A Commentary On Bill Ackman's Pershing Square Holdings Semi-Annual Letter

Summary

• Bill Ackman is a legendary hedge fund manager, who, regardless of a stretch of underperformance, we could all stand to learn a thing or two from.
• Several things stood out to me from my review of this letter.
• Pershing Square Tontine Holdings - Ackman's mega SPAC - remains an attractive buy in our current market.

Author's Note: This article was originally posted on my blog, where I cover personal finance, investment ideas, cryptocurrency, real estate investing, and a number of other things.  If this commentary was of value to you, please let me know, as I could consider posting more such commentaries in the future and/or expanding my coverage universe to other fund letters.

Bill Ackman is one of the most famous living hedge fund managers and practices a combination of activist and value investing. He has been in and out of the news for years for… his outperformance… then his underperformance (and very big, very public, very bad bets)… his tremendously successful COVID 19 hedge… then his massive SPAC, Pershing Square Tontine Holdings, in which I am an investor and have covered previously.

Not long ago, he released his Semi-Annual Letter for Pershing Square Holdings (OTCPK:PSHZF), and I thought it would be worth discussing.

Ackman's Double Edged Performance

Ackman starts the letter off with this handy chart that demonstrates his performance versus that of the S&P500.

Looks good, right?

Interestingly, Ackman has only recently begun to include this chart in his letters, probably because recent performance has made the results appear much more impressive.

So… let’s break it down.

First, let’s look at the performance of Pershing Square Holdings (OTCPK:PSHZF) since its IPO, as this is the only way the average retail investor can truly co-invest with Ackman. Unfortunately, it has comfortably underperformed the S&P500.

Source: Seeking Alpha

When you magnify just this part of the chart, things certainly look less impressive.

Over this time, Ackman has been famously on the wrong side of many large, public bets, and his performance has suffered for it. While his long term CAGR hovers around 16%, this is heavily buoyed by his pre-2015 and post-2018 performance.

But that post-2018 performance is interesting, though, and it has to make you wonder… which Ackman are we going to be getting in the future?

In January of 2018, Ackman was well aware of his poor performance, performance that is completely unacceptable given the high fees he charges his investors. With this in mind, he outlined a plan to return to prior levels of performance. He would “go back to the basics.” In practice, this meant cutting staff, eliminating visits with investors, and more time spent directly performing investment research.

How has this gone in practice?

Well… well. Quite well.

Source: Seeking Alpha

Since that announcement, Ackman has more than tripled the performance of the S&P500.

While this seems promising, I think the sample size is too small to judge for now. Additionally, a large part of the outperformance is attributed to his COVID-19 hedge, where, you have to admit, he knocked the trade right out of the park.

With so much outperformance from a single trade, you have to wonder… is he lucky or good? Is Ackman “back?” Should we all be buying PSHZF hand over fist?

I am not sure we can answer this question yet. Ackman certainly has his answer, though….

Ackman Is Concerned With His Share Price

Ackman spent a considerable portion of the letter essentially lamenting the Pershing Square Holdings share price and arguing why it should be higher.

He referenced the stock’s large discount to Net Asset Value (NAV) several times and cited a number of reasons why he believes this discount should be closed and the steps he has taken towards that end:

Source: Pershing Square Holdings Semi-Annual Letter

In the same vein, Ackman is very concerned with trying to get Pershing Square Holdings listed on the FTSE 100 Index, functionally the British version of the S&P500. He spends multiple pages of the letter explaining why Pershing is on the cusp of inclusion in the FTSE 100 and how this would be a catalyst for higher share prices and reduced discount to NAV.

Again… Ackman is deeply concerned with his share price.

In fact, at one point Ackman goes on to say “our strong preference is for the shares to trade at or above net asset value over the long term.”

Interestingly, this strikes me as somewhat counter to the traditional value investor’s mindset. The opportunity to repurchase shares at a high discount to NAV and – to the in theory much higher – intrinsic value should be a moment of joy for the value investor, no?

Of course, this is, I think where pride and self-worth comes into the equation. Years ago, before his poor 2015-2018 performance, NAV and share price closely tracked each other:

Source: Pershing Square Holdings

That this discount is so much larger today strikes me as a the market declaring a lack of confidence in Ackman’s investing abilities… and… well… that has to grate on the once beloved hedge fund manager.

The other explanation, of course, is that in Ackman’s line of business, he needs to show strong and consistent performance. That is how he attracts new capital and gains power and influence. A close in the discount to NAV would markedly increase Pershing’s share price performance this year and would be a wonderful source of “free” PR.

Ackman, a Man of the People?

I was somewhat surprised to see Ackman spend a considerable portion of the letter setting himself up as something of a “man of the people.”

First, he discussed the superiority of his SPAC’s structure and how it was much, much more aligned with public shareholders than any other SPAC in existence.

Let us be clear: he is right.

Ackman could have easily structured his SPAC the way everyone else does to ensure he made a quick buck off of it, but he chose not to. I see no other reason for him to have done so except that he believes in his ability to make a good deal and wants the ultimate company to be successful. For someone looking to invest in a potential winner, this looks like a very good opportunity to me. I have previously covered Pershing Square Tontine Holdings favorably at this link.

He also spends the final pages of the letter discussing the widening income gap and the disproportionate ability of the rich versus the poor to participate in the compound gains of the economy.

I have previously written about the incredible magic of compounding, and there can be no doubt that the inability of those who live paycheck to paycheck to meaningfully participate in the stock market’s compounding is a mortal handicap on their ability to build wealth or secure their financial futures. With cash subject to inflation and bonds looking like a very poor investment for the foreseeable future, this problem has only gotten worse.

Ackman goes so far as to suggest a few solutions. First, he suggests that an investment account worth $6,750 could be set up by the government for every US child at birth. Invested in zero-cost index funds, these would grow to be worth about $1 million by age 65 based on historical stock market returns. Second, he suggests that corporations could be mandated to set aside tax free investment accounts for all workers, much like the Australian superannuation system.

Frankly, I find the first of these two plans very, very interesting. I would make a handful of adjustments, such as allowing persons to draw on their accounts in the event of meaningful healthcare expenses or requiring these accounts to be set up by the child’s family in the event the family net worth exceeds some number (for example, $10 million). But on the whole, this would seem to be a meaningful, incremental improvement to many of the retirement savings problems we have in our country today, the Social Security funding gap, and the inability of the poor to participate in our country’s economic growth.

And at the very least, it’s less ridiculous and asinine than Andrew Yang’s universal income plan.

Conclusion

All in all, I am not sure if Ackman is “back.” I am long Pershing Square Holdings with a small position, and I am long Pershing Square Tontine Holdings, Ackman’s SPAC, with a much larger position.

Part of my reasoning for being long Pershin Square is the ability to participate heavily in the success o the SPAC at a discount to NAV. Add in a hedge fund manager who may be “back,” a portfolio that mostly consists of blue chips, and a 30%+ discount to NAV… well it seems like a reasonable risk/reward profile.

I will plan to continue to monitor Ackman’s performance and enjoy reading his letters.