The stock market may have stabilized during the last week of May, but it did little to help Bill Ackman’s Pershing Square Holdings. The manager’s publicly traded hedge fund fell 9.5 percent for the month and is now down 18.2 percent year-to-date.
On a recent investor call, Ackman admitted that Pershing Square could easily underperform the broader market at times — and this is definitely one of them. In contrast to Pershing Square, the S&P 500 was flat for the month and down about 13 percent through May.
“We are not a trading firm trying to position ourselves so that we are going to outperform the market in six months, nine months, even 12 months,” he said on the call. “What we do is, we look to find businesses that we think we can own for years, in some cases, decades or more.”
Ackman explained that “our portfolio composition is very different from the S&P 500. And that difference is really what has enabled us over an extended period of time, approaching our 19th year, to earn well above market returns over the period. But it also means that, there are going to be times where our variant portfolio is going to underperform the market.”
This time, one of the culprits is the inflation-driven surge in the price of oil. “Since the end of the quarter energy stocks have done well, and historically we have owned no energy stocks,” he said.
Even though Ackman has continued to call on the Federal Reserve to raise rates more aggressively to stem inflation — which he thinks would lead to a recovery in the stock market — he hasn’t gotten nervous enough to sell any of the stocks in his concentrated portfolio except for Netflix, which he owned for three months before dumping the stake at a $400 million loss when its growth projections were much lower than anticipated.
Years ago, Ackman began to transition the majority of his assets to a permanent capital vehicle — Pershing Square Holdings — from his traditional hedge funds, which now make up a small portion of the firm’s assets. As a result, he doesn’t face the redemption risk that has bedeviled other hedge funds during market selloffs.
Still, Pershing Square holds a small number of stocks, which makes it more vulnerable to market stress. His top three holdings account for more than half of Pershing Square Holdings’ portfolio, according to Fitch Ratings.
Universal Music is the biggest investment, which represents 20 to 25 percent of the portfolio, according to Ackman. The hedge fund made a big investment in the company to fulfill Pershing Square’s contractual obligation to Universal parent Vivendi after Ackman’s plans to have his special purpose acquisition company, Pershing Square Tontine Holdings, invest in the French company was thwarted by the Securities and Exchange Commission.
“The business quality, its growth characteristics, and the price we paid made this position we wanted to make quite large,” said Ackman, who recently joined Universal’s board. But Universal couldn’t escape the market rout. The stock fell 4 percent in May and was down about 16 percent for the year through May.
On the call, Ackman told investors that Pershing Square likes businesses that offer royalties, with Universal Music being “the top of the list.” He compared Universal artist royalties to other Pershing Square’s companies, which are run as franchise businesses. Referring to Universal and Hilton Holdings Worldwide, he said, “What's interesting here [at Universal] is the artist is really the franchisee in a way; the artist is creating the content in which we receive a royalty, Hilton--a royalty on people staying in Hilton, branded hotels; Restaurant Brands, a royalty on people, eating in our various concepts that are franchised by Restaurant Brands.”
Pershing Square’s next largest position is Lowe’s, the home improvement retailer that is coming off a pandemic and stimulus-driven boom in home renovations. The stock was down 25 percent for the year through May and 1 percent for the month.
Chipotle Mexican Grill, Pershing Square’s third largest investment, is down 20 percent year to date and 4 percent in May. But with a stock price of nearly $1,374 per share, Chipotle has been an incredible home run for Ackman, who took a 10 percent stake in the beleaguered restaurant in 2016 for around $400 per share, and joked that his team had to eat there every day until the stock hit $500. It took a while, but his efforts at getting a new CEO led to one of Ackman’s most underrated activist victories.