Pershing Square Holdings 04 March 2022
Disclosure – Independent Investment Research
This is independent research issued by Kepler Partners LLP. The analyst who has prepared this research is not aware of Kepler Partners LLP having a relationship with the company covered in this research report and/or a conflict of interest which is likely to impair the objectivity of the research and this report should accordingly be viewed as independent.
Pershing Square Holdings (LON:PSH) is a closed-ended vehicle that is the flagship fund of Bill Ackman’s Pershing Square Capital Management. Currently, PSH has net assets of £7.4bn and trades at a wide discount . Pershing Square is known as a ‘hedge fund’ or ‘activist’ manager, however, it is fairer to refer to Bill as a fundamental value investor. Occasionally, hedging may be used, notably to protect from significant selloffs as opposed to creating a low volatility return stream.
PSH’s portfolio is extremely concentrated, with approximately 8-12 core holdings at one time. The disclosure on holdings is weak however, and as at 31/12/2021, PSH had 11 long positions in addition to some further hedging. Pershing Square’s strategy is to acquire smaller pieces of ‘superb’ businesses over which it can have significant influence, rather than controlling interests in lower-quality businesses.
During periods of perceived risk, Pershing Square has employed hedges with the aim of protecting capital. The 2008 Financial Crisis and the onset of the COVID-19 pandemic in 2020 are examples where substantial gains were generated. Most recently, in January 2022, Pershing Square crystallised significant gains in the fund’s interest rate hedges, with the proceeds opportunistically reinvested into Netflix shares.
As highlighted in Performance, the combined annual return of the strategy from 01/01/2004 to 25/02/2022 is 17.4% per annum, versus the S&P 500’s annualised return of 10.6% per annum. PSH’s performance track record has been significantly improved by three consecutive strong years of growth between 2019 and 2021. However, as discussed in Discount, poor performance between 2015 and 2018 inclusive is a key reason for the shares trading on an extremely wide discount.
2021 was another strong year of performance for PSH. Of the 26.9% gains made during the year, the largest contributors to return were positions in Lowe’s and Universal Music Group, with Interest Rate Swaptions in third place, as discussed in Portfolio.
The years from 2015 to 2018 were a challenging period for the manager. Demand for PSH’s shares trailed during this period and resulted in a very wide discount which at times breached the 30% mark. The current discount has widened and is now back at around 30%. We suspect that poor disclosure within the underlying portfolio, with only weekly NAV estimates and high fees, are key areas that make it difficult to see PSH achieving a dramatic re-rating in the immediate term. Nonetheless, when reviewed on its fundamentals, PSH offers a highly distinctive strategy that has compounded at an attractive rate and could complement a diversified US equity portfolio or portfolio of funds.
With those who have patience and tolerance for the risk presented by a highly concentrated portfolio, there are relatively few candidates in the investment trust universe that are available at a discount anywhere near the 30% level that PSH currently trades at. We highlight that further share buybacks will be accretive to the NAV at such levels.
- Wide discount to NAV results in highly accretive future buybacks
- Large insider ownership, which despite the high fees results in a motivated team seeking to generate strong returns
- Highly regarded manager, who has delivered a distinctive return profile on a historic means
- Portfolio disclosure is poor, and fees are high
- Highly concentrated portfolio means returns can be significantly impacted by one holding
- Structural gearing results in higher financial risk and NAV volatility