Hedge funds boost P&G holdings to over 4%

• Hedge funds see opportunity in activist investor's push for turnaround
• Hedge fund manager Ackman owns just 1%, but gains support from other funds
• At least 68 funds bought P&G shares since July, pushing holdings to 4.4%

Six months after hedge fund manager Bill Ackman purchased a $2 billion stake in Procter & Gamble, the lineup of major investors at the consumer products giant has taken a subtle, but noteworthy shift.

Hedge funds such as Ackman's Pershing Square Capital Management now own 4.4% of institutional shares, double their holdings from June 30. While their overall share of the company is still small, they could be an influential voting bloc for changes if current turnaround efforts falter.

"These guys are lining up and making their bets," said Pete Sorrentino, a portfolio manager with Huntington Asset Advisors in Norwood, Ohio.

Ackman caught worldwide attention on July 12 with news he had purchased a 1% stake in P&G. The purchase signaled Ackman's intention to take an activist role in pushing for changes to boost shareholder return.

A Cincinnati Enquirer analysis of Bloomberg data and filings with the Securities and Exchange Commission shows that at least 68 hedge funds purchased P&G stock after Ackman's initial buy.

Together, they accounted for one-fourth of the 75 million shares purchased by institutional investors from July to September, according to an analysis of Bloomberg data. Their total ownership is now more than those of other individual groups of investors such as insurance companies and pension funds.

Hedge funds are known for making aggressive, sometimes risky investments for short-term gains. In contrast, investment advisers make up the largest investor category by far. At P&G, they include major financial firms Vanguard Group, State Street Corp. and BlackRock Institutional Trust. All categories of institutional investors own 63% of P&G shares; the rest are owned by individuals.

Recently trading above $70, shares of P&G are up nearly 15% since Ackman's involvement became public. Shares closed Friday at $69.93.

Hedge fund investors "know their power is in numbers," said James Early, senior analyst with investment research company The Motley Fool. "With just a little over 1% of the company, Bill Ackman knows he can't do much in terms of a proxy fight. But his bid was a spotlight, and he's depending on the bandwagon effect."

Analysts say the moves intensify pressure on CEO Bob McDonald and the board of directors to improve performance against competitors such as Colgate-Palmolive and Unilever.

"Bob's under a lot more pressure," said Leon Loewenstine, managing director at Riverpoint Capital Management. "He's still in control, he's got the ball, and he's running with it. But he's got a lot of people breathing down his neck, and he can't afford mistakes."

P&G officials said the company "welcomed investors" to purchase shares, but declined further comment.

Ackman did not comment for this story.

Bold moves, big bets

Procter & Gamble's investor drama began in July after Ackman received approval from the Federal Trade Commission to acquire a large stake with the intention of advocating unspecified changes.

Investors found the overture stunning.

"This is not a typical hedge fund play," said Matt McCormick, a portfolio manager for Bahl & Gaynor. "They usually target somebody they can push around a little more," such as smaller, easier-to-sway public companies, McCormick said.

The world's largest consumer products company, P&G also is one of the Cincinnati region's oldest and most respected employers. In terms of sales and shareholder value, it's worth more than all but 11 other corporations on the S&P 500.

Locally, it's likely the region's most widely held stock.

"Ten years ago, you would have never expected this kind of thing to happen at P&G," said Early of The Motley Fool. "Everyone thought they were immune to something like this. Clearly, that's no longer the case."

The move by Ackman -- who has advocated cost-cutting, divestitures and management changes at other firms -- came after a recent string of earnings disappointments on top of slow growth that had kept P&G's stock in neutral for years.

Since his investment, Ackman met with P&G management, delivering a 75-page list of complaints about the company's performance under McDonald, TheWall Street Journal reported.

Since then, Ackman has continued to boost his stake, and P&G shares have climbed as other investors have bought and sold.

During the September quarter, Ackman's Pershing Square Capital Management became P&G's 10th largest investor by acquiring 6 million shares for a total of 27.9 million.

Meanwhile, other hedge funds added 19.8 million shares. Among the largest: Scout Capital Management of New York, which bought 6.7 million shares. It previously owned no P&G stock; now, P&G shares make up almost 11% of Scout's holdings.

During the same quarter, 80 hedge funds sold 4.8 million shares. Twelve hedge funds kept their P&G holdings unchanged.

Common ground, similar trades

Several hedge funds making P&G purchases have followed Ackman into previous investments.

Among them are Citadel Advisors of Chicago, D.E. Shaw of New York and Renaissance Technologies of New York, which have purchased a combined 7.1 million shares in P&G since July.

They had followed Ackman into acquisitions of J.C. Penney. Ackman has owned more than 16% of that retailer since October 2010. Unlike Ackman, all three hedge funds have since pared their stakes or sold out entirely at JCP.

Citadel and D.E. Shaw also boosted their own shares at Fortune Brands (now Beam) after Ackman took a commanding stake and advocated big changes at the Deerfield, Ill.-based maker of Jim Beam bourbon. They also cut back their stake after the company spun off its Moen faucets and Master Lock brands into a separate company and sold its Titleist golf ball business.

Representatives from Citadel, D.E. Shaw and Renaissance Technologies did not respond to requests for comment.

Analysts say it isn't unusual for hedge funds to trade in a stock that has the attention of a major investor.

"Ackman's the Pied Piper," said McCormick of Bahl & Gaynor. "If he's producing results elsewhere and the stock is moving up, that's all some need to jump in with both feet."

McCormick noted the arrival of more hedge fund investors is a double-edged sword. The investors could win Ackman more influence over P&G as he advocates changes to boost the stock, such as cost-cutting or divestitures.

But more shares owned by hedge funds also could mean more volatility. If Ackman doesn't get his way or the company's ongoing turnaround plan appears to stall, hedge fund investors could grow impatient, and a large sell-off could ensue.

Riverpoint Capital's Loewenstine said the hedge funds' involvement could be a good thing for P&G and its shareholders, as management is forced to step up its game.

"It provides a little spark to get management focused on changes that need to take place and on growth," he said.

Loewenstine said the big danger from the added hedge fund pressure is that management could become "short-sighted" trying to produce strong quarterly results and take its eyes off long-term strategy.

Watching quietly, taking action

P&G isn't commenting directly on the recent investor moves. But it hasn't sat still.

The company says it's making faster-than-expected progress on a job-cutting program announced last spring. The company's board of directors has issued statements affirming support of chief executive McDonald and his turnaround strategy.

Last month, P&G announced it's increasing its share repurchase program and deepening cuts to non-manufacturing personnel. The job cuts will be in addition to a 10% reduction already underway well before Ackman's advances on the company. That move is expected to slash 5,700 non-factory jobs by the end of P&G's fiscal year in June.

The company also has delivered better-than-expected results in its last two quarters.

In the quarter ending Sept. 30, P&G posted $3.13 billion in profits, or $1.06 per share. The performance blew past analyst estimates of 96 cents per share. The showing sent P&G shares to $70.99, the highest level since 2008.

Analysts interpret the company's actions as proactive steps aimed at reassuring investors it is doing everything it can to maximize their return.

"P&G has been around forever, and many of its shareholders have formed a surprisingly loyal ecosystem," Early said. "They're not going to dump this company at the drop of a hat. Most of them are very patient."

Still, he noted, any misstep in coming quarters by P&G could give Ackman a more interested audience, especially from the newest members of the company's investor pool.

"Ackman's case is harder now, but his pressure is still good and viewed as beneficial among the investors that have been lukewarm," Early said.