Star fund manager Terry Smith has attacked Bill Ackman as a ‘shockingly bad’ activist after resisting the US hedge fund manager’s attempts to secure board seats from Automatic Data Processing (ADP.O), the payroll processing giant that features in the Fundsmith Equity fund.
Smith delivered the broadside against the Pershing Square chief executive as he criticised shareholder activists for their short-termism, speaking at a seminar organised by Maltese bank MeDirect.
He criticised the ‘activist playbook’ where activists buy shares, ‘shout at the company in public, get them to do things – split the company, spin things out, take on leverage, pay a special dividend, buy back shares – then the activist sells their stake and goes away’.
‘This leaves us with two businesses where we had one before, a lot of investment banking fees, higher leverage, and a situation we have inherited that is less satisfactory than it was before.’
‘I’m interested in companies really growing in value,’ he said. ‘The thing that worries me is not what happens in share price terms but what happens in the company, because in the end we own businesses and we want to own for a long time.’
Smith took aim at Ackman (pictured), who in 2017 lost his battle to gain three seats on the board of Automatic Data Processing, a longstanding holding in the £18.6 billion Fundsmith Equity fund. Smith was among the majority of ADP shareholders who voted against Pershing Square's candidates.
He said Ackman’s plan for ADP amounted to simply ‘cut costs quickly’ and that the manager was a ‘shockingly bad’ activist investor. ‘I don’t know what I would let him run but it wouldn’t be my money,’ he said.
Despite Ackman’s failure to shake up ADP’s boardroom, the manager, whose strategy is accessible to UK investors through the Pershing Square (PSHP) investment company, has continued to benefit, like Smith, from the strong performance of the shares, up 38% over the last 12 months.
The US hedge fund manager has however been cutting his stake, which stood at around 8% of the company’s shares at the height of his battle, and had fallen to less than 1% by the end of last year, according to Refinitiv data.
Pershing Square is the best performing London-listed, closed-end fund of the last 12 months, with the shares up 58%. That follows a number of punishing years for the manager, who suffered heavy losses on a major position in Canadian pharmaceutical company Valeant, now renamed Bausch Health (BHC.TO), and a bet against nutrition company Herbalife (HLF.N) that backfired.
Ackman responded by cutting back on his non-investment activities and focusing on the portfolio. Earlier this year Pershing Square started paying dividends but analysts are wary of its expenses with total annual charges including a performance fee and transaction costs amounting to 4.9%. Activist investment trust British Empire (BTEM) holds a small stake in the company and is pushing Ackman to do more to reduce its shares' yawning 26% discount to net asset value.
Smith said he wasn’t always opposed to shareholder activism, and pointed to Nelson Peltz of Trian Fund Management as a ‘pretty good’ operator, despite having opposed Peltz’s pressure on PepsiCo (PEP.O) to spin off its Frito-Lay snacks business.
‘Some activists are better than others,’ said Smith. ‘We don’t always agree with [Peltz] - he had a plan for PepsiCo that we didn’t agree with - but he’s still pretty good.’