Is Bill Ackman’s New Fund Worth Investing In?
We’ll break down the filing and give you the pros and cons for your family
Billionaire investor Bill Ackman has just filed with the Securities and Exchange Commission (SEC) to list a closed end fund on the New York Stock Exchange (NYSE) that will allow regular investors to invest alongside accredited investors with him. As an aside, an accredited investor is someone who has a net worth of over $1 million or has earnings of $200,000 in the past 3 years ($300,000 for couples). Due to government regulations, most of the time only accredited investors are allowed to invest in things like hedge funds.
The SEC needs to review the filing so it likely will be a few months before the ticker, PSUS, starts trading on the open market, but it’s an interesting idea that will basically allow everyday investors a piece of the action without having to pay the hefty fees usually associated with investing in any major hedge fund.
For anyone serious about actually investing, we would recommend reading the filing in full (you can read it here), but let’s drill down on what we learned reading it and the important considerations we were focused on.
If you own it, what’s this fund actually investing in?
When you buy into a fund like this, it basically is just a way for you to own a bunch of different things at once instead of having to go out an make all of these investments yourself (i.e. you own whatever the fund is invested in). While this strategy offers you immediate diversification, the burden as an investor shifts to you to know and pay attention to what the fund is actually investing in.
When it comes to Mr. Ackman’s fund in particular, the filing notes that this one will focus on investing in 12 to 24 core companies (translation: by owning a piece of this fund you will own the 12 to 24 companies they are investing in).
The companies the fund will target for investment will all be be large-capitalization (this just means big companies) and investment grade (this just means companies with low debt levels).
These particular companies will be selected by Mr. Ackman himself with a focus on a long term investment horizon (so basically by owning this offering you are betting on his ability to select good companies to invest in, similar to the accredited investors who invest in his hedge fund).
The filing lays out his selection criteria in more detail as follows:
Simple, predictable, and free-cash-flow-generative. The Adviser (aka “the fund”) will generally seek to invest in companies with a proven track record of growth and free cash flow generation, and predictable future financial performance that it expects will generate strong, sustainable growth in cash flows over the long term.
Formidable barriers to entry. The Adviser will generally seek companies that have long-term sustainable competitive advantages, significant barriers to entry, or “wide moats” around their business, and low risks of disruption due to competition, innovation or new entrants.
Limited exposure to extrinsic factors. The Adviser will generally seek investments that are not materially affected by macroeconomic factors, commodity prices, regulatory risks, interest rate volatility and/or cyclical risk.
Strong balance sheet. The Adviser will generally seek investments in companies that are conservatively financed relative to their free-cash-flow generation.
Minimal capital markets dependency. The Adviser will generally seek investments in companies that are not highly reliant on the capital markets to operate and grow their businesses.
Large capitalization. The Adviser will generally seek investments in companies with large enterprise values and significant long-term growth potential.
Attractive valuation. The Adviser will generally seek investments in companies at an attractive valuation relative to its view of the company’s long-term intrinsic value.
Exceptional management and governance. The Adviser will generally seek investments in companies that have trustworthy, talented, experienced, and highly competent management teams.
Our take is that these are all good starting points and good characteristics when looking for companies that are good investments, but it will ultimately be how he actually puts this criteria into practice that matters.
Fine, but what’s his track record?
So now we know what he is buying and that we are basically making a bet on his selections, we need to know what his track record has been in the past.
Someone’s track record is crucial to understand when ever you are investing with anyone because it gives you a way to judge them. Without it, you really don’t know much (kind of liking picking a team to win without knowing their previous win loss record).
When in comes to Mr. Ackman, his private investment fund, which has been around since 2004, has beaten the S&P 500 index which is impressive (his funds return is on the left hand side at 15.6% vs. the S&P 500 at 9.7%).
The illustrative example of what this new offering’s returns would have been (that is the 18.5% number in the second column from the right) just includes lower fees than you would have to pay than if you invested in his hedge fund (more on fees below).
This table of past returns by no means guarantees that they will continue to outperform in the future, but it does show a strong track record which would make us feel better about investing.
So what’s the downside?
As with any investments, there are downsides, and they are important on understand them here before considering investing with Mr. Ackman and this new fund.
As we see them, here are the downsides we picked up in in the filings:
Fees. For the first 12 months the fund will not charge investors any fees which is pretty good (our guess is that accredited investors in his hedge funds probably pay a 2% management fee and then pay 20% of all profits he generates for them). But then after the first 12 months the fund will charge you 2% a year on any money you invest with them (whether your investment makes money or not). This is high end for a fund like this (most are between 0.5% and 1.0%).
Leverage. The filings state that the fund will use debt to increase returns as they see fit (after the first 12 months). Using debt can be both good and bad as it can increase a return if things are going well but it can also lead to greater downside when things aren’t (think the 2008 housing market vs. buying and selling a house in 2005 or 2006).
Hedging. The filings note that the fund will use “hedging” which is term meaning that the fund will not just own stocks outright (they will make investments to protect the downside should these stocks go down). This is not necessarily a negative, but it is just something to be aware of that they will own more than just these 12 to 24 stocks.
Investment team. The filing lays out the investment team that will be tasked with finding these 12 to 24 companies to invest in and their backgrounds are all impressive. The one point we would flag is that virtually all of them come from backgrounds in private equity vs. previous public market investing roles (so they don’t have much traditional “public stock market experience”). Mr. Ackman will likely be making all decisions here but this team is unproven for the most part in the public markets so that is a consideration.
Final Thoughts…
Time will tell whether this new offering will turn out to be a good investment or not, but it is a novel idea from Mr. Ackman that will allow ordinary investors a chance to invest with him.
We hope more broadly offerings like this can put the spotlight on creating more investment options for ordinary investors.
Should you have any questions feel free to shoot us a note here.
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