Billionaire Dan Loeb is a prominent activist investor that managed around $18 billion in assets via his hedge fund Third Point (stock picks, investor letters), including an equity portfolio valued at some $11.09 billion as of the end of 2014. Third Point has had a relatively slow year as its Offshore and Ultra funds gained 5.7% and 6.8% during 2014. In an uncertain economic environment impacted by weakening currencies, slumping oil prices, and slow economic growth across regions, Mr. Loeb prefers to invest in companies that can provide a consistent growth and solid cash flow. Among 10 largest holdings from Third Point’s equity portfolio (which amass 64% of the total portfolio value), several companies represent long-term positions, held by the fund for at least one year. Among these companies are Dow Chemical Co (NYSE:DOW), Actavis plc (NYSE:ACT), Sothebys (NYSE:BID).
Generally speaking, the majority of investors are focused on a long-term horizon, that’s why they are not worried about the volatility of stocks and short-term fluctuations. This is actually a good strategy, which was also outlined by Warren Buffett in his last letter to Berkshire Hathaway’s shareholders. “For the great majority of investors, however, who can – and should – invest with a multi-decade horizon, quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing power over their investing lifetime,” Mr. Buffett said. However, Mr. Loeb, who manages money on behalf of other investors cannot focus on a multi-decade horizon and have to take advantages that appear on the market from time to time. Overall, the investor considers that the current environment is favorable for activism and Third Point will reshuffle its portfolio during the current year.
Nevertheless, despite Mr. Loeb’s plans to reload Third Point’s portfolio, many positions from the fund’s latest 13F are oriented towards long-term growth. The majority of these companies are large and mega-cap stocks, which, even though can provide value in the long-term from a significantly large initial investment, may not satisfy smaller investors. In fact, the same story applies not only to Third Point but to most investors in general. As our research indicates, 50 most popular picks among hedge funds (generally mega-cap companies) underperformed the market by 7.0 basis points per month between 1999 and 2012. On the other hand, our strategy, focused on small cap picks of over 700 funds that we track, returned almost 130% between August 2012, and March 2015, versus S&P 500 ETF gains of 52.9% during the same period. Nevertheless, let’s see the companies in which Mr. Loeb is invested with a long-term horizon.
At the end of 2014, Dow Chemical Co (NYSE:DOW) represented the third-largest holding in terms of value. Third Point holds 22.0 million shares of the company valued at slightly above $1.0 billion. The fund initiated a position with 7.73 million shares during the fourth quarter of 2013 and during the second quarter increased the stake to 22.0 million shares. Dow Chemical Co (NYSE:DOW)’s stock inched up only by 3% during 2014, and Mr. Loeb went activist on the company in January. After disclosing a 1.9% stake in the company, Mr. Loeb pushed for a split of the company, but instead Dow Chemical Co (NYSE:DOW) agreed to separate up to $8.5 billion worth of business and repurchase $5.0 billion worth of stock. Moreover, in November, Dow and Third Point reached an agreement in order to avoid a proxy fight. Under the terms of the agreement, the company agreed to appoint two Third Point’s nominees to the board of directors. In exchange, Third Point agreed to take down the website it created to promote its campaign for changes at Dow Chemical Co (NYSE:DOW) and not to criticisize the company for a year.