Dan Loeb’s Third Point posted a solid gain in July, but it still fell slightly short of profitability for the year.
Third Point Offshore rose 2.2 percent for the month, reducing its loss for the year to a mere 90 basis points, or 0.90 percent, according to the firm’s July monthly report.
The multistrategy fund was led by its equity book, which kicked in 2 percent to net gains in July, according to the report. A gross gain of 3.4 percent for the firm’s long book was offset by a 1.4 percent loss from the short book.
July gains were driven by Chinese e-commerce company Alibaba Group Holding; diversified life sciences and diagnostics company Danaher; chip giant Nvidia; chemicals giant DuPont; and financial services company Fidelity National Information Services.
Institutional Investor reported last week that Third Point had sharply increased its net exposure to stocks to 70 percent from 42 percent at the end of June, according to the firm’s second quarter-letter.
“We see healthy upside in the valuations of our portfolio,” Loeb stated in the letter.
He dismissed concerns about high S&P valuations, noting that artificial intelligence (AI) and companies such as Tesla and Nvidia have skewed the S&P multiple. “We are finding many high-quality companies trading at reasonable valuations, especially when considering their prospective growth or the specific transactions they are undergoing to unlock value,” Loeb said in the letter.
According to the July report, the firm’s five biggest long positions at the end of July were utility Pacific Gas & Electric; cloud giant Microsoft; e-commerce giant Amazon; Danaher; and retailer Bath & Body Works.
Three of Third Point’s five biggest losers in July were undisclosed short positions. Loeb said in the letter that the short-selling environment “is much more challenging than it has been historically,” and he stressed that “fundamental analysis is increasingly taking a back seat to monitoring daily option expiries and Reddit message boards.”
Third Point’s credit book kicked in 0.40 percent to net gains in July, but it has been the portfolio’s star for the year — its 2.7 percent contribution to net returns more than offset the 2.6 percent decline from equities. Credit gains were nearly evenly divided between corporate and sovereign credit and structured credit.
“In times of extreme credit market dislocations, our corporate and structured credit books are sources of outsized short-term returns,” Loeb stressed in the second-quarter letter. “Today, our credit portfolio is delivering steady, low-volatility returns as a result of current yields and appreciation of special situations.” He added that corporate credit generated an 8.7 percent net return on assets in the first half of the year.
Loeb asserted that structured credit is “poised for strong results” over the next 18 months, due to numerous events and catalysts that underly many of the RMBS (residential mortgage-backed securities) mezzanine structures that the firm controls. Third Point’s total exposure to credit is 40 percent, and Loeb said the firm expects to deliver less-correlated and lower-risk 15 percent IRRs (internal rates of return) over the next 18 months.
