Bill Ackman sure attracts more than his fair share of attention. He feuds and makes up with other big-time investors, donates to significant urban initiatives, and tries to take down companies that he thinks screw over low-income minorities (Herbalife, of course).

As an investor, Ackman makes headlines as often as any other activist. Shedding a tear at an annual meeting (Target), partnering with a CEO to target a competitor (Allergan), or loudly shorting a bastion of the mortgage finance industry before the housing bubble burst (MBIA), few would call him a quiet shareholder.

Yet, like other significant activist investors Carl Icahn and Nelson Peltz, we have not seen an explanation of Ackman’s investment strategy and approach. Based on a review of his over 50 activist projects, from the always-helpful SharkRepellent data, we discern a specific method. Overall, his role as a pure portfolio manager, not a business executive, leads to financial and strategic moves, rather than operational ones, with an emphasis on real estate.

Started small, just like any other activist

Many others profiled Ackman’s personal history, so we need not do that. He has 51 activist situations since 1995, or roughly 2-3 per year.

We note Ackman started small, both in terms of his portfolio and its names, with his first fund, Gotham Partners. His first situation, an effort to restructure Rockefeller Center, dates to 1995 and involved an investment of less than $10 million. For his first 15 years, covering 40 different situations, the average market cap of his activist names was about $600 million, if we exclude McDonalds (2005) and Target (2007).

As an activist, Ackman really took off about five years ago, a few years after closing Gotham Partners and forming Pershing Square. The 15 projects since 2011 have an average market cap of $30 billion. These include bigger, complicated ones, like Air Products, P&G, Allergan, Zoetis, and Mondelez.

Pure portfolio manager

Ackman doesn’t manage companies, he manages investments. He maintains a highly concentrated portfolio, with at most 15 names, and typically around 10. This concentration, along with the need to invest $10 billion or more, means that he takes larger stakes in increasingly bigger companies. All but three of his activist investments have included a Form 13D filing.

In picking companies, Ackman has a particular focus on real estate. This makes sense, given his family history and early career. His activist companies include dozens of real estate managers, REITs, and real estate finance companies. Other segments, like retailing (JC Penney, Target) or restaurants (McDonalds, Wendy’s), usually entail restructuring company real estate. He moved beyond real estate only in recent years, as he needed to invest larger amounts in bigger names.

As a portfolio manager, Ackman gets creative:

1. ❖His hedge fund thinking includes notable shorts, like MBIA, Fannie Mae, Freddie Mac, and of course Herbalife; we don’t consider these activist investments, but they help his clients make money
   

2. ❖He likes bankruptcies (General Growth)
   

3. ❖He worked with Valeant on the innovative activist strategy at Allergan, which also worked well for Ackman investors, not so much for Valeant
   

4. ❖In 2014 he created a novel public company vehicle for attracting investor capital, but these shares haven’t done quite as well.
   

Activist approach

Ackman promotes strategic, financial and executive improvements. He’ll push to restructure a balance sheet, sell a division or the entire company, or change CEOs. He has less interest in operational detail.

Ackman rarely pursues a proxy contest, although he threatens them frequently. He solicited proxies at only four companies, most recently Allergan, and at Target before that. He usually settles for some BoD seats, sometimes for himself, and a restructuring or executive change.

Ackman happily works with other shareholders. He will follow other activists into existing situations (Mondelez), and partner with former Pershing Square analysts (Zoetis). Real estate guys do this often.

Ackman sure knows how to get publicity for his causes and his investments. He backs it up with a sound portfolio management approach and superior results.