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Bill Ackman: I considered liquidating entire Pershing Square equity portfolio

14 April 2020

Hedge fund manager became so concerned about coronavirus he nearly sold his US stock market investments in February before protecting portfolio with bond trades.

Hedge fund manager Bill Ackman grew so concerned about the economic and health implications of coronavirus that he considered selling the entire portfolio of Pershing Square Holdings (PSH ) in late February.

While he decided to take out giant hedges to protect against losses instead, he has now revealed what stayed his hand, and why.

‘We considered, for the first time ever, liquidating the portfolio in its entirety because we believed it was likely that markets would decline materially,’ he wrote, in PSH’s annual report published last week.

‘After a careful review, we concluded that a hedging strategy was more consistent with our long-term ownership philosophy, and would likely lead to a better long-term outcome than selling off all of our assets.’

On 25 March Ackman announced the lucrative payoff from those hedges, which upon sale generated total proceeds of $2.6bn across Pershing Square funds and $2.1bn for PSH, roughly offsetting the losses seen across the £4.8bn investment company’s concentrated portfolio including hotel, restaurant and retail stocks. 

At the time, the activist investor said the reason he had arguably called the bottom of the market was increasing confidence that drastic governmental action, and particularly the beginning of lockdowns in the US, would bring the spread of Covid-19 under control, although he also did not rule out taking out further hedges.

The activist investor has now addressed directly whether that attempt to time the market was ‘prudent’, with so much uncertainty still prevailing.

‘We of course do not know whether the recent lows that have been achieved will be breached by further market declines,’ said the New York-based fund manager.

‘Our decision to unwind our hedges was driven by the less favorable risk-reward ratio offered by our credit hedges as spreads widened, and the much more favorable risk-reward ratio presented by the then-trading values of companies in which we bought shares.’

That outcome was to plough back gains into existing US equity positions, including reopening a holding in Starbucks (SBUX.O), now 10% of the portfolio, that had only been closed in January.

The comments add to information provided by Ackman on 26 March, rejecting criticism he might have sought to profit from an appearance on broadcaster CNBC by further driving down markets.

He revealed the hedges were credit default swaps on US investment grade and high yield credit indices and European debt. At the peak, their value had ballooned so they accounted for nearly 40% of Pershing Square’s capital as stock prices declined.

A further argument made in the results for the decision was that, in the event of the recovery, rapidly rising markets reduce liquidity, making it difficult for large buyers to jump back in.

‘We have therefore chosen to be a substantial buyer as markets have declined,’ said Ackman.

Reinvestment of the proceeds of the hedges included increasing stakes in Warren Buffett’s Berkshire Hathaway (BRKA.N), first bought last year, by 39% and Burger King-owner Restaurant Brands (QSR.TO) by 26%. He believes the group, along with Starbucks and burrito chain Chipotle (CMG.N) will ‘likely gain digital and delivery market share during this period, and will thereby emerge stronger from the crisis’.

Hotelier Hilton (HLT.N) was increased by 34%, on the back of its ‘dominant market position’, while home improvement chain Lowe’s (LOW.N) was upped by 46%.

The stake in Howard Hughes Corporation (HHC.N), which ‘has significant short-term exposure to the crisis’ with Texas property developments exposed to the oil downturn, was increased by 158% with a $500m dollar investment in what Ackman said was the first equity offering of any company since the crisis began.

That still leaves Ackman with a large pile of cash, up 4% to 18%, with which to make new investments.

The successful hedging and market timing have left PSH in positive territory for the year so far. At last week’s close the sterling shares, which were launched nearly three years ago, had gained 7.7% while the weekly updated NAV had advanced 12.7% up to the end  of March. This follows a bumper 45.6% total return last year for UK shareholders in the Guernsey-domiciled investment company.

Despite significant share buybacks, the stock continues to trade on a stubborn 31% discount below net asset value, according to Numis Securities, reflecting its earlier poor performance before Ackman re-focused his energies on the portfolio. Over five years the dollar shares, which were launched in 2017, have fallen 24% with the now quarterly dividends included. 

 

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