Understanding the share price movements

The main reason for the FTSE 100 fall last week was the mini-budget from the Chancellor. Even though I feel the cuts in taxation and stamp duty are positive for some stocks in the medium term, other UK assets suffered. For example, the British pound was battered, falling to the lowest level since 1985 against the US dollar. With bond markets also having a terrible week, this negative sentiment pulled the stock market down with it.

Despite this, Pershing Square shares pushed higher. It’s actually a fund that has the ability to buy and sell a range of stocks, along with more complicated financial instruments. According to the half-year report, it recorded a 9.9% gain from interest rate swaptions. These derivatives essentially allow the fund managers to take a view on future interest rates. Clearly, they’ve called the move correctly!

The fund has almost half of the invested money in US stocks. Even though the US markets were down last week as well, the focus of the fall was the UK. Given the lack of exposure to UK stocks, it doesn’t massively surprise me that the fund didn’t lose a lot of ground on Friday.

Would I buy the stock?

Looking at the broader picture, I think it could be a smart move to buy shares in Pershing Square. I like the unconstrained nature of the fund. It doesn’t just have to invest in stocks. If it has a firm conviction on interest rates or other financial assets, it can action this view. This could allow the share price to outperform even during a bear market for stocks.

This can be seen from the one-year performance, which is positive, even though most stock markets around the world have lost ground.

I do note that this can be taken as a risk though. The fact that it can short a stock means that losses can balloon quickly. This has been the case occasionally in the past, with founder Bill Ackman being contrarian on some picks.

Further, the share price currently trades at a large 35% discount to the net asset value. The company has commented that it’s not happy about this discount. Yet it represents a good opportunity for me to step in as a long-term investor. In years to come, if this discount reverts back to the actual value of the net assets, I’d be in profit.

When I have some free cash, I think I’ll buy Pershing Square shares for my portfolio.

Under the guidance of Bill Ackman, the managers of Pershing Square (LSE:PSH) have been actively buying shares in companies that include Lowes Companies Inc (Home Improvement), Chipotle, Domino’s Pizza and Hilton Worldwide. While the rest of us consider scaling back our restaurant visits and delaying house renovations, Mr. Ackman and his team believe there is plenty of life yet in consumer discretionary spending Stateside.

At present, the Pershing Square share price trades at a significant discount to asset value despite its impressive run over the last two months. Such performance in the face of poor economic data could reflect a belief that the US Federal Reserve will in fact be able to engineer a soft landing and consequently will be able to slow or even reduce interest rates faster than the prevailing consensus.

Time will tell. Recent comments from Jerome Powell do admittedly make that soft-landing scenario look less likely.  But bearing in mind that share prices are there to reflect future earnings, not present, and that the US tends to lead the prevailing cycle, Pershing Square may prove to be fortuitous buy for me.

Mr. Ackman has enjoyed a colourful investing career and has certainly made some calls that missed rather spectacularly. Shorting the US supplement maker Herbalife is one such example. But the Pershing Square of today is a different company, no longer the aggressive hedge fund, but practitioners of the more longer-term, more sustainable principles of ‘buy and hold’ investing. This is a transition that Mr. Ackman himself is keen to stress, even stating that some of investments are in businesses where an “exit will not be required”.

Interestingly, however, he is understood to have made significant sums for the fund in the derivatives market, using more complex financial instruments that profit from the expectation of higher future inflation and interest rates. Such practices reflect those skills and behaviour of the former hedge fund manager. Considering the relatively low amount of capital involved in such trades (1.4% has been quoted), this appears to me to be an acceptable risk-to-reward strategy that has the benefit of muting the worst of the economic news.

I have not yet decided if Pershing Square deserves a place in my portfolio. I am certainly going to keep it on my watchlist and take another look at it when I feel more confident that consumer sentiment is on the rebound.

Investment trust

Pershing is an investment trust that looks for long-term investment in primarily North American companies. Founded in 2012, the fund is managed by renowned investor Bill Ackman. The billionaire is known as an activist investor, which is defined as an investor who typically looks to get involved in how a business is run.

So what’s happening with Pershing shares currently? Well, as I write, they’re trading for 2,705p. At this time last year, the stock was trading for 2,453p, which equates to a 10% return over a 12-month period.

UK shares have risks

One of the main issues I always consider when it comes to investment trusts and hedge funds is the risk of over-diversification. This is basically that, when there are lots of different types of companies in a fund, it can often have an overall negative impact on the rate of return. This can be due to different sectors having varying levels of returns. I do understand that diversification is important, but sometimes too much can be negative. This is something I carefully consider when looking at investment trusts like Pershing.

Next, even renowned investors get it wrong sometimes. For example, Ackman’s Pershing bought Netflix stock and to say the investment did not yield returns, would be a fair assessment. In fact, it sold its stake at a $400m loss back in April. However, I do understand that a past track record is not a guarantee of the future.

The bull case and my verdict

So let’s take a look at some of the positives of Pershing shares then. Whenever I consider any UK shares, I look at rates of returns. These can be broken down further when it comes to investment trusts. For example, I want to know the rate of cumulative return. For Pershing, a cumulative rate of return of over 230% since its inception is impressive.

Next, I look at returns in the form of dividends that would boost my passive income. The current dividend yield of Pershing shares is 1.5%. This is lower than the FTSE 100 average of 3%-4%, but I would expect this to continue to grow. I am aware that dividends are never guaranteed, however.

At current levels, Pershing shares look dirt-cheap to me on a price-to-earnings ratio of just under three. The general consensus is that a ratio of 15 and below on the FTSE 100 represents value for money.

Overall, I like the look of Pershing shares and would buy some for my holdings. As well as the passive income opportunity, cumulative rate of return, and dirt-cheap shares, I feel like I can learn a lot about stock picking and boosting my own portfolio too if I bought the shares. Ackman and his team have a great track record. I might get better at picking UK shares that will boost my returns in the long term by learning from them and their habits.

Scottish Mortgage Investment Trust (LSE: SMT) and 3i Group (LSE: III) are long-standing Footsie constituents. They were joined by Pershing Square Holdings (LSE: PSH) two years ago following its promotion from the FTSE 250. Let’s examine each in turn.

Scottish Mortgage Investment Trust

The Scottish Mortgage share price has risen 150% over five years, despite a substantial recent drawdown. The investment trust offers shareholders exposure to US growth stocks, Chinese shares and unlisted equities.

Scottish Mortgage has a significant concentration in biotech stocks. Leading mRNA technology pioneer Moderna and DNA-sequencing outfit Illumina feature in its top three holdings. They’ve helped Scottish Mortgage deliver stunning returns recently, but both stocks have fallen around 50% in 2022.

Scottish Mortgage shares have a high risk/reward profile. Deputy Manager Lawrence Burns recently stated “genuine long-term investing requires not just patience but the ability to endure periods of intense discomfort. We have experienced such discomfort often with our holdings.”

Taking Moderna as an example, mRNA technology has potential applications beyond Covid-19 vaccines to a range of healthcare issues from influenza to cancer. I believe it would be short-sighted to ignore Scottish Mortgage’s future growth prospects based solely on recent share price declines in its holdings.

3i Group

Venture capital group 3i has a particular focus on private equity and infrastructure in North America and Northern Europe. With a low price-to-earnings ratio of 2.69 and a dividend yield of 4.18%, 3i stock looks to me like an attractive value investment prospect at present.

Barclays recently issued a target of 1,840p for the 3i share price — considerably above today’s price of 1,112p. The investment trust’s most recent results give credibility to this bullish forecast. Total revenue for the last financial year increased by 44%. Furthermore, 3i hiked its dividends by 30%.

I see room for further growth, but 3i shares aren’t immune to challenges posed by soaring inflation. Consumer goods stocks make up a large portion of its portfolio. These companies are particularly susceptible to fluctuations in household spending.

Pershing Square Holdings

Bill Ackman’s investment trust is notable for its unique activist investment approach. Pershing focuses on large-capitalisation North American companies with strong potential that often have financial difficulties.

Pershing’s cumulative return of 234% since its inception in 2012 looks impressive at first glance. However, it trails the S&P 500‘s 278% return over the same period.

Ackman is undeniably a successful investor. After all, his net worth totals $2.8bn. However, recent blunders — including an ill-fated foray into Netflix shares — show even the most prescient investors make mistakes. Pershing liquidated its $1.1bn stake in April for a $400m loss.

Which FTSE 100 investment trust would I choose?

Each investment trust adopts a different investment philosophy, giving shareholders exposure to different corners of the stock market.

Currently, I think 3i is the best fit for my portfolio. After recently leapfrogging Scottish Mortgage to become the UK’s largest investment trust, it’s the first one I’d invest in.

Benefiting from volatility

A stock market crash should contain the usual characteristics of high volatility and large daily swings. From that angle, stockbrokers and investment managers should benefit. Therefore, I’d consider buying shares of Hargreaves Lansdown (LSE:HL). The company offers retail investors a platform to trade stocks as well as offering ISAs and other investment tools. The share price is up 3% over one year.

The business makes more money when clients engage in higher levels of activity. So more volatility in the markets would be a good thing for Hargreaves Lansdown. As an ISA provider, it should also benefit from an influx of funds in a few months to tie in with the deadline next April.

Although I think a stock market crash could see the company make higher revenue per client, the risk is that some clients withdraw funds. If investors are worried about the root cause of the crash, then they might take funds out and hold it as cash.

Getting help from the pros

A second company that I’d buy if we see a crash is Pershing Square Holdings (LSE:PSH). The stock is quite unusual in the sense that it’s basically a listed hedge fund. The fund managers have a fairly free remit on what stocks to buy and sell, along with other more complicated derivative trades. The bottom line is that the stock price should track the net asset value of the fund.

If we do see a stock market crash, I think holding some money with the professionals is a good move. The share price is up 37% over the past year. I know that the fund holds stocks from all over the world, but if I compare the return to the FTSE 100 benchmark of 28%, I can see the excess return generated.

The risk here is that trades can go very wrong. The founder, Bill Ackman, once made a huge loss betting against Herbalife. Another similar case could always happen.

A defensive option for the stock market crash

The final stock I’d pick up is J Sainsbury (LSE:SBRY). This might sound somewhat dull in comparison to the other two options. But if we do see a stock market crash, I’m going to want some protection. The supermarket chain should perform better than most in the market as it’s a defensive stock. It could see inflows from other investors who are thinking the same. Over the past year, the share price is up 43%. 

The reason it’s a defensive stock is because the supermarket offers essential goods. Regardless of the underlying cause of the crash, people will still need to eat and drink. 

A risk here is that supply chain disruption could mean the company might not be able to handle the surge in demand. This is something I’d need to keep an eye on.

The FTSE 100’s winners and losers in October

The FTSE 100 actually includes 101 shares, because one is dual-listed. Of these 101 stocks, 64 increased in value in October. The highest rise was 14.3% and the smallest increase was a tiny 0.1%. The average gain across all 64 winners was 5.7%, almost triple the wider index’s increase. At the other end of the scale lie 37 losing stocks, with losses ranging from a mere 0.4% to a marked decline of 14.8%. The average loss across all 37 losers was 4.7%.

This low-profile share caught my eye

Looking over the 13 Footsie shares with gains of 9% and more, I spotted one fairly obscure stock that I’ve been monitoring for some time. Unlike the FTSE 100’s many household names, this particular stock is fairly obscure — even arcane and mysterious. The Footsie winner to catch my attention for its October performance is Pershing Square Holdings (LSE: PSH). For the record, Pershing was in the top 10 of Footsie gainers this month, recording a 10.7% rise.

Pershing has easily beaten the FTSE 100

I imagine that if I asked the average person in the street what Pershing Square Holdings does, I’d get a blank stare. But, to me, Pershing is a most fascinating and unusual UK stock, because it’s actually a listed hedge fund. However, I’ve written about this unusual share lurking in the FTSE 100 only four times in 2020-21.

Before I explain what Pershing does, I’ll first set out its share-price performance over various periods. On Friday, PSH stock closed at 2,940p, up more than a tenth (+10.7%) over one month. It’s also ahead 16.2% over three months and 8.5% over six months. Over one year, it has leapt by 42%, comfortably beating the FTSE 100’s gain of 29.8%. Over five years, it has absolutely obliterated the Footsie (+8.1%), skyrocketing by 142.2%. Impressive.

PSH is a listed hedge fund

Buying a PSH share for less than £30, I can invest in Pershing Square Capital Management (PSCM). PSCM is a successful US hedge fund run by American investor Bill Ackman. Ackman’s successful stock-picking has delivered him a net worth of $3.3bn (£2.4bn). Today, PSH’s market value is over £6.2bn. PSH is actually an investment trust, with shares listed in London since May 2017. ‘Wild Bill’ Ackman is known for making large, value-driven bets on listed stocks. In one month in 2020, he turned $27m into $2.6bn by buying credit-protection derivatives weeks before ‘Meltdown Monday’ (23 March 2020). Wow.

In my view, Bill Ackman is one of the best fundamental/value investors in the business. I don’t own PSH, but I’d be more than happy to entrust some of my money to him. Indeed, I’m annoyed that I didn’t buy PSH stock when it fell below £25 in August. Nevertheless, I’m rather excited at the thought of owning part of a hedge fund (something normally reserved for the ultra-rich). But I’m also expecting a fairly rocky ride along the way. In 2020-21, PSH stock has ranged from a low of 1,122p on 23 March 2020 to a high of 2,955p today. Hence, while I’m willing to take a punt on PSH and Bill Ackman, this is not a stock for faint-hearted or risk-averse investors!

A hedge fund hidden in the FTSE 100

Hedge funds are private investment vehicles run for the benefit of their managers and wealthy investors. In return for actively investing, hedge fund managers usually charge 2% a year in fees, plus 20% of profits beyond agreed benchmarks. Hedge fund managers employ a variety of strategies to produce market beating returns. They invest in a wide range of assets, including stocks, bonds, property, credit, commodities, gold, and so on. To boost returns, they may use leverage (investing borrowed money) or aggressively gear up through financial derivatives. But as they are considered high-risk investments, hedge funds are only available to high net worth (HNW) clients. Hence, typical minimum investments into successful hedge funds might be £500k or even £1m. And yet we have a listed hedge fund hiding in plain sight within the UK’s FTSE 100.

With a market value of £5.3bn, Pershing is one of the FTSE 100’s smaller members (#97 out of 101 by market cap). Its modest size might mean that the business is overlooked by Footsie fans who focus on mega-cap investing. But I see Pershing as a most interesting and unusual Footsie share — and one I’m keen to invest in right now.

How PSH has performed

To show you what I mean, here is this FTSE 100 stock’s performance over seven different timescales. These returns are based on PSH’s closing price of 2,515p on Friday:

One day: +0.8% | Five days: -3.3% | One month: -3.1% | Six months: -4.5%

One year: +16.2% | Three years: +116.1% | Five years: +107.2%

[fool_stock_chart ticker=LSE:PSH]

As you can see, Pershing has produced attractive returns over one, three, and five years. However, over the past six months, it has fallen back from its 52-week intra-day high of 2,845p, hit on 16 April. Therefore, this FTSE 100 stock today trades at 330p below its peak, a discount of more than a ninth (11.6%) today. 

What is Pershing?

Pershing Square Holdings is structured as an investment trust — a fund with London-listed shares. Pershing listed in London in May 2017. Registered in Guernsey, the trust tracks the Pershing Square Capital Management (PSCM) hedge fund run by US billionaire Bill Ackman. As an activist investor, ‘Wild Bill’ makes big, bold bets on public companies. When he wins, PSCM and Pershing usually win big. For example, in one month, he turned $27m into $2.6bn by buying credit-protection derivatives weeks before ‘Meltdown Monday’ (23 March 2020). Wow.

For me, Bill Ackman is one of the best fundamental value investors on either side of the Atlantic. Indeed, his investing skill has delivered him a net worth of $3.1bn. Hence, once my pension paperwork is done, I’m planning to invest a few thousand pounds into this FTSE 100 share. I’m willing to take the risk of investing in a listed hedge fund, but this isn’t for everyone. More risk-averse investors might not fancy enduring the heightened volatility of investing in Pershing. But, on balance, I’m comfortable with entrusting some of my wealth to Wild Bill Ackman.

Rolls-Royce shares: unfairly valued?

It’s not hard to see the appeal. Rolls-Royce shares still languish far below where they were a few years ago. With Covid-19 infection rates falling in the UK and demand for international travel roaring back, I think there’s a lot to be optimistic about. Put simply, more planes in the sky mean greater demand for the company’s engines (and the need for those engines to be maintained) going forward.

Yesterday’s news that the Rolls would be looking to turn cash-flow positive in the second half of this year was also encouraging. That said, it’s clear a full business rebound is still some way off. As indicated yesterday, the slow recovery in travel means its target of £750m in cash flow might not be reached in 2022 as hoped. A lot can happen before then. This is where things get problematic.

Based on past performance, Rolls still qualifies as a high-beta stock. In other words, its share price is more sensitive to setbacks than the market as a whole. That’s concerning if I think a correction is imminent.

As an aside, ‘anchoring’ myself to historical prices that Rolls-Royce shares have hit should also be avoided. In reality, stocks don’t know how valuable they once, were or whether they’re regarded as ‘bargains’ or not. Shares also don’t care who owns them. 

Speaking of bargain hunting, I wonder if I might be able to make a better return from Pershing Square (LSE: PSH)?

Better buy?

I reckon this top-tier fund has stayed off many radars due to its manager — US billionaire Bill Ackman — not being particularly well known in the UK. Lacking exposure to tech stocks, PSH definitely doesn’t generate as many headlines as fellow FTSE 100 member Scottish Mortgage Investment Trust either.

Ackman is a value-focused investor and Pershing Square has just 10 ‘bargain’ holdings. Some names will probably ring a bell. Hilton and Chipotle, for example. Others like Lowe’s (the home improvement retailer) and Agilent Technologies (analytical instrument developer) may be less familiar. Universal Music Group will also enter the portfolio soon.

What I find really interesting about Pershing Square is that it trades on a big discount to its underlying holdings (net asset value). That’s despite PSH outperforming the S&P 500 index over the last five years — no mean feat considering the latter’s huge dependence on only a few tech titans. 

Then again, like Rolls-Royce shares, the portfolio has definitely benefited from the huge bounce seen in stocks as a whole over the last year or so. So, if I were to invest in PSN now, I’d still expect some volatility. I’d also need to be comfortable with Ackman’s occasional desire to short stocks (which hasn’t always paid off).

Risk vs reward

All things considered, I’d be more inclined to buy a stake in Pershing Square over Rolls-Royce shares today. I don’t expect an easy ride for either. Nevertheless, the former focuses on companies that offer Buffett-style ‘economic moats’, high returns on capital and robust balance sheets. This leads me to think PSH offers a better risk/reward trade-off compared to RR.

Choppy markets

There are a few reasons for the recent increase in volatility in the stock market. The main one is concerns about higher inflation and higher interest rates. Investors are trying to prepare for the possibility of rates rising sooner rather than later. This means they have to adjust their portfolios accordingly. For example, would I want to hold a stock that has high levels of debt if the interest repayments are going to get more expensive?

Another reason for the volatility is the continued uncertainty regarding Covid-19. The optimism of a few weeks ago seems to have been tempered somewhat. The rise of the Delta variant and the restrictions that are still in place on international travel are hurting travel and tourism stocks.

Why Pershing Square?

Trying to navigate the choppy seas is difficult for a retail investor like myself. So what about if I was a professional? Pershing Square is a company made up of professional money managers. It’s the UK entity of the American listed hedge fund, run by Bill Ackman. As of May 2021, Pershing Square held 10 stocks in its portfolio. 

Logically, Pershing Square shares should mirror the price of its underlying investments. The share price is up 34% over one year. This shows to me that the managers at the company know what they are doing, and are doing it well.

During 2020, some key holdings included Starbucks and Chipotle, both of which performed well. Most of the exposure is in the US and Canada, although this isn’t a constraint imposed by the team.

My thinking here is that buying Pershing Square shares allows me to get access to the knowledge and expertise of the professional managers. I wouldn’t invest everything in the company, but I think whatever I do invest should help me going forward if markets stay volatile. Their ability to successfully pick global stocks and outperform is a large plus when it comes to me trying to use my money wisely.

Risk around Pershing Square shares

The risk to investing in this stock is that even professional money managers have bad periods. Bill Ackman reportedly lost $1bn when investing in Herbalife several years ago. This shows that no one is 100% successful at beating the market, and so I could lose money if bad investments happen this year.

On balance though, I am looking to buy Pershing Square shares as I like the exposure to a focused team of professional investors that it gives me, especially during the choppy period we’re going through.

This FTSE 100 firm is a hedge fund

The FTSE 100 share is Pershing Square Holdings (LSE: PSH). PSH is an investment trust — a fund that sells its shares, just as other listed companies do. There are 300+ trusts listed in London, but PSH interests me most. This Guernsey-registered investment trust tracks the Pershing Square Capital Management hedge fund. This is run by US billionaire Bill Ackman. In the secretive world of hedge funds, Ackman is renowned for making big, bold bets. Occasionally, they come unstuck, but some of ‘Wild’ Bill’s conviction trades pay out big-time. Last year, he turned $27m into $2.6bn by buying credit-protection derivatives weeks before ‘Meltdown’ March 2020. That generated a near-100-fold return (+9,530%) in one month!

PSH crashed in 2020

Bill Ackman founded his hedge fund in 2003, but PSH didn’t list in London until May 2017. The real drama for shareholders came in 2020, when Covid-19 rocked the world. As with almost all UK shares, PSH had a volatile 2020. The shares closed at 1,454p on 31 December 2019, but then endured a rough ride as Covid-19 swept the globe. On 19 March 2020, they hit a 2020 closing low of 1,134p. Their 2020 intra-day low of 1,122p followed days later, on 23 March. Since then, this FTSE 100 stock has skyrocketed, more than doubling in under 14 months.

This hedge fund has thrashed the FTSE 100

On Friday, PSH shares closed at 2,670p, more than £15 higher than their March 2020 lows. Indeed, they have gained more than 135% since their 2020 closing low. Over a similar period, the FTSE 100 itself has climbed by less than 38%. Thus, PSH has absolutely thrashed the Footsie since the market bottomed out. Here’s how the stock has performed over various timescales:

As you can see, PSH shares have gained in value over all five periods, ranging from three months to three years. However, this stock didn’t really catch my eye until it entered the FTSE 100 index in December 2020. Since then, it’s been on my buy list.

Will I still buy PSH?

Recently, I decided to buy PSH shares inside my personal pension. Unfortunately, I’m still waiting for the pension-transfer admin to be done. Will I still buy this FTSE 100 share when the paperwork eventually goes through? I’m confident that I will, because I see Bill Ackman as one of the best fundamental value investors around. After all, he’s not worth upwards of $3bn for nothing. And I’ve never invested in a hedge fund before, so this will be a first for me. It will also help me to diversify and expand my portfolio, thus reducing my overall risk.

Investing in a listed hedge fund is highly risky, so it’s not for widows and orphans (or any risk-averse investors). Also, I’m expecting PSH stock to be more volatile than the wider FTSE 100 index. But I’m willing to ride this roller-coaster with Wild Bill Ackman at the helm!