Bill Ackman wishes he had sold some of his winners in 2015.
In a letter to Pershing Square shareholders published Tuesday, the hedge fund manager outlined a number of the struggles his firm faced in 2015.
Among them was what Ackman described as a “missed opportunity to trim or sell outright certain positions that approached our estimate of intrinsic value.”
Said another way, Ackman didn’t sell at the top.
Ackman writes (emphasis ours):
The first place to look for an explanation is mistakes we made in 2015, and we did make some important mistakes. Principally, we missed the opportunity to trim or sell outright certain positions that approached our estimate of intrinsic value. Our biggest valuation error was assigning too much value to the so-called “platform value” in certain of our holdings. We believe that “platform value” is real, but, as we have been painfully reminded, it is a much more ephemeral form of value than pharmaceutical products, operating businesses, real estate, or other assets as it depends on access to low-cost capital, uniquely talented members of management, and the pricing environment for transactions
And of course the most notable “platform” in Ackman’s portfolio is that possessed by Valeant Pharmaceuticals, Ackman’s largest single holding.
In his letter Ackman makes a nod towards the extensive rush of negative news that surrounded the company this fall which sent shares down about 60% from their all-time high.
But another problem Ackman found himself with this year was an inability to bail on the Valeant position.
As Ackman writes (again, emphasis ours):
Our failure to sell [Valeant] stock wasn’t entirely an unforced error as we found ourselves largely restricted from trading during this period. During the summer, we were made aware of a large potential transaction that Valeant was working on, and as a result, we were restricted from trading at a time when it would have been prudent to take some money off the table. In retrospect, in light of Valeant’s leverage and the regulatory and political sensitivity of its underlying business, we should have avoided becoming restricted to preserve trading flexibility, or alternatively, we should have made a smaller initial investment in the company.
Back in the summer reports surfaced that Valeant was working to acquire Zoetis, an animal-health company that was valued near $25 billion at the time.
Ackman owns Zoetis — as of his most recent filing with the SEC Ackman owned about $1.7 billion worth of the company — and therefore couldn’t sell as Valeant made its approach to acquire the company.
And so when your hands are tied — presumably because Ackman had information regarding the sale that could have prompted questions regarding insider trading were he to move either the Valeant or Zoetis position during deal talks — you’re stuck with what Ackman (an avid tennis player) would call a “unforced error.”
But in his letter, Ackman doesn’t think Pershing’s poor performance were a result of his own mistakes but a mistake on behalf of the market.
“We do not believe that our investment performance in 2015 was primarily due to unforced errors, but rather due mostly to the market’s reappraisal of our holdings without a corresponding material diminution in their intrinsic value,” Ackman writes.
“While stocks can trade at any price in the short term, it is rare for companies to trade at material discounts to intrinsic value for extended periods. Fortunately, the lessons we have learned in 2015 should be easy to avoid in the future.”
In 2015 Pershing Square fell 20.5% net of all fees, far underperforming the S&P 500’s 1.4% total return.
And while of course the point of hedge fund is not to match or exceed the S&P 500’s return in all situations, falling 20% short of the benchmark stock index’s performance is a major disappointment. The average hedge fund lost 3.6% last year, according to Hedge Fund Research.