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Bill Ackman’s Pershing Square: 4 things investors should know

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Bill Ackman’s Pershing Square (LSE: PSH) has been confirmed as a new entry to the FTSE 100. After a stellar run, the investment trust will enter the blue-chip index later this month and I believe investors need to know the following four things.

#1 – The portfolio

Pershing Square is Ackman’s hedge fund, which makes concentrated investments in North American companies. Ackman can ‘go long’ and bet the stock will rise, or ‘short’ where he believes the share price will fall.

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As of November, the hedge fund manager had 10 long positions in North American companies. The stocks included coffee house chain Starbucks and restaurant brand Chipotle. Like Warren Buffett, Ackman invests in simple, predictable businesses that have high barriers to entry. Buffett would describe these companies as having a moat around them.

Ackman takes big positions in companies where he is typically the largest shareholder. This way he can be an activist investor and it able to influence the company at board level.

#2 – Pershing Square Tontine Holdings

Within Pershing Square’s 10-stock portfolio, Ackman holds a large stake in Pershing Square Tontine Holdings. It listed on the New York Stock Exchange in July 2020 and is Ackman’s Special Purpose Acquisition Company (SPAC).

An SPAC is a company created with the sole purpose to merge or acquire other businesses. The SPAC raises money from investors and then uses these funds to purchase existing businesses.

Pershing Square investors get access to Ackman’s expertise in mergers and acquisitions of companies through PSTH.

#3 – Performance

Ackman is a man who makes big bets. Earlier this year, he was concerned over the economic impact of Covid-19 on the American economy.

In February, Ackman backed his concerns with a $27m bet on financial instruments, whose value would rally when investors started to protect themselves against companies defaulting. This bet worked in Ackman’s favour and he made a profit of $2.6bn in the market crisis, which he reinvested in undervalued companies. Pershing Square’s strong performance this year has been driven by this trade.

Recently, Ackman has repeated his bearish call. Although not as big as his earlier bet, the hedge fund manager believes US companies will struggle and has taken insurance against corporate defaults to hedge the risk of his stock portfolio falling in value.

#4 – Discount to NAV

Pershing Square shares are trading at a discount of 24% to its Net Asset Value (NAV). The investment trust’s entry into the FTSE 100 should somewhat reduce this discount.

All the passive funds that track the index will need to buy the shares in substantial quantities. This bulk buying means that Pershing Square’s share price is expected to rise in the short term.

Would I buy?

I expect Pershing Square shares to rise in the short term but I won’t be buying. Ackman’s large bets make me uncomfortable and he has a very concentrated portfolio.

It’s great when the investments work in his favour but his large calls can also go sour. I can’t help but question whether he will be able to replicate the success of his earlier bet and am uneasy about paying a significant performance fee.  

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Chipotle Mexican Grill and Starbucks and recommends the following options: short January 2021 $100 calls on Starbucks and short January 2021 $100 calls on Starbucks. 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.