PSH.L - Pershing Square Holdings

[ValueMaven]

Complex tax treatment for U.S. Investors - similar to a K1 is what explains most of the discount to NAV.  I dont believe you can buy this in an IRA, and in a taxable account - you are hit with complex filings.  Does anyone have a good view on this??

[Jurgis]

Complex tax treatment for U.S. Investors - similar to a K1 is what explains most of the discount to NAV.  I dont believe you can buy this in an IRA, and in a taxable account - you are hit with complex filings.  Does anyone have a good view on this??

 

Read the thread. thepupil has discussed this couple times already. Yeah, you should not own this in taxable account. Regarding IRA, it's your decision ultimately.

[thepupil]

Complex tax treatment for U.S. Investors - similar to a K1 is what explains most of the discount to NAV.  I dont believe you can buy this in an IRA, and in a taxable account - you are hit with complex filings.  Does anyone have a good view on this??

 

I would push back a little that it "explains the discount". Pershing Square came public at NAV and was sold to international investors and US investors aware of the complex tax treatment. There are many similar funds in the UK/Netherlands that don't trade at such a discount. Would it help close the discount if these things were not in place? Absolutely! Ackman's brand is stronger in the US.

 

As has been said, this is a PFIC and should not be owned in a taxable account unless you want to make the requisite filings. there's no question there. 

 

I own the ADR in an IRA of an accredited investor. The IRA is not a rollover IRA, such that it can not be considered "ERISA" assets, as from my read, you potentially shouldn't invest ERISA money in PSH because it isn't registered with the SEC.

 

Can you own a PFIC in an IRA? the answer to that, in my opinion, is YES.

 

There are other potential issues. Which ones are you thinkin about specifically (UBTI? Foreign withholding tax? etc?).

 

Owning the ADR helps with some foreign holding reporting requirements. I don't think one could argue purchasing PSH = a "prohibited transaction".

 

PFIC:

 

https://www.lexology.com/library/detail.aspx?g=833d6ea6-ecaa-4210-a9d4-90b1fcf008ff#:~:text=General%20rules&text=As%20a%20result%2C%20for%20instance,subject%20to%20the%20PFIC%20rules.

First, the Final Regulations modify the definition of shareholder as announced by the US Treasury and the IRS in Notice 2014-28, whereby a United States (US) person shall not be treated as a shareholder of a PFIC to the extent such person owns PFIC stock through a tax-exempt organization or account. This effectively extends the exemption that was already afforded to the tax exempt organization under the temporary and proposed regulations to the US shareholder(s) of such organization, and expands the exemption to encompass tax exempt accounts as well. As a result, for instance, a US person owning stock of a PFIC through an individual retirement account (IRA) described in Section 408(a) will not be treated as the shareholder of the PFIC stock, and in turn, is not subject to the PFIC rules. Because Notice 2014-28 originally provided for the aforementioned exemption, it will be effective for the taxable years of US persons who own stock of a PFIC through a tax-exempt organization or account ending on or after December 31, 2013.

 

https://www.ey.com/Publication/vwLUAssets/US_persons_holding_PFIC_stock_through_tax-exempt_organizations_or_accounts_will_be_exempt_from_Form_8621_filing_requirements/$FILE/2014US_CM4364_US%20persons%20holding%20PFIC%20stock%20through%20tax-exempt%20orgs%20to%20be%20exempt%20from%20Form%208621%20filing%20reqs.pdf

 

 

I would note that an SEC registered mutual fund does own PSH NA. Perhaps they file the PFIC stuff on behalf of the underlying investors.

https://matissefunds.com/total-returns-for-period-ending-63014/facts-and-reports/

 

The brokerages themselves are split on the issue

https://www.barrons.com/articles/how-to-buy-bill-ackman-dan-loeb-on-the-cheap-1458970084

In the U.S., individual investors often need to be “qualified”—that is, have substantial income and liquid net worth—in order to buy hedge funds. The Ackman and Loeb funds, in contrast, can be purchased through many brokerage firms, including Merrill Lynch and Fidelity, without restrictions. Charles Schwab allows purchases with some restrictions, but Morgan Stanley allows only qualified investors with a net worth of $25 million or more to buy the two funds, as they aren’t registered in the U.S.

[ukvalueinvestment]

Can it really be correct to say that a demand issue in the US tax treatment is the cause of the discount?

 

After all investors all over the world have the ability to price up Bill Ackman risk and the merits of his vehicle.

 

If this was a screaming buy then plenty of UK investors would have done so.

 

I suspect that, like me, they want to like it but are put off by the structurally high fees and the fact that Ackman seems to have the potential to go "off piste" (Valeant, Herbalife) (ie same underlying concerns as US investors)

[aws]

It looks like they suspended their repurchases, since there hasn't been any announcements since September 3rd and they used to announce almost daily.  Perhaps that's to increase the chance of the FTSE inclusion people were talking about, but a side effect is the discount has also jumped back up to 35% of NAV.

[thepupil]

Just bumping for the $41/ share NAV (remember when this briefly hit $14?) pre any PSTH deal and to point out that PSH raised some 10 year money at 3.25%. At just okay LT  returns, PSH’s moderate leverage helps offset fee drag (as did repurchases when they were happening)

 

Very slight discount narrowing despite him having turned off repurchases for some time.

 

#InBillWeTrust

#FTSE250HereWeCome

#WhyPickStocksWhenYouCanInvestWithTheSilverFox

 

 

 

 

[thepupil]

Stock up 4%, narrowing to about 22% discount to last reported NAV.

 

Who knows, FTSE 100 inclusion + consummation of a deal at PSTH (as a reminder PSH gets the founders shares / right to invest more) may just get us into the more respectable mid teens discount range.

 

 

 

 

Fund manager Bill Ackman's Pershing Square Holdings is on the brink of being included in the U.K.'s blue chip FTSE 100 index, after delivering an impressive run of performance during the coronavirus pandemic.

 

The fund's share price has jumped by 116% to 2,459 pence (3,274 cents) on Nov. 30, from March 23 when it stood at 1,134 pence.

 

Over the past 12 months, the fund's share price is up 48% while the FTSE 100 index has fallen 10%.

 

"Shares in PSH have leapt partly due to deft choreography by CEO Bill Ackman's fund management team during the coronavirus crisis. Moves to hedge its equity portfolio just before the pandemic hit paid off when the market crashed in late March," said Susannah Streeter, senior investment and markets analyst at investment platform Hargreaves Lansdown.

 

Pershing Square hedged its portfolio in February after predicting that economic shutdowns were coming to Europe and the U.S. in line with China's experience of coronavirus.

 

Pershing Square bought "very large" numbers of credit default swaps on the assumption that U.S. and European credit spreads would widen when the expected lockdowns took place, according to a March 26 letter to investors.

 

"By March 12th, our CDS contracts had increased in value to $2.75 billion, and we began selling," the letter said.

 

A CDS is a derivative that allows an investor to swap their credit risk with that of another investor.

 

"The company has been waiting in the wings for some time, but there is a chance it could move from FTSE 250 understudy to a FTSE 100 performer," Ms. Streeter said.

 

Changes to the FTSE index will be announced on Dec. 2 based on closing prices on Dec. 1, with changes effective after close on Dec. 18.

 

To enter the FTSE 100 index, potential joiners have to number in the top 90 by market capitalization to ensure inclusion, and existing constituents have to drop outside the top 110 to guarantee demotion.

 

Entering the FTSE 100 can boost shares further, as funds that track the index are likely to include the new entrant's shares in their portfolios. It also brings a softer benefit; conferring upon constituents the prestige of being described in the media and elsewhere as a premium, "blue-chip" stock.

 

 

[ValueMaven]

Still struggle w/how a U.S. investor can buy this w/o all of the annoying tax considerations.  I guess I havent done enough research into this yet.  I prefer Pershing Square Holdings over the SPAC at this point - which is trading like 25% above cash

[SI]

These guys were added to the ftse 100 after the lse close. Share inclusion date is a few days before Xmas.

[LC]

Billy Acks webinar:

 

[thowed]

Stock up 4%, narrowing to about 22% discount to last reported NAV.

 

Darn it, yet another 'sin of omission' on my part.  Classic 'I'll wait til the discount gets to 30% again' tightness.

 

That said, I still don't really understand the portfolio, but it should have gone into my 'what if I'm wrong' basket.

 

Well done, Pupil.

[petec]

I concur: well done Pupil.

 

I'm trying to quantify the impact of the fee schedule here.

 

My understanding is that the fees are basically:

- 1.5% per annum (charged as 0.375% per quarter, in advance).

- 16% of NAV above a high water mark.

 

Simplifying this so that the NAV goes up steadily every quarter, I get the following results.

 

Assuming 2% growth per quarter (8.2% per year), after 5 years I get a 49% return before fees and 32% after fees.

 

Assuming 3% per quarter (12.6% per year), after 5 years I get 81% before fees and 57% after fees.

 

To double your money in 5 years, the silver fox has to deliver 4.4% per quarter (18.8% per year), which gives 137% before fees and 100% after fees.

 

Does this feel about right to those who understand it better than me?

 

 

[Foreign Tuffett]

I concur: well done Pupil.

 

I'm trying to quantify the impact of the fee schedule here.

 

My understanding is that the fees are basically:

- 1.5% per annum (charged as 0.375% per quarter, in advance).

- 16% of NAV above a high water mark.

 

Simplifying this so that the NAV goes up steadily every quarter, I get the following results.

 

Assuming 2% growth per quarter (8.2% per year), after 5 years I get a 49% return before fees and 32% after fees.

 

Assuming 3% per quarter (12.6% per year), after 5 years I get 81% before fees and 57% after fees.

 

To double your money in 5 years, the silver fox has to deliver 4.4% per quarter (18.8% per year), which gives 137% before fees and 100% after fees.

 

Does this feel about right to those who understand it better than me?

 

Why ever assume NAV goes up steadily each Q?  This is Bill 'I love the smell of portfolio volatility in the morning' Ackman. He makes big bets. Sometimes they pay off and sometimes they do not.

[thepupil]

he's not making that assumption, he's just trying to confirm his calculation of expected gross-net spread which is something like this.

 

Gross        Fees

0.00%      -1.5%

5.00%      -2.1%

10.0%      -2.9%

15.0%      -3.7%

20.0%      -4.5%

 

i'll throw out what I think is a reasonable expectation of 11.2% gross, 8.2% net, which is comprised of 10% return on the investment portfolio with 20% leverage at cost of 4% (2039 bonds yield 3.5%, but have a 4.9% coup, 2030's yield 3%, 3.25% coupon).

 

I would be satisfied, but not ecstatic if NAV growth is 8% / year for the next decade; I think this is an equity rate of return. this assumes a significant degradation in alpha generation from Ackman's prior record* given size/inevitable hiccups. 2030 NAV would be $96 / share in this instance.

 

*(2004-2019 = 14% net / year, 2020 he's up 62% net, Ackman has generated very good returns for 16 years. Gotham compounded at a good rate from all information I can find, making his 1993-present TR one of the best of which I am aware)

 

 

 

petec, i agree with your calc, have a 97% cumulative net return at 18.8% gross for 5 years.

 

 

 

 

 

[petec]

I concur: well done Pupil.

 

I'm trying to quantify the impact of the fee schedule here.

 

My understanding is that the fees are basically:

- 1.5% per annum (charged as 0.375% per quarter, in advance).

- 16% of NAV above a high water mark.

 

Simplifying this so that the NAV goes up steadily every quarter, I get the following results.

 

Assuming 2% growth per quarter (8.2% per year), after 5 years I get a 49% return before fees and 32% after fees.

 

Assuming 3% per quarter (12.6% per year), after 5 years I get 81% before fees and 57% after fees.

 

To double your money in 5 years, the silver fox has to deliver 4.4% per quarter (18.8% per year), which gives 137% before fees and 100% after fees.

 

Does this feel about right to those who understand it better than me?

 

Why ever assume NAV goes up steadily each Q?  This is Bill 'I love the smell of portfolio volatility in the morning' Ackman. He makes big bets. Sometimes they pay off and sometimes they do not.

 

I'm not sure whether the timing of gains changes the impact of fees over a 5 year holding period. That's something I will test in a second step. But as I first step I wanted to exclude timing from the analysis. 

[petec]

he's not making that assumption, he's just trying to confirm his calculation of expected gross-net spread which is something like this.

 

Gross        Fees

0.00%      -1.5%

5.00%      -2.1%

10.0%      -2.9%

15.0%      -3.7%

20.0%      -4.5%

 

i'll throw out what I think is a reasonable expectation of 11.2% gross, 8.2% net, which is comprised of 10% return on the investment portfolio with 20% leverage at cost of 4% (2039 bonds yield 3.5%, but have a 4.9% coup, 2030's yield 3%, 3.25% coupon).

 

I would be satisfied, but not ecstatic if NAV growth is 8% / year for the next decade; I think this is an equity rate of return. this assumes a significant degradation in alpha generation from Ackman's prior record* given size/inevitable hiccups. 2030 NAV would be $96 / share in this instance.

 

*(2004-2019 = 14% net / year, 2020 he's up 62% net, Ackman has generated very good returns for 16 years. Gotham compounded at a good rate from all information I can find, making his 1993-present TR one of the best of which I am aware)

 

 

 

petec, i agree with your calc, have a 97% cumulative net return at 18.8% gross for 5 years.

 

Very useful, thanks.

[thepupil]

While I may get laughed out of the room for suggesting this; I’d also throw out there that Billy may lower the fees over time if the discount persists “forever”

 

also i forgot to mention that, fees do potentially get reduced by 20% of incentive fees earned by Pershing Square from external (non PSH public shares) LP

s. Because PSH is much bigger than Pershing Square's normal LP's, this isn't a big amount.

 

It used to be a more material consideration.

 

see page 40

https://assets.pershingsquareholdings.com/2020/08/28125504/Pershing-Square-Holdings-Ltd.-June-2020-Interim.pdf

[thepupil]

not to spam here, but just to pencil things out more explicitly

 

If PSH can make an 8% net return over the next decade, and at any point trades to NAV, then your IRR over the next decade will look like the first column (where the variable is the year it trades at NAV).

 

If it trades to a 15% discount, then the second column. At a constant multiple (no re-rating) you simply earn the net return (if it widens then you make less than the net return and so forth)

 

it's a simple excel function, though reality will obviously be far noisier. the go-forward return and the discount are probably correlated (one would think the better PSH does the lower the discount, but that hasn't been the case in 2020 as even now the discount is wider at ~25% vs since inception average of 18%, 5 yr average of 22%)

 

EDIT: threw in the march 2020 40% discount for shits&gigs

 

0%           15%                  40%

1    46%        25%            -10%

2    26%        16%

3    20%        14%

4    17%        12%

5    15%        11%            4%

6    14%

7    13%

8    12%

9    12%         

10  11%          10%            6%

[johnpane]

What lag after the dividend pay date is typical for the funds to be credited to U.S.-based brokerage accounts?

 

[thepupil]

about a week for the ADR at fidelity (payable 9/17, showed up 9/23)

[choubris]

Can someone explain why PSH's stock price would ever move closer to NAV? What mechanism would cause this? For an ETF there's the system of Authorized Participants arbitraging the price. For a closed-end fund there's nothing? Why would we believe the gap would narrow?

[Guest cherzeca]

Can someone explain why PSH's stock price would ever move closer to NAV? What mechanism would cause this? For an ETF there's the system of Authorized Participants arbitraging the price. For a closed-end fund there's nothing? Why would we believe the gap would narrow?

 

you could absolutely buy the majority of PSH's holdings and short PSH.  but suppose PSH announces a big whoopee acquisition through the SPAC etc. PSH goes up and your individual holdings sit there, dumb and happy. does this risk explain price differential? I dunno.

[choubris]

Yeah, I can see the argument that PSTH being successful has a halo effect on PSH. Or that PSH's NAV will keep going up and so will PSH. I just don't understand why the difference to NAV would narrow. I found the 'closed-end fund puzzle' articles, but they also offer no strategy for how the gap would narrow. So my conclusion is there's lots of wishful thinking that it will narrow because … 'the market will recognize Bill Ackman's skill at making money which will narrow the gap'. (He also writes about this in his latest letter)

 

I'm genuinely curious if there's something I'm missing because PSH does look attractive, even more so if there's reason to believe the NAV gap will narrow/close.

[thepupil]

There’s no arbitrage mechanism. The balance of buyers and sellers (“the market”) will determine the discount.

[Guest cherzeca]

There’s no arbitrage mechanism. The balance of buyers and sellers (“the market”) will determine the discount.

 

there absolutely is an arb strategy, but every arb strategy requires a catalyst. if you think PSH closes discount with a catalyst event, you just buy PSH...no arb. if you think PSH discount will expand, short name buy majority holdings...then you are betting against ackman pulling out a catalyst acquisition out of his hat.  so not attractive to me as I think ackman is loaded for bear