Third Point Investors (TPOU ) fund manager Daniel Loeb believes current market conditions favour his activism, which is just as well as the hedge fund has a lot of ground to make up after last year.

The recently published fourth quarter updated showed the Guernsey investment company, a feeder for the US-based Third Point Master Fund, lagged the market rally at the end of 2022 with net asset value (NAV) up 1.2% versus the 7.5% rise in the MSCI World index and 9.9% in the US S&P 500 benchmark.

It was a difficult year for the £550m portfolio of equities and bonds with NAV slumping just over 24%, after a historically bad first half. The outcome for the year was worse than the declines of 17.7% in the MSCI World and the 18.1% in the S&P 500.

Discount opportunity

Disappointing as that was, holders of its sterling shares are currently sitting on a three-year total return of 38.5% that is still ahead of the MSCI World index.

The setback has left the sterling shares on a wide 18% discount below NAV, that looks interesting ahead of a potential 25% tender offer in a year’s time.

The company has previously agreed that if its average discount exceeds 10% in the six months to March 2024, it will offer to buy back a quarter of its shares at a 2% discount. A further tender offer will occur three years beyond that if the discount exceeds 7.5% in the six months to March 2027.

Killik’s Mick Milligan last year urged the closed-end fund to curb its high charges if it wanted more wealth managers to buy the shares.

Optimist for 2024

Loeb attributed the fourth quarter underperformance to his fund’s defensive positioning, big falls in several large holdings, such as cybersecurity provider SentinelOne, and the write-off or markdowns in crypto-related private investments, including FTX.

Loeb said the rally in risk assets, driven by hopes the Federal Reserve would slow down the pace of its interest rate hikes, would not be sustained because it was ‘merely a technical phenomenon’. This looks accurate as markets wobble against renewed hawkishness from the Fed as inflation proves difficult to quell.

However, Loeb is not a bear, believing markets are overly-concerned with short-term company profits as recession fears grow.

‘Our earnings outlook for 2024 is more favourable. Conditions are ripe for many types of event-driven and activist investing thanks to the unique set of circumstances that converged over the past few years,’ he said.

ESG ‘delusion’

He claimed Covid had discouraged companies from letting go underperforming or surplus workers, while a ‘delusion around ESG and “stakeholder capitalism” allowed boards and management to take their eye off the ball in managing margins and returns on invested capital.’

Over the quarter, Loeb opened a new position in US insurer AIG, which is repositioning as a property-casualty insurer through the listing of its life insurance subsidiary, Corebridge.

Loeb believes the proceeds will be used for share buybacks and that the remaining P&C business offers attractive returns after improving its underwriting and reducing costs in recent years.

‘As a result, AIG’s P&C operations have gone from an unprofitable 117% combined ratio in 2017 to a 92% combined ratio in 2022 and have seen seven consecutive quarters of favourable reserve development,’ he told investors.

Taking a bath

More aggressively, Loeb lifted Third Point’s stake to 6% in Bath & Body Works, piling pressure on the US soap and fragrance company with an open letter demanding seats on the board to resolve issues with its strategy and costs. The company, which span off from Victoria’s Secrets in 2021, is the fund’s fourth largest equity position and its shares have shot up on hopes Loeb will succeed as a catalyst for change.

The activist continues to press Colgate-Palmolive after it reported ‘disappointing’ results over the quarter, though Loeb believed the consumer goods giant was ‘on the road to delivering more predictable returns moving forward’.  

Big credit opportunities

Although the sudden end to near zero interest rates last year proved a brutal shock for TPOU’s debt portfolio, Loeb said it remained a ‘mainstay’ with 12.6% in credit and 26% in asset-backed securities.

The fund has hedged duration, or interest rate exposure, and anticipates a busy time this year trading in and out of high-yielding debts for good risk-adjusted returns.

‘When we examine today’s opportunity set, we see significantly higher yields than in 2020, and in some cases higher than in the past 15 years, and more credit protection for these bonds. We can invest at the senior portion of the capital structure at yields hedge funds would traditionally get only from the bottom-most portion of the capital structure,’ Loeb said.