An In-Depth Look at Billionaire Bill Ackman’s Concentrated Equity Portfolio

Renowned activist investor Bill Ackman has been removed from the list of 20 best-performing hedge fund managers in history, after his fund Pershing Square Capital Management L.P. suffered its “greatest peak-to-through decline and worst annual performance ever” in 2015. The concentrated, research-intensive, fundamental value investor lost 20.5% net of all fees last year, after scoring a 40% gain in the previous year. Our own metric pegged his stock picks’ losses at 21.7% for the year, based on the weighted average returns of his long positions in stocks with at least a $1 billion market cap, based on the size of those positions at the beginning of each quarter.

While 2015 is a year the billionaire investor would like to forget and had surely hoped to put behind him, his fund is not doing all that great in 2016 either. Nonetheless, Bill Ackman has already proven that he can generate exceptional returns for investors and he will most likely prove it again in the upcoming years. As already mentioned, Ackman holds a relatively concentrated portfolio consisting of only eight long positions, one of which significantly weighed on his fund’s performance last year. The value of the equity portfolio overseen by Pershing Square dropped to $12.46 billion from $13.95 billion in the final quarter of 2015, during which time the activist reduced his exposure to only one company. With that in mind, the following article will discuss Ackman’s top equity holdings at the end of 2015 and the performance of the companies in question.

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Let’s start off our discussion with Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), which was the worst performer within Bill Ackman’s portfolio last year. Pershing Square trimmed its stake in the beleaguered drug company by 2.88 million shares during the fourth quarter, ending the year with 16.58 million units of common stock, with a portion of the stake in Valeant being sold for tax reasons. According to a newly-amended 13D filing, Ackman currently owns 30.71 million shares of Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), which include 21.59 million shares of common stock and 9.12 shares underlying call options. The shares of the specialty pharmaceutical and medical device company are down by 48% over the past 12 months due to amplified political attention on drug pricing, regulatory scrutiny, criticism and attacks from short sellers, and the interruption of an important distribution arrangement. Nonetheless, the billionaire investor does not believe that the aforementioned headwinds “will permanently impair Valeant’s intrinsic value”. Andreas Halvorsen’s Viking Global increased its exposure to Valeant Pharmaceuticals Intl Inc. (NYSE:VRX) during the December quarter by 2.80 million shares to 7.79 million shares.

Pershing Square left its position in Canadian Pacific Railway Limited (USA) (NYSE:CP) untouched during the fourth quarter at 13.94 million shares, which were valued at $1.78 billion at the end of 2015. The position accounted for 14.28% of the fund’s concentrated equity portfolio and was the fourth-largest equity position. The shares of the transcontinental railway company have lost 35% over the past year and trade at a forward P/E multiple of 13.81, which is below the average of 15.25 for the companies included in the S&P 500 benchmark. Canadian Pacific Railway Limited (USA) (NYSE:CP) has been attempting to buy Norfolk Southern Corp. (NYSE:NSC), but the target has rejected all takeover offers thus far. Norfolk’s officials believe that regulators would reject such a merger, while Canadian Pacific’s management continues to believe that a potential merger would create a more efficient railway company. Daniel S. Och’s OZ Management cut its stake in Canadian Pacific Railway Limited (USA) (NYSE:CP) by 1.72 million shares during the fourth quarter, to 2.08 million shares.

Bill Ackman’s hedge fund owned 43.37 million shares of Mondelez International Inc. (NASDAQ:MDLZ) at the end of December, which were worth $1.94 billion. The activist firm did not make any adjustments to its Mondelez stake during the quarter. The stock of the global snacking powerhouse is up by nearly 6% over the past 12 months despite losing more than 12% since the beginning of 2016. The company generated net revenue of $29.6 billion during 2015, which was a decrease of 13.5% year-over-year. The decrease was mainly attributable to the adverse impact of currency exchange rates and the negative impact from a transaction related to its coffee business.

In July 2015, Mondelez International Inc. (NASDAQ:MDLZ) combined its wholly-owned coffee businesses with the businesses owned by D.E Master Blenders 1753 B.V. to create a new company called Jacobs Douwe Egberts (JDE). As a result, Mondelez holds a 43.5% equity interest in the combined JDE. Leaving the coffee businesses aside, Mondelez’s management anticipates organic revenue growth of at least 2% in 2016 and double-digit adjusted EPS growth at constant currency. Bill Ackman and his team “continue to be highly optimistic about the potential for Mondelez as it improves its operational efficiency and continues to grow while remaining an attractive merger candidate”. Nelson Peltz’s Trian Fund Management L.P. reported owning 48.03 million shares of Mondelez International Inc. (NASDAQ:MDLZ) through its 13F for the fourth quarter.

Let’s move on to the two largest equity holdings of Pershing Square, which did not incur any adjustments during the final three months of 2015. Bill Ackman’s investment vehicle held a 41.82 million-share position in Zoetis Inc. (NYSE:ZTS) at the end of 2015, which was valued at $2.00 billion and accounted for 16.09% of the fund’s equity portfolio. Earlier this week, the global animal health company released its financial results for the fourth quarter and full 2015 year, posting fourth-quarter revenue of $1.3 billion, a decrease of 3% year-over-year. Zoetis Inc. (NYSE:ZTS)’s 2015 revenue totaled $4.8 billion, which was flat relative to 2014. However, the company’s operational revenue, which excludes the impact of foreign exchange, grew by 8% year-over-year. At the same time, its adjusted net income for 2015 increased by 13% to $889 million, or $1.77 per diluted share. Let’s not forget to mention that Zoetis shares are down by nearly 12% in the past year. Cliff Asness’ AQR Capital Management owned 4.79 million shares of Zoetis Inc. (NYSE:ZTS) at the end of 2015.

Air Products & Chemicals Inc. (NYSE:APD) was Ackman’s largest equity holding at the end of December, comprising 20.55 million shares valued at $2.67 billion. The holding represented 21.46% of Pershing Square’s equity portfolio. The manufacturer of gases and chemicals has seen its stock decline by 14% over the past year or so. In a recent letter to investors, the activist hedge fund manager said that the stock is “the fifth most hedge-fund-owned stock in the index [S&P 500 Index], and hedge fund liquidations [due to increased market volatility] may, therefore, explain its substantial underperformance compared with its direct competitor Praxair since year-end”. Moreover, analysts at UBS, who have a ‘Buy’ rating on Air Products & Chemicals Inc. (NYSE:APD) and a price target of $151 on it, classify the stock as a defensive stock that can continue to generate double-digit EPS growth in the face of worsening macroeconomic conditions. It should be mentioned that Air Products & Chemicals is a dividend aristocrat that has increased its annual dividend payments for 38 consecutive years. John Griffin’s Blue Ridge Capital owned 1.60 million shares of Air Products & Chemicals Inc. (NYSE:APD) on December 31.

Disclosure: None