Morning Brief: Ackman Seeks Break-up of United Technologies

Bill Ackman said he established an activist position in the conglomerate United Technologies. Ackman groups the company into three major segments that encompass several of its well-known industrial brands: UTC Aerospace Systems (UTAS), including Pratt & Whitney; Otis Elevator Company; and Climate, Controls and Security.

In a letter to investors in Pershing Square Holdings, Ackman lamented that even though United Technologies has “one of the most advantaged business portfolios in the multi-industrial sector,” its stock is currently trading at about 16 times Pershing Square’s estimate of this year’s earnings. “This valuation is significantly below our estimate of the company’s underlying value based on the overall quality and future earnings growth potential of UTX’s operating subsidiaries,” Ackman asserts.

He adds the firm has had a “constructive engagement” with management “who appear focused on unlocking shareholder value.” Ackman calls for the company to divide into three separate companies in order to achieve fair value.

“In a separation, management focus and alignment will also likely improve as compensation can be more easily designed to meet shareholder objectives, and entrepreneurial zeal is unleashed from the IPO-like nature of corporate spinoffs,” he adds. “Furthermore, by separating the three businesses, each company’s capital structure can be engineered to meet its competitive and long-term capital requirements.”

Several months ago CNBC’s Scott Wapner reported that Ackman was building a position in the stock. Meanwhile, in the first quarter Dan Loeb’s Third Point established a 7.1 million-share stake in United Technologies, making it the hedge fund firm’s third-largest U.S. long position.

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Meanwhile, Ackman is staging a mini-rally this month. The embattled activist investor’s Pershing Square Holdings has posted a 6 percent gain for the first two weeks of May alone, boosting its gain for the quarter to 9.4 percent. Given his recent history of losses, this passes for success. The fund is now break-even for the year-to-date.

In the document filed on Thursday, Ackman provides interesting insight into which stocks have worked and which ones continue to plague the fund this year through May 15. Two stocks have contributed at least 50 basis points to gross performance: fast-food company Chipotle Mexican Grill and payroll processing outsourcer Automatic Data Processing. Five stocks detracted by at least 50 basis points for the year through May 15. They were led by its short position — now closed out — in Herbalife, followed by long positions in mortgage giant Federal National Mortgage Association, fast-food company Restaurant Brands International, mortgage giant Federal Home Loan Mortgage Corporation, and packaged foods giant Mondelez International.

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Total Asian hedge fund capital rose by $810 million in the first quarter, bringing the total to $123 billion, according to a new report from data tracker HFR. This is a tad less than the record $126.3 billion invested in Asian hedge funds in the second quarter of 2015. Meanwhile, India-focused hedge funds led returns among all Asian funds in April. The HFRI Emerging Markets: India Index jumped 3.9 percent for the month. This follows an 8.4 percent loss in the first quarter. The HFRI Japan Index fell for the third straight month in April. As a result, it is down 0.5 percent for the year to date. The HFRI China Index fell 1.3 percent in April and is also down 0.5 percent for the year.