- Bill Ackman's Pershing Square posted a record 70% return in 2020.
- The billionaire investor's new hedge has already tripled in value to almost $500 million.
- Ackman won't close his first SPAC deal this quarter, but he's already planning a second.
- See more stories on Insider's business page.
Billionaire investor Bill Ackman trumpeted his fund's record performance last year, revealed his latest hedge has tripled in value to nearly $500 million, and touched on his plans for a second blank-check company in his shareholder letter this week.
Here are the five key takeaways from Ackman's letter.
Pershing outperformed thanks to pandemic bets
Pershing Square scored a 70% increase in net asset value including dividends in 2020, notching its best annual return in its 17-year history, Ackman said. The fund has delivered a compound annual return of 17.1% since its inception in 2004, outpacing the S&P 500's 9.8% return over the same period.
Put another way, Pershing's early backers have earned a 15-fold investment gain in 17 years, dwarfing the five-fold gain they would have earned in a zero-cost S&P 500 index fund during that period, Ackman said.
Ackman's pandemic hedge last spring, which involved spending $27 million on credit-default swaps then selling them for $2.6 billion weeks later, accounted for 45% of Pershing's net gain last year.
Another 25% stemmed from Ackman's decision to invest more than $2 billion of the hedge proceeds into beaten-down stocks in its portfolio during the market downturn, he said.
In other words, 70% of Pershing's net investment gains had nothing to do with the underlying performance of the companies in its portfolio, Ackman said.
Another hedge is paying off
Ackman noted in his letter that Pershing owns "very large notional hedges in the form of interest rate swaptions" that it bought between December and early February. Like his pandemic hedge, they "have a potential payoff that is multiples of our capital at risk," he said.
The investor touted the fact that Pershing spent $157 million on those positions, and they've already tripled in value to $493 million, equivalent to 4.2% of the fund's total assets.
The SPAC hunt continues
Ackman discussed Pershing Square Tontine, the special-purpose acquisition vehicle he took public last year, in his letter. While he remains confident the SPAC will be an important contributor to the fund's future success, he admitted it wouldn't achieve its goal of closing an acquisition this quarter.
The investor softened the blow by saying Pershing would likely launch a second SPAC after the first one seals a deal. Shareholders in the first SPAC will likely be able to invest in the second vehicle without paying a premium, he added.
Pershing isn't another conglomerate
Ackman quoted from Warren Buffett's latest letter to Berkshire Hathaway shareholders about the "terrible reputation" of conglomerates.
He argued Pershing doesn't suffer from several of the disadvantages of conglomerates that Buffett outlined. For example, it can buy controlling interests in quality companies at attractive prices, and take non-controlling interests in businesses.
It also doesn't have to pay corporate taxes as it's a closed-ended fund registered in Guernsey. It can also access cheap, long-term funding via publicly traded bonds, Ackman said.
Moreover, Pershing can buy non-controlling interests in businesses cheaply, and still exert similar influence to a controlling shareholder without having to pay a control premium. Ackman described that as enjoying the "best of both worlds."
Companies can help solve the world's problems
Ackman addressed the push for environmental, social, and governance (ESG) standards for corporations in his letter. He argued that "philanthropy alone cannot save the world," governments can't be relied on to solve all the problems either, and capitalism is "far from perfect."
However, he emphasized that high-quality, responsible businesses can create jobs, generate returns for investors, savers, and pensioners, and provide desirable goods and services. Good ESG practices are "fundamentally aligned with running a successful business," he added.
Ackman pointed to Agilent, Lowe's, Starbucks, and Chipotle as four companies in Pershing's portfolio that are making major strides towards greater sustainability.