Bill Ackman has been on a roll for the past 15 months, but his main investment vehicle, Pershing Square Holdings, a European, closed-end fund with a market value of nearly $4 billion, is languishing at a 30%-plus discount to its net asset value.
This gives investors an inexpensive way to ride with Ackman, who runs a highly concentrated portfolio dominated by a half-dozen stocks: Chipotle Mexican Grill (CMG), Hilton Worldwide Holdings (HLT), Berkshire Hathaway (BRK. A), Lowe’s (LOW), Starbucks (SBUX), and Restaurant Brands International (QSR).
Pershing Square Holdings is traded on Euronext (ticker PSH NA) and lightly on the “pink sheets,” under the ticker PSHZF. The shares finished Thursday at $19.22, a 32% discount to the fund’s most recently disclosed net asset value of $28.35 on April 7. The asset value is published weekly on the firm’s website.
The discount on Thursday’s close may have been closer to 35%, given the appreciation in the fund’s holdings. The fund, whose net assets totaled $5.7 billion at the end of March, made up about 80% of the money run by Ackman’s Pershing Square Investment Management. (The net assets exceed the market value of the shares because of the discount.)
U.S. closed-end equity funds tend to trade at discount to net asset value, typically in the range of 10% to 20%. Pershing Square Holdings has traded at a wide discount to NAV in recent years, ending 2019 at a 29% discount, but the current discount is near a peak.
Ackman is a believer, personally holding 20% of the shares outstanding.
A bit of controversy
He can also be a polarizing figure and his emotional appearance on CNBC in March underscored that. Ackman warned that “hell is coming” and urged President Donald Trump to shut down the country to counter the spread of Covid-19.
He also generated headlines for his investment coup in paying $27 million for cheap credit-default swaps earlier this year that turned into $2.6 billion when markets cratered in March.
That gain substantially offset losses in his firm’s portfolios and enabled Pershing Square Holdings to produce a 5.8% return through April 7, against a 15% decline in the S&P 500. This came after a blockbuster 2019, when the fund gained 58.1%, handily topping the S&P 500’s 31.5% return.
The fund remains little known, no doubt because of its European listing. Barron’s, however, has written favorably on it, including an article last July.
Analyst Matt Hose, who follows European closed-end funds for Jefferies, has a Buy rating on the fund and wrote last month that Ackman’s “shrewdly judged protection of capital immediately following a +58% NAV year, will further enhance the fund’s investment case and aid the ultimate contraction of the discount.”
The fund has been buying back shares and it pays a 2% annual dividend. It repurchased $174 million of stock last year and has stepped up that pace in 2020, buying back more than $20 million a month in the first quarter. These buybacks enhance the net asset value.
Hasn’t always been this sweet
Ackman did have a widely publicized rough patch from 2015 to 2017, when the fund returned negative 43%, way behind the S&P 500’s 38% total return.
That performance soured many of his hedge fund clients who took money from the firm, leaving Ackman to focus on the closed-end fund. It also contributed to a widening of the discount on the closed-end fund, which stood at just 3% at the end of 2015.
Despite the big gains in the past 15 months, the fund’s share price is still about 20% below its original offering price of $25 in 2014, although the net asset value is higher.
So why does the fund trade at such a big discount to NAV?
Part of the reason is a hefty fee structure. The base management fee is 1.5% annually, with an incentive fee of 16% a year. With the fund above its high-water mark, it is earning that incentive fee. The rocky performance several years ago likely is a contributor to the discount.
Some investors engage in arbitrage of buying the fund and shorting its top holdings to play a potential narrowing in that discount. So far this year, that strategy has worked wonderfully.
While the discount has widened, the fund has substantially outperformed its big-equity holdings because of the hedge gain. There may be some unwinding by arbs of their position in the fund lately, dampening the share price.
As Ackman’s main investment vehicle, the fund is unlikely to liquidate or turn into an open-end fund that would trade at NAV. While Ackman, 53, charges a steep fee for a long-only fund with just 10 holdings, he deserves credit for being willing to buy back stock. Pershing Square earns no fee on repurchased shares.
Ackman has become more bullish on the stock market in recent weeks, writing in the Pershing Square Holdings recently issued annual report that he is “increasingly positive on equity and credit markets,” citing the “all-in” response by the Treasury and Federal Reserve.
The revenues and earnings for the majority of businesses over the next year or so will be extremely poor, and in some cases disastrous, but for companies with strong balance sheets, dominant market positions, and which do not need access to capital, the virus will likely only disrupt the next 12 to 24 months of cash flowsBill Ackman
Infusion of Capital
Ackman liquidated the credit default swaps and redeployed the money by adding to existing holdings in Berkshire, Hilton, and other stocks while re-establishing a 10% weighting in Starbucks.
Ackman wrote that he and his team are not distracted now that Pershing Square is “no longer actively raising capital” for its private hedge funds.
Without marketing or investor relations responsibilities, the investment team’s resources are now entirely dedicated to investment analysis, selection, monitoring, and portfolio management.Bill Ackman
Ackman, known for his activism, has been relatively quiet on that front and has turned into a buy-and-hold investor in what he views as best-in-class companies. He initiated the positions in Berkshire and Agilent Technologies (A) last year.