Pershing Square's novel way to resolve a 27% discount

While the trio occupies the podium on FE's sector-agnostic 'Alpha Managers' ranking, as measured by their funds’ 10-year performance, Bill Ackman of Pershing Square Holdings (PSH) ought to be in the frame – even if a decade-long comparison can’t be made until the fund celebrates the 10th anniversary of its London listing in October.

Given the trust trades at a 27 per cent discount to net asset value (NAV), ‘celebrates’ might be the wrong word. But despite the discount and lack of a tech focus during this time, Pershing’s headline return has been almost unmatched. Viewed on shorter horizons, we can drop ‘almost’: over five years, the closed-end fund is up 234 per cent, versus 100 per cent from the S&P 500, 25 per cent from the All-Share, and 174 and 157 per cent from the best-in-class equity investment trust and open-ended funds, respectively, per FE.

However, although Ackman holds both chief executive and portfolio manager roles, singling him out as the ‘star’ underplays Pershing’s eight-person investment team, of which he is just one member.

Despite this breadth, half of Pershing’s special sauce comes from the concentration of its North American equity holdings, which currently number nine. Since adopting a less adversarial strategy in 2018 – a stark contrast to Ackman’s own brand of political activism and social media use – Pershing’s deliberative approach to stockpicking has been a sleeper success. For example, when it opened a position in Google parent Alphabet (US:GOOG) last March, the team had been waiting for a decade to buy in at a discount.

Other calls, such as a series of spectacularly-timed derivative trades at the start of the Covid-19 pandemic, have won Pershing comparisons to macro investor luminaries such as George Soros. And while the trust’s moves aren’t always perfect (take the ill-timed bet on Netflix (US:NFLX) in early 2022) the marriage of smart long-term stockpicking and asymmetric market bets, when consistently applied over time, has resulted in serious gains for investors. In the two decades since Pershing was founded, cumulative net returns have exceeded 2,100 per cent, almost four times that of the S&P 500.

But star status, and a record to back it up, hasn’t convinced everyone. Chief among the turn-offs is PSH’s high charges, which until now have consisted of a 1.5 per cent management fee and a 16 per cent performance fee above a high-water mark. Combine that with returns that have at times lagged blistering US tech stock gains over the decade, and the discount makes a bit more sense.

An offset arrangement with Pershing Square Capital Management (which both mirrors the holdings of and acts as investment manager to PSH) was designed to mitigate those performance fees, once $120mn (£95mn) of IPO costs were repaid. Frustratingly, however, a big drop in PSCM’s fee-paying capital means no benefit has accrued to PSH shareholders.

Now, however, a solution might be on the cards. After much deliberation over how to boost its US shareholder base, PSCM last week announced plans to launch a New York-listed closed-end fund with a similar structure and investment focus to PSH. Although this fund will only charge a management cut of 2 per cent of assets, a fifth of these ad valorem fees will accrue to PSH, meaning the latter’s performance fees should now reduce – potentially “substantially”, in PSH’s telling.

Marketing efforts for the new US fund aren’t aiming low. While $10bn was cited as an ‘illustrative’ asset haul, the Investors’ Chronicle understands that, privately, Pershing believes it can attract more than double that, given its track record and Ackman’s growing profile. Another private fund, managed by PSCM and focused on Pershing’s asymmetric bets is also in the works, could help to lower charges further.

Hypothetically, then, a large chunk of PSH’s performance fees could soon be erased by its manager’s expansion. Although this comes with lots of ‘ifs’, Ackman and his team’s large holdings of PSH stock provide an incentive to make this work. The kicker – the imminent possibility of a New York-listed PSH twin trading at NAV – could be the bedrock for another year of huge share price gains for UK investors.