US needs Australian-style superannuation: Bill Ackman

Wall Street hedge fund legend Bill Ackman has praised the Australian superannuation system as a way to bridge the growing income inequality in the US.

The activist investor also sees some potential turmoil ahead with COVID and the US elections but told The Australian in an interview: “By the second half of next year, the world will be meaningfully better.

“We will know who the president of the United States is, and we will hopefully have a widely distributed vaccine and a return to some degree of normalcy, which I think we would all greatly appreciate.”

He added: “The biggest risk to the markets is not whether Trump or Biden is president; it is making sure there is a smooth transition either to the second Trump administration or to the first Biden administration.

“Hopefully we don’t have more civil unrest, more uncertainty, more divisiveness.”

Mr Ackman is described an activist investor who is prepared to intervene to push corporate boards and management to do what is necessary to enhance value.

“Few investors would admit to not being activist any more,” he said.

He will be a guest at the Sohn Hearts &Mind conference on November 13.

“What worries me is that there is a lot of speculation, and valuations for some companies are enormous,” he said.

“At some point in time, interest rates will rise. But equities are still the best investment class.”

He is concerned about inequality in the US, and the growth of index funds and their impact on the market.

In his latest newsletter, he cited the Australian superannuation system as a way to overcome the inequality. His comments contrast sharply with Treasurer Josh Frydenberg and other critics of the super system.

“If capitalism continues to leave behind most Americans, as the growth in wages has not come close to the more tax-efficient compound growth that has been achieved by investing in the stockmarket, more and more Americans will seek changes, potentially radical ones, to the system, or seek an alternative system,” he said.

“Corporations could be required to set aside a fixed per cent of salary or wages in a tax-free investment account for all workers that would also be restricted from withdrawal until retirement, similar to the approach used by the highly successful and popular Australian superannuation system,” he wrote.

“The system has created savings of scale for growing generations of its citizens. Since the superannuation system’s launch in 1991, Australia now has $2.7 trillion of super assets — nearly twice the country’s GDP.

“Remarkably, Australia has created the fourth largest pension system in the world, in the 53rd most populous nation.

“In addition to helping all Americans build wealth for retirement, mandatory equity savings accounts for all would encourage greater financial literacy, and, as importantly, give all Americans the opportunity to participate in the success of capitalism,” he added.

“We are entering an era in which we expect the dominant, well-capitalised, great companies that comprise our portfolio to accelerate their growth in market share and profitability over the long term as they effectively adapt to the changes wrought by the virus.

“If there were a stock market index of private, small businesses, it would likely be down 50 per cent or more. Small business failures will make the income inequality problem even worse.”

Mr Ackman’s portfolio includes Restaurant Brands (Burger King et al), life sciences and diagnostics group Agilent Technologies, retailer Lowe’s, Starbucks, Hilton, real estate group Howard Hughes and US government-backed mortgage groups Fannie Mae and Freddie Mac.

Asked why he doesn’t invest much offshore, he said: “We can find 10 interesting things to do in the US. We are better off being close to our investments.”

He noted: “The stockmarket covers big companies, not small companies. The more technologically adept companies are in a better place today because the world is more digital now.

“We look to own large companies which are great businesses and have super durable growth with strong free cashflows and high barriers to entry.

“Index funds were a great invention by Jack Bogle, and they created a vehicle for many people to own equities. But index funds now own 25 per cent of some companies and their increasing control creates governance risks.”

The late Jack Bogle created the Vanguard group in 1974.

The concern is index funds buy stocks based on their inclusion in an index, not their fundamental value.

Ironically, Mr Ackman is hoping index fund buying will help support his company Pershing Square, which is just outside the FTSE 100 index, and help bridge the gap between its net asset value and stock price.

Earlier this year he made $US2.8bn shorting the US market.

“It was one of the most asymmetric, low downside, big upside situations I’ve ever seen,” he said.

“I could not conceive of a scenario where a virus spreading around the world would cause people to be more comfortable about buying corporate credit, and that’s what made it low risk,” he added.

When the market fell Mr Ackman went long.

This article was originally posted on The Australian here.

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