Pershing Square extends outperformance in 2023

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Pershing Square Holdings has published results for the year ended 31 December 2023 and they are good. The NAV return for the year was 26.7% and the share price return 36.0%, outperforming the S&P500 which returned 26.3%.

The performance was driven by the underlying portfolio. The portfolio hedges detracted from returns in 2023 but have been a considerable source of returns in earlier years.

One major change so far in 2024 was covered in our story on 8 February 2024 and on the news show the day after. This related to changing the way that the performance fee is calculated and plans to launch a US-listed version of Pershing Square Holdings.

Extracts from the chairman’s statement

The Investment Manager established a large position in Alphabet, the parent company of Google, in H1 2023. The Investment Manager initiated a position early in 2023 as concerns about the impact of AI on Alphabet’s business caused the company’s share price to decline to an attractive valuation. Alphabet has been a tremendous investment to date and was the third largest contributor to PSH’s performance in 2023. PSH exited its investment in Lowe’s in 2023 because the Investment Manager believes Lowe’s future returns had become less certain amidst the current macroeconomic environment. Lowe’s was a highly successful investment as the share price, including dividends, increased 175% from our average cost at announcement date to our average sale price.

The Investment Manager’s registration statement for Pershing Square SPARC Holdings, Ltd. (“SPARC” or “Special Purpose Acquisition Rights Company”), a significantly more efficient and improved successor to the traditional Special Purpose Acquisition Company, became effective on September 29, 2023. SPARC has begun to pursue potential business combination opportunities with private, high-quality, growth companies including carve-out transactions with large capitalization public or private companies. A transaction with SPARC will enable a private company to substantially avoid the costs and risks associated with the traditional IPO process. It will enable a private company to raise a minimum amount of capital at a negotiated fixed price, with the Pershing Square funds (primarily PSH), affiliates of SPARC, committing a minimum of $250 million and up to $3.5 billion as anchor investors in the transaction.vii Ultimately, SPARC expands the universe of potential businesses that PSH can buy, and the Investment Manager will keep shareholders updated on its progress as appropriate.

During 2023, the Board and the Investment Manager thoroughly examined the options for obtaining a U.S. listing for PSH with the goal of increasing the number of investors who could own PSH. After encountering numerous restrictions, limitations and issues relating to inter alia the Investment Company Act of 1940, adverse tax considerations, and challenging structuring requirements, the Board and the Investment Manager decided a U.S. listing was not viable and that PSH will remain a publicly-traded closed-end fund over the long term.

As of March 19, 2024, PSH is the 57th largest company by market capitalization in the FTSE 100 and would be the 46th largest were its shares to trade at NAV. The Investment Manager continues to increase its global marketing efforts, both directly and through its relationships with Cadarn Capital and LodeRock Advisors, to better inform the potential universe of investors about PSH. While this marketing effort along with the other corporate actions the Board has taken in recent efforts may have a positive impact on the narrowing of the discount, the Board continues to believe that the most powerful driver of long-term shareholder returns will be strong absolute and relative NAV performance.

Extracts from the manager’s report

We added one company to the portfolio in 2023, Alphabet (aka Google), and we exited one, Lowe’s. Our limited portfolio activity should not be a surprise. In that we are a long-term investor which attempts to identify businesses we can own for a decade or more, you should generally expect limited changes in our equity portfolio composition. Frenetic investment activity is often the enemy of long-term performance. An investment manager who markets itself as a long-term owner of businesses, but who is constantly buying and selling new securities is likely misrepresenting their strategy.

In 2023, our hedges generated 187 basis points (bps) of losses principally due to an energy-related hedge (-108bps) and Japanese interest-rate swaptions (-141bps) offset somewhat by mark-to-market gains on USD interest-rate swaptions (+92bps) referencing several tenors (30-year payer swaptions, and 5-year and 1-year receiver swaptions).12 Our 30-year USD interest-rate payer swaptions (instruments that increase in value as rates rise) were valued at 92% above cost at the beginning of the year, but we did not realize these gains because of continuing concerns we had for most of the year about rising interest rates.

In October, we believed that interest rates were unlikely to rise further and we sold our 30-year USD interest-rate swaptions and generated a smaller profit (33% premium above cost). We then initiated investments in 1-year and 5-year instruments that increase in value as rates decline, which we continue to hold.

We also continue to maintain our energy-related hedge to mitigate the impact of a large rise in energy prices. As energy prices decreased in 2023, the hedge’s value declined to about 39% below cost at year end and has increased in value since the beginning of the year with the rise in energy prices.

PSH : Pershing Square extends outperformance in 2023

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