Our search for profitable ways to invest in American assets takes a doubly unusual turn today: the shares we have in mind not only trade in London but are those of an investment trust.
We are tipping it because its valuation looks anomalous to say the least.
It’s a fund we have shied away from in recent years after an unhappy entanglement in 2017 and 2018: Pershing Square Holdings fell heavily after our initial tip and we took an opportunity to exit when it had recovered almost all the lost ground. The shares have gone on to gain 129pc since then and that burst in the share price since our sale reflects the changes that have taken place at the trust.
Many of its past problems, and the suspicion that many investors seem to harbour towards it today, judging by the 30pc discount at which it trades in spite of its spectacular recent performance, stem from the fact that the driving force behind the trust, the American billionaire Bill Ackman, began his career as a hedge fund manager and is still perceived as one, with the result that Pershing Square is still perceived as a hedge fund.
That may have been a fair description in the past, when he took big “short-selling” bets against some stocks, most famously Herbalife, a US supplements business, but nowadays the fund is a straightforward vehicle for investing in large North American stocks such as Canadian Pacific Railway and Domino’s Pizza. (Its new status has been recognised by the Association of Investment Companies, the trusts’ trade body, which has moved it from the hedge fund category to US equity.)
What is even more interesting is what Questor sees as an almost Damascene conversion on Ackman’s part: his investment persona has been transformed from Wall Street buccaneer to Warren Buffett.
Ackman wrote in last year’s annual report: “In 2017, Pershing Square was in the midst of resolving the overhang from two bad investments that contributed to a several-year period of underperformance, which led us to what is best described as a moment of reflection for Pershing Square.”
He went on to describe its subsequent transformation, part of which was “our renewed commitment to the core investment principles that have driven the substantial majority of our returns over time”, namely “to invest in the extremely durable growth companies that meet our core principles for business quality, simplicity, predictability and free cash flow generation”.
In an echo of Buffett’s dictum that his preferred holding period is “forever”, Ackman wrote of Universal Music, in which Pershing Square and his other funds acquired a 10pc stake last year: “We do not need an exit strategy. Rather, our strong preference is to find businesses where we believe that an exit will not be required.”
As part of the reinvention of his investment process, Ackman also stopped raising money for his private funds and stopped his regular meetings with investors, both of which he said were time-consuming and detrimental to his core task of managing the portfolios. Ackman and his associates also increased their own stake in the trust to about 25pc, which gives them a huge amount of the “skin in the game” this column welcomes.
The icing on the cake is Ackman’s recent use of derivatives to make huge sums from his correct assessment last year that inflation and higher interest rates were about to return. Before you object that this sounds like a regression to his former hedge fund ways, we must point out that he committed only $157m (£128m), just 1.4pc of the trust’s assets at the time, for an eventual payout of more than $1bn.
These hedges offer “asymmetric payoffs” and “consume only a modest amount of our capital if the potential market disruption does not occur”, the trust said in the annual report.
This is the opposite of the dangers of shorting, where a modest outlay can explode into losses without limit if the share price of the shorted company rises rather than falls. Ackman has since bought a similar asymmetric derivative to protect the portfolio from inflation and rising rates.
Questor sees this trust as a Buffett-like portfolio with a little hedge fund brilliance sprinkled on top and trading at an unwarranted discount.
Questor says: buy
Share price at close: £26.60
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