Pershing Square

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​Pershing Square (PSHZF) is a closed end fund that gives you an opportunity to invest alongside Bill Ackman, one of the great hedge fund managers. I have followed him for years along with others like David Einhorn, David Tepper, Dan Loeb, Ray Dalio, and Monish Pabrai.  To invest in a hedge fund, you must be an accredited investor which means you must meet certain income and/or net worth requirements. In addition, the top performing funds can have minimum investments as high as $10 million.  You can invest in Pershing for the cost of a pizza.

What I like about Pershing:
 
1.  Excellent long-term track record. For the past 16 years, the compound annual return was 14.3% (after fees) vs 7.5% for the S&P 500.  Keep in mind, ~80% of mutual funds underperform the S&P and only ½% of fund mangers beat the S&P by more than 3 pts/year over a long period of time.

2.  By my estimation, the current holdings of Pershing are undervalued by around 20% after this recent sell-off.

3.  Pershing is currently selling at a 37% discount to Net Asset Value
         Net asset value as of 4/14/20: $30.21
         If NAV is 20% undervalued, it should be $37.76
         PSHZF price as of 4/21/20: $18.95
         Total discount 49.8%

4.  In an effort to reduce the large discount to NAV, they have been aggressively buying back their own stock.  Since May 2017, they have acquired $650M of its shares representing 17.7% of shares outstanding. 
 
5.  In 2019, they initiated a quarterly dividend of $0.40/share giving it a dividend yield of 2.1%

6.  Ackman owns 22% of the shares outstanding.  This puts him in alignment with you as an investor.  I like to see managers eat their own cooking.  Many hedge fund and mutual fund managers have a very small or no investment at all in the funds they manage.

7.  Pershing may take an activist approach depending on the situation.  This can provide a catalyst to close the gap between where shares of a company are trading and where they should trade. The level of activism can range between private conversations with management, a private letter, a public letter, or a public campaign to push for board seats and even management change.  There seems to be a negative feeling about most activist investors.  Normally when activists take on a company, both sides will push for their views and try to discredit the other.   Most people think of activists coming in and firing people, selling off pieces of the company, and loading it up with debt.  These actions can create big returns for investors, but this is not what I want from an activist.  I like to see activists actually help a company recognize its potential if it has been underperforming.  I also have no problem with an activist exposing a company that is overpaying its executives, wasting money on pet projects, owning too many private jets etc.  You can see why CEOs are not fans of activists.  Sometimes people forget it is the shareholders who own the company, not the executives.
 
      What I don’t like about Pershing:
 
1.  High fee structure: The fund charges 1.3%/16% which means 1.3% of assets plus 16% of profits.  Although this seems high, it is lower than the typical hedge fund which charges 2% & 20%.   This is how I look at it: Best case, I don’t expect the market to generate much more than 6% per year from current price levels.  If Pershing generates similar returns, the incentive fee would be 0.96% plus 1.3% or a total of 2.26%. Many people are paying a financial advisor around 1% of assets and the advisor is investing the money in mutual funds with the average mutual fund charging around 1.25% for a total of 2.25%.  I’m betting Ackman will outperform the average financial advisor over time.

2.  High profile short positions and large single company bets that have blown up in the past.  The two that really hurt performance in the 2015-2017 time frame was a large bet on Valeant Pharmaceuticals and a large short position in Herbalife.  Without these two blow ups, I estimate the 16-year track record would have been 16.1%/year instead of 14.3%.  A very impressive return compared to the 7.5% for the S&P 500. 
 
After this difficult period, Ackman made it clear he was going back to the approach that worked so well for him over the years.  Investing in undervalued high-quality companies.
 
After significant underperformance in 2015-2017, he did (0.7)% in 2018 when the S&P was (4.4)% followed by an amazing return of 58.1% in 2019 vs 31.5% for the S&P. 
 
Through March 2020, Pershing was up 3.3% and the S&P was down 19.6%.   
 
If you want to learn more including current holdings of the fund:
 
 www.Pershingsquareholdings.com
 
Disclosure: Long PSHZF
 
Questions or comments, feel free to email me at [email protected]
 
Disclaimer: Askfinanceguy.com is not an investment advisor, brokerage firm, or investment company.  This blog is for educational and/or entertainment purposes only. Use this information at your own risk. Do not consider anything on this page to be legal, tax, or investment advice.