That first bet
The billionaire investor anticipated governments would be forced to shut large swaths of their economies in order to curb the spread of coronavirus, leaving many indebted companies exposed. When that swiftly proved accurate, the value of the insurance ballooned and Pershing Square exited the trade in mid-March, pocketing $2.6bn in profits after having only paid $27m in premiums.
Mr Ackman chose to plough the winnings back into equities, adding to several of Pershing Square’s existing stakes and acquiring new positions that set the company up to profit from a stock market rally.
The new bet
Pershing Square placed its new bet against corporate credit on the day that Pfizer and BioNTech released positive trial data on their Covid-19 vaccine, causing markets to take a sudden bullish turn.
Unbelievably PSH still trades at a 30% discount to NAV, I find it hard to understand why!? I started buying just before its FSTE 100 listing and have been adding ever since.
Maybe its just that US-based investors dismiss the FTSE 100 as too stagnant and fail to see the hidden value in Pershing Square (after all, its investments are essentially all strong US companies), maybe investors don’t like the fairly concentrated portfolio, or maybe just that its priced in Sterling…? But that said, just imagine if you offered US investors shares in Lowes, Chipotle, Domino’s, Hilton etc on the open market with a 30% discount, they’d fly!
If that wasn’t reason enough, you also get some astute management to hedge against risk (see Bill Ackman’s 2020 corporate default play) and you also get the potential bonus from fund’s tie-in with the Pershing Square SPAC, essentially risk-free.
It even pays a (small) dividend and there’s no stamp duty to pay.
Am I missing something here? Every time I add more (I try to every opportunity funds permit) I almost feel like this is too good to be true and I must be missing something ominous that other puts other investors off!
I think its slightly criminal tbh because US investors see the word “FTSE” and immediately lose interest. I think its a mixture of a lot of things, many of which you listed. Also possibly his previously bad performance so its discounting the risk of that happening again. But a) he’s openly said he isn’t interested in these big short positions again and b) I think it should be clear to anyone he is a supremely talented investor, proved time and time again from last year to even buying Dominos in that dip. He said in the interview he likes that they aren’t reliant on any of the delivery names and I hadn’t even thought of that but its true. Totally trust him to outperform long term and with the massive press of what will probably be a Bloomberg merger with PSTH and I think the discount will narrow substantially. They can also buyback stock since they can make money on the arbitrage.
Agreed, the markets do strange things with ‘celebrity’ investors. Even now, whenever Bill Ackman is interviewed, the interviewer often can’t resist dragging up Herbalife again. But, to his credit, Ackman always keeps his composure and admits his mistake. It’s hard to put a figure on it, but for context it was reportedly a loss of $1billion with Herbalife, but the credit market insurance decision early in 2020 made PSH $2.6billion alone!
Interestingly, when doing a little research around their recent Domino’s move, I found an article dated July 2019 (I’ll link it below if I can). They advised a strong ‘Sell’ on PSH at the time after PSH increased their gearing to invest more. Now that certainly did prove to be a costly mistake! At over 80% up just over a year later, with far fewer shares in issue and still trading with a 30% discount to NAV.
What I like about Bill Ackman is he remains level-headed and invests, as much as possible, in value companies that demonstrate safe reliable cash flows. Sure, he’s made mistakes and no doubt will again (don’t we all?), but his pedigree gives me some confidence in the future.
Why did they list on the FTSE? Seems like an odd choice to me, no?
Elephant in the room is the hedge fund fee structure (1.5/16) for a holding company with liquid securities
Thats not a small fee and definitely something to bear in mind. However, from the Annual Report itself:
The problem with this approach is that investors can only replicate changes in our portfolio when we disclose them. By the date on which we are required or choose to disclose a new position, its trading price is typically well above PSH’s average cost of acquisition. As a result, investors who attempt to track and replicate the portfolio will likely have a substantially higher cost basis in our investments, and therefore will earn lower returns.
More significantly, there are limited disclosure requirements for the various hedging transactions we have historically executed. For example, had PSH Replicators simply purchased and held PSH’s portfolio as of the beginning of last year until the end of the year and paid no fees, they would have realized a 15.4% return.10 Had they purchased PSH shares instead, they would have earned a 70.2% NAV total return and an 84.8% TSR as the opportunity to realize returns from the credit hedge and reinvest the proceeds in our existing holdings would not have been in the PSH Replicator’s portfolio.
Net of fees, long-term PSH investors have earned substantially superior returns than that of the theoretical PSH Replicator. For the above reasons, we believe that PSH is an attractive acquisition at its NAV, and an even better investment when it is trading at a discount to NAV.
I have to say though it is probably the simplest, and possibly most valuable way to play the PSTH-UMG deal, given most brokers will have issues or delayed communication regarding what people are actually entitled to. I’ve not bought more PSTH for that exact reason but am considering buying PSH. As always though this fund is only worth it if you truly believe in BA’s execution. If not there’s really no point.
Immediately seems like bad news for UMG but good news for TME competitors.
Transaction has been completed, all PSH holder now have 7.1% of UMG in their portfolio with the option to buy about 2.9% in September.
Minor point but 7.1% is held by PSH + affiliates, and so PSH ownership will be slightly lower than this. Would be interesting to see market reaction (if any) in the morning.
As I hold some PSH I’m hoping for a bounce in the share price tomorrow. Especially as it currently trades at over a 25% discount to NAV.
But as it was already speculated that PSH would buy the UMG shares maybe that was already priced in. I’ll still be hoping for a bounce though!
My conviction in BA seems to lower by the day. The words watering weeds comes to mind…