With the majority of companies seeing large percentages of their respective values being wiped off in the mayhem brought about by COVID 19, Bill Ackman used a device most now associate with the film about the subprime mortgage scandal, 'The Big Short'. The instrument used being the credit default swap (CDS).
Pershing Square Holdings (PSH), the closed-ended fund version of Mr Ackman’s famous hedge fund, purchased $27 million (CDS) on various investment grade and high yield credit default swap indices. At that time, these were trading at near-historical low levels, as the spectre of defaults seemed unlikely. Analysts at Investec said this move was “arguably the greatest trade the UK closed-end industry has ever witnessed, and certainly the most profitable with the highest IRR”.
Within a month the CDS move had generated $2.6 billion for the hedge fund with $2.1 billion being gained by PSH. With the hedge closed the money was issued to reinvest in equities at sharply discounted prices, some of it used to bulk up existing positions and also add to companies to the firm’s high conviction portfolio.
The hedge certainly paid off, in the first quarter of this year PSH had produced a NAV total return of 3.3 percent compared to the S&P Composite NAV total return of minus 19.6 percent. In sterling terms it gets even better, total shareholder return for Q1 was 9.7 percent versus a loss of 25.1 percent for the FTSE All Share. Impressive performance indeed and no fluke, for 2019 PSH had returned 58 percent versus 28.9 percent of the S&P 500.
Mr Ackman said on Twitter a couple of nights ago: “Massive stimulus is being injected globally to backfill the economy and bridge us through the crisis. Most corporations, banks and consumers entered the crisis well capitalized. Rates are extremely low. There is no housing or commercial real estate overhang.
“Nearly every research institute and lab have redirected their work to a cure for the virus, which increases the probability of finding therapeutics and a vaccine. This is the first such moment in my lifetime where the entire world is all-in on one problem”.
Time to buy
PSH’s shares trade at a 39 percent discount to NAV, the key drivers are the share capital/voting structure and the highly challenging period shortly after IPO, while recent volatility has fuelled a further leg down according to Investec.
However, analysts at the investment bank have put a ‘buy’ rating on the stock. Mr Ackman used the proceeds of his fantastic short to bolster his positions in Agilent, Berkshire Hathaway, Hilton, Lowe’s and Restaurant Brands. In addition, several new investments were made including re-establishing an investment in Starbucks (at the start of February, the company announced that it had sold this investment, locking-in a 73 percent gain over 19 months).
Mr Ackman is no stranger to controversy, he appeared on CNBC on 18 March and gave further colour on his views in a thought-provoking and emotive interview. With many governments behind the curve and so much complacency amongst larger segments of the population (arguably, little has changed), this was a clear wake-up call that sadly have been too few and too far between.
Mr Ackman said that he believed “the best approach to killing off the virus was for the entire country to close the borders and shut down for 30 days, other than for essential businesses, government, and services”, adding that he had gone from very bearish to bullish, because the only answer “is to shut the world for 30 days”.
Having invested $2.1 billion in equities while the rest of market is moving to cash, you wouldn’t bet the (in)famous hedge fund don.
