In an exclusive interview with interactive investor, billionaire hedge fund manager Bill Ackman names the stock in his portfolio that could quadruple in value over the next 12 months.
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You can watch the other two videos in our three-part series here:
- Bill Ackman: where I invested billions in 2020
- What Bill Ackman thinks will happen to stocks in 2021
Lee Wild, head of equity strategy, interactive investor:
Hello, today I have with me Bill Ackman, one of the world's best-known investors and the man behind hedge fund Pershing Square Holdings (LSE:PSH). Hello, Bill, thanks for joining me.
Bill Ackman, founder and chief executive, Pershing Square Holdings:
Thanks for having me.
You own 10 companies, you want to invest in businesses that you're going to own for a number of years into the future. My question is, among those 10 is there a favourite stock for 2021? Is there one that you think, well, I really think this one will do better than the rest in 2021? And also, is there a particular sector that you think investors should be looking at for the next 12 months.
So, you know, we like all of our companies, which is why we own them. Obviously, if we didn't like them and didn't think they offered attractive rewards at this level, we would sell them. There's one I think that's a really interesting special situation; it meets all the same criteria for business quality, but it's a much smaller investment in the portfolio and I think it's worth a look.
So Fannie Mae* and Freddie Mac* are pretty well-known companies globally and they're also well known for blowing up in the financial crisis. Fanny and Freddie, their business is basically buying up mortgages from banks – they're called conforming mortgages that meet certain standards, or mortgages on middle class people's homes – and they chop those mortgages.
They put them into – chop them up into little pieces in effect by issuing securities backed by them, and they guarantee those securities. So it's an insurer, if you will, of very, very low-risk assets, and it's how using the US housing finance system works.
We have a 30-year pre-payable fixed rate mortgage, because Fannie Mae and Freddie Mac, beginning as early as the 1930s, were in that business. They blew up during the financial crisis because they were inadequately capitalised and they started buying subprime and other securities, and there wasn't adequate oversight.
We, seven years ago, bought into Fannie and Freddie on the belief – you know, the government ended up taking them over, putting them into what was called conservatorship, and then injecting a large amount of capital, and people believed that Fannie and Freddie would never be able to pay back the government and they were in effect insolvent.
The reality is, they recovered very, very quickly from the financial crisis, and they repaid the government with the 10% interest and more over time. But for political reasons, the Obama Administration stepped in and said, well, even though you paid us back, we're going to consider our obligation not paid back at all, and so the stocks languished in the kind of low $2 a share range.
President Trump and the Secretary of Treasuries, Steven Mnuchin, basically said, look, this is not a tenable situation, these entities need to go back and to be recapitalised, need to go back to the public market, and began a series of steps early in the Trump Administration. And almost all of those steps have been taken.
The most recent step was the issuance of the Capital Rule, which says that these entities are going to have to hold something like $280 billion of capital, and today they have $30 billion of capital.
On December 9th, the Supreme Court is hearing a case as to whether the government's expropriation of these companies was legal. That's a really interesting – you'll get some interesting data on how the Supreme Court feels about it. It's a more conservative court now, because of recent appointments. Conservative courts done like expropriation of private companies, so there's a big opportunity there.
And then it's the last two months of the Trump Administration, Mnuchin we think will want to finish the job. If either of those two outcomes happen, either way, what is today a $2.50 stock could be a $10 stock in a very, very short order. And even Biden, if neither of those two things happen, the Supreme Court does not rule in favour and Mnuchin is too distracted with other things in the Trump White House to do anything, we still think the next administration will continue on the path of bringing these companies back to the public market.
So it's sort of an interesting special situation with a very attractive reward, trading, you know, maybe something slightly above our costs seven years ago, so it's an investment that has not panned out yet. And as I say, we're super long term, but, you know, it's the only thing in the portfolio that could be up four, five, six times in the next 12 months. So that's the more exciting part of the portfolio.
Actually, the Head of the – I heard he passed away recently – described that situation as the Head of the Wellcome Trust's CIO – he said, “oh, is that the sex and violence part of the portfolio?” And I said, well, that's an interesting way to describe it.
Well, it is fascinating stuff, Bill, and we'll watch that one closely. Bill Ackman, Pershing Square Holdings, thanks very much for joining me today.
Thank you so much, appreciate it.
*Shares of Fannie Mae and Freddie Mac are currently traded what’s called Over the Counter (OTC). This means you can't buy them on a major public stock exchange.
Bill Ackman, who runs his London-listed Pershing Square Holdings (LSE:PSH) investment vehicle, owns the two stocks in his portfolio.
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