| William Ackman, Pershing Square (Bloomberg) |
Let’s face it. If you are long equities, there have been very few safe havens over the past two days, since the Brits voted to bail out of the euro zone.
Since that vote, the Standard & Poor’s 500 stock index has fallen about 5.4 percent, the Nasdaq composite index has dropped about 6.6 percent, and the Dow Jones industrial average has slipped 5 percent.
Yet as poorly as these indexes fared, many of the worst-performing stocks over the past two days have been the biggest holdings of the high-profile activist hedge fund set. Most of the big-name activists were already in the red for the year. This will sink them into a deeper hole at the year’s halfway mark.
Why are the activist stocks sinking more than the broad stock market? Several reasons.
For one thing, this group of flamboyant investors ultimately runs long-only funds that specialize in scooping up lousy companies whose stocks many other investors are shunning. During the best of times, they are known as event-driven funds. They rely on a catalyst — usually themselves — to trigger an event that would most likely drive up the stocks of the underperforming or bloated companies.
However, during bad times these managers are more vulnerable to the overall market’s declines when their catalysts are not working (or there are no catalysts). Most of the activists also run very concentrated portfolios, so declines among their largest holdings often have outsize negative impacts on their portfolios. For example, the three largest positions of New York–based Corvex Management accounted for more than half of the hedge fund firm’s disclosed U.S. long assets at the end of the first quarter. And all three of these stocks have tumbled much more than the broad market.
Shares of Yum! Brands, Corvex’s largest position, are down nearly 8 percent over the past two days. This stock alone accounted for nearly 30 percent of the hedge fund firm’s disclosed U.S. long assets. Last year Corvex founder Keith Meister was named to the board of the company, which operates the Taco Bell, Pizza Hut and KFC restaurant chains. (Earlier this month New York–based Soroban Capital Partners — which always likes to remind people it is not an activist firm — disclosed it nearly quadrupled its stake in Yum! Brands to more than 20.9 million shares, or 5.1 percent of the total shares.)
Shares of Signet Jewelers, Corvex’s second-largest position at the end of the first quarter, are down 9 percent over the past two days. About one month ago Corvex boosted its stake to 8.3 percent.
Its third-largest holding is in the Williams Cos., which last week likely found its hopes of being acquired by Energy Transfer Equity dashed when a court ruled the deal does not have to proceed. As a result, the stock has fallen more than 8 percent, including about 6 percent on Monday alone.
Meanwhile, Valeant Pharmaceuticals International continues to spell trouble for a number of activists, chief among them William Ackman’s Pershing Square Capital Management. Valeant’s shares are down nearly 15 percent in the past two days alone, dropping below $19 apiece. New York–based Pershing Square is the second-largest shareholder of the drugmaker, although the stock is its sixth-largest holding. (Valeant is also the ninth-largest holding of San Francisco–based ValueAct Capital; it was one of the firm’s top two holdings before the stock collapsed over the past year.)
Shares of Canadian Pacific Railway, Pershing Square’s second-largest holding, are down 7.6 percent over the past two days.
Sachem Head Capital Management’s largest holdings have also taking a beating over the past two days. The New York firm is headed by Ackman protégé Scott Ferguson.
For example, Autodesk was off more than 7 percent on Monday alone and nearly 15 percent over the two-day period. It accounted for nearly 30 percent of Sachem Head’s 11-stock U.S. portfolio.
In March, Autodesk, a maker of 3-D design software, named three new directors to its board under a settlement reached with Sachem Head and sometime-activist firm Eminence Capital, also based in New York. One of the three directors will be Ferguson. Software maker CDK Global, Sachem Head’s second-largest long holding — accounting for about 20 percent of assets — fell by 5.6 percent, more or less in line with the market’s decline.
The Bank of New York Mellon, the largest holding of Richard (Mick) McGuire III’s Marcato Capital Management, is down 13 percent over the past two days. Shares of the financial services giant alone accounted for virtually half of the San Francisco hedge fund firm’s U.S. long assets at the end of the first quarter.
Bank of New York is also the fifth-largest holding of New York–based Trian Fund Management, which actually holds a much larger position in the stock than Marcato. Trian, led by Nelson Peltz, held only nine disclosed positions at the end of the first quarter.
Trian, however, has not been hurt as much as other activist hedge fund firms. It is one of the only activist managers in positive territory this year — it was up more than 4 percent through June 17 — and its largest holding, General Electric, is down less than 6 percent over the two-day period. The industrial giant’s stock accounted for nearly one quarter of Trian’s U.S. assets at the end of the first quarter.
Food wholesaler Sysco Corp., Trian’s second-largest holding, is off only 1 percent.
One widely followed activist stock, however, is actually up over the past two days. Shares of Rolls-Royce, the supplier of aircraft engines to airplane makers, is up about 1.2 percent over the past two days. ValueAct is the largest shareholder. Earlier this year Bradley Singer, chief operating officer at the San Francisco activist firm, was named a director to the company.
