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Investment Trust Watch: Pershing poleaxed by Valeant

Things go from bad to worse for activist investor Bill Ackman and his hedge fund Pershing Square whose shares plunged this week. 

 
Investment Trust Watch: Pershing poleaxed by Valeant

Things are going from bad to worse for star hedge fund manager and activist investor Bill Ackman.

Shares in Pershing Square Holdings (PSH ), the £2.8 billion Guernsey-based, Euronext-listed investment company he runs, dropped nearly 14% this week after Valeant, the controversial US drugs company it backs, botched an earnings release and saw its share price more than halve in one day.

The slump in Pershing’s shares two years after their launch saw their discount to Numis Securities’ estimated net asset value more than double to 23% by yesterday’s close. Given the stock has traded on an average discount of just over 5% in the past year that’s left the fund with a Z-score of -4.7, making it easily the cheapest closed-end fund in our first table below.

Just to recap, a Z-score is a measure used by analysts to see how far an investment is trading above or below its usual range. As a rule of thumb, a Z-score below -2 is considered ‘cheap’ while a score above 2 is viewed as ‘expensive’.

Whether any investor will take the plunge on Pershing in its present state is doubtful. Shares in the concentrated portfolio, which holds around a dozen core positions, have more than halved in the past year with its net asset value (last updated on 8 March) falling nearly 40%.

Matthew Hose, analyst at Jefferies, said the decline in the NAV would have increased the fund’s gearing – or borrowing – to around 27%, which may have alarmed investors: ‘we feel that for some closed-end fund investors, particularly those used to more conventional “trusts”, gearing of 25-30% of NAV could be approaching the limit of their comfort zone.’

Pershing’s stake in Valeant, which has come under fire for aggressive sales and marketing practices, accounts for around 7.5% of its assets, even after an 80% slide in its shares since August. However, Hose pointed out Ackman’s trades in Valeant options might increase that exposure to 10%.

In true activist style Ackman (pictured) put a representative on Valeant’s board and issued a statement that he would ‘take a much more proactive role at the company to protect and maximize the value of our investment', whilst reaffirming his belief that the ‘underlying business franchises that comprise Valeant are worth multiples of the current market price.

‘Getting to those values, however, will require restoration of shareholder confidence in the management and governance of the company,’ he said.

An interesting twist to the saga has been Ackman’s clash with rival activist Jeff Ubben of ValueAct who also owns a stake in Valeant. According to the Financial Times Ubben and his boardroom representatives believe overly demanding targets were a factor in the company’s woes, which they trace back to chief executive Michael Pearson’s decision to join Ackman in 2014 in an unsuccessful hostile bid for Allergan, the maker of Botox.

The debacle comes at a difficult time for the hedge fund sector. According to Hedge Fund Research, 979 funds closed last year, up from 864 in 2014, making it the worst year for liquidations since 2009. This follows a period of disappointing returns from many big hedge funds.

'Cheap' trusts Share price premium (- discount) to net asset value % Average 12-month discount % Z-score
Pershing Square Holdings (PSH) -23.2 -5.2 -4.7
Blackstone GSO Loan Financing (BGLF) -14.6 -0.8 -3.8
Jupiter Global (JPG) -6.0 -1.6 -3.6
Law Debenture (LWDB) -9.4 5.6 -3.3
Value and Income (VIN) -23.5 -17.4 -3.2
Kubera Cross-Border (KUBC) -64.5 -57.0 -3.1
Baring Emerging Europe (BEE) -17.0 -11.9 -3.0
Blue Capital Global Reinsurance (BCGR) -12.8 -6.4 -2.9
CVC Credit Partners Euro Opps - Euro (CCPE) -4.2 -0.2 -2.9
Dolphin Capital Investors (DCI) -85.9 -71.0 -2.8
Temple Bar (TMPL) -9.3 -4.6 -2.8
Jupiter Green (JGC) -10.4 -4.4 -2.6
Witan IT (WTAN) -5.5 -0.4 -2.6
Schroder UK Growth (SDU) -12.7 -10.0 -2.6
Schroder UK Mid Cap (SCP) -16.6 -10.5 -2.6

Source: Numis Securities

Testing times for Temple Bar

Could share buy-backs be in the offing for Temple Bar (TMPL ) with the discount widening to over 9% as the Alastair Mundy managed fund continues to struggle? In the trust’s annual report published this month the chairman, John Reeve, reiterated the board’s willingness to repurchase stock following the issuance of new shares in 2013 and 2014.

In the report Mundy apologised for the downturn in performance caused by his value style of buying cheap, unloved stocks like banks, oil & gas companies and industrials and asked for shareholders to be patient.

‘We recognise our disappointing performance in recent times and apologise for it, but continue to believe that certain parts of the market are significantly overvalued and dangerous to investors. We look forward to investing our liquid assets when opportunities arise,’ he writes.

The trust’s biggest position is an 8.6% weighting in the 2016 4% UK government gilt which he holds instead of cash.

As a result of the widening discount total returns for shareholders over three years are currently flat, despite 11% growth in net asset value, which is slightly ahead of the 10.5% advance in the FTSE All Share. That’s one of the poorest returns in the UK Equity Income sector, with only Murray Income (MUT ) and Dunedin Income Growth (DIG ) performing worse. However, over five and ten years it remains ahead of the All Share with total returns of 41% and 83%.

'Expensive' trusts Share price premium (- discount) to net asset value % Average 12-month discount % Z-score
BB Biotech (BION) 3.8 -15.9 3.6
Sequoia Economic Infrastructure Inc (SEQI) 11.1 7.1 3.0
Aurelius AG (AR4) 33.8 17.7 2.6
Personal Assets (PNL) 1.8 0.0 2.3
Tritax Big Box REIT (BBOX) 10.2 5.4 2.2
Burford Capital (BUR) 84.8 45.7 2.1
BlackRock North American Income (BRNA) -5.2 -8.5 1.8
CATCo Reinsurance Opportunities Fund (CAT) 1.2 -2.4 1.8
European Real Estate (ERET) -15.3 -34.4 1.7
BlackRock Commodities Income (BRCI) 5.8 1.5 1.6
Reconstruction Capital II (RC2) -23.3 -42.3 1.6
Industrial Multi Property Trust (IMPT) -40.4 -60.0 1.6
RIT Capital Partners (RCP) 3.9 0.7 1.5
Henderson Global (HGL) -8.8 -10.8 1.5
Alpha Real Trust (ARTL) -29.6 -36.3 1.4

Source: Numis Securities

Sticking with the first table, the name change for Jupiter Global (JPG ) from the more unconventional Jupiter Primadona three months ago doesn’t seem to be helping its profile with the fund of fund’s discount widening to 6% and a Z-score of -3.5.

Weaker share prices are also evident at Value and Income (VIN ), Baring Emerging Europe (BEE ) and Jupiter Green (JGC ).

By contrast, our second table shows the discount on Henderson Global (HGL ) narrowing slightly as shareholders await details of the proposed merger with Henderson International Income (HINT ).

RIT Capital Partners (RCP ) is trading back at a small premium following a brief foray into discount territory which I highlighted a few weeks ago.

Demand is strong at Tritax Big Box (BBOX) with the share price advancing to a 10% premium above NAV. This week the real estate investment trust, which specialises in buying huge logistic and distribution centres, issued a confident outlook statement with its annual results. Last month it raised £200 million from investors, an impressive achievement given turbulent stock markets.

1 comment so far. Why not have your say?

CUEBALL

Mar 20, 2016 at 20:12

Held Vin through the crash finally selling out around 2 quid a few years back never looked since to be honest....astonished to see it back here...solid holdings to match the solid yield ...no brainer around these levels

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