Ackman Stands by Citigroup; Investors Restless

Chidem Kurdas

This has not been a good year for Bill Ackman’s Pershing Square. The main fund lost around 15% as of the end of September. In 2010, by contrast, the return was good.

Some funds of funds that were perhaps attracted by last year’s performance and put money into Pershing Square as an alpha-generating event-driven strategy talk about moving elsewhere There have been withdrawals, though recent returns are better.

One reason – but not the only reason – for the loss is a position in Citigroup, which fell almost 40% in the past 12 months. Mr. Ackman argues that the share price already reflects the risk from the European debt crisis and the bank’s exposure to Greece, Portugal, Italy and other countries with shaky credit is very small relative to its book value.

He expects a resolution of the crisis will bring substantial gain to the stock.  Indeed, today’s coordinated action by central banks lifted financial stocks as well as the broad market. Yet the industry as a whole faces headwinds.

In addition he points out that Citi is on track to return capital to shareholders in 2012 and that should be another catalyst for appreciation.

Citi is cheap and Mr. Ackman’s reasoning sounds solid.  Earlier this year he added to his Citi stake in a contrarian move while others sold financial stocks.

Event-driven strategies typically take time to play out, so short-term volatility is not the right measure to consider in assessing the investment. But not all investors can be patient. To paraphrase a quote attributed to the economist John Maynard Keynes, the market can remain scared much longer than an investor can remain solvent.

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