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Bill Ackman: Big Problem Areas In 2015

Don't forget to get on the free newsletter for activist insights [subscribe here]. Here's where Bill Ackman had big issues in 2015.

The inception of the portfolio’s decline began with Valeant in August. We have discussed at length the events at Valeant which catalyzed the stock’s initial decline: political attention on drug pricing and the industry, regulatory scrutiny, attacks by short sellers, and the termination of a distribution arrangement representing ~7% of Valeant’s sales. But, we would never have expected that the cumulative effect of these events would have caused a nearly 70% decline in the stock, nor do we believe that they will permanently impair Valeant’s intrinsic value.

Contemporaneous with the decline of Valeant, the rest of our portfolio went into free fall which has continued up until the present. While our portfolio is highly concentrated, we are highly diversified in the industries in which we invest: sweet snacks and chewing gum, industrial gases, real estate, specialty pharmaceuticals, specialty chemicals, frozen foods, animal health, housing finance, railroading, and quick service restaurants. One would not expect a substantially greater than market value decline in our portfolio due to recent company-specific and macro events as has occurred since August  

You will note that the best performers in the long portfolio since August were Mondelez, Zoetis, and Air Products. These three companies are the only ones in the current portfolio which are in the S&P 500. Despite their large market caps and business quality, which would ordinarily qualify them for inclusion in the S&P 500 index, Canadian Pacific, Valeant, and Restaurant Brands are Canadian-domiciled and therefore not eligible. Their shares have also likely suffered because they are components of Canadian market indexes that have experienced large capital outflows and substantial declines due to Canada’s large energy and commodity exposures.

The companies in our portfolio that have suffered the largest peak-to-trough declines are Valeant, Platform, Nomad, and Fannie and Freddie. The inherent relative risk of their underlying businesses and their more leveraged capital structures partially explain their greater declines in market value as markets moved to a “risk off” mentality. But their massive declines in value, in our view substantially more than can be accounted for due to fundamental issues in their respective businesses, cannot, we believe, be attributed to these factors. Importantly, none of these companies is in any of the important market indexes. Their shareholder bases are, therefore, largely comprised of hedge funds and other active managers, which we believe has contributed to their underperformance.