With all sectors of investment companies trading below asset value as high inflation and interest rates alarm stock markets, contrarian investors are spoiled for choice looking for potential closed-end fund bargains.

Analysts at Investec believe there are fewer bigger opportunities right now than Pershing Square Holdings (PSH ), the £6.1bn, FTSE 100-listed North America equities fund in whose shares the broker makes a market.

Despite mounting a ‘spectacular recovery’ in the past five years, Pershing Square shares continue to languish on a 33% discount, leading Investec’s Alan Brierley and Ben Newell to say it is ‘fundamentally mispriced’ and still tarred with ‘misconceptions’ five years after fund manager Bill Ackman refocused his attention on the portfolio and stopped activist short selling.

This followed a bad experience campaigning against US nutrition supplements group Herbalife.

Ackman’s decision to stop raising money for other open-ended hedge funds run by his firm Pershing Square Capital Management in New York has also paid off with a significant improvement in PSH’s performance.

Morningstar data shows PSH has badly underperformed the US stock market since launch in October 2014, with net asset value (NAV) up 136.6% but the shares delivering just 80.7% against the index return of 180.1%

However, in the five years to 31 May the analysts say the Guernsey investment company is ranked first out of 141 investment trusts and open-ended funds investing in North America.

Including dividends, it grew NAV by 229.1%, far beyond the 63.8% peer group average and the 81% sterling return from the US stock market as measured by the S&P Composite index.

Pershing has pulled away from the S&P

Source: Morningstar, dollar returns over five years

If you’re wondering what the discounted share price has generated for shareholders, the latest answer, as our chart shows, is a 177.7% total return up to yesterday’s close. Although less than the 223.5% growth in NAV, it still beats the 86% from the S&P 500 and trounces the six other London-listed North America funds (source: Numis Securities).

Core to this ‘remarkable’ performance are two macro trades of a lifetime that Ackman pulled off during and after the 2020 pandemic. First, as coronavirus struck the West, he quickly piled in and out of credit default swaps, a form of insurance on bond prices, in order to generate a large profit to offset the falls in his US stock picks as the developed world went into lockdown.

Concerned about the inflationary impact of governments’ Covid-19 support measures at the end of 2020 Ackman ‘hit the ball out of the park again’ with interest rate hedges to protect his equity positions against the surge in the cost of living.

Together, these trades generated an astounding $5.3bn in proceeds at a cost of just $446m. While Brierley and Newell do not dwell on the huge performance fees these generated, it is a fact that they inflate investors’ total estimated costs to around 6%, according to the company’s key information document.

That is a factor in the shares’ chronic discount as the presence of such high charges discourages wealth managers in particular from buying the stock.  

It is also a fact that the remarkable performance that the analysts highlight is after all charges and costs, which might make it less important an issue.

Instead, the Investec pair turn their attention to the core, concentrated equities portfolio assembled by Ackman and his team. Although the success of the macro trades clouds the picture, they believe Pershing Square is not really a hedge fund at all, holding a straightforward collection of ten high-quality, conservatively-financed businesses with recurring cashflows and high barriers to entry, the latest addition being a $1.1bn investment in Google parent Alphabet.

The analysts said the stocks are ‘typically non-cyclical, economically resilient businesses which are believed to have limited downside’ such as Canadian Pacific, the only North American rail operator with a direct route from Canada to Mexico; Chipotle, the Mexican grill restaurant chain; and Universal Music Group.

‘At a time when actively managed US large-cap funds are continuing to struggle to beat the S&P Composite, we firmly believe that Pershing Square Holdings is a unique and compelling investment proposition, and that strong fundamentals are enhanced by the current rating,’ said the analysts, who also appreciate the team’s hefty ‘skin in the game’ owning nearly £1.4bn of shares following concerted buybacks by the board to narrow the discount.

With Ackman having previously flagged the possibility of re-listing Pershing Square in the US to bring it closer to its natural investors, there is a chance that corporate action could eventually eradicate the discount, making Investec’s note a timely reminder of the merits of this unusual fund.