Third Point applies an opportunistic approach to investment, exemplified by Third Point Investors’ (TPOU’s) portfolio activity this year. As we discuss under Portfolio, the manager has successfully pivoted exposure to asset classes during the market volatility experienced in early 2020, managing risks and delivering a lower-volatility return for the year.
TPOU’s objective is to provide consistent long-term capital appreciation. To achieve this, the manager looks across global credit and equity markets for the best risk-adjusted returns. During 2020, Daniel Loeb stepped back into the role of sole CIO, once again driving the investment process across the whole strategy.
TPOU’s portfolio is now largely invested in three areas: credit, activism and equity of high-quality compounders. During March, the team deployed capital away from equities to credit situations with highly asymmetric outcomes. Simultaneously, they reshaped the equity portfolio through a series of well-timed entries into high-quality companies able to reinvest in their own businesses in order to generate high IRRs over time. New positions include Alibaba, JD.com, Amazon and Disney.
Third Point’s strong long-term track record contrasts with a difficult past five years. Equity returns (S&P 500) have significantly outpaced TPOU over this period, but when compared to the AIC’s Flexible Investment peer group, NAV performance has been more in line. Loeb’s return as sole CIO led to several portfolio changes, enabling TPOU to rebound from market lows. Year to date, TPOU has therefore performed more strongly than this peer group, despite not outpacing the S&P 500.
TPOU’s discount remains wide at 23%. The board has stated that it will reassess options if the discount has not materially narrowed by late 2020.
Third Point seems reinvigorated by Daniel Loeb having resumed his role as sole CIO. More generally, the Third Point team believe they are well positioned to capitalise on further dislocations in equity markets by facilitating complex financing and restructurings in credit markets.
TPOU’s performance has been less strong than that of equity markets over the past five years. This fact, allied to TPOU’s membership of the AIC’s Hedge Funds sector, may be the reason the discount has been so persistent. However, having observed the investment process for quite some time, it occurs to us that the investment approach, underlying asset classes and performance all suggest TPOU might be better viewed in the context of the AIC’s Flexible Investment peer group. When viewed through this prism, TPOU’s performance is impressive relative to this peer group.
In our view, the 23% discount is therefore anomalous. Having taken several progressive steps aimed at narrowing the discount, there is potential for the board to take a different – perhaps more aggressive – route if the discount has not narrowed by the end of the year.
This potential upside, combined with the measured, risk-aware approach to investing that the manager demonstrates, implies that TPOU offers some unique investment properties. When taken on its own, the NAV offers an attractive risk-adjusted exposure to global equities and special situations, as represented by the credit and activist positions. At the same time, the share price offers material upside potential from the discount narrowing should the board decide to become more aggressive. In the context of a challenging economic backdrop, this combination could prove attractive.
|Good long-term track record||Compared to typical closed-ended funds, relatively poor disclosure on underlying portfolio
|Manager's ability to pivot portfolio on asset classes with good potential risk-adjusted returns||Uninspiring performance relative to equity markets over five years|
|Discount at wide level in absolute terms; board buying shares back||High OCF compared to long-only equity funds, but this is expected to decrease moving forward|