The listed trust version of Bill Ackman’s hedge fund Pershing Square, Pershing Square Holdings (PSH) has released its results for the year ending 31 December 2021 and one noticeable aspect is that despite a strong performance by the underlying portfolio, the fund’s discount to NAV widened from 23 percent to 28.3 percent during the reporting period.
During the year, PSH’s total NAV return including dividends was 26.9 percent, ending the year at $57.30 per share. PSH generated a total shareholder return of 18.6 percent over the same period as a result of the widening of the discount to NAV.
By comparison, the S&P 500 increased 28.7 percent during the year ended December 31, 2021. This performance in 2021 follows a period of performance for PSH including its three-year annualized NAV return of 50.1 percent (share price 48.4 percent, S&P 500 26.0 percent) and five-year annualized NAV return is 26.4 percent (share price 23.8 percent, S&P 500 18.4 percent).
PSH’s growth in 2021 was driven by the performance across its portfolio companies, most notably at Lowe’s, Universal Music Group (UMG), and from PSH’s interest rate hedge position. According to the firm, the largest detractor from performance in 2021 was the decrease in value of PSH’s commitment to invest in Pershing Square Tontine Holdings (PSTH). The PSTH share price declined from $27.72 to $19.72 during 2021, leading to a decrease in the value of PSH’s forward purchase agreements and Sponsor Warrants.
At an initial cost of $157 million – or 1.4 percent of PSH’s assets at the time – the interest rate hedge’s asymmetric nature protected the portfolio. The hedge increased in value during the year. In January 2022, the substantial majority of the hedge was sold generating proceeds of $1.25 billion across the Pershing Square Funds.
The proceeds were then used to establish a new core position for PSH in Netflix, whose share price had significantly declined in recent months, leading the portfolio manager to believe it was undervalued.
However, the portfolio manager remains concerned about the potential impact of inflation on PSH’s portfolio and has since re-established a similar asymmetric interest rate swaption position to protect the portfolio going forward.
During the year, PSH initiated positions in UMG, Domino’s Pizza and Canadian Pacific Railway. It also took profit by exiting from its positions in Starbucks and Agilent Technologies. In early 2022 PSH initiated a position in Netflix with the proceeds generated from its interest rate swaption hedge and also established a new interest rate swaption hedge.
Going forward, the portfolio manager is focused on finding a potential transaction for Pershing Square Tontine Holdings Ltd. (PSTH) that meets its core investment principles. The firm has filed a public registration statement for Pershing Square SPARC Holdings (SPARC), which remains subject to SEC review. If the deal is approved, it will allow the fund to continue to work on a potential merger transaction without burdening investors with the opportunity cost of keeping their money in a trust account.
