Andrew Bary
Investor Bill Ackman's flagship fund had its worst year of relative performance versus the S&P 500 since 2017, but his management company still stands to reap a sizable incentive fee.
Pershing Square Holdings, a European-listed closed-end fund whose shares also are traded in the U.S. under the ticker PSHZF, returned 10.2% based on its net asset value during 2024, according to information on the fund's website. That compares with the nearly 25% total return on the S&P 500 index.
Barron's estimates that the fund, with a net asset value of $13 billion, could have produced $200 million in incentive fees plus $190 million in base management fees for Ackman's investment firm, Pershing Square Capital Management. Pershing Square had no comment.
Assets at Ackman's firm totaled more than $17 billion at the end of 2024, so the Pershing Square Holdings fund accounts for the majority of the total.
Ackman, a billionaire, is focused on what he views as quality growth stocks. Pershing Square Holdings has a concentrated equity portfolio involving about a dozen stocks including Alphabet, Restaurant Brands International, Chipotle Mexican Grill, and Hilton Worldwide Holdings.
Several laggards, including Restaurant Brands, depressed performance last year. The fund owns only one of the Magnificent Seven stocks: Alphabet.
The fund has a high fee structure, similar to those for hedge funds. It charges a base management fee of 1.5% annually and an incentive fee of 16% of the fund's returns. There is no hurdle rate for the incentive fee but it is subject to a high-water mark, meaning it isn't payable when the fund is recouping losses.
U.S. mutual funds, meanwhile, are required to beat a benchmark to earn incentive fees.
Pershing Square Holdings, which went public 10 years ago, is one of the largest closed-end funds. It has long traded at a big discount to its net asset value, but the gap broadened to 33% at the end of 2024 from 29% a year earlier. The fund's net asset value stood at around $71 a share on Dec. 31, a hefty premium to the share price of $47.65.
Most U.S. closed-end equity funds trade at discounts of less than 15%.
Ackman had a disappointing 2024 in terms of investments. Not only did Pershing Square Holdings lag far behind the market, he had to withdraw a proposed offering to sell a large U.S. closed-end fund due to insufficient demand about six months ago.
Pershing Square Holdings is off to a good start in 2025, partly because of its holdings in Fannie Mae and Freddie Mac. The mortgage-finance companies' stocks have risen about 75% so far this year as investors bet that the incoming Trump administration may release them from government control, resulting in a bonanza for investors.
Ackman, who has more than a million followers on X and was one of the most prominent Trump supporters in the investment community, has tweeted favorably about the outlook for Fannie and Freddie. But Pershing Square Holdings doesn't report the size of its Fannie and Freddie holdings, making it hard to gauge the impact on the fund.
The fund's shares have gained 5% so far this year to around $50. Pershing Square Holdings has yet to report any January performance data. That could come later this week.
Barron's has argued that the high fee structure for what amounts to a long-only equity fund contributes to the wide discount on Pershing Square Holdings. Ackman has a small investment staff of just a few dozen and arguably could get by with just a base management fee.
Still, we have written favorably on Pershing Square Holdings despite the fees because the stock's discount to net asset value offsets that cost by allowing investors to buy assets for a good deal less than they are worth. The fund also gives investors access to Ackman, a renowned investor who has a strong record in recent years.
Ackman's view has been that the fund is more than its equity investments. He says it also benefits from periodic macro bets, such as a corporate-bond hedge that paid off big during 2020, that differentiate it from regular open-end and closed-end equity funds.
The fund clobbered the S&P 500 in 2019 and 2020, but trailed behind the index from 2015 through 2017.
The fund's shares have returned 8% annually since it went public via an initial public offering in 2014, putting it well behind the S&P 500's 13%-plus annual total return, Bloomberg data show. The fund's returns are higher than 8% based on the NAV.
Pershing Square Holdings can be tricky for U.S. investors to purchase because it is based overseas. Tax filings can be more complicated than for a U.S. mutual fund, with investors getting a passive foreign investment company statement, which is similar to a K-1 filing for publicly traded limited partnerships.
Potential investors need to accept the high fee structure because Ackman owns more than 20% of the fund, making it difficult for an activist to challenge his decisions. Fees could be lower is Ackman can revive his U.S. fund.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
January 08, 2025 03:00 ET (08:00 GMT)
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