Third Point Offshore Investors Limited (TPOIL) is a £645m Guernsey registered, London-listed investment company that is a closed-end feeder fund into the Third Point Offshore Fund, Ltd. (the “Master Fund”). Third Point describe themselves as “opportunistic multi-asset investors”. They are best known for their event driven, value-oriented approach, which the management team apply opportunistically and dynamically across asset classes. Daniel S. Loeb is the portfolio manager who oversees all investment activity and is supported by a lean investment team of approximately 30.
The majority of the fund’s assets are currently invested in long and short equities positions, but it also has exposure to corporate and sovereign credit, asset-backed securities, venture investments, risk arbitrage, and macroeconomic events. The manager blends bottom-up security selection with macroeconomic insights layered on top, aiming to deliver strong risk-adjusted returns over the longer term. Daniel is not restricted by region or asset class, allocating in a flexible manner, and is happy to take concentrated positions in his best ideas (currently the largest is Baxter International at c 13% of NAV). Whilst combining a variety of strategies, one of the largest contributors to alpha generation since inception has been through taking an activist/constructivist approach, often involving interaction with company management to enact corporate change and unlock value.
Performance over 2018 did 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 the long term, the strategy aims to deliver mid-to-high teens annualised returns, but with an “awareness of risk” and a flexibility that aims to mitigate drawdowns. After a flat period of performance over the nine months to September 2018, Third Point had a poor Q4, with the NAV falling by ~12% over this period. January 2019 has seen a strong start with positive NAV performance of +2.9%. Third Point has added several resources and refocused on core investment strategies to be better positioned for NAV performance in 2019 and thereafter.
The discount on TPOIL has been persistent since 2015, which has prompted the board to undertake a number of initiatives to try to close the discount, by making the vehicle more attractive to UK investors. The company achieved a premium listing on the LSE on 10th September 2018, meaning that TPOIL was eligible for inclusion in the FTSE indices at the year-end rebalance. In addition, the company has started buying shares back and has also announced a reduced management fee, down from 2% per annum to 1.25%. In addition, the fund carries a modified high watermark provision relating to the performance fee. As such, the Company will bear a 10% performance fee on all gains in the Master Fund until the Master Fund’s returns increase by approximately 30% since 31 December 2018. The fund also issued a new website in 2018 (www.thirdpointoffshore.com) which includes the ability for shareholders to register for emailed updates on performance, portfolio changes, corporate developments, etc. Further, the board enacted a new share buyback programme in Q4 to help combat the discount.
The board and manager have made good progress in making TPOIL a more attractive investment vehicle, further added to in our view by the recent appointment of Steve Bates as the new chairman. The board also appointed Rupert Dorey as non-executive director to replace Keith Dorian who will not be standing for re-election at the next Annual General Meeting. Both Steve and Rupert are very recognisable names in the UK closed-end fund sector, and in our view together represent a significant upgrade for TPOIL shareholders in terms of representation.Third Point reported disappointing numbers for Q4, but 2019 has started strongly, and there are several catalysts for stocks in the portfolio which could drive performance in the short term. Certainly, we view the opportunity for the managers to invest flexibly both long and short across asset classes remains attractive.
With many of the structural and corporate imperfections ironed out, there is a better chance of seeing a marked improvement in demand for the shares, thereby narrowing the discount. Indeed, with the discount having narrowed from its wide point of c. 24%, this could already be happening. With the board now buying shares back, the current discount level might be considered partially underwritten. As such, today’s discount of c. 20% could offer an attractive entry point to a strategy that has delivered excellent risk-adjusted returns for more than two decades, within a vehicle with features which now feels more atuned to the UK market.
|Good long-term track record
||Compared to typical closed-end funds, relatively poor disclosure on underlying portfolio.
|Catalysts on several investments are approaching
||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 is expected to decrease moving forward