| Dan Loeb, chief executive officer of Third Point LLC (Photo Credit: Simon Dawson/Bloomberg). |
Daniel Loeb’s Third Point is off to a strong start this year after suffering what the firm characterized as a “disappointing” 2016. The New York multistrategy firm, which is best known for its activist positions, rose another 1.6 percent in April for a 7.5 percent return this year. The performance was slightly better than the Standard & Poor’s 500 stock index’s 7.2 percent gain through April. Third Point was up 6.1 percent last year, roughly half as much as the benchmark.
The firm’s 2017 gains are being driven by its equity longs, which are up more than 9 percent. That has more than made up for Third Point’s nearly 2 percent loss on equity shorts, a decline that isn’t too bad considering the strong stock market. Meanwhile, the firm’s credit book is up about 0.4 percent this year.
Loeb, who has noted he became more bullish in general since Donald Trump won the presidency, has a net equity market exposure of 64.7 percent. That’s down from 71.4 percent at the end of the third quarter.
“We have actively positioned our portfolio to absorb modest S&P sell-offs in order to remain aggressive buyers at appealing prices,” Third Point said in its first-quarter letter.
The firm told investors it temporarily reduced more than 20 percent of its equity exposure in advance of the April 23 French election “at a relatively inexpensive cost” of about 20 basis points.
“We continue to maintain the bulk of our exposure in equities, including in several new initiatives where we believe the environment is ripe to take actions to remedy poor performance,” Third Point added.
Third Point also said in its letter that during the first quarter it mostly made new investments in financials, industrials, and energy. The firm told clients it is mostly focused on areas of improving global growth rather than on the so-called Trump trade. Third Point says it’s seeing more opportunities in Europe, citing “strong and improving economic data.” And it is more confident of this trend now that the first round of the French elections passed “without incident.”
After three straight years of flat S&P earnings, Third Point expects earnings growth to drive gains, and it expects cyclical companies “to get a tailwind from U.S. policy shifts this year.”
The new stock positions highlighted by Third Point in its letter reflected these themes and sentiments. For example, the hedge fund earlier received some attention for its case for breaking up the industrial conglomerate Honeywell International, asserting the stock trades at a “substantial discount to its industrial peer group.” Third Point recommended it spin off its aerospace unit, one of four primary business segments. “It is clear to us, as well as several sell-side analysts, that Aerospace’s presence in the portfolio is the chief cause of Honeywell’s discounted valuation and that Aerospace would be better off as a stand-alone entity,” the firm said.
At the same time, Third Point made the case for two European stocks. It recently took a position in UniCredit, the second-largest listed bank in Italy, which Third Point says has a significant presence in Germany and Austria.
“The first quarter of 2017 marked a turning point in both capital and credit in European financials,” the hedge fund told clients. “While at home the opportunity in financials is linked closely to rising rates, banks in Europe offer a different hook: tangible progress on balance sheet clarity.”
Third Point also said it had made an investment in German utility operator E.ON during the first quarter. It explained the company has been misunderstood by the markets since it spun off its generation assets last year to focus on its regulated grids and renewables business.
“The German government’s policy of ‘energy transition’ caused the precipitous buildout of renewables, forced nuclear plant shutdowns, and a number of poor capital allocation decisions that led to an 80 percent decline in E.On’s market capitalization over the last decade,” Third Point said. “In our view, the worst is in the rear view mirror.”
Third Point expects the company to sell assets over the next year to deleverage its balance sheet and boost its dividend payout.
