Ackman’s closed-end fund is trading at a steep discount. Maybe it’s the high fees.

Investor Bill Ackman recently highlighted the 17% annualized, above-market returns generated by his Pershing Square capital management since 2004. But many investors in Ackman’s largest investment vehicle,


Pershing Square Holdings
,

didn’t do so well.


Pershing Square Holdings

(ticker: PSH. Netherlands) is the largest closed-end equity fund in the world, with approximately $12 billion in net assets. It trades in Europe on Euronext and the London Stock Exchange, and lightly on OTC markets under the symbol PSHZF.

Since going public at $25 a share in 2014, it has generated a 7% annualized return based on its recent price of $39.40, according to Bloomberg data. Over the same period, the S&P 500 has returned more than 14% annually.

The fund languishes at a 30% discount to its net asset value, which stood at $56.21 as of March 31. The fund’s performance since 2014 based on its net asset value is much better than that based on its share price, but still lags the market.

The fund, which is open to U.S. investors, holds a concentrated portfolio of about a dozen stocks led by $3 billion in stakes in


Universal Music Group

(UMGNF).

While he has earned a reputation as an activist, Ackman is now focused on buying high-quality companies and “constructive engagements” with management, he wrote in his recent annual letter to shareholders. of Pershing Square Holdings. No more high profile short selling efforts. “We have permanently retired from this line of work,” he wrote.

The fund’s other investments include


Lowe’s

(MOO),


International restaurant brands

(QSR),


Dominos Pizza

(DPZ),


Hilton Worldwide Holdings

(HLT),


Chipotle Mexican Grill

(GCM),


Canadian Pacific Railway

(CP),


Howard Hughes Corp.

(HHC), and a recent addition,


netflix

(NFLX). The fund uses leverage, which amplifies returns.

In his annual letter to shareholders, Ackman cited the fund’s “extraordinary” performance over the past four years, when it easily topped the


S&P 500 index.

The fund has come back strong after a poor period from 2015 to 2017, when Ackman was hurt by investments such as Valeant Pharmaceutical – now


Bausch Health

(BHC)—and a short position in


Herbalife

(HRB). The fund grew 58.1% in 2019, 70.2% in 2020 and 26.9% in 2021 based on its net asset value.

The fund’s share price has tripled since a 2018 low, but that hasn’t been enough to bring it closer to the performance of the S&P 500 since 2014. Its raise has generated huge costs for Ackman’s company over the past few years. last two years thanks to a high fee structure.

It charges a base fee of 1.5% per year and an annual incentive fee of 16%. In a burst in 2020, the fund generated $790 million in fees, including $695 million in performance fees. In 2021, the fund generated $610 million in fees, including $464 million in performance fees.

The fee structure means that in a year like 2021, when the fund trailed the 28% return of the S&P 500, Pershing Square can still reap a windfall in fees.

The high fee structure could explain why the fund is trading at such a significant discount to its net asset value. US-listed closed-end funds have lower fees and now trade on average at around net asset value. It is rare to see discounts of more than 15%. Pershing Square Holding’s discount of 30% compared to 23% at the end of 2020.

Other potential reasons for the steep discount were the lack of redemptions in 2021, the fund’s large size and its unusual status as a European-listed closed-end fund that holds US stocks.

The fund cannot sell to US investors and therefore remains largely unknown to US investors.

One of the drawbacks of Pershing Square Holdings is that it is classified as a passive foreign investment company, which requires US holders to file an IRS form 8621. This could lead to tax hassles for investors. Some brokerage firms do not allow clients to buy the fund because it is listed overseas.

With Ackman owning around 20% of the fund, activists cannot easily target him.

In his letter, Ackman wrote that his goal is to make the discount go away: “Our strong preference is that PSH shares trade at or around the intrinsic value for which we believe our net asset value per share is a conservative estimate. . With continued strong performance, we expect PSH’s discount to NAV to narrow and its NAV and market returns to converge.

Barrons wrote favorably of the fund as a way to get Ackman’s services at a discount, while acknowledging the drawbacks of the fee structure. Over the past 18 years, Ackman has generated an annualized return of 17.1% versus 10.2% for the S&P 500. Pershing Square Holding has fallen 1.7% year-to-date through March, about three percentage points better than the S&P 500.

The significant discount could be reduced if the fund were to eliminate, reduce or modify its incentive fees. Ackman, for example, could create a minimum rate for incentive fees or adopt a more balanced incentive structure.

Loyalty counter-funds
(FCNTX), the $125 billion mutual fund managed by Will Danoff with an excellent long-term record, charges base fees and has incentive fees tied to the S&P 500. These fees are symmetric. If Contrafund beats the S&P 500, its overall fee increases and if it lags the index, the fee is reduced.

It’s a more investor-friendly structure, but it’s unclear if Ackman would consider it. The fund declined to comment.

As it stands, Pershing Square is expected to earn around $150 million this year from fund management fees alone. That’s not bad, considering there are 13 senior executives and investment professionals at Pershing Square who had a “material impact” on the fund’s risk profile. For 2021, they split $430 million in fees, averaging $33 million each.

Write to Andrew Bary at [email protected]

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