By Svea Herbst-Bayliss
BOSTON Aug 21 Activist investor William Ackman
admitted he made mistakes in bets on retailers, including J.C.
Penney where he has lost hundreds of millions of
dollars, but is sticking by a wager against Herbalife,
where he faces big paper losses.
In a letter to shareholders written less than a week after
his embarrassing departure from the J.C. Penney board, Ackman,
47, counted three "failures" at his $11 billion hedge fund
Pershing Square Capital Management. All were retailers: Borders
Group, now bankrupt, Target, and J.C. Penney.
He said he may exit Penney, where he owns 39 million shares
and is the company's biggest investor, but would not say when.
At Target, he stuck it out for 19 months after losing a bitter
and expensive proxy fight, he reminded investors.
He also devoted plenty of ink to his other current problem
bet, Herbalife, where he is sitting on some $300 million in
losses, and said there are signs things may yet turn his way.
"Clearly retail has not been our strong suit, and this is
duly noted," Ackman wrote in a 23-page long, second-quarter
letter to investors, dated August 20 and seen by Reuters.
Coming three years after he built his Penney stake and told
skeptics they would shop at the ailing retailer after he
overhauled the store, the letter signals an acknowledgement of
weakness and insight not often seen among hedge fund managers.
"Retailing is for retailers. It's not for hedge fund
managers," said Erik Gordon a law and business professor at the
University of Michigan. "Successful retailers have spent their
whole lives in the business. Ackman finally figured that out."
For Herbalife, where Ackman is pitted against other big fund
managers, including George Soros and Carl Icahn, the jury is
still out, Ackman said, noting its fate is in the "undecided
Serious product quality issues plus timely aggressive
regulatory intervention may still save the day on Herbalife, he
said, declining to give more details about which regulators may
be probing the company.
"It's tougher to hang on until the gains pan out when you
are shorting a company. It takes a hard head," Michigan's Gordon
Ackman refused to show his hand and has previously
sidestepped questions from investors about what he would do with
J.C. Penney as his investment sunk. Penney is now trading at a
40 percent discount to where he bought it.
His problems have weighed on returns. He was up 6.3 percent
in the first half, just barely more than the average hedge fund.
Since then the gains shriveled to roughly 2.7 percent in
mid-August, said an investor, who asked not to be named because
the information is not public. The average hedge fund gained 4.5
percent in the first seven months of the year, according to
tracking group eVestment.
Ackman, known for his unwavering confidence in himself, also
pointed to the gains he's made long term: 463.4 percent over
nearly 10 years.
Even as his failures generated dramatic headlines in the
last months, Ackman effectively shrugged them off, saying media
attention is part of the cost of being an activist. "We are
going to make mistakes," he acknowledged, adding that because of
his size, those blunders are going to be a lot more visible than
"We believe our activist track record, both long and short,
is the best of any activist investor of which we are aware,"
Ackman wrote to clients which include state pension funds in
Massachusetts and New Jersey and wealthy investors.
Bets on Wendy's International, General Growth
Properties and Canadian Pacific Railway, among
others, have been winners on the long side and bond insurers
MBIA and Ambac paid off on the short side.
As for his latest big bet -- a $2 billion investment in Air
Products and Chemicals, he said he believes the downside
risk to be "modest" and that the price is a "bargain" if he "can
successfully effectuate change."
A month ago Ackman told investors he wanted to raise as much
as $1 billion for his fifth special purpose vehicle, Pershing
Square V (PSV). In the letter he said he raised $450 million in
outside capital and launched the vehicle with $900 million to
invest in Air Products.
While the fund was buying, Air Products put in a poison pill
stopping Ackman from getting more and he acknowledged that he
has not able to use all of his firepower. "We were not able to
deploy all of the PSV capital raised so we returned the
additional funds to the PSV investors," he wrote.