Will 2017 be the year of Bill Ackman?

Bill Ackman has paid a high price for being one of the most high-profile hedge fund managers in the world. He turned from hero to zero in the last 18 months since extraordinary strong returns made room for a period of very poor performance. We believe the core Pershing Square engine has not broken and we would not be surprised to see Pershing Square back at the top of the performance league tables for 2017.

1. Existing positions with events playing out

Pershing’s portfolio is made up of positions with anticipated short-term events and stable quality business. In the first category, Ackman expects his largest holding, Mondelez, to become an acquisition target. Specifically, he expects Kraft Heinz to come out with a bid for the company. Another prominent event driven name is Freddie Mac/Fannie Mae. Following the election of Donald Trump and the appointment of Steve Mnuchin as Treasury Secretary major decisions are anticipated in Q1 on the future of the entities. If it goes the way Ackman anticipates, the shares could quadruple from here after doubling in 2016. His short position in Herbalife is also set for an interesting year. In May the new FTC rules will start applying to the company’s business, an event that Ackman thinks will have the company collapse. Other anticipated events are a new acquisition by Restaurant Brands and further divestures, streamlining and a subsequent re-rating of troubled Valeant.

On the more pedestrian end Howard Hughes Corporation and Air Products are large positions that show very strong operational performance, yet remain somewhat undiscovered (especially Howard Hughes). We expect these names to continue to contribute.

2. New positions

We include Chipotle here, a position that Ackman disclosed in September of last year. Pershing has already stirred up things at Chipotle resulting in the resignation of the co-CEO and the appointment of 4 board members. Shares popped 5% at announcement of the position but were volatile for the remainder of 2016. In January the share price seemed to have found its way up, gaining 12% for the month.

In addition, Pershing Square has been building 2 new, hitherto undisclosed, positions. We expect the names of these positions to be announced over the coming weeks as well as Ackman’s plans on how to unlock value there.

3. A declining discount

Pershing Square Holdings trades at a 16% discount to the underlying fund. The discount has been growing when performance was poor and hasn’t come back materially yet despite the underlying fund’s 15% climb since Q2 2016. We know that the team at Pershing Square is considering various options to help shrink the discount, and we anticipate some action on this front in 2017. While we think this will go a long way in reducing the discount, a further pick up in performance will be the best way to have the discount reduced. Already, in January the discount shrank from 20% to 16% providing a nice tailwind to Legends Fund. A complete disappearance of the discount would add 20% to our position. The risk-reward is compelling as we don’t see a significant risk of the discount to trade significantly wider than its current level.

Pershing’s year end letter is available here with great detail on all positions.