Activist impresario Bill Ackman’s Pershing Square hedge fund operation turned around in 2019, after four losing years, despite his much-touted new stake in Warren Buffett’s Berkshire Hathaway.
Pershing delivered a solid 58.1% surge last year for its investors, who have suffered mightily from Ackman’s misbegotten advocacy of Valeant Pharmaceuticals and his short-selling campaign against Herbalife Nutrition, among other missteps.
Ackman last spring credited his new Berkshire holdings as a key component of Pershing’s stellar 2019 growth rate. Well, Buffett’s company stock did advance 15.4% for the year, although that was about half of what the S&P 500 did.
Pershing’s big gains came from elsewhere. Ranging from mortgages to lodging to fast food, its best-performing stock holdings as of August (the list hasn’t been updated since then) had spectacular performances for the year ending December 31.
Leading elements were the two government-backed mortgage giants, Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac). They were ahead 166% and 147%, respectively, during all of 2019. Other leaders as of August also finished the year well, Hilton Worldwide Holdings, up 58%, Chipotle Mexican Grill, 88%.
Those stocks’ showings are a welcome relief. Two of his positions lost Pershing billions after they went south. With Valeant, Ackman backed a company that fell into a hole for its controversial drug-price hikes and its use of a pharmacy subsidiary to peddle its products, involving allegedly fake sales. His battle against nutrition company Herbalife, which Ackman branded a Ponzi scheme, brought him into conflict with fellow activist Carl Icahn, who went on to become the company’s biggest shareholder. Ackman closed out his short position in 2017 after Herbalife gained 51%.
Ackman has long lauded the legendary Buffett, 88, as his role model. They both have an eye for value and focus on a stock’s fundamentals. Buffett, though, is seldom one to take an activist stance, while Ackman, 53, avidly takes stock positions to force major corporate changes. As a hedge fund leader, Ackman will move in and out of stocks, with a 25% turnover in 2019’s third quarter, whereas Buffett emphasizes holding onto his securities.
Why the hedge fund operator has waited until this past year to assemble a position in Berkshire—he owns the less expensive B shares ($226), rather than the A shares ($339,469)—is unclear. Ackman, who has said his new position in Berkshire represents 11% of Pershing’s net asset value, describes himself as a longtime Buffett fan. He is a frequent attendee at Berkshire shareholder meetings, known as “the capitalist Woodstock.”
To Ackman, Buffett’s company is underestimated by the stock market. “Berkshire Hathaway’s undervaluation is partially explained by the fact that it is one of the least followed and misunderstood mega-cap companies,” Ackman argued in an August letter to investors. Wall Street, he contended, doesn’t appreciate its strong insurance businesses, its other units like railroad Burlington Northern (which enjoys a strong barrier to entry), and it daunting $100 billion cash position.
To critics, Berkshire is too big to render the magnificent market performance it once sported. During the past 10 years, the B shares have risen an average 11.5%, trailing the S&P 500’s 13%. Most of Berkshire’s investment growth came earlier in its time under Buffett. If we go back to 1964, when Buffett took over what was then a failing textile outfit, Berkshire racked up 20% annually, double the S&P’s 10%.