A rebound in performance and the launch of dividend payments show that US hedge fund manager Bill Ackman (pictured) has been pulling out some – but not all – of the stops to get Pershing Square Holdings (PSH) back on track.
The activist investor has a long way to go. Since listing in London in October 2014, the dollar shares of the £2.7 billion Guernsey-based investment company have lost a third of their value, largely due to an expensive campaign to short shares in Herbalife (HLF.N) – a position he closed last year – and a controversial investment in Valeant (VRX.TO), a Canadian pharmaceutical group investigated by US regulators over accounting irregularities and which was at the centre of the highly politicised row over ‘price gouging’.
An annual investor day in London a year ago signalled the start of a turnaround, however, as Ackman, stung by the awful share performance, promised things would improve. Since then his company has bought back $300 million of PSH shares in a tender offer and Ackman and his managers have ploughed a significant amount of their own money into the stock. These increase their ‘skin in the game’ and try to counteract the wide discount on the shares.
More significantly, Ackman slimmed down his organisation and stepped back from operational matters and marketing to focus on investing. The impact wasn’t felt immediately but nevertheless is abundantly clear in the one-year numbers with net asset value (NAV) spiking nearly 50% and the shares – though trailing the underlying increase because of their 25% discount to NAV– putting in a welcome 35% revival.
Much of this has come in an impressive New Year rally with the shares up over 26% so far this year alone.
Stripped of its ‘short’ positions, Pershing is now a geared, long-only concentrated portfolio of US stocks Ackman regards as fundamentally high quality but undervalued.
It has reported strong returns from Chipotle Mexican Grill (CMG.N), which has benefited from the launch of ‘lifestyle bowls’ catered towards different diets, as well as Burger King-owner Restaurant Brands (QSR.TO).
US government housing agencies Fannie Mae (FNMA.N) and Freddie Mac (FMCC.N) have rallied after president Donald Trump appointed Joseph Otting, head of the office of the comptroller of the currency, acting director of the Federal Housing Finance Agency, which could signal a route back to privatisation.
This week the company sought to bolster investor sentiment further with the announcement that it would start to pay dividends for the first time. A quarterly pay-out of $0.10 per share (that can be made in pounds as PSH launched a sterling share class two years ago) equates to a yield of 2.5% at the current share price.
Analysts welcomed the move but doubted it would be enough to attract the hordes of income investors needed to buy the shares and re-rate the stock. Matthew Hose of Jefferies said it was ‘a mild positive’ but pointed out income investors would be put off by the portfolio’s stock risk and volatility.
For growth investors with a higher risk tolerance, however, there is a clear chance to grab a bargain and invest in a fund manager who appears to have regained his mojo.
‘We think it presents an attractive opportunity to access an actively managed portfolio of high-quality, large-cap US companies with higher earnings growth than the S&P 500,’ commented Conor Finn at Liberum.
Ewan Lovett-Turner of Numis Securities agreed but pointed out two flies in the ointment. The first is that a re-rating and a narrowing in the discount will rely solely on improved performance, if Ackman has anything to do with it.
According to Lovett-Turner, the hedge fund manager made it clear at this year’s Investor Day on Wednesday that he did not want to see the fund shrink further and was opposed to further tender offers and share buybacks that ordinarily would be used to narrow the discount.
That’s a contentious stance and one that won’t wash if there is not a significant move in the discount. Activist investors such as Asset Value Investors, managers of British Empire (BTEM), hold a small stake in PSH and, while pleased with the recent gains, will agitate for change if there is no improvement.
Commenting before the investor meeting, British Empire fund manager Joe Bauernfreund repeated his view that the discount was ‘unsustainably wide’, stating that the company should use the proceeds of its recent sale of a holding in US speciality chemicals manufacturer Element Solutions (ESI.N) to buy back more shares and fund a further tender offer.
Or as Hose put it: ‘Although we expect the normalised NAV performance to eventually lead to a more normalised rating in the near to medium term, should this not occur, the board would need to consider more aggressive action.’
Last, but not least, there’s also going to have to be a cut in charges if the company is serious about attracting investors willing to give Ackman a second chance. The fund’s fees are a ‘significant headwind’, said Numis’ Lovett-Turner.
‘The “all-in” charges shown in the company’s key information document are 4.87% per annum, including 1.41% for performance fees and 0.51% for transaction costs,’ the analyst added.
That’s an eye-watering amount that is going to do nothing to appeal to UK investors used to getting good returns from investment trusts for well less than a third of the amount Pershing Square currently gets paid.