| Year | Pershing Square | S&P 500 |
| 2013 | 9.6% | 32.4% |
| 2014 | 40.4% | 13.7% |
| 2015 | (20.5%) | 1.4% |
| 2016 | (13.5%) | 11.9% |
| 2017 | (4.0%) | 21.8% |
Although Pershing Square trounced the S&P 500 by approximately 27% in 2014, the remaining years aren't even close with the S&P 500 shellacking the hedge fund. In fact, while 2013 and 2014 are a wash if you compare the index to Pershing Square, 2015-2017 shows the S&P 500 gaining roughly 35% compared to Bill Ackman's investments losing 38%. It's a 73% difference in performance for those three years. Small sample size? Yes, but we're in a bull market and these are the times when investors make money.
I don't mean to single Pershing Square out, but Bill Ackman puts himself in this position by making frequent television appearances on high profile business networks such as CNBC. His dust up with activist investor Carl Icahn on CNBC's Fast Money over Herbalife (HLF) was all the rage in the business press over a year ago. Mr. Icahn was buying shares of Herbalife while Mr. Ackman took a significant short position, calling the company a pyramid-scheme. The big story here wasn't the overall success or failures of their portfolios, but the pissing match they created on national television.
In a recent CNBC Fast Money segment, money manager Mario Gabelli of GAMCO Investors, defended Bill Ackman's poor performance stating that Ackman's company would be back after a rough patch. Gabelli also stated his own firm has 600 securities under management. That's closet indexing. Being the highest paid money manager on Wall Street, he has a vested interest to promote active management. These guys are thick as thieves.
In reality, when you're dealing with investments, the bottom line should always be performance. The majority of hedge funds have underperformed the market the past decade. Icahn Enterprises (IEP) may be an outlier only because it gained a whopping 154.83% in 2013. However, for the most part, the returns have been lackluster to negative for the past decade. If you put your money in Icahn Enterprises beginning in 2014, you're behind the eightball. According to multiple reports, hedge funds in total gained 8.5% in 2017 as opposed to 21.8% for the S&P 500, and that was the best performance year since 2013.
Anecdotally, in 2007 Warren Buffett bet one million dollars with asset managers Protégé Partners LLC that over a 10 year period, an index fund would outperform a basket of hedge funds, otherwise known as a fund of funds. Over the decade, the S&P 500 returned 7.1% compounded annually while Protégé Partners selections averaged 2.2%. Protégé Partners ponied up. Although the wager was for charity, you get my point. Mr. Buffett has long promoted the use of index funds for individual investors. In his 2013 annual Letter to Shareholders, he stated that he would allocate 90% of his fortune bestowed to his wife in S&P 500 index investments. That's a big time endorsement.
I expect more from the high costs associated with these well heeled money managers. Hedge Fund Research reports the average hedge fund management fee is 1.45% of assets. Pershing Square charges clients 1.5%. I'd rather be in an S&P 500 index fund such as the iShares Core S&P 500 ETF (IVV) which charges 0.04%. That's $4 for every $10,000 invested. SPDR S&P 500 ETF Trust (SPY) has an expense ratio 5 basis points higher than the lowest priced S&P 500 index trackers, but you're paying for liquidity and it's still much less expensive than an actively managed fund.
With the expense wars heating up between ETF providers, you can find ETFs with smaller expense ratios than iShares Core S&P 500 ETF. The SPDR Portfolio Total Market ETF (SPTM), which includes over 3,000 domestic equities, has an expense ratio of 0.03%. Many sources in the business press have reported about the ongoing ETF expense ratio reductions. Some are speculating that some index funds holding fees will drop to zero within the next few years to enable management firms such as Vanguard, Blackrock and State Street Global Investors to commandeer your assets.
Standing in the Shadows of Love
Damon Runyon once said: "The race is not always to the swift, nor the battle to the strong, but that's the way to bet.". That pearl of wisdom may have been true in an era before the proliferation of high frequency trading and computer algorithms, but now that we are in the age of artificial intelligence, the turtle, not the hare appears to be the smarter way to wager - at least in the long run. Don't take my word for it, just examine the statistics. Sabermetrics is not only confined to baseball. Big Data in the investing industry is current and prevalent. There are many excellent books up-to-date and available that prove this thesis.
In the mid 1970's, Charles Ellis wrote a research paper that later morphed into his pioneering passive investing book "Winning the Loser's Game". I read it years ago and recommend the most recent edition as a starting point. However, during the past six months there are two books I've read that are fresher in my memory. The first is "The Incredible Shrinking Alpha" by Larry Swedroe and Larry Berkin. It's like a pamphlet, but well worth the price of admission. The second is the 10th anniversary edition on John Bogle's "The Little Book of Common Sense Investing". If you are new to investing, they are eye openers.
Although the debate over active vs. passive investing rages on, it's passive indexing that trounces active managers once you remove fees and expenses from the equation. That is the overarching theme in the three books I have just recommended. This is especially true in a computerized stock market. Trust me, you're not faster than a bot. "Everyone is entitled to his own opinion, but not his own facts.". That old political chestnut by Daniel P. Moynihan was prescient in a time before being inundated by artificial intelligence from Google, Facebook, Amazon and Apple. Ego has no amigo in the investing world. Just follow the facts.