Third Point Investors 05 December 2019
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Third Point Investors. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Third Point applies an opportunistic approach to investment. Its objective is to provide consistent long-term capital appreciation; to achieve this, the managers look across global credit and equity markets for what they view as the best risk adjusted returns. Daniel S. Loeb is the portfolio manager, overseeing all investment activity supported by a lean investment team of approximately 35. Daniel invests in both long and short opportunities, but over longer time periods it is expected the portfolio will exhibit an element of market directionality.
Third Point reports that the team have increasingly been adding exposure to activist or ‘constructivist’ positions. Their track record in activism is strong, having delivered a gross annualised return of 23% since 2011 in this part of the strategy. Third Point believes that it is well placed to continue to invest profitably in this way; especially given the management company's significant size (in terms of AUM) and experience. The team notes that activism cannot be replicated in an environment where quant and systematic strategies are arbitraging away traditional sources of stock-picking alpha.
Since Third Point Offshore Investors Limited (TPOIL) listed on 25th July 2007, the US shares of the company have delivered NAV total returns of 160.5%; versus an S&P 500 return of 106% in USD terms (source: Morningstar). The shares have also displayed lower volatility than US equities (12.4% versus 14.7%). In contrast to the long-term outperformance of the strategy, however, TPOIL has lagged the equity index over the past five years. Given that TPOIL’s net equity exposure has been less than 100%, we demonstrate that the degree of underperformance is not so large after all.
Perhaps as a result of the apparent underperformance, TPOIL has traded on a wide discount; having last traded on a premium to NAV in 2015. The discount has prompted several initiatives from the board and manager including: merging its share classes into one, a significant management fee cut, and a move to a premium listing on the LSE. In September 2019 the board announced that it was seeking to buy back up to $200m worth of shares over the next three years. This announcement caused the discount to narrow by several percentage points; though the current discount of 21.2% remains wide in absolute terms.
Third Point describe themselves as “opportunistic multi-asset investors”. They are best known for their event-driven, value-oriented approach; which Daniel Loeb (the portfolio manager) applies opportunistically and dynamically across asset classes. Over the long term, the strategy aims to deliver annualised returns in the mid-to-high teens but with an awareness of risk and a flexibility that aims to mitigate drawdowns. So while the fund typically has a net long exposure, this can be moved flexibly, allowing the fund to be positioned net short if the manager feels the opportunity set warrants it. This adaptability was evident in 2008-09, when the fund reached a net short position of -34% in December 2008, before moving significantly net long in 2009 as markets recovered.
Over the period of 22 full years since Third Point was founded, 2018 was only the manager’s fourth down year. Still, performance over the past five years has not matched the strong long-term performance of the strategy; which has annualised at almost double that of US equity markets since inception in 1995, with significantly lower volatility and drawdowns. Over this longer period TPOIL has delivered strong relative returns, encompassing multiple market cycles and shocks. In our view this makes the fund an attractive combination of equity-beating returns over the longer term, alongside shorter-term absolute return characteristics in many environments.
The board and manager have made good progress in making TPOIL a more attractive investment vehicle for UK investors. In terms of TPOIL shareholder representation, the three new board members recruited during 2019 amounted to a significant upgrade. Additionally the announcement of the $200m buyback programme highlighted the company’s commitment to reduce the discount. This sets the scene for further narrowing if the manager’s performance starts to match their longer-term track record.
|Good long-term track record
|Compared to typical closed-end funds, relatively poor disclosure on underlying portfolio
|Manager focusing on areas of market in which it has an edge
|Weaker performance during 2018
|Discount at wide level in absolute terms; board buying shares back
|Historically high OCF compared to long-only equity funds, but expected to decrease moving forward