Pershing sq\ is an investment trust that is looking forward to a Trump windfall

The high-conviction hedge fund may benefit from Pershing sq\'s unconventional wager on US mortgage behemoths Fannie May and Freddie Mac

An exception is Pershing sq\. Holdings (LSE: PSH). Despite returning 101% over the five years until the end of 2025 and 14% over a single year, the investment trust is currently trading at a 25% discount to net asset value (NAV). However, this is a large, liquid investment trust with a market value of almost 8 billion that invests in listed larger companies in the US, the largest and (until 2025) top-performing market in the world. It is neither a niche strategy nor an obscure or illiquid fund.

The US hedge fund Pershing sq\. Capital Management, established by Bill Ackman in 2004, is in charge of Pershing sq\. Holdings, which went public in London in 2014. Eight to twelve core holdings account for the vast majority of its portfolio (there are currently 15 listed holdings, but the size of each position is not disclosed). These holdings are either corporate turnarounds or undervalued growth. Pershing sq\. is an activist investor who is willing to participate, offer advice, put pressure on management, and suggest changes in either scenario.

This portfolio is small enough that it is easy to go through each piece separately and understand Ackman's perspective. Ten percent of the capital was invested in Meta as of December. According to the annual report, "Pershing believes that the market is underestimating Meta's long-term upside potential from AI and that market concerns around Meta's capex spending on AI-related projects are misplaced." Ackman does not think that its multiple represents sustainable earnings growth of 20 percent, which is attributable to declining unit shipping costs and a doubling of data center capacity by 2027, even though an opportunistic investment in Amazon in April is performing well.

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Alphabet, the company that owns Google, is still valued at "quite reasonable" with "high teens earnings growth achievable indefinitely." PSH made an investment because they believed Google's leadership in AI was undervalued. Although Universal Music is doing well, "technical factors" have caused the stock to decline. The shares are currently trading at the lowest earnings multiple (roughly 20) for four years, and Ackman thinks a rerating will follow an impending US listing.

Burger King's owner, Restaurant Brands, is "outperforming a tough market" thanks to new businesses and declining consumer spending. Hilton is a hotel chain that trades on "30 times next year's earnings," but its profits are rising thanks to its capital-light franchising model, effective cost control, annual share buybacks of 5%, and expansion into new locations worldwide. Hertz, a car rental company, is "making progress on its turn-around" and has the potential to produce £1 billion in annual cash flow, which is currently zero.

Uber is a new investment "on a mid-20s multiple, which is extremely cheap given a high rate of earnings growth" for the transportation company. It is one of three companies in the autonomous vehicle market, and growth is quickening. The UK-based pension and annuity company Just Group has been acquired by financial group Brookfield, which "is poised for an excellent year."

Pershing sq\. has raised its ownership of US real estate firm Howard Hughes to 47% during the last 12 months. Creating new towns, like the one 35 miles from Las Vegas, while keeping the commercial property and selling the residential land to developers is Howard Hughes' area of expertise. Two of the projects are located in Texas, and one is located outside of Phoenix, Arizona. In order to emulate Warren Buffett's Berkshire Hathaway by investing the cash flow from insurance, the group intends to use its funds to purchase an insurance business.

Ackman acknowledges that he underestimated the difficulty of turning around Nike and that he held onto the final 20% of the trust's stake in the restaurant chain Chipotle for too long. They have both been sold.

Pershing sq\.'s wager on companies supported by the government.

All of this makes for an intriguing investment tale, but Ackman has a talent for adding substantial value through investment coups, like hedging the portfolio in advance of the pandemic shock in early 2020 and acquiring its share in Universal Music at a discount in 2021. The most recent is the explosive growth of shares purchased in 2013 for about £1 each in the Federal Home Loan Corporation and the Federal National Mortgage Association, commonly referred to as "Fannie Mae" and "Freddie Mac." The goal of these government-sponsored enterprises (GSEs) is to combine mortgage loans into tradable securities that have an implicit government guarantee. This makes mortgages more accessible by allowing lenders to reinvest in new ones.

Prior to the financial crisis of 2008, mortgage underwriting standards became extremely lax. At a cost of £190 billion, the US government bailed out Fannie Mae and Freddie Mac after they suffered significant losses. They were required by the terms of the bailout to give warrants that entitled the US Treasury to 80% of the ordinary shares and pay a 10% cash dividend on preferred stock. Nevertheless, in order to pay the 10 percent dividend, the two continued to need to borrow more money from the Treasury. As a result, the Obama administration changed the terms in 2012 to simply give the Treasury 100% of quarterly profits.

After this "net worth sweep" ended in 2019, Freddie Mac and Fannie Mae kept their profits to increase their capital. By that time, the Treasury had received £301 billion in dividends, which gave it an 11.6 percent rate of return and £25 billion more than what was required under the original plan for a 10 percent dividend.

The government maintains that it is entitled to interest forfeited since 2019 and that it still owns the preferred stock (as well as the warrants for common stock). Rather, Ackman contends that the preferred stock should now be considered fully repaid. As a result, the US Treasury would essentially own about 80% of the common shares.

The shares are currently traded over the counter, but Trump, Treasury Secretary Scott Bessent, and Commerce Secretary Howard Lutnick have indicated that they think it's time to relist them on the New York Stock Exchange. The administration may be drawn to them for ideological reasons (Trump called the sweep "stealing money from its citizens" in 2021), but they may also be valuable.

The Donald Trump.

According to Ackman, an 80 percent stake is currently valued at £300 billion, and he thinks that amount could easily double or triple from here. Therefore, he contends that although the shares should be listed on the NYSE and the Treasury's warrants should be exercised, "now is not the right time to sell" the government's stake. Additionally, he supports a requirement for much larger reserves than in the past and wants to see the Treasury continue its "conservatorship" (i.e., regulatory oversight) to keep the companies concentrated on guaranteeing mortgages without the previous practice of taking on new lines of business.

Pershing sq\. has huge potential.

Why is this important for Pershing sq\. shareholders? In 2024, the shares of Fannie Mae and Freddie Mac, which were purchased for a meager sum in 2013, increased by 207% and 284%, respectively. Ackman projected "an upside of five or six times in two to three years" at that point. The holdings made up between 5 and 6 percent of the portfolio, according to the disclosed portfolio attribution for 2024. They have almost doubled since then. The two holdings will probably make up around 10% of the portfolio today, net of performance fees and accounting for the appreciation of the remaining holdings.

They were only trading on 3.5 and 2.5 times next year's earnings, according to Ackman's estimation from late last year. The value of those holdings would quadruple from their current share prices at his "illustrative" post-listing target of over £40 per share (earnings multiples of 16 and 13). That would raise PSH's NAV by at least 25% net of the manager's profit share. The upside to the share price would be much higher because the rest of the portfolio would also be contributing and the discount would probably drop significantly on such a coup.

In September, shares of Fannie Mae and Freddie Mac reached a 17-year high, but since the Trump administration seems to be concentrating on other issues, they have declined. However, it will undoubtedly not be a pleasant surprise. Pershing sq\. Holdings's stock is expected to increase if and when it chooses to re-list Fannie Mae and Freddie Mac.