Pershing Square: conviction, activism and top-class performance

Pershing Square [LON:PSH] investment trust is the Guernsey-registered vehicle of ‘star’ American fund manager Bill Ackman, that tracks the performance of Pershing Square Capital Management, an American fund.

A GBP7bn powerhouse, the fund invests in a concentrated portfolio of large-cap companies to maximise the long-term compound annual rate of growth in the intrinsic value per share. In simpler terms, the fund holds a low number of stocks which the managers ‘sweat’ to make significant positive contributions to the portfolio, consider the impact of inflation, and reinvest their returns in the fund.

• Games Workshop’s conquest continues with record profits and licensing boom
• Podcast: Baillie Gifford’s Gary Robinson on US growth stocks
• Best-performing FTSE 100 stocks in 2024

The fund has a technology and North America bias and favours larger corporations as the fund’s philosophy is to focus on companies that have recurring cashflow – in other words corporations that have stable revenue generation.

Pershing Square is an activist fund

This is standard schtick for large cap North American funds, albeit Ackman and his team does it very well, but what is different about the Pershing Square fund is that the fund is very activist, in that it will use the heft that its positions allow to engage with the companies that it invests in.

Ackman launched Pershing Square Capital Management in 2003 when activist investors were as easy to find as unicorn manure and developed the activism part of his operations over the last 20-years. Now most investment managers will ‘say’ that they are activist investors, but Ackman and Pershing Square have honed activism into an art.

In an interview with Brunswick, Ackman distilled his philosophy of actively approaching the boards of the companies his fund hold, saying: “They should listen. If a good idea comes in from the outside, it’s free advice. They should take it seriously and consider it. Activists are just shareholders at the end of the day. If a shareholder says, ‘Look, you have dramatically underperformed for a period of  time, your competition has twice the margins you have, and we think the issue is a management issue,’ then a company has to take that very seriously and study it with management.”

He further elaborated: “[…] We would never propose anything unless we believe it is in the long-term best interests of the company, period. We take very large stakes in companies, and we tend to own them for years. In almost all of the 32-odd activist situations we’ve been involved in over eleven-years, the stock trades at a meaningfully higher price today than even after we exited.”

Ackman hasn’t shied away from the contemporary culture wars, wading into the argument about the ‘liberal’ and antisemitic regimes he believed were perpetuating America’s ivy league universities, being one of the most vocal critics of Claudine Gay, Harvard’s first African-American president, who was forced to resign at the beginning of the year. He has stated that he will not be scared to use his money and influence wherever he chooses, regardless of whether that creates enemies in public institutions, Washington DC or in the media.

Derivative-driven performance

The other distinguishing feature of the Pershing Square fund is that it is not shy of using derivatives to super-charge its performance. Again, the use of derivative bets are common in the hedge fund space, but Pershing Square follows the vision of ‘go big, or go home’ and will back a conviction to the hilt, having refined the practice since the fund’s inception.

Over the fund’s life these trades have delivered billions in profits to the fund, keeping Pershing Square in the top quartile of performance over one-, three- and five-years and is in the top-20 of performance for hedge funds globally, returning double the S&P500 return with its share price rising over 200% in five years, better than any other FTSE100 stock, the index that investment trust lives in.

The fund has evolved over the last two decades, following a long-only strategy, meaning that it won’t short stocks.

Investors can buy a slice of the action by buying a share in the fund. The fund opened trading at 3,936.26p on 5th March and over one-year would have returned investors 32.3%. Over three-years the share returned 62.3% and over five-years returned 215.9%.

Proposed flight to the US shelved

But the fund was nearly not available for UK investors, as the fund manger was mooting moving the fund from the FTSE100 to the US, and it was only last month that the fund shelved this plan, preferring instead to open up a new closed-ended fund in the US that would follow the same investment philosophy.

The rationale for the move was that by transferring to America, the fund would be closer to its investment universe and target market, and be able to market to US-based investors and was planning on achieving this through a reverse takeover of an existing company.

Thankfully for UK investors the 1940 Investment Company Act in the US scotched this plan, and Pershing Square instead committed to building a USD10bn fund in the US, called Pershing Square US, and the new fund would not charge performance fees.

The issue with the current arrangement is that despite the fund’s stonking performance, in the UK it trades at a significant discount to asset value of around 28%, primarily as a result of the fund’s existing performance fees, which has led to the fund committing to significant share buyback over the past few years. The investment company pays 16% of its underlying investment return to Ackman’s Pershing Square Capital Management, on top of a 1.5% annual charge. The new US fund will have no additional performance fee on top of its annual management charge. That could make it more attractive to international investors operating across borders.

Pershing Square top five holdings

Holdings on 14th February 2024 (according to SEC 13F filings)

The fund holds eight stocks in total.

• Find the latest research for Pershing Square on the AIC website