Pershing Square’s Bill Ackman has seen the light

Chipotle
Chipotle has served up appetising returns

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

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

The good news is that Ackman now says he’s experienced his Damascene moment. He has decided to refocus on simply being a good long-term investor rather than raising many more billions for myriad funds. And that means that the London-listed vehicle Pershing Square will be the main focus of his attention.

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 fund will probably be volatile because of those concentrated bets, but if US equities generally do well, it should outperform. If this does happen, investors could benefit from a number of tailwinds: the discount narrowing; the performance fee being significantly underwater (it won’t kick in until the NAV reaches $26.37, compared with the current figure of $22.42); and dividends helping to smooth returns.

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.