Like mentor, like disciple . . . sort of.
It’s well-known by now that William Ackman’s New York–based Pershing Square Capital Management was the top-performing activist hedge fund firm last year, posting a gain of 40 percent.
However, at least one activist who previously worked for Ackman also did very well in 2014. Scott Ferguson, who was Pershing Square’s first analyst, posted a 22.5 percent gain in his Sachem Head fund, which surged nearly 10 percent in the fourth quarter alone. Ferguson became a partner at Pershing Square before leaving in 2012, after nine years at the firm, to start New York–based Sachem Head Capital Management. In early 2014, Sachem Head disclosed that it was running about $1 billion.
Ferguson’s gains last year were especially driven by his investments in Zoetis, the animal health company, and CDK Global, a provider of technology and marketing services to auto retailers that was spun off from payroll-processing company Automatic Data Processing in late September. In November, Ferguson’s mentor, Ackman, disclosed an 8.5 percent stake in Zoetis. Ackman said also that he had a joint filing agreement with Sachem Head, which owned only 4.395 million shares of Zoetis, or slightly less than 1 percent of the total outstanding. Combined, however, the two firms had an economic interest of 9.4 percent of Zoetis.
However, unlike Pershing Square, Sachem Head had been building a stake in the company all year. The 4.395 million shares represented the exact number it reported holding at the end of the second quarter, when the stock accounted for 14.5 percent of its portfolio, making it the fund’s largest holding.It constituted more than 18 percent of the portfolio at the end of the third quarter. We earlier reported that Sachem Head had owned 2.27 million shares of Zoetis at the end of the first quarter but did not report the position until August 15, three months after the first-quarter filing was due and one day after the second-quarter filing was disclosed.
Less than a week after Pershing Square disclosed its stake — and revealed its joint filing with Sachem Head — Zoetis hosted its first-ever investor day. Chief financial officer Paul Herendeen outlined the company’s priorities for capital allocation, according to a press release. These included a pledge to “aggressively manage its operating costs to drive revenue and support a complex growing business.”
The executive also promised to “use capital for value-creating business development activities that add to or complement [the company’s] existing business base” as well as to return capital to shareholders.
At the same meeting, Zoetis announced a $500 million share repurchase program. Then in December it boosted its dividend by 15 percent.
Shares of Zoetis rose more than 31 percent last year, including 16 percent in the fourth quarter alone.
In late October, Sachem Head disclosed a 7.88 percent position in CDK Global.
In a regulatory filing, Sachem Head said the stock “is undervalued and is an attractive investment” and that it planned to hold discussions with the company, board of directors, stockholders and others on issues including governance and board composition, management, operations, financial condition, strategic plans and the future of the company. In November the company announced its first quarterly dividend.
In early December, Sachem Head reported it had economic exposure to roughly another 3.15 million of the company’s shares under certain cash-settled total-return swaps, bringing its total economic exposure to 15.8 million shares, or 9.84 percent of the total number of shares.
Meanwhile, in December, Sachem Head was joined in its CDK investment by another activist hedge fund firm. New York–based Fir Tree Partners, founded by Jeffrey Tannenbaum, disclosed that it had an 8.8 percent stake in the company. Fir Tree said in a regulatory filing that it had held discussions with CDK management to discuss topics including margins, capital allocation policies and the alignment of management and employee incentives with shareholders. Fir Tree also said it planned to hold further discussions with the company and possibly make proposals related to management and policies.
The stock closed at $31 on its first day of trading in late September and closed on December 31 at $40.76. Sachem Head paid between $26 and nearly $31 for its shares, according to a regulatory filing, suggesting that the firm made between 32 percent and 57 percent on its investment. Meanwhile, shares of Air Products and Chemicals, Sachem Head’s second-largest holding at the end of the third quarter, rose nearly 11 percent in the final three months of the year.
In the second quarter, when Sachem Head was up about 5 percent, it did especially well from energy investments. Its second-largest holding at the end of the second quarter was Cheniere Energy, which hopes to liquefy and export natural gas from Sabine Pass, Louisiana.
It is not known what other investment moves Ferguson made in the fourth quarter. However, according to an investor in his fund, Sachem Head was 77 percent net long at year-end.
