12% or 15% of your money in something, it’s not a day trade.” (When he talks about such percentages, bear in mind that he manages over $18 billion.) “You have to focus first and foremost on high-quality businesses that can’t blow up and should grow in value over time”.
But he is convinced that his greatest strategy comes from using his stake in a company to intervene in the decision-making, strategy, cost structure, management and structure of the business. Buying a huge stake in the company gives you control, something very valuable.
Going back to the earlier example of General Growth Properties, he recounted that experience in Bloomberg. After buying shares in General Growth Properties for 34 cents a share, he pushed it into Chapter 11 bankruptcy and restructured the company. He moved a group of its properties into a new entity under the name Howard Hughes Corp. Pershing Square sold its stake in General Growth eventually but still owns Howard Hughes. The firm netted more than $3 billion on an initial investment of $60 million.
Last winter, his fund had a stake of more than 12% in liquor company Beam Inc. The fund’s team Beam’s management extensive research arguing that the time was right for the company to sell itself. A few weeks later, Beam entered into an agreement with Japanese whisky maker Suntory Holdings Ltd. The deal closed in May, and Pershing Square netted more than $1 billion.
The year 2014 was rough for most hedge fund managers, but Pershing Square Holdings returned an astounding 40.4% and went from managing around $11.5 billion assets at the start of the year to more than $18 billion currently. New York Times claims that Ackman earned $950 million last year. Pershing Square Holdings' IPO in October -- which opened on the Euronext Amsterdam exchange -- was one of Europe's largest in 2014, at $2.7 billion.
Bill Ackman is a value investor with an activist bent, taking large positions in a handful of companies and advocating for change. This suave, silver haired, hedge fund manager may not be a household name, but is a high-profiled player in his circles.
Last year he sued the U.S. government, claiming the federal government has improperly confiscated the profits of Fannie Mae and Fannie Mac. In December 2014, Ackman told Bloomberg TV that McDonald’s could be managed better and could learn from its smaller rival (His fund was the second-largest investor in Burger King Worldwide Inc.). His comment fueled speculation that he would buy a stake and push for changes and the stock jumped 3.3%, the biggest one-day gain in 9 nine months. Just like that.
Call him what you like (
Forbes referred to him as Wall Street's loudmouth on its cover) but the name Bill Ackman carries more weight now than it did a year ago.
