1 August 2023
Third Point Publishes Q2 2023 Investor Letter
Highlights:
- Major indices continued their robust performance during the second quarter, with a handful of technology-related stocks continuing to represent the majority of their performance.
- Although Third Point had some exposure to these tech positions, returns were dampened from losses from market/position hedges, single name short positions, and several poorly performing long positions.
- While the market has had an impressive – if narrowly led – run to start the year, Third Point believes there is still upside available given its constructive view on inflation, rates and the consumer.
- The advent of generative AI will have an enormous impact on markets, and Third Point has added to positions in AI beneficiaries trading at reasonable valuations.
- The balance of the equity portfolio remains in undervalued positions that have important upcoming catalysts such as spinoffs or operational turnarounds.
- Corporate and structured credit have performed well and are anticipated to be continued sources of valuable, lower volatility returns.
- Updates are also provided on equity positions Shell and Danaher.
Third Point LLC, the Investment Manager of Third Point Investors Limited (“TPIL” or the “Company”) announces it has published its quarterly investor letter for Q2 2023. The full letter can be accessed at the Company’s website: https://www.thirdpointlimited.com/resources/portfolio-updates
Performance Key Points:
- Third Point LLC (“Third Point” or the “Investment Manager”) returned 1.1% in the flagship Offshore Fund (the “Master Fund”) during the second quarter of 2023, compared with the S&P 500 Index return of 8.7% and the MSCI World Index return of 7.0% in the same period.
- The top five positive contributors for the quarter were Pacific Gas & Electric Co., Microsoft Corp., Amazon Inc., Alphabet Inc., and Ferguson PLC.
- The top five negative contributors for the quarter were Alibaba Group Holding Ltd., Danaher Corp., Catalent Inc., International Flavors & Fragrances Inc., and a private position.
Outlook and Market Commentary:
- Last October, Third Point correctly observed that markets bottom when economic data looks most bleak. Unfortunately, instead of expressing this constructive view by investing in high quality companies with earnings growth, Third Point committed capital primarily to value situations, which have underperformed this year.
- Looking ahead, the Investment Manager continues to see favourable economic conditions driven by declining inflation, which will eventually lead to a less hawkish monetary policy. While Third Point is cognisant of consumer vulnerabilities as savings are depleted, it also sees potential for the US Federal Reserve to begin easing as consumer run out of cash, which should make for a mild recession, if any.
- Given this backdrop, Third Point believes there is still upside to the market, notwithstanding the run to-date. The Investment Manager is finding many high quality companies trading at reasonable valuations, especially when considering prospective growth.
- While gross equity exposure remains modest (below 100% on the long side), Third Point has increased its net exposure to about 70%. Approximately 45% of this net exposure is composed of direct and indirect AI “winners” trading at reasonable valuations, as Third Point believes that many stocks have not yet fully incorporated the resultant business impact of AI. The balance, or about 55%, is a diversified portfolio of companies such as PCG, Danaher, FIS, AIG, Jacobs Engineering, and others that are undervalued and have important upcoming catalysts.
Portfolio Updates
- AI-Driven Positions
- Third Point has been investing in AI-enabled business models since its 2016 Series B venture investment in Upstart, which ultimately became the firm’s most lucrative investment.
- Today, the Investment Manager believes that AI is creating investment opportunities across the information technology “stack,” starting with semiconductors at the bottom and proceeding upwards to infrastructure software and application software.
- Third Point is mindful of the “hype cycle” that currently surrounds AI and the attendant regulatory risks. However, while the AI investment opportunity is in its infancy and will take time to mature, the Investment Manager sees clear evidence that it is already leading to the creation (and destruction) of large profit pools that the market has not fully realised.
- Update on Danaher (DHR)
- Danaher is the portfolio’s longest held investment and remains a top 5 position.
- The company has underperformed the market this year due to a slowdown in the bioprocessing industry and more cautious spending by biopharma customers. Third Point anticipates that this slowdown is temporary, and that the bioprocessing industry will return to normalized growth of high-single digit to mid-teens in 2024 and beyond.
- Danaher is also on track to spin off its Environmental & Applied Solutions division in Q4, which marks the last step in its transformation into a pure-play life sciences tools and diagnostics company.
- Update on Shell (SHELL NA)
- Third Point initiated a position in Shell in the summer of 2021 and highlighted the company’s significant discount to intrinsic value as well as to US-listed peers after decades of poor performance.
- While shares have performed well since the initial investment, the shares still trade at a staggering discount to intrinsic value, and Third Point believes it represents a compelling investment at current levels.
- Third Point is encouraged by the upgrade of its management team, with the appointments of Wael Sawan as CEO and Sinead Gorman as CFO. They have demonstrated an unwavering commitment to shareholder value, capital discipline, and improved returns.
- Update on Corporate and Structured Credit
- High yield spreads have traded in a tight range this year, but dispersion has been relatively broad, and Third Point has identified improving situations despite the uncertain macro backdrop. Additionally, events such as the short lived “banking crisis” created attractive trading opportunities that the credit team capitalized on.
- The corporate credit portfolio consists largely of bonds or bank debt at the top of capital structure, and the Investment Manager has favoured industries that should outperform if the most forecast recession in history finally materializes. Third Point is finding attractive opportunities in healthcare, telecommunications and select sectors/credits within commercial real estate.
- While timing is difficult to predict, Third Point believes high yield spreads will widen as defaults surface, driven by a weaker economy or refinancing challenges from higher interest rates.
- Within structured credit, residential mortgages and consumer credit outperformed to start the year, as house prices remained resilient and legacy borrower performance has been steady, given their locked in low mortgage rates and 40-50% equity held in their homes.
- With the regional banking crisis in March, banks and credit unions are now also selling loans to right-size their asset and liabilities. While most headlines suggest that banks will sell commercial real estate loans, Third Point believes that most selling will be focused on consumer loans given the lower duration and mark-to-market impact. The Investment Manager will look for forced selling situations to potentially add exposure.
- Ends -
Press Enquiries
Notes to Editors
About Third Point Investors Limited
www.thirdpointlimited.com
Third Point Investors Limited (LSE: TPOU) was listed on the London Stock Exchange in 2007 and is a feeder fund that invests in the Third Point Offshore Fund (the Master Fund), offering investors a unique opportunity to gain direct exposure to founder Daniel S. Loeb’s investment strategy. The Master Fund employs an event-driven, opportunistic strategy to invest globally across the capital structure and in diversified asset classes to optimize risk-reward through a market cycle. TPIL’s portfolio is 100% aligned with the Master Fund, which is Third Point’s largest investment strategy. TPIL’s assets under management are currently $600 million.
About Third Point LLC
Third Point LLC is an institutional investment manager that actively engages with companies across their lifecycle, using dynamic asset allocation and an ethos of continuous learning to drive long-term shareholder return. Led by Daniel S. Loeb since its inception in 1995, the Firm has a 39-person investment team, a robust quantitative data and analytics team, and a deep, tenured business team. Third Point manages approximately $11.5 billion in assets for sovereign wealth funds, endowments, foundations, corporate & public pensions, high-net-worth individuals, and employees.
