BOSTON (Reuters) - Billionaire investor William Ackman, whose portfolio has gained almost 50% this year, said his fund can keep delivering “high, long-term” returns, and he expects that a newly disclosed stake in Berkshire Hathaway Inc (BRKa.N) will help boost gains.
Ackman, writing in a letter to clients one day after announcing in a filing the purchase of roughly $700 million of Berkshire stock, said the conglomerate is misunderstood.
Berkshire is cheaper than it should be and has understated its near-term earnings, but future earnings can grow significantly, Ackman said.
“We believe that Berkshire’s share price is likely to increase substantially over the coming years,” Ackman wrote in the letter.
Berkshire, run by billionaire Warren Buffett, Ackman’s 88-year-old idol who is often called the world’s greatest investor, owns over 90 businesses from Geico auto insurance to Dairy Queen ice cream.
Ackman, whose $8 billion Pershing Square Capital Management ranks as one of the world’s most closely watched activist investment firms, surprised some investors and outsiders alike with the bet on Berkshire, which has a $500 billion market capitalization.
Ackman, 53, singled out Berkshire’s insurance business for praise and said it is able to invest a substantial majority of its insurance assets in publicly traded equities while its peers are limited mainly limited to investing in fixed-income securities.
“These structural competitive advantages of Berkshire’s insurance business are enduring and will likely further expand,” Ackman wrote, adding that Buffett should also be known as the “world’s greatest insurance company architect and CEO.”
The CEO of United Technologies’ (UTX.N), Gregory Hayes, who made headlines in June with plans to merge with Raytheon, was singled out for criticism. Pershing Square liquidated its holdings in June, and on Thursday Ackman said he had lost confidence in management and called the deal the “catalyst for our exit.”
While he could have tried to oust executives and board members - something he has done at companies ranging from Canadian Pacific to Chipotle - Ackman said it made more sense to just leave. “It was more productive to sell our stock at a small profit and focus our efforts on finding new opportunities,” he wrote.
Now that Pershing has gained 48.9% this year through Aug. 13, Ackman felt confident enough to say that there is plenty more money to be made through his brand of activism.
But Ackman said he will not necessarily be as public in pushing for changes as he has been in the past and that Berkshire will be a passive investment. Several Ackman investors said, with a laugh, that they don’t expect Ackman to call Buffett up with a list of suggestions on how to perform better.
One example where a soft touch has worked so far is Starbucks (SBUX.O), an investment Ackman announced late last year and which has been one of his biggest winners. Starbucks stock price has surged more than 50% this year.
Howard Hughes Corp (HHC.N), the developer of master planned communities whose board is chaired by Ackman, is going through a strategic review. Ackman said no decisions have been reached and a variety of options are being reviewed, ranging from “a sale of the company; a sale, joint venture or spin-off of a portion of the company’s assets; a recapitalization of the company; or changes in the corporate structure of the company.”
Reporting by Svea Herbst-Bayliss; Editing by Leslie Adler