The following is Bill Ackman’s Q2 letter to investors. The letter which discusses the upcoming Pershing Square IPO, VRX, AGN, HLF and more was reported moments ago by Bloomberg News. ValueWalk has obtained a copy of the letter – readers can find the entire letter below.
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Dear Pershing Square Investor:
The Pershing Square funds outperformed the major market indexes for the first and second quarters of 2014 and since inception as set forth below:
Pershing Square – Reflections After Ten Years
We began investing capital January 1st, 2004 in partnership with a subsidiary of Leucadia National Corp. (NYSE:LUK) which invested $50 million in Pershing Square, L.P. at our launch. At the time of Leucadia’s investment, Gotham Partners did not have regulatory closure with respect to the SEC’s and New York Attorney General’s MBIA-related investigations. Leucadia’s investment, and most importantly, its imprimatur were critical to the successful launch of the firm. We will forever be indebted to Ian Cumming and Joe Steinberg, then Chairman and CEO of Leucadia, who backed us when few others would. As a thank you gesture at the time, we offered Leucadia a substantial minority interest in the management company for no additional consideration, but they asked for nothing but good investment results in exchange for their investment, and for that we are very grateful.
Pershing Square – Returns Since Inception
Over the last ten and one-half years, we have generated net returns to our investors of 626.7% or 7.3 times day-one investor capital. Over the same period, the S&P 500, our principal benchmark, as it has historically comprised most of our holdings, has returned 118.8% or about 2.2 times. Expressed as a compounded annual return, the funds have returned 21% net per annum versus 8% for the S&P 500. In a world in which investors are pleased to earn returns that are one or two percentage points per annum above the S&P over 10-year periods, our approximate 13 percentage point annual net margin over the index is notable.
We are proud of our record and how that record has been achieved. While our returns have been strong, our downward volatility (the only kind of volatility investors really care about) has been minimal. We have had two negative years in our history, 2008 when the funds declined 12% to 13%, and 2011, when the funds declined approximately 2%. While the S&P index is by design a fully invested index, we have generated our returns with negative leverage, i.e., cash has averaged 14% of invested capital since inception. Some might therefore criticize us for the inefficient use of our balance sheet, for clearly the liquidity and nature of our holdings would have allowed us to be more invested over time. Indeed, we could have comfortably supported a modest amount of margin leverage without taking undue risk.
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Pershing Square – Portfolio update: Herbalife (HLF)
Since our discussion of Herbalife Ltd. (NYSE:HLF) at the annual dinner in February, there have been a number of materially positive developments which are confirmatory of our thesis.
On March 12th, Herbalife Ltd. (NYSE:HLF) disclosed that it had received a Civil Investigative Demand (CID) from the FTC. This is not simply an informal staff inquiry. Commencement of this type of proceeding requires a preliminary staff examination of the facts and legal issues, an application to the full Commission, and the majority vote of the Commissioners to initiate formal proceedings. This is the most significant FTC action on MLMs and pyramids in over 35 years, and you can expect it will entail a thorough examination of the practices of HLF.
According to press reports, the Department of Justice in the Southern District of New York and the FBI have commenced criminal investigations of HLF. The Southern District is one of the premier prosecution offices anywhere in the U.S. An investigation could include mail and wire fraud, money laundering, tax evasion, false health claims, and RICO (Racketeer Influenced Corrupt Organizations). A RICO investigation could look at the top distributors, many of whom we have profiled on our website, and trace their coordinated, parallel illegal businesses, which continue to be facilitated and promoted by Herbalife Ltd. (NYSE:HLF).
