Here’s an overview, from Bill Ackman, on why his Pershing Square Capital is struggling. The fact is; the fund isn’t correlated.
Perhaps the largest correlation in our portfolio is one that we have not previously considered; that is, the fact that we own large stakes in each of these companies. We have had the benefit of a “following” of investors who track and own many of our holdings. This has given us significantly greater clout than is reflected by our percentage ownership of these companies, and we believe that it is partially what has caused the “pop” in market price when we announce a new active investment. As a result, these active managers’ performance is often closely tied with ours. When Valeant’s stock price collapsed, our performance, and that of Pershing Square followers, were dramatically affected. Nearly all of these investment managers are subject to daily, monthly, and quarterly redemptions, and therefore, many were likely forced to liquidate substantial portions of their holdings which overlap with our own.
While we review the ownership structure of a company before we invest to look for large holders who might be opposed to the type of corporate changes we intend to advocate, whether a company is in the S&P 500 or other major stock market indexes, or whether the owners are hedge funds or passive investors has not played a meaningful role in our analysis. We select investments based on business quality, discount to intrinsic value, and catalysts to unlock value, but not principally based on who else owns or will own the stock. The vulnerability of a company to an overall market decline, a short seller attack, or negative headlines is highly correlated with the nature of the investors who are the principal holders.
Companies like Mondelez and Zoetis whose owners are principally index funds, ETFs, and other passive investors have much more stable and more “permanent” ownership bases, and appear, therefore, to suffer from much less volatility. Even Air Products, which is in the S&P 500, has suffered from the fact that it is the fifth most hedge-fund-owned stock in the index, and hedge fund liquidations may, therefore, explain its substantial underperformance compared with its direct competitor Praxair since year-end. As of this writing, Air Products has declined by ~9% since year-end, while Praxair, which has the 8th lowest hedge fund ownership of companies in the S&P 500, has only declined 4%. We believe that these exaggerated stock price movements represent a short-term opportunity for long-term investors to accumulate additional shares at attractive prices.
While it is impossible to know for sure, we believe that our continued negative outperformance in the first few weeks of the year relates primarily to forced selling of our holdings by investors whose stakes overlap with our own.
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