Pershing Square USA’s Underperformance

Investors who bet on Bill Ackman’s acumen probably aren’t feeling all that enthused right now. Since the Pershing Square founder released his closed-end fund ‘Pershing Square USA’ (PSUS) in April, it hasn’t followed the broader market’s uptrend. Quite the contrary: The share price for Ackman’s fund has only gone down since its $5 billion opening.

Investors who bought PSUS at $50 per share are now seeing their investment trade in the $40-range. By comparison, the S&P 500 is up nearly 14% year-to-date, while more tech-heavy indices like the NASDAQ-100 are doing even better.

Why Is PSUS Trading at a Discount?

As a closed-end fund, the price of Pershing Square USA doesn’t perfectly mirror the value of the shares Ackman holds like a mutual fund or ETF. Instead, this fund can trade at a discount or premium based on market sentiment. The NAV gives the most accurate estimate of this fund’s true value if you purely look at the assets it holds.

As of the time of writing, Pershing Square estimates the NAV per share on PSUS is $50.32. That’s roughly 20% higher than where PSUS is actually trading at the current market price. According to The Wall Street Journal, Ackman said this ultra-low rate is ‘frankly absurd.’

The underperformance may also stem from Ackman’s investment preferences. In a more recent August 12 letter to shareholders, Ackman openly acknowledged that ‘semiconductors and tech hardware and equipment’ have driven the S&P 500’s outperformance. Yet you won’t find names like Sandisk or Micron in Pershing Square’s portfolio as they don’t fit Ackman’s stated investment style.

High Fees and the Challenge Ahead

Barron’s also pointed to another factor impacting Pershing Square USA’s underperformance: High fees. The annual management fee on PSUS shares is about 2%, which is quite high compared with standard ETFs and mutual funds. For instance, Vanguard’s popular S&P 500 ETF (VOO) currently has an expense ratio of just 0.03%.

Investors need to believe a closed-end fund like PSUS will significantly outperform benchmark indexes to justify its pricey fees. As Ackman told current investors, ‘We clearly need to do a better job of generating demand for our funds, which requires active marketing and you can help by spreading the word about PSUS.’

Pershing Square’s Strategy and Future Plans

As for what Ackman sees as the root cause, he mentioned ‘technical factors from the IPO’ and the company’s failure to market the fund effectively. However, the underperformance may also stem from Ackman’s investment preferences. In a more recent August 12 letter to shareholders, Ackman openly acknowledged that ‘semiconductors and tech hardware and equipment’ have driven the S&P 500’s outperformance. Yet you won’t find names like Sandisk or Micron in Pershing Square’s portfolio as they don’t fit Ackman’s stated investment style.

Despite the underperformance, Ackman is still working on a fund that helps investors break into venture capital. He is also making big moves he believes will create long-term value. In the past few months, Pershing Square bought six new companies for the Pershing Square USA fund. These include well-known names like payment processors Visa and Mastercard and the global streaming behemoth Netflix.