Bill Ackman (Trades, Portfolio) is an iconic investor and the founder of Pershing Square. He is known for his bold investing style and relentless persistence when it comes to activist investing. In September, he took the stage at CNBC’s Delivering Alpha Summit. I have summarized this talk and provided extra context around some of the points Ackman made. Let’s dive in.
Ukraine investments
As the war rages on between Russia and Ukraine, President Volodymyr Zelensky called a “secret meeting” of 10 influential business people and investors from around the world. One of these people was Ackman. The meeting was part of a talk to urge business investment into Ukraine, even before the war has finished.
Ackman revealed he took a call from Mike Moritz, a former chairman at Sequoia Capital, which is regarded as the world's leading venture capital firm. The firm invested into Zipline, a company which sells drones that are used to ship medical supplies. The business did not plan to invest into Ukraine, but this was encouraged via “philanthropic investment,” of which Ackman provided approximately $24 million. Although he noted this investment was not for “economic return,” he is “bullish on post-war Ukraine.”
Focused portfolio
Ackman has a focused portfolio of “eight amazing companies,” which he said tend to do well in “any economic environment.” He also has “tiny investments” in Fanny Mae (FNMA, Financial) and Freddie Mac (FMCC, Financial), which make up less than 1% of the equity portfolio.
Pershing Square also operates some “hedges” on both rising energy prices and high interest rates. He is known for turning $26 million into $2.6 billion, with his bet that interest rates would rise in 2020. Ackman purchased very far out of the money option protection against high yield bond indexes.
Investing in high-quality businesses
Despite the macroeconomic environment, Ackman said he is still bullish on owning “high-quality businesses,” ideally with “pricing power.” He pointed out that many of the companies he owns have a “royalty element.” For example, Universal Music (XAMS:UMG, Financial) is a "royalty" on music streaming, Alphabet Inc. (GOOGL, Financial) is a “royalty” on people advertising online and Hilton (HLT, Financial) is a “royalty” on people staying in hotels.
Investing in Alphabet
Alphabet was Ackman’s most recent investment at Pershing Square. This was because Alphabet looked like it had “fumbled” its artificial intelligence offering, given the rise of ChatGPT and Microsoft Corp.'s (MSFT, Financial) resurgence of Bing. However, Ackman saw this as an opportunity to invest at just “15 times earnings.” He believes Alphabet will be a “dominant player” in AI due to its huge access to data, strong in-house talent and vertical integration with Google Cloud.
Understanding the intrinsic value of a business
The value of a business is its future expected cash flows discounted back to today. Normally investors would use the prevailing interest rate in 2020 or 2021, which was between 1% and 2%. This resulted in investors investing at high valuations. However, Ackman reveals he has always used a high discount rate of around 10% to mitigate for any uncertainty. During a low interest rate environment, this can mean opportunities are missed, but now that rates are higher, Ackman’s strategy works exceptionally well.
Future of interest rates
Ackman believes “interest rates will go higher” and he still has his hedge on expecting this. For reference, interest rates have been hiked by 525 basis points since March 2022 to the 5.25% and 5.50% level, a 22-year high. This is surprising for some analysts given the U.S. inflation rate has steadily declined from 8.2% in September 2022 to just 3.7% by the end of August 2023. Although this is still higher than the Fed’s 2% target and thus, Jerome Powell is not looking to ease rates until he is certain inflation is squashed. There was a slight uptick in inflation from 3.2% in July to 3.7% in August.
In the short term, the guru believes there are “many reasons” interest rates could go higher. These include a highly probable “government shutdown.” This would be the fourth to occur over the past decade, and would impact everything from air travel to national parks. Most government employees would be furloughed without pay, which would, of course, impact the economy. This is just to a lack of buy-in from both parties regarding spending bills.
Ackman also believes there could be a “data shutdown” as the agencies which provide data on interest rates, inflation, etc., would be shutdown, effectively making the Federal Reserve blind.
He said we have the “worst technical environment in our lifetime” for the supply of bonds versus the buying of bonds. China is selling, as is Russia and Saudi Arabia. Ackman’s view as an investor is not being paid enough for the risk of entering into a 30-year contract with the U.S. government. Then there is “massive deficit spending” with the U.S., having approximately $33 trillion in federal debt. Ackman believes if we looked at the U.S. as a business, it is not ideal to have one-third of the debt repricing in the next year at higher rates.
Ackman believes the 30-year Treasury bond rate, which is at 4.73%, could surpass 5%.
Final thoughts
Ackman is an incredible investor who has evolved over time. He is a “continuous learning machine” and sees every “mistake as a learning opportunity,” These days, he says he does not “short stocks,” but he jokingly notes he has “psychological shorts” against certain stocks he thinks will fall. But his main focus is on long-term investments in great companies.
