Sounds like a con, doesn't it. Read on, you will be surprised
Before I tell you how, here are the companies we are talking about:
- Agilent $A - Lab Testing Company
- Berkshire Hathaway $BRK-B - run by this old guy called Warren Buffett, I hear he is a pretty good investor
- Chipotle $CMG - Burritos to die for
- Fannie Mae $FNMA - Mortgages
- Freddie Mac $FMCC - Mortgages
- Hilton $HLT - Hotels
- Howard Hughes $HHC - Real Estate
- Lowes $LOW - Home Improvement
- Restaurant Brands $QSR - Burger King, Popeye's, & Tim Horton's
- Starbucks $SBUX- Coffee anyone
Nice collection of investments, isn't it.
They just happen to be held by a closed end fund call Pershing Square Holdings, Ltd. (LN:PSH) (LN:PSHD) (NA:PSH).
But that is not all - "$PSH has approximately 18% of the portfolio in free cash"
Pershing Square Holdings is currently trading at $20.70 but as at April 21st it had net assets of $29.27 per share (they update this value every week - so check the current Net Asset Value if you like) That means the shares are trading at a 29.3% discount to its Net Asset Value.
Remember its assets are made up of investments in the 10 companies listed above plus a bunch of cash ready to take advantage of more opportunities.
Normally I would prefer to invest directly in the companies itself, rather than a closed end fund - but I cannot buy these companies directly at a 29.3% discount.
- Net Asset Value published weekly
- Performance Report published monthly
- Transparency Report published monthly
- Account Statement published monthly
- Regular Shareholder Letters
Management Interests Aligned
Their annual report described it best
During 2019 and after year end, affiliates of the Investment Manager continued to acquire additional shares of PSH. Unlike many other closed ended funds where the investment manager has only a deminimis investment, in PSH, the manager is by far the largest investor. We now own more than 22% of the fully diluted shares outstanding, representing $1.28 billion of PSH’s equity.8 Our large ownership stake in PSH materially improves the manager’s alignment of interests with other shareholders, particularly when compared with other investment funds.
As a result of the incentive fee, we receive a larger percentage of the profit ts than other shareholders to compensate us for managing the portfolio. Many critics of incentive fees argue that they give investment managers an incentive to take excessive risk because if a fund is profit table, the manager receives a fee, but if the fund loses money, the manager can walk away without personal losses. In other words, if the manager does not have a substantial ownership stake in the fund, the incentive fee can be considered a free, or nearly free, option which increases the incentive to take risk because options become more valuable with increased volatility.
At PSH, the fact that affiliates of the manager own more than 22% of shares outstanding minimizes the incentive for the manager to take excessive risks, as losses are borne proportionately by the manager with other investors. In other words, the risk of loss and opportunity for gain of our large shareholding overwhelm the option value of the incentive fee. Furthermore, in our case, our PSH ownership is a disproportionately larger percentage of our net worth than for nearly all of our unaffiliated shareholders, so our principal incentive is to protect PSH from permanent losses, and then to maximize long-term profits.
Fund buying back its own shares
The fund has been buying back their own shares because they believe it is undervalued. Remember management gets rewarded based on assets under management, so this could be actually reducing their management fee. But as noted above, management owns 22% of the fund.
I liked this opportunity so much, I sold my shares in Berkshire Hathaway $BRK-B and invested in Pershing Square Holdings because:
- I liked the companies they are invested in
- I liked the cash they are sitting on (Plus Berkshire is sitting on $120 Billion Cash - so between the 2 of them, they have to be in a great position to take advantage of any bargains that arise from the Corona Virus disruption to the economy
- I like the transparency - if they change what they are doing and I do not like it, I can sell)
- I like the fact management is a big shareholder
- I like that the fund is buying back shares because they believe the shares are undervalued.