Manager Monday: Pershing Square Capital Management
This Manager Monday, we take a look into the public filings of Pershing Square Capital to discover the source of their outperformance.
Google Herbalife. Look at the first results: herbalife.com, Herbalife on Wikipedia, and Herbalife on Facebook. So far, so expected. Now scroll down to the 4th result. Do you get the following catchy URL? : www.factsaboutherbalife.com
This is Pershing Square Capital Management’s website against Herbalife. Clearly, Bill Ackman’s SEO consultants have been doing a fantastic job in making the website a top search result. Even better, it is not the only one. Who wouldn’t click on www.herballifepyramidscheme.com? (if you are interested in the counterattack from Herbalife, click here).
Herbalife’s stock price has been highly volatile in the last 5 years, ranging from a minimum of $27.27 to a maximum of $81.81. Not surprisingly, the largest trading volumes coincided with public declarations from Bill Ackman. He is more than a public figure—he is an influential investor and one of the few pure activists in the market.
Pershing Square Capital Management is a multi-billion dollar New York- based, concentrated activist hedge fund. It was founded by Bill Ackman in 2004 with an initial $54M drawn from personal funds and Leucadia National.
But what makes Pershing Square different from the rest of activist investors, other than the high-profile war against Herbalife? Let’s find an answer to that question.
About our Data
Everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance.
Novus Activist Portfolio
At Novus, we like simulations. Even more so if they are interactive. One of them is our Activist Portfolio, which currently comprises the top 61 activist investors. We compile position-level data from public filings and simulate a portfolio that includes their long holdings at any given point in time. Some of the funds in the portfolio are:
Since our last presentation of the Activist Portfolio, the long AUM managed by activist investors has risen from $176B to $192B, which still reflects over 9% of our Hedge Fund Universe Portfolio (the HFU portfolio includes all hedge funds that file with the SEC). In the last ten years, our Activist Portfolio has outperformed the S&P 500 except for 2008, 2011, and 2014. One hundred dollar invested in this portfolio in 2005 would be equivalent to 201 dollars now, and only 116 dollars for the S&P 500.
We don’t believe in performance metrics alone to determine the quality of a manager. Instead, we think about the investment world through the Novus Framework lenses. This framework divides performance into market driven beta and manager alpha. Our activist portfolio rendered an alpha/beta ratio of 0.31x over the past 5 years:
To better understand what these numbers mean, we shall compare them to our Hedge Fund Universe Portfolio. The latter portfolio’s alpha/beta ratio is of only 0.14x. Activist Managers are creating more alpha than most of the hedge funds out there.
Now that we have recapped activists’ investment acumen, let’s move into analyzing one of the most vocal of them: Bill Ackman.
Is Pershing Square Capital Better than Other Activist Managers?
Yes. And the difference is substantial: in the last 10 years Pershing Square outperformed the S&P 500 by 222%. The spread between Pershing Square and the HFRX Global Hedge Fund is even wider (319%).
But as we read in legal disclaimers, past performance is not an indicator of future performance, so let’s consider more forward-looking metrics.
As Pershing Square’s AUM increased over time, it faced the trilemma of all hedge fund managers: it had to choose between greater concentration, larger market cap exposure, or deterioration of liquidity. Pershing Square chose all of them. The top 5% securities have comprised ~90% of the portfolio over the last 10 years. Moreover, the median market cap of its book has moved from mid-cap to large cap, and 30-Day Liquidity has decreased over time — especially since 2010 (from 93% to 5%!).
Compared to the Activist Portfolio, Pershing Square is more concentrated, more illiquid, and invests in larger names. It seems like the perfect combination for high risk / high reward. And indeed, Pershing Square created more alpha relative to beta since inception: 0.56x (Pershing Square) vs. 0.26x (Activist Portfolio).
If we go deeper into market capitalization, we see that the exposure to large and mega caps is consistent with better annualized returns and more security selection alpha in comparison to mid, small, and micro caps. In fact, Pershing Square sizes up those market caps that bring home the best results, while we cannot say the same about other activist investors, who are usually concentrated in smaller caps.
So, not only is Pershing Square highly concentrated — allowing Bill Ackman to get involved in the operations of companies he invests in — it also prefers large and mega caps, making the hedge fund more prone to publicity. What else could one ask from an activist manager?
On top of this, Pershing Square’s annualized sector returns beat those of the Activist Portfolio by a wide margin, except in Financials. Because Bill Ackman’s portfolio is highly concentrated, it would be more accurate to look into the batting average—if you own few positions, they better be winners!
The following charts show that Pershing Square had a better batting average than the Activist Portfolio across all sectors it invests in except for Consumer Staples and Financials.
Bill Ackman’s Pershing Square has all the ingredients of an activist manager: it is highly concentrated in terms of security number, it is 80% right, and it gives outmost importance to media attention. All of these, plus the outstanding security selection alpha, makes it one of the most successful activist hedge funds of the moment.
Although past performance is not an indicator of future returns, our Novus Framework does indicate that Pershing Square is wildly successful. It is not only superior to most hedge funds in the market, it is also a first class activist fund.