Bill Ackman has said he is done with the noisy and aggressive proxy battles that made him one of Wall Street’s best-known agitators. It is a consequence of the maturity and heft that Pershing Square Capital Management has built, as a fund with about $18.5 billion in assets under management.
Pershing Square Holdings, the star hedge fund manager’s listed vehicle, is finding it harder to capture the imagination of British investors. The shares trade 37 per cent lower than the value of its assets, but the magnitude of that discount belies a returns record that is building in stature and consistency.
The FTSE 100 constituent is an oddity among London’s investment trusts. The vehicle is a reflection of the approach taken by Ackman’s Pershing Square Capital hedge fund, which takes positions in about a dozen or so large American companies, often advocating for change. The largest holdings include Universal Music Group, where Ackman, 57, has taken a board seat, Hilton Worldwide, the hotels group, along with restaurant chains such as Chipotle and Restaurant Brands International, the Burger King owner.
Ackman looks for businesses that he thinks will be hard to disrupt, either by new entrants, technological change or regulatory challenges. The idea is to seek out those with large competitive moats, low debt and solid cash generation, which will enable the companies to deliver high compound returns over the longer term.
Concentrating assets in a few holdings makes Pershing Square one of the largest, if not the No 1, shareholder in the companies it invests in. That muscle brings with it the ability to push for change. New positions are few and far between, although they included a fresh $1.1 billion stake in Alphabet, Google’s parent company, at the start of this year, a bet on the stock’s cut-price level and the potential to use artificial intelligence within its search business.
Critics might say that the portfolio of large US stocks is easy for investors to replicate without the help of a third party, and one charging sizeable fees. Shareholders pay an annual management fee of 1.5 per cent of assets, plus a performance fee of 16 per cent of any gains. Ackman’s sharpest riposte would be the impressive returns generated in recent years. Deduct fees and over the five years to the end of December the value of Pershing Square’s assets has risen at an annual compound rate of 25.1 per cent, more than twice the 9.4 per cent delivered by the S&P 500.
Ackman’s biggest gains have come from bets on the bigger picture. A canny bet that interest rates would need to move higher at the end of 2020 netted the fund $2.7 billion on its initial hedge of $384 million. That helped to insulate the fund against the ravages of inflation and the market volatility that unfolded from the war in Ukraine. Losses last year were contained at 8.8 per cent, versus the 18.1 per cent sustained by the S&P 500. More strikingly, Pershing banked $2.6 billion in proceeds from the purchase of only $27 million in credit default swaps as the global pandemic took hold at the start of that same year. Gains have been reinvested back into buying more of some existing holdings.
True, Ackman’s record hasn’t always been rosy. At the start of last year, he sold his investment in Netflix for a loss after only three months, prompted by an unexpected switch in strategy by the streaming group. Bad bets on Herbalife (a short interest) and Valeant Pharmaceuticals led to a bruising 18 months through to the end of 2017. The upswing since then has been striking.
Yet Pershing’s painful discount to its net asset value endures. Share buybacks have ensued in an attempt to tackle the dislocation. Since 2017, more than $1.1 billion has been repurchased, reducing the outstanding share count by around a quarter. Investors should take heed.
ADVICE Buy
WHY The discount attached to the shares is too severe given the strong performance of the trust
Telecom Plus
Discord within the energy market provided the strongest fillip yet for Telecom Plus’s business model. The FTSE 250 group, which trades under the Utility Warehouse brand, welcomed a record 22 per cent more customers last year as supplier failures and the cost of living crunch prompted consumers to search for better deals. The upshot? An 81 per cent increase in pre-tax profits over the 12 months to the end of March.
The company offers consumers a cheaper deal by bundling services together, although about a third of customers have switched for gas and electricity supply alone.
The market crisis is unprecedented, so it is unsurprising that such high levels of organic growth are unlikely to continue. The company is comfortable with analysts’ forecasts of a rise in customer numbers of between 12 per cent and 16 per cent this year. If proven accurate, that would be impressive enough. Churn has increased to about 5 per cent in recent months as rivals put up more of a fight to win and retain customers, but that is still below a historical norm of 12 per cent to 13 per cent. The expectation of slower growth has been reflected in a de-rating in the shares, which trade at 14 times forward earnings, about half the level last summer. But, considering the punchy guidance and impressive cash generation, the correction looks overdone.
A capital-light business model means that the utility supplier has a record of generous cash returns. Another bump in the final dividend brings the total payment in respect of this year to 80p a share, which equates to a potential dividend yield of 4.9 per cent at the latest share price.
Telecom Plus is keeping a policy of paying 85 per cent of after-tax profits in place, but flexing how it returns capital. Investors can expect share buybacks to come into the mix — logical given the depressed value of the shares.
Bad debts should be watched closely. Arrears edged up to only 1.6 per cent of revenues over the course of last year, from 1.2 per cent the year before. Telecom Plus’s income and capital appreciation prospects both remain intact.
ADVICE Buy
WHY Shares look cheap given the income and growth potential on offer
