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36% discount! Here’s the next FTSE 100 stock I’m buying in August

Google office headquarters

Pershing Square Holdings (LSE: PSH) is certainly an unusual FTSE 100 stock. It is essentially a listed hedge fund run by a US billionaire who holds no UK shares.

Here’s why I’m adding it to my portfolio this month.

What is this stock?

Pershing Square Holdings is a closed-end fund that gives investors exposure to Pershing Square Capital Management. This is a New York-based hedge fund run by Bill Ackman, a renowned US investor.

He and his team run an ultra-concentrated portfolio of large US stocks with wide moats (typically just 8-12 holdings). At the end of June, the fund held eight stocks.

% of portfolio
Chipotle Mexican Grill 18.86%
Restaurant Brands International 16.73%
Lowe’s 15.58%
Hilton Worldwide Holdings 12.56%
Howard Hughes Corporation 12.09%
Canadian Pacific Kansas City 11.27%
Alphabet Class C 10.49%
Alphabet Class A* 2.42%
*Alphabet’s Class A shares come with voting rights, while Class C shares don’t.

The Alphabet position was purchased in Q1 at an average price of $94. The stock is $128 today and Ackman just upped his bet on the Google owner.

Now, this could seem problematic for me, as I’m also a shareholder of Chipotle Mexican Grill and bought Alphabet shares in February (at $89).

However, there is much more to Pershing Square. That’s because the fund uses derivatives and other hedging instruments (hence the name ‘hedge fund’) to protect the portfolio against a sharp drawdown in equity markets.

These strategies can lead to eye-popping outperformance during bear markets. One extreme example was in early 2020 when Ackman grasped the seriousness of Covid-19 and purchased derivatives designed to hedge against a market meltdown. In a single month, he turned $27m into $2.6bn!

Massive discount

As is usual with hedge funds, there are charges involved, with an annual investment fee of 1.5% and a performance fee of 16%.

This high fee structure could be a reason why the fund trades at a whopping 36% discount to its net asset value (NAV). Additionally, the complex financial instruments involved are seen as high-risk by some, as is the portfolio’s extreme concentration.

These are all issues for investors to consider.

Performance turnaround

Ackman originally came to prominence as an activist short seller. But there is one high-profile example of this backfiring when he publicly shorted supplements marketing firm Herbalife. He ended up losing about $760m on this trade.

This dragged on the hedge fund’s performance between 2012 and 2018. However, Ackman gradually stopped vocal short selling to spend more time quietly researching. Consequently, the fund’s recent performance has been exceptional.

Pershing Square S&P 500
2019 58.1% 31.5%
2020 70.2% 18.4%
2021 26.9% 28.7%
2022 -8.8% -18.1%

The Pershing Square share price is now up 151% in five years (excluding dividends).

I’m buying

Hedge funds are generally only accessible to wealthy investors. But this stock offers me a chance to directly align my money with one of Wall Street’s brightest minds.

Further, management has considerable skin in the game, owning around 26% of the shares. This aligns the goals of these insiders with my own as a shareholder.

Finally, Pershing Square tends to thrive amid market uncertainty, which has become more pronounced in recent years.

All in all, I think this unique FTSE 100 stock offers a very attractive risk-reward proposition.

The post 36% discount! Here’s the next FTSE 100 stock I’m buying in August appeared first on The Motley Fool UK.

Should you invest £1,000 in Pershing Square Holdings, Ltd. right now?

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in Alphabet and Chipotle Mexican Grill. The Motley Fool UK has recommended Alphabet. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.