Pershing Square's Bill Ackman has seen the light

Bill Ackman, the notorious activist investor, could turn his Pershing Square hedge fund into the next Berkshire Hathaway.

939_MW_P20_funds
Chipotle has served up appetising returns

Bill Ackman, boss of hedge fund Pershing Square, has attracted a lot of publicity over the last few years, much of it negative. He bet big and unsuccessfully on Valeant Pharma a few years ago, and then also took a very public short position on supplements seller Herbalife, which also went wrong. Less prominently, he listed his main investment vehicle Pershing Square (LSE: PSH) on the London Stock Exchange. This has been a huge disappointment, with the share price down by 37% in US dollars since its 2014 launch.

Ackman's new strategy

In recent years Ackman has made several changes to the listed fund, mainly with the aim of narrowing the discount to net asset value (NAV, the value of the underlying portfolio), which currently stands at around 25%. The management now owns about a fifth of the shares in issue. It has acquired $520m of shares in the open market since May 2018, including $672m held by Ackman directly, according to Bloomberg. This year also brought news that the fund would pay out a $0.10 quarterly dividend, representing a 2.5% yield.

The obvious question though is whether Pershing Square can now deliver consistently. Until fairly recently, the answer was probably not. As with many hedge funds that chose to list funds or shares on the London stockmarket, the attempt to beat the benchmark index has singularly failed to deliver for public market investors.

But that could soon change. In 2018, PSH's NAV total return was -0.7%, outperforming the -4.4% of the S&P 500. And looking at the last few months, most of the major disclosed holdings are up, with particularly strong returns from restaurant Chipotle, the Restaurant Brands group, and government-backed mortgage agencies Fannie Mae and Freddie Mac.

Ackman's strategy appears to resemble Warren Buffett's. It's all about investing in high-quality, simple, predictable, free cashflow-generative businesses with substantial barriers to entry for competitors.The crucial active ingredient, however, is the way Pershing engages with companies where necessary removing managers and a board, and bringing in a new regime to run the company.

UK investors have a choice if they fancy a bet on US equities: they can invest in this very broad and liquid market with an exchange-traded fund, or they can go with active managers who are taking big bets in a fairly uncomplicated fashion. Pershing is now an activist bet on high-quality US large-caps, especially in the consumer space.

Expect ups and downs

The downside is that those concentrated bets might not pay off, and the discount could grow if US equities slide, negating the dividends. Then the board might have to consider even more aggressive action to narrow the discount. But investors might be tempted to give Ackman's London fund a chance. If he succeeds he could turn Pershing Square into his version of Berkshire Hathaway a long-term play on quality US businesses.

Recommended

If you think now is a good time to buy, look at these investment trusts
Investment trusts

If you think now is a good time to buy, look at these investment trusts

With the latest market slides, an awful lot of assets are beginning to look very cheap indeed. If you are thinking of buying, Merryn Somerset Webb has…
10 Mar 2020
How to build a properly diversified investment trust portfolio
Sponsored

How to build a properly diversified investment trust portfolio

Max King explains how to build a well diversified portfolio using one of our favourite tools – investment trusts.
25 Feb 2020
Why investment trusts are the best vehicle for your money
Sponsored

Why investment trusts are the best vehicle for your money

Max King explains the advantages of investment trusts – sometimes called closed-ended funds – over their open-ended counterparts (or Oeics).
11 Feb 2020
Investment trusts: the Cinderella of investment arrives at the ball
Funds

Investment trusts: the Cinderella of investment arrives at the ball

Investors should look beyond the market noise of a single year and examine the bigger picture. Max King explains what we can learn from 25 years of in…
8 Jan 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020