Market Musings - June 10, 2018
We continue our blog series: Market Musings, Volume 2, Edition 18, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Ackman's Back; Time to Back Ackman".
When celebrity hedge fund manager Bill Ackman appeared on the cover of Forbes in May 2015 as "Baby Buffett" (above), in retrospect it marked his "Sports Illustrated Curse" moment. Over the past three years, Ackman's perfect billionaire life has seemingly imploded, marred by a huge ($1 billion) short bet gone awry (HLF, for which see here), a massive (>$3 billion) long bet gone spectacularly wrong (i.e., VRX, for which see here), gigantic overall underperformance versus the market for his hedge fund Pershing Square (see here) and even a divorce from his wife after a 25-year marriage (see here). Below are a few choice quotes from Ackman's supposed "peers", evidencing the fact that Ackman schadenfreude has reached peak levels in recent years:
"I think he hits a brick wall at about 197 miles an hour. I think he’s done. I think he’s a dead man walking and he’s completely un-investable."
"I think he’s proven himself incapable of managing risks. I think that’s kind of obvious at this point."
"I don’t think that it’s particularly fair, but there is some glee."
(What a classy industry, by the way, where the moment you are down all of your peers jump on top of you and try to stomp you into oblivion, at least verbally).
a. Ackman-as-a-Service is Available at a Firesale Price - Ackman is an investment manager. Every day he wakes up thinking about how to make his clients money. This is a service; one which we could label "Ackman-as-a-Service" (AaaS). Normally, a high-quality service is priced accordingly. In the investment world, depending on the context, one refers to either book value (or BV) or net asset value (or NAV) as a benchmark. For example, buying "Buffett-as-a-Service" (BaaS) will cost one about a 40% premium to the book value of the net assets Warren Buffett oversees at Berkshire Hathaway, BRK-A (source); similarly, "Icahn-as-a-Service" (IaaS) will cost close to 25% to 30% above the NAV of the assets Icahn manages via Icahn Enterprises, IEP (per slide 25 in this investor presentation). Quite reasonably given their respective stellar long-term track records, investors are willing to pay a premium to have Buffett or Icahn manage their assets. Yet, due to Ackman's recent underperformance, Ackman-as-a-Service is currently available at a discount of 21.4% (or 1-(14.70/18.71)) to the June 5th NAV of the assets that Ackman and his team currently manage at PSHZF--or a discount of 60% versus Buffett and 50% versus Icahn--as evidenced by the following (sources here and here, respectively):
Clearly, investors have given up on Ackman's abilities as a manager due to his struggles over the past three years. Yet if we look at his entire Pershing Square track record (not just the most recent 3-year snapshot), it is clear that Ackman is an outstanding investor. Below is Pershing Square's gross performance by year since inception versus (1) the S&P 500 (including dividends) and (2) Berkshire Hathaway (BRK-A) (note that 2017 and 2018 YTD returns are for PSHZF rather than Ackman's hedge fund; Pershing Square 2004-2016 historical performance can be found on slide 9 of this presentation):
From this table we can see that, purely looking at Ackman as a long / short investor (and therefore ignoring management and incentive fees for the moment), he has outperformed both the S&P 500 and Berkshire over past 14.5 years by over 770% cumulatively(!), while his long-only portfolio has outperformed the S&P 500 and Berkshire by 9.5% and 9.2% per year, respectively. Clearly, a large chunk of this outperformance would not have reached Ackman's hedge fund investors due to the notorious 2-and-20 fee structure that such funds typically employ. However, for an investor today in PSHZF this drawback is limited due to fee waivers and the $26.37 NAV high-water mark, as noted in the last bullet point from the following 2017 PSHZF annual report excerpt:
In essence, the next 40% of NAV appreciation (26.37/18.71) will be nearly fee-free for the PSHZF long.
Obviously, the time to invest in a distressed asset is when it is still considered distressed, not after the recovery has already occurred (by definition, such an asset would no longer be considered "distressed" at that point). If there was ever a time to view Ackman as a distressed asset, now is it. As shown above, Ackman-hate in the investment world is about as strong as it could possibly be. If one waits for Ackman's comeback to become an obvious success before placing one's bet on PSHZF, "betting on Ackman" will have much less upside potential.
b. Interests Aligned - Significantly, Ackman has been putting his own money where his mouth is by buying a large number of PSHZF shares on the open market (source):
When a manager mouths platitudes about their optimism for the future, shares being undervalued, etc., these words should typically be taken with a large grain of salt. However, when a manager backs up bullish words with huge amounts of their own money, investors should pay close attention. In short, by putting $160,000,000 of his own money into PSHZF over the past two weeks, Ackman has in effect gone "all-in" betting on himself. Whether he succeeds or fails for PSHZF unitholders in the future, the outcome will not be negatively affected by any conflict of interest. Ackman's interests and the interests of minority PSHZF holders now appear fully aligned.
c. Signs Point to Ackman's Comeback Being Firmly Underway - Lastly, recent signs point to Ackman's comeback as a premier investment manager being firmly underway. The most obvious sign is the dramatic reversal in PSHZF's NAV over the past month, going from from negative 5.5% as of May 3rd to positive 7.5% as of June 5th, a positive 13% swing in total:
Suddenly all the Ackman haters (who shall remain nameless) appear a bit flummoxed. However, this positive trend should not be surprising for several reasons. First, one would expect that Ackman's performance should eventually mean-revert. The 2015-2017 period of underperformance should clearly be considered the exception rather than the rule, given Ackman's overall excellent track record since 2004 (as shown above). Second, for better or worse Ackman is probably one of the most persistent investment managers alive. Witness his five-year battle against HLF, which one noted fund manager likened to the Siege of Stalingrad. In our view, Ackman is the type of person who simply will not tolerate permanent failure; thus, setbacks such as Ackman has recently experienced should only fuel his fire for redemption, which should eventually be reflected in his investment results. A humbled Ackman is hungry Ackman. Third, the fact that Pershing's assets have declined drastically since mid-2015, while painful for Ackman personally, is actually bullish for PSHZF holders. As Buffett is fond of stating, "size is the enemy of performance" in investing. Ackman's AUM is now much smaller, meaning the universe of potential investments he can make is now much larger than it was three years ago. Finally, Ackman has stated that he is going back to basics as an activist investor and will be avoiding the limelight going forward (see here). So there should be no more public shorts like HLF, no more passive investments made at a full price a la VRX and no more distractions like engaging in a CNBC-broadcast food fight with Carl Icahn. Thus, all signs look good prospectively for an investor betting on Ackman via PSHZF.
Conclusion - An investor seeking an alternative to ETFs and index and mutual funds, yet still wanting to outsource the stock-picking aspect of investing, has just a few options. One could buy shares of BRK-A or IEP and pay a large large premium to the value of the respective underlying investment holdings for the privilege of coattail-riding an Icahn or a Buffett. Conversely, one could buy PSHZF at a massive 20+% discount to NAV and cede the decision making to Bill Ackman, who appears poised for a comeback and has put nine-figures of his own money in said investment vehicle, evidencing clear financial alignment with the rest of PSHZF's unitholders. Additionally, Ackman just turned 52 and manages around $8 billion, while Icahn is 82 (managing over $20 billion) and Buffett is about to turn 88 (overseeing about $400 billion). If age and size are the enemy of future performance, the advantage lies with a (relatively) young, hungry and more nimble Ackman, who still has decades of investing ahead of him and has recommitted to the activist investing style that first brought him to prominence. If Ackman regains a significant measure of prior stock-picking glory (which we think he will), PSHZF is likely the vehicle by which he achieves this end. And enterprising investors can currently get aboard for the ride at enviable prices before the train leaves the station. All aboard!
DISCLOSURE: Long PSHZF.