Pershing Square: the investment trust hoping for a Trump windfall
Pershing Square's contrarian bet on US mortgage giants Fannie May and Freddie Mac could pay off for the high-conviction hedge fund
Pershing Square Holdings (LSE: PSH) is an anomaly. The investment trust is trading at a discount of 25% to net asset value (NAV), despite having returned 101% over the five years to the end of 2025 and 14% over one year. Yet this is no obscure or illiquid fund or niche strategy: it is a large, liquid investment trust with a market value of nearly £8 billion investing in listed larger companies in the US, the world's largest and (until 2025) top-performing market.
Pershing Square Holdings, which was listed in London in 2014, is run by Pershing Square Capital Management, a US hedge fund founded in 2004 by Bill Ackman. The substantial majority of its portfolio is invested in eight to 12 core holdings (at present, a total of 15 holdings are currently listed, but the size of each position is not disclosed). These holdings consist of either undervalued growth or corporate turnarounds. In either case, Pershing Square is an activist investor, happy to get involved, advise, pressure and propose management changes.
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The valuation of Alphabet (Google's owner) is still “quite reasonable” with “high teens earnings growth achievable indefinitely”. PSH invested because they thought Google's leading position in AI was being under-estimated. Universal Music is trading strongly but the stock has been weak due to “technical factors”. Ackman believes an imminent US listing will lead to a rerating, with the shares currently trading at the lowest earnings multiple (around 20) for four years.
Meanwhile Restaurant Brands – the owner of Burger King – is “outperforming a tough market”, helped by new openings and consumers trading down. Hotel chain Hilton trades on “30 times next year's earnings” but earnings are growing strongly, helped by its capital-light franchising model, strong cost control, share buybacks of 5% per annum and growth in units around the world. Car-rental group Hertz is “making progress on its turn-around” with the potential to generate cash flow, currently zero, of $1 billion per annum.
Transport firm Uber is a new holding “on a mid-20s multiple, which is extremely cheap given a high rate of earnings growth”. Growth is accelerating and it is one of three players in the autonomous vehicles market. Financial group Brookfield “is poised for an excellent year” and has bought pensions and annuities firm Just Group in the UK.
Over the past year, Pershing Square has increased its stake in US property group Howard Hughes to 47%. Howard Hughes' speciality is creating new towns, such as one 35 miles from Las Vegas, retaining the commercial property but selling residential land to developers. There are two projects in Texas and one outside Phoenix, Arizona. However, the plan here is to use the group's cash to buy an insurance company, with the aim of mimicking Warren Buffett's Berkshire Hathaway by investing the cash flow from insurance.
On the downside, Ackman admits to having held on too long to the last 20% of the trust's holding in restaurant group Chipotle and to having underestimated the scale of the challenge of turning around Nike. Both holdings have been sold.
Pershing Square's bet on government-sponsored enterprises
This all adds up to a compelling investment story, but Ackman has a knack of adding significant value through investment coups, such as hedging the portfolio ahead of the pandemic shock in early 2020 and the acquisition of its stake in Universal Music at a low price in 2021. The latest is the bursting into life of positions bought in 2013 at around $1 a share in the Federal National Mortgage Association and the Federal Home Loan Corporation, generally known as “Fannie Mae” and “Freddie Mac”. These are government-sponsored enterprises (GSEs) whose purpose is to bundle mortgage loans into tradable securities with an implicit government guarantee. This enables lenders to reinvest in new mortgages, thereby expanding their availability.
In the run-up to the 2008 financial crisis, mortgage underwriting standards became very loose. Fannie Mae and Freddie Mac suffered large losses and were bailed out by the US government at a cost of $190 billion. Under the terms of the bailout, they had to pay a 10% cash dividend on preferred stock and grant warrants entitling the US Treasury to 80% of the ordinary shares. However, the pair kept having to borrow more from the Treasury to pay the 10% dividend. Hence in 2012, the Obama administration amended the terms so that the Treasury simply received 100% of quarterly profits.
This “net worth sweep” ended in 2019, with Fannie Mae and Freddie Mac then retaining their earnings to build up their capital. By that point, the Treasury had received $301 billion of dividends, giving it an 11.6% rate of return and $25 billion more than owed under the original plan for a 10% dividend.
The government's position is that it still owns the preferred stock (and the warrants for common stock) and is entitled to interest foregone since 2019. Ackman instead argues that the preferred stock should now be regarded as fully repaid. This would, in effect, leave the US Treasury with around 80% of the ordinary shares.
At present, the shares trade over the counter, but Trump, treasury secretary Scott Bessent and commerce secretary Howard Lutnick have signalled they believe it is time to re-list them on the New York Stock Exchange. The attraction for the administration may be partly ideological (in 2021, Trump described the sweep as the US government “steal[ing] money from its citizens”) but also because they could be worth a significant amount.
Ackman estimates that an 80% stake is already worth $300 billion and believes that could easily double or treble from here. So he argues that the Treasury's warrants should be exercised and the shares listed on the NYSE but “now is not the right time to sell” the government's stake. He also wants to see a continued “conservatorship” (ie, regulatory oversight) by the Treasury to keep the firms focused on guaranteeing mortgages without the past practice of taking on new lines of business, and advocates a requirement for significantly higher reserves than in the past.
Huge upside for Pershing Square
Why does this matter for shareholders in Pershing Square? Those Fannie Mae and Freddie Mac shares, which were bought for a pittance in 2013, appreciated 207% and 284% respectively in 2024. At that point, Ackman estimated “an upside of five or six times in two to three years”. From the disclosed portfolio attribution for 2024, it is possible to estimate that the holdings accounted for between 5% and 6% of the portfolio. They have since nearly doubled. Net of performance fees and taking account of the appreciation of the rest of the portfolio, the two holdings are likely to account for nearly 10% of the portfolio today.
Ackman estimated late last year that they were trading on just 3.5 and 2.5 times next year's earnings. At his “illustrative” post-listing target of over $40 a share each (earnings multiples of 16 and 13), those holdings would quintuple in value from their current share prices. Net of the manager's profit share, that would add at least 25% to PSH's NAV. With the rest of the portfolio also contributing and the discount likely to fall sharply on such a coup, the upside to the share price would be significantly greater.
Shares in Fannie Mae and Freddie Mac peaked at a 17-year high in September, but have retreated as the Trump administration appears to be focused on other priorities. Still, it is surely not going to look a gift horse in the mouth. If and when it decides to re-list Fannie Mae and Freddie Mac, Pershing Square Holdings's shares are likely to jump.
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