In his latest June 2022 Semi-Annual Letter, Bill Ackman discusses the fund manager’s dilemma. Here’s an excerpt from the letter:
While our approach to investing capital is logical and straightforward and has a long-term outperformance record, it is the rare investment manager that can implement such a strategy. Many of our colleagues in the industry have told us that they would prefer to invest as we do with their own money, but that their investors’ demands effectively prohibit such an approach
While many investors in funds claim to be long term, they require short-term liquidity from their managers. When managers oversee funds that can be withdrawn on short notice, they generally have no choice but to manage for the short term.
Furthermore, most investors in funds are fiduciaries who are themselves held to short-term measurements of their own performance. So when the inevitable period of underperformance occurs due to broad-based market movements or otherwise, investors in funds redeem their capital, and their managers become forced sellers.
The inherently short-term nature of the investment management industry is a large contributor to stock (and bond) market volatility. As many funds suffered substantial drawdowns earlier this year, they sold stocks to raise capital to meet redemptions, and reduced market exposure as their risk appetites declined.
This pattern of reducing equity market exposure as stock markets decline occurs in every market disruption, but it is precisely the opposite of what long-term investors should do. It is axiomatic that the lower the price paid, the better one’s long-term returns.
Yet, in each crisis and/or market drawdown, fund managers sell and reduce exposures, rather than increase exposures at more favorable valuations. The inverse is also true. Investors in funds generally commit more capital when funds are generating strong absolute performance.
During the ebullient market which preceded this year’s decline, investors committed more capital to funds which put the money to work at higher valuations. Investments at higher valuations are destined to generate lower returns. Pershing Square Holdings’ closed-end fund structure and large insider ownership provide us with the ability to be a truly longterm investor in a world where the vast majority of fund managers are constrained to a shorter-term approach.
You can read the entire letter here:
Pershing Square Semi-Annual Letter – June 2022
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