Hedge fund magnate Bill Ackman is coming off the worst two-year stretch of his career, and he wants his clients to know he's learned his lesson.
Owing largely to a disastrous investment in Valeant, a pharmaceutical company that came under fire for its pricing practices and other issues, Ackman's Pershing Square Holdings saw returns for its $11.1 billion main fund tumble 13.5 percent net of fees in 2016, according to a report the company released late Tuesday.
That's coming off a 2015 loss of 20.5 percent for a fund that historically has done very well against market benchmarks such as the . The fund has more than tripled the index's return since 2004, according to Pershing records.
The annual report gave Ackman the opportunity to offer a mea culpa for the loss and to explain to investors what he learned from the experience, with special focus on the Valeant investment.
"My approach to mistakes is that I personally assume 100 percent of the responsibility on behalf of the firm while sharing the credit for our success," Ackman said.
"While I and the rest of the Pershing Square team have suffered significant losses from this failed investment as we are collectively the largest investors in the funds, it is much more painful to lose our shareholders' money, and for this I deeply and profoundly apologize," he added.
Pershing exited its Valeant position earlier this month at a price that he said in the letter could "end up looking cheap." He believes the company has made some important changes but still has "a lot of work" left. Moreover, he said, future gains are likely to be incremental and unlikely to justify the firm's continued involvement.
His listed four takeaways as lessons from the investment: That managerial competence in deploying capital doesn't translate to value-added for a business; that "changes in regulations, politics or other extrinsic factors" can't be accounted for and can dent value; that even a strong management team can make mistakes; and that a big price decline in a stock "can destroy substantial amounts of intrinsic value" including "morale, retention and recruitment."
Valeant — down 19.2 percent in 2016 — was the most public setback for Ackman, but it was far from his only loss. In fact, winners and losers were split evenly, with the Valeant loss tilting the scale negative in terms of returns for the fund.
Ackman's ups and downs
| Winners | Return (%) | Losers | Return (%) |
|---|---|---|---|
| Restaurant Brands | 3.3 | Valeant | -19.2 |
| Air Products & Versum | 3.1 | Currency derivatives | -1.3 |
| Fannie Mae | 31 | Mondelez | -1.4 |
| Freddie Mac | 1.7 | Platform Speciality | -1 |
| Canadian Pacific | 1.2 | Chipotle | -0.8 |
| Undisclosed | 1 | Nomad Foods | -0.6 |
| All other winners | 0.6 | Other losers | -1.7 |
| TOTAL WINNERS | 14 | TOTAL LOSERS | -26.1 |
| OVERALL | -12.1 |
Source: Source: Pershing Square Holdings
"We are extremely focused and working hard to continue to repair the damage done from our investment in Valeant by diligently overseeing our existing portfolio companies and identifying new opportunities," Ackman said.
Pershing did have two hugely successful exits during the year: Canadian Pacific, after seeing a 318.9 percent return, and Zoetis, with a 57.9 percent gain in just two years.
There was another bright side for investors in the downturn — they got a break on fees.
While the industry has long relied on the 2-and-20 formula — 2 percent of assets as a management fee plus 20 percent on performance — more and more firms are breaking away from that model. The current industry average now is 1.6 percent and 17.7 percent respectively, according to Hedge Fund Research.
Pershing clients typically pay 1.5 percent and 16 percent, but a change last year sent fees even lower. Clients now will pay lower fees when the gross fund return is less than 16.5 percent, and more when that level is exceeded. The letter did not specify how high or low those fees would go.
However, clients won't pay any performance fees until Pershing's net asset value climbs above $26.37 a share — the "high-water mark" for the fund the last time a performance fee was charged. To get there, the fund would have to climb nearly 45 percent from the net asset value of $18.25 at the end of February.
The fund has not had a single-year gain that high since its inception in 2004, according to firm records, though it did top 40 percent in 2004 and 2009.
Ackman said he's dedicated to getting the fund back on track.
"With a strong commitment to the core principles that have generated the vast majority of our returns since inception and the best and most experienced team that we have had since the formation of the firm more than 13 years ago, we are well positioned for a strong recovery," he said.