Delivering net asset value (NAV) returns of 16.1% a year since 2004, fund manager Bill Ackman’s latest investment views always offer valuable insights.
The manager of the Pershing Square Holdings Ord GBP (LSE:PSH) investment trust focuses on buying profitable companies with established business models, with good growth prospects ahead of them.
Not afraid of making bold calls, Ackman’s investment trust has been one of the standout performers over the past five years, delivering a near share price 150% return for investors. That’s well ahead of the 50% that a global shares tracker would have returned and 15% for a FTSE 100 passive fund.
His trust changed investment policy in 2018 to focus on just a handful of high-quality companies, while also taking measures to buy insurance against risks associated with macroeconomics, such as rising interest rates and inflation.
Ackman used this hedging ability to help protect the portfolio against a crash in the bond market when the pandemic struck, as well as rising inflation when economies came out of lockdown.
Writing in PSH’s half-yearly report, Ackman goes into depth about his latest two investment calls: protecting the portfolio against higher bond yields and buying the dip in Alphabet Inc Class A (NASDAQ:GOOGL) shares. We look into how he is investing.
Higher interest rates
One hedge Bill Ackman has on at the moment is protecting against rising long-term US Treasury bond yields as a result of inflation staying higher for longer in America.
Ackman says that despite the Federal Reserve’s rapid tightening of monetary policy and widespread predictions for a recession, the labour market and economic growth have remained highly resilient.
“The pace of job growth has recently slowed somewhat, but remains about twice the level that we would expect in a stabilised economic environment. We believe that emerging structural forces, including higher defence spending, energy scarcity and the transition to green energy, deglobalisation, and the increased bargaining power of labour, will likely contribute to sustained longer-term inflationary pressures,” he said.
While the yield on the 30-year US bond has risen from 3.6% in early April to around 4.4% today, Ackman says that it will go higher still.
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“Investors have become so accustomed to low long-term rates for many years that 4.3% seems like a high long-term rate for many fixed-income investors. We do not believe that current levels of long-term Treasury rates are high considered in a longer-term historical context, and when one does the math on what long-term rates must be for investors to earn an adequate long-term, risk-free return in excess of inflation.”
Ackman calculates that if inflation declines and stabilises at 3%, above the Federal Reserve’s target of 2%, 30-year Treasury yields could reach or exceed 5.5%.
Earlier this year Ackman bought Alphabet (Google’s parent company) shares for PSH. His view is that it is one of the world’s greatest businesses with deep barriers to entry and massive network effects underpinning its core search business.
Ackman bought shares as they fell due to concerns about Microsoft winning the artificial intelligence battle, and Alphabet falling behind.
He said: “Google is the dominant leader in the fast-growing digital advertising market. Google has 85%-plus market share in search and, along with YouTube, approximately 50% share of the digital advertising market. With higher and improving returns on investment, we expect digital ads to continue to take market share from traditional ad formats like TV and print, and increasingly drive the total advertising market growth above its historical trend.”
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He adds that Alphabet’s cloud computing business is a top-three player in an oligopolistic market that is in the early stages of a shift of IT workloads from on-premise to cloud and hybrid cloud solutions.
“These powerful secular tailwinds have enabled Google to grow overall revenues at a high-teens compound annual growth rate over the last five years, which should continue to support near- double-digit top-line growth in the coming years,” Ackman said.
And all that growth comes at a bargain prices, Ackman argues.
“Google’s current valuation represents, in our view, an opportunity to own one of the most advantaged scaled players in AI with an unmatched business model and a long runway for growth. The share price has appreciated nearly 40% from our initial cost and we believe there still remains significant upside given the company’s high level of future earnings growth and potential for continued multiple expansion over time.”
Alphabet shares have risen 45% this year.
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