Every three months, a group comes together to review membership of the FTSE 100 index. If a Footsie member has fallen to below 110th in the size rankings, then it is ejected from the index. Likewise, if a listed company has risen to 90th or above, then it enters the FTSE 100. Thus, over its 36-year history, the index has changed and evolved to reflect more accurately the wider UK stock market.
The FTSE 100’s newbie
Usually, these quarterly reshuffles are pretty mundane, with outcomes usually obvious well in advance. But the next reshuffle — on Friday, 18 December — is rather exciting. That’s because the newest FTSE 100 member is a controversial hedge fund run by Bill Ackman, an outspoken American billionaire.
The newest FTSE 100 share is Pershing Square Holdings (LSE: PSH), a Guernsey-registered investment trust whose stock tracks the Pershing Square Capital Management hedge fund. In the low-key, secretive world of hedge funds, Ackman is a flamboyant activist and fundamental investor. He makes huge conviction bets that often pay off spectacularly — or fail miserably. For me, Ackman is a wild man who rolls the dice hard in order to generate ‘alpha’ (market-beating) returns.
Bill Ackman’s wildest bets
Ackman founded Pershing Square Capital Management in 2003. From the beginning, he made outsized bets on lowly valued US corporations. One high-profile investment was Ackman’s huge position in controversial drugmaker Valeant Pharmaceuticals. When Valeant’s stock collapsed following regulatory investigations and lawsuits into price-gouging, Ackman’s fund may have lost over $2.8bn on this trade. That’s a lot livelier than the typical FTSE 100 stock.
Ackman also waged a long war against the multi-level-marketing practices of Herbalife Nutrition, a US-based seller of nutritional supplements. Ackman alleged Herbalife was a ‘pyramid scheme’ and, by shorting Herbalife stock, aimed to profit from falls in its share price. Rival billionaire investor Carl Icahn took the opposing view, becoming a major shareholder in Herbalife. In 2014, Herbalife’s share price almost halved, thanks to intensive public campaigning by Ackman.
Foreseeing the economic carnage to come from Covid-19, he bought $27m of credit-protection products just before the March meltdown. Around a month later, he sold out for $2.6bn, whilst warning that “Hell is coming”. In other words, Ackman made almost 100 times his money in four weeks. He then reinvested this windfall into cheap shares. Wow. But is PSH a suitable vehicle for inclusion in the FTSE 100?
I’d buy Pershing Square shares
After a market-beating 2020 (the fund made a 62.8% gain to end-November), Ackman now manages $17bn of assets and has a $2bn personal fortune. I’ll admit that I’m a fan of ‘Wild’ Bill Ackman and his willingness to “make a bold call that nobody believes in”. His contrarian and activist style of investing appeals to me, as does the fact that his fund also gained 58.1% in 2019 (and after big losses in some years).
As I write, the PSH share price is 2,490p, just below its 2020 high of 2,559.85p on 1 December. This values the trust at just over £3.1bn. It’s also 2.2 times the 1,122p the low on 23 March. This newly minted FTSE 100 stock has soared by nearly four-fifths, leaping 79.7% in 12 months. Yet it trades at a discount of nearly a quarter (24.9%) to its underlying net asset value (NAV). To me, that’s far too wide a gap, so I would happily back Bill Ackman by buying this share today!
Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.