Bill Ackman's Pershing Square Q2 Letter: No Gold Hedge for Us

Courtesy of Dealbreaker, here's the latest from Bill Ackman's hedge fund, Pershing Square Capital Management. His second quarter correspondence is a bit tardy and he acknowledges that in the letter. Referring to their positions, Ackman discusses Pershing Square's stakes in Target (TGT), EMC (EMC), General Growth Properties (GGWPQ.PK), Automatic Data Processing (ADP), and his return to shares of McDonald's (MCD). He also touches on his fund's short exposure through credit default swaps (CDS) as well as mistakes and missed opportunities regarding its due diligence.

In his correspondence, we learn that Pershing's largest short position is a valuation hedge for their investment in General Growth Properties (GGWPQ.PK) because their valuation is a large component of the equation that determines recoveries for the equity holders. Additionally, he mentions they are also short a REIT that trades at a high valuation, has weak underlying assets, and poor business prospects. Since he does not name names, you can obviously speculate as to what this short position is in.

We also see that his corresponding long position in General Growth is up substantially as the equity they owned has risen more than 12-fold since their buy at $0.34 per share and the unsecured debt they own has tripled in value over the same timeframe. They consider Simon Property Group (SPG) to be the most comparable REIT. Ackman argues that since SPG trades at a cap rate of 7% using trailing 12 month net operating income, a very similar General Growth under the same cap rate would have an enterprise value of $40 billion. This would then value shares of GGWPQ at around $40 per share.

Ackman goes on to provide updates on numerous other portfolio holdings but we'll let you read about those in the letter. One last paragraph we want to focus on is Ackman's brief mention of the risk to one's purchasing power. Due to quantitative easing and money printing by the Fed, he acknowledges that there are concerns about future buying power of the dollar. Ackman highlights that many investors have turned to gold to hedge these risks, but not Pershing Square. Instead, they have decided to fight this risk by owning "high quality businesses that have pricing power due to market position and/or business model, and/or that earn their profits globally."

This is interesting to see his stance on the matter as we can't really recall him addressing it before. You'll remember that David Einhorn and Greenlight Capital made a large gold investment and now are storing physical gold. Additionally, John Paulson's hedge fund Paulson & Co bought gold via GLD (the exchange traded fund) to hedge their share class denominated in gold. It's interesting to see each fund manager's individualistic approach and hedging vehicle of choice. However, the main thing to take away from all of this is the fact that they see inflation as a potential threat in the future and are trying to mitigate this risk accordingly.

Embedded below is Pershing Square Capital Management's Q2 investor letter. Additionally, make sure you check out our coverage of Pershing Square's portfolio here:




You can download the investor letter in .pdf form here. And of course make sure you check out the discount to the Value Investing Congress where you can hear Bill Ackman and numerous other prominent hedge fund managers present actionable investment ideas this coming October in New York City.

We'll leave you with a good quote from Ackman himself in the letter, "Trading is largely an art and not a science, a discipline in which you can always look back and conclude that you could have done it better. That is one of the reasons why portfolio managers hire traders (it enables the portfolio manager to shift the blame to others) and why being a trader is such a treacherous job."

Comments

[chap08:]

"In that gold does not generate cash flow, it does not have any intrinsic value"

I'll just say that I disagree and that to support my case, I call ..... all the evidence of human history.

As an aside, I also believe that the oceans, the air and the sun have intrinsic value, despite their poor cash flow yield.

Sep 25 07:44 AM

[Old Trader:]

A difference in opinion is what makes a horse race, isn't it? Having said that, I can't argue too strenuously against Ackman's method against of protecting against inflation. Any sort of hard asset investment should do well, too.

Sep 25 09:20 AM

[Slvrizgold:]

So his fund doesn't own any gold. Apparently, he is the company of the other 99% of fund managers! This is proof that the gold bull has LOTS more room to trample. Just wait until people figure out the "economic recovery" is FAKE and cherry picked statistics DOES NOT a good economy make! When will people learn their Propaganda Media is always LYING to them and is controlled by power hungry elities - NOT truth seeking journalists! Just wait until the next banking hammer falls (commercial RE, not to mention many more residential resests and defaults still in the pipeline.

Personally I think John Paulson and David Einhorn are infinitely smarter. After all, how many people have done better this decade? Besides Paulson, do you know anyone richer BY MULTIPLES than he in the last few years?!?! I will tell you one group - gold and silver bulls (assuming they hold bullion!)

Bill Achooman is just another ambivalent head in the sand lemming who wouldn't know a good deal if it fell out of the sky and landed on his face.

Sep 25 10:20 AM

[mouth:]

Hard to live without air and sun. Of course women need gold and diamonds


On Sep 25 07:44 AM chap08 wrote:

> "In that gold does not generate cash flow, it does not have any intrinsic
> value"
>
> I'll just say that I disagree and that to support my case, I call
> ..... all the evidence of human history.
>
> As an aside, I also believe that the oceans, the air and the sun
> have intrinsic value, despite their poor cash flow yield.

Sep 25 01:30 PM

[joeflynn:]

If gold does not have any intrinsic value then why do foriegn governments and central banks keep it?

Sep 25 08:09 PM

[Dialectical...:]

I agree about the gold nonsense (which is to say it is nonsense not to have some), but what really struck me was his valuation of GGP based on comparison to SPG. It strikes me as a bit like doing a Woolworth's valuation with a comparison to Walmart. $0.40 a share maybe, but not $40.

Sep 26 02:43 AM

[Vuke:]

Add to that the fact that men, generally, like women. Gold often plays a starring role in the relationship.

On Sep 25 01:30 PM mouth wrote:

> Hard to live without air and sun. Of course women need gold and diamonds

Sep 28 12:47 PM