The heightened role that passive investment plays in the stock market appears to be hurting a prominent hedge fund investor — Bill Ackman, CEO of Pershing Square Capital.
The impact of passive on the market is a main theme of Ackman’s annual investor update, which he unveiled on Tuesday. “Index inclusion [is] becoming more important,” said Ackman. Passive funds represent more than half, 54 percent, of all mutual fund and ETF assets, he noted, quoting Goldman Sachs Research. That is similar to estimates by Michael Green, the so-called Cassandra of passive investments who has been warning about the dangers of its outsized influence. Several prominent investors have begun to echo those concerns.
Now it’s Ackman’s turn. A number of Pershing Square’s dozen stock holdings aren’t in the index, which helps put his hedge fund’s performance in perspective. Last year, the net gain of 10.2 percent for Ackman’s Pershing Square Holdings, his publicly traded hedge fund, was less than half of the 25 percent gain for the S&P 500.
The 2024 showing also dragged down the vehicle’s annualized performance below the S&P 500, according to the investor presentation. Pershing Square has far outdone the S&P 500 since it was launched in 2004, but most of those gains were in the earlier years — before the passive trend took hold. Ackman’s publicly traded fund, which was launched on Dec. 31, 2012, has an annualized net performance of 13.5 percent, compared with 14.8 percent for the S&P 500.
Along the passive theme, Alphabet, one of the so-called Magnificent Seven stocks that dominate the index, was Ackman’s biggest winner for the year, contributing 3.9 percentage points of net gains.
Other winners, Chipotle Mexican Grill and Hilton Worldwide, are also included in the index. In contrast, several of Pershing Square’s biggest losers last year —Universal Music Group, Restaurant Brands, and Howard Hughes International —are not included in the index.
Notably, Pershing Square’s latest investment, Uber Technologies, which Ackman announced in early February, is included in the S&P 500. Ackman said that in January his fund took a big stake in the ride-hailing company, which he had owned through his family office before it went public.
Instead of critiquing the passive trend, Ackman hopes to capitalize on it. “High levels of passive flows increase the importance of index inclusion,” Ackman said, adding that “Pershing Square is actively engaged with some of its portfolio companies to help evaluate index inclusion potential.”
But several of the companies in the Pershing Square portfolio are not headquartered in the U.S., including Universal Music and Restaurant Brands, which makes inclusion impossible at the moment. Last year those two stocks contributed 1.5 percentage points and 1.4 percentage points of net loss respectively.
Ackman said his portfolio companies are “taking steps” to gain entrance to the S&P500, citing Brookfield Asset Management’s adoption of a simplified corporate structure, a move of the headquarters to New York, and its switch to U.S. filing standards. The effort seems to have helped: Brookfield was another of Pershing Square’s winners last year, contributing 3 percentage points to the net gain.
The hedge fund manager also noted that market concentration is increasing, and a handful of megacap technology stocks — like Alphabet — have driven the index’s outsized returns over the past two years. As a result, while the S&P 500 appreciated by 25 percent, including reinvestment of dividends, the average stock was up just 13 percent, Ackman noted in the presentation.
He added that the ten largest companies in the S&P 500 accounted for nearly 40 percent of total market capitalization and nearly 60 percent of total return last year, according to Goldman. The investment bank said the 10 largest companies trade at 27 times earnings, compared with 20 times for the other 490 companies.
Inclusion in the S&P 500 doesn’t guarantee success, however. Ackman’s biggest detractor in 2024 was Nike, an S&P 500 stock that was a new Pershing Square investment during the year. It was also the hedge fund’s worst performer, contributing a net 1.9 percentage points of loss.
Nike’s stock collapsed on poor earnings shortly after Pershing Square bought the stock. Ackman disclosed that earlier this year the hedge fund converted its Nike common equity position to deep in-the-money call options. He said that allowed the firm to “preserve the upside potential while unlocking capital to make new investments.” Ackman now calls Nike a “turnaround” story.
