Third Point LLC is a New York-based investment advising firm founded in 1995. The company released its Q2 2019 Investor letter – a copy of which can be downloaded below. Third Point, which was founded by Daniel S. Loeb, invests in global credit and equities and manages capital for government and corporate pensions and sovereign wealth funds. Its investment strategy is known to be both value-oriented and event-driven. As Third Point’s CEO, Loeb leads all research and portfolio management activities. Before starting Third Point, Loeb held various leadership roles at Citigroup, Jefferies & Co., Lafer Equity Investors, and Warburg Pincus. Loeb gained decades of experience in the securities industry and dedicated experience in private investment, distressed debt, risk arbitrage, and high-yield bond sales. He holds a bachelor’s degree from Columbia University.
In its recent Investor Letter, Third Point LLC announced a 3.8% gain for its Offshore Fund, which brings a year-to-date (YTD) return of 13.1%. It also provided more information about its quarterly performance.
“In our 2018 year-end Investor Letter, we outlined our 2019 plans: to generate alpha by concentrating on specialized strategies where we believe we have an edge and to reduce market risk via lower net exposures and less beta in the portfolio. During the first half of this year, we primarily focused on event-driven strategies, including activist investing. We also grew our concentrated book of single name shorts and increased some sector and market hedges to dampen volatility and market correlation. Our nets have averaged ~40% this year. We believe that this positioning, late in the economic cycle, allows us to take advantage of market corrections and be poised to shift into credit as opportunities emerge. Of course, it is impossible to predict when the credit cycle will turn. However, given current debt levels throughout the system and the potential for an economic slowdown in the next few years – although we see nothing on the immediate horizon – we believe flexible positioning is appropriate.
Given the fund’s lower net exposure this year, we are pleased that Third Point’s Offshore Fund gained +3.8%1 during the Second Quarter of 2019 and returned +13.1% through June 30, 2019. For the first half of 2019, our RoA for the long/short equities book was +26.4% and equities contributed over 80% of our total net P&L. These returns were primarily driven by active investments including Sotheby’s, which agreed to sell itself for a significant premium in June, and a new position in Sony, which was the largest contributor to profits in Q2. In the first half of this year, active engagement positions in Baxter, Nestlé, United Technologies, Campbell, Sony, and Sotheby’s comprised six of our seven top profit contributors. Similarly, four of our five top performing positions in Q2 were such names. Credit also contributed positive returns for Q2 and for the year overall, led by a position in the unsecured debt of PG&E. Each of our credit strategies – corporate credit, sovereign credit, and asset-backed securities – generated gains.
U.S. equity markets have been strong this year despite weak global growth and low overall earnings growth. The strength seems largely driven by the dovish pivot in Fed policy from targeting higher neutral rates to focusing on low inflation and trade war concerns to initiate a rate cutting cycle. After some initial hiccups early in his tenure, the “Bernanke Put” baton that was handed to Janet Yellen seems now to have been passed to Fed Chair Powell. In Europe, the ECB has initiated efforts this year to stimulate Eurozone growth by maintaining rates at sub-zero levels and renewing a program of cheap bank loans, rather than tightening as previously forecast. In Asia, China has stimulated via credit and fiscal policy and may have room to stimulate further.
We expect growth to stabilize for the rest of the year, partially because manufacturing activity – the main driver of global GDP swings – appears likely to be overshooting on the downside, driven by inventory liquidation. Financial conditions have eased meaningfully and there are few imbalances in the U.S. economy. Thus, while we may be “late cycle”, we do not see any evidence of an immediate economic downturn. We continue to closely monitor the health of the U.S. consumer, given its outsized contribution to GDP, and second order effects from an inverted yield curve.
Our equity book has the highest proportion of idiosyncratic to other types of risk (market, sector, factor, etc.) in over five years, and our nets are at the low to mid-level of our historical exposure ranges. With this portfolio composition, we believe we are well-positioned to generate alpha while navigating the growth slowdown versus fiscal easing paradigm that should drive markets again during Q3.”
You can download a copy of Third Point LLC’s Q2 2019 Investor Letter here:
You can also see the list of our 2019 Q2 investor letters and download them on this page.