Ackman Said Coronavirus Made Him Consider Liquidating Portfolio

Activist investor Bill Ackman said he was so concerned about the potential impact of the coronavirus that he considered liquidating his hedge fund’s entire portfolio for the first time ever.

Instead, he opted for another strategy that saw him invest in a lucrative credit hedge that earned his firm about $2.6 billion in profits when the market turned.

He said in a letter to Pershing Square shareholders Monday that he used the proceeds from the bet to substantially boost his investments in several of his portfolio companies, including increasing his stake in Warren Buffett’s Berkshire Hathaway Inc. by 39%, and reinvesting in a new position in Starbucks Corp. that’s valued at roughly $730 million.

“We were sufficiently concerned about the health and economic implications of the coronavirus that we considered, for the first time ever, liquidating the portfolio in its entirety because we believed it was likely that markets would decline materially,” Ackman said in the letter. “After a careful review of the portfolio, we concluded that a hedging strategy was more consistent with our long-term ownership philosophy, and would likely lead to a better long-term outcome than selling off all of our assets.”

28,222 in U.S.Most new cases today

-22% Change in MSCI World Index of global stocks since Wuhan lockdown, Jan. 23

-1.​063 Change in U.S. treasury bond yield since Wuhan lockdown, Jan. 23

Pershing Square used the proceeds to capitalize on the sell-off in the market to increase his holdings in Howard Hughes Corp., the real estate company that Ackman chairs, by 158% through a previously announced secondary offering. Ackman said his new Starbucks investment amounted to about 10% of Pershing Square’s $7.3 billion in assets under management after exiting his previous investment in the coffee chain this year.

The activist investor said he boosted his stakes in Lowe’s Cos. by 46% and in Hilton Worldwide Holdings Inc. by 34%. Pershing Square also increased its holdings in Burger King owner Restaurant Brands International Inc. by 26% and medical device-maker Agilent Technologies Inc. by 16%. The firm’s cash position has also increased from 14% to 18% of its assets, Pershing Square said in the report.

In a letter last month, Ackman said his firm paid roughly $27 million for hedges to protect his portfolio against the impact of the virus, which were made in the form of purchases of credit protection on investment-grade and high-yield credit indices. The hedges generated $2.6 billion in proceeds by the time he exited them on March 23.

As a result, Pershing Square returned 11% on its investments in March, amid the broader sell-off, bringing its year-to-date returns to 3.3% through March 31, according to its website.

“We of course do not know whether the recent lows that have been achieved will be breached by further market declines,” Ackman said. “Our decision to unwind our hedges was driven by the less favorable risk-reward ratio offered by our credit hedges as spreads widened, and the much more favorable risk-reward ratio presented by the then-trading values of companies in which we bought shares.”

He said he believed Pershing Square was well positioned to weather the impact of the coronavirus pandemic now that the hedges have been unwound.

“We are fortunate to own businesses that are designed to withstand the test of time,” he said. “Importantly, our portfolio companies are generally considered essential businesses, and for the most part will remain open to the extent possible during a state and/or a national shutdown. All of our portfolio companies, however, will be affected to varying degrees in the short term by the virus’ impact on the global economy.”

Ackman has been vocal about his thoughts on how the Covid-19 crisis will affect the markets and what should be done to prevent its spread, including calling for a 30-day shutdown across the U.S. He said “hell is coming” in a March 18 interview if drastic steps weren’t taken to prevent its spread.

A week later, he said in a interview with Bloomberg TV he had made a $2.5 billionrecovery bet” on a bounce back, after gaining confidence in President Donald Trump’s response the outbreak was “heading in the right direction.”

On Sunday, Ackman once again took to Twitter again to convey his thoughts on the virus in a series of posts.

“While it is hard to be positive when we know that tens of thousands more will die and many more will get severely sick, I have no choice but to be more optimistic about the intermediate future based on the data and facts I have seen recently. I hope I am right,” he wrote.

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