Ackman v. Icahn: Who’s the Better Investor?

January 31, 2013   Stephen Taub

For all their acrimonious exchanges and legal skirmishes, the hedge fund gurus appear closer in investment style and focus than they may care to admit.

   
   
   Phone foes: Carl Icahn (top) and Bill Ackman
 Photo credit: (Bloomberg)
In one corner was Carl Icahn, the iconic grizzly bear of hedge funds who, at 76, still instills fear in boardrooms ever since he shot to prominence in the 1980s as the U.S.'s foremost corporate raider. In the opposite corner was 46-year-old William Ackman, sporting his trademark head of slick white hair and appearing cool and collected.

Ackman, head of Pershing Square Capital Management, was all polish, his delivery measured and even-toned. Icahn's rants by contrast were long-winded riffs bordering on stream of consciousness reflections laced with profanity. If the New York-born Jew hailed from the South, his manner of speech would be called "down home."

For about an hour, the two activists - Icahn mostly - sparred and jabbed verbally, mesmerizing CNBC viewers with Wall Street's version of reality TV. Yet, despite their apparent differences, Icahn and Ackman share not a few common attributes as hedge fund activists.

In some ways, Ackman seems like a younger version of Icahn, given their investment styles and focus. Both spend the bulk of their time targeting activist situations, and on occasion ginning up publicity where they see fit. Unlike most hedge fund managers, both are media savvy in their opportunism.

They both prefer to own a very small portfolio of stocks. For example, last year Icahn owned long investments in 16 or 17 different companies, while Ackman owned nine longs, according to regulatory filings. This does not include shorts, such as Herbalife, which may not show up in regulatory filings for the fourth quarter.

Both appear more comfortable investing in brand name companies with high visibility. Ackman's third quarter holdings included J.C. Penney, Burger King and Procter & Gamble. Icahn owned shares of Navistar, Oshkosh, Take-Two Interactive and Hain Celestial.

Like Icahn and other activists, Ackman will frequently agitate, badger or sometimes bully his target into making significant changes to its business - usually calling for the sale of key assets or an outright sale of the company. In that respect, they're no different from other investors who seek some quick return from, say, a big one-time dividend payment to shareholders.

Perhaps the biggest difference is that many of Icahn's most successful investments have been in biotechnology, a sector that Ackman has mostly avoided. Icahn's spotting of drug maker ImClone Systems was particularly successful.

Asked for comments, Icahn disagreed with these comparisons. He says when he and his team take control of companies, they have little to do with day-to-day management or micro decisions, suggesting that his nemesis tends to play that role. Icahn cites an investment he made in Las Vegas hotel and casino Stratosphere in the past decade, where he quadrupled his $300 million investment in five years. He also combined a cluster of oil companies that he bought out of bankruptcy from 2000 to 2005 and scored a five times return when he sold them to Sandridge Energy for $1.5 billion.

"We do what we are good at - financial structuring and being sure the numbers are coming in properly," Icahn maintains. "If not, we find out why. And if we are not satisfied we bring in a new CEO. We never become a second CEO." Another dig at Ackman.

Icahn, who controls Icahn Enterprises, a $6 billion-market cap, publicly traded company housing most of his investments, also questions Ackman's penchant for taking very large stakes in companies - as Pershing Square has done with J.C. Penney or with Target several years ago. He says it makes Ackman vulnerable if his firm faced a rash of redemptions: "We would not concentrate as much capital as he does unless you have enough permanent capital to back it up." (Ackman did not respond to requests for comment.)

Ultimately, investors really care only about one thing: returns. By that measure, Ackman and Icahn are pretty far apart, according to our analysis covering eight years starting 2005. That was the year Ackman launched Pershing Square International (Pershing Square LP was established the prior year) and it was the first full year of operation for Icahn Partners. (Icahn closed down his hedge fund to outside investors in the middle of 2011. Nonetheless, we include returns for the past two years).

 

From the analysis, Ackman clearly delivered better returns than Icahn. His average annual return is slightly less than 18 percent, versus 12.75 percent for Icahn. In dollar terms, for instance, if you invested $100 with each of them on January 1, 2005, you would have $342 if you gave it to Ackman or $223 if you sent it to Icahn.

One of the major reasons for the difference is that Icahn suffered one big loss year - he was down more than 35 percent in 2008. Ackman had two losing years, but both were of lesser magnitude. Although Icahn outperformed Ackman for the past two years, Ackman outperformed Icahn in five of the six prior years.

The returns numbers cited here do not include Icahn's huge gains from Stratosphere and the energy companies he sold to Sandridge. Ackman's numbers also do not reflect his astounding $1.8 billion loss in Pershing Square IV, a separate hedge fund he created several years ago to invest solely in Target, when its stock fell 90 percent in 2009.

If these investments were included in the main funds of the two investors, their returns would be much closer to each other, something Icahn was quick to point out.



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