Third Point investor Daniel Loeb (Trades, Portfolio) posted a higher return than the S&P 500 index in June, saved from negative performance by gains in his bond portfolio.
Loeb’s Third Point Offshore Fund returned 0.8% for the month, compared to 0.3% for the index. It was the third month this year he outperformed the market, but the fund is still falling short for the year through June 30, gaining 2.1% with the index up 3.8%. Loeb’s returns have been on an upswing for the past four months, with credit boosting returns since March while long positions struggled.
In the first quarter, a peaking dollar and a conviction that oil had bottomed led Loeb to “flip” his corporate credit position from net short to net long and “aggressively” add to energy credit during the first quarter, he said in April.
Loeb’s $17.5 billion Third Point hedge fund describes itself as “event-driven, value investing.” The strategy has generated an annual return of 15.9% since its founding, more than doubling the S&P 500 return of 7.0%.
By switching to long positioning in energy bonds early in the year Loeb captured much of their upside. The S&P 500 Energy Corporate Bond Index had slumped to a four-year low on Feb. 12 before surging almost 20% through the end of June. Year to date it rose 13.8%, with an 8.7% rise in the second quarter. Energy bonds outstripped other bond market constituents by a wide margin, with the S&P 500 Bond Index gaining 8.6% year to date.
Investors shied away from corporate energy bonds early in the year as the price of oil dropped to less than $30 a barrel in January, precluding debt sales as the threat of defaults loomed. Year to date, the price per barrel has increased more than 23%, though it is down to $47.22 Thursday after breaching $50 for several days in early June for the first time in almost a year.
Despite the rally, ratings companies made a spate of credit ratings downgrades in global oil and gas majors like Transocean (RIG, Financial), ConocoPhillips (COP, Financial) and Exxon Mobil (XOM, Financial) during the first half. S&P 500 Global Ratings does not expect any resurgence in the sector to last long. The agency said on June 28 it sees oil companies continuing to face lower profitability, cash flows and liquidity, leading to record default rates in 2016. It also foreclosed on the possibility of a significant rise in oil prices, though the supply glut should begin to dissipate as shale and offshore production declines.
By contrast, Loeb’s stocks gained no ground in June, with long positions declining 0.2% and shorts gaining 0.1%, for a net loss of 0.1%. Loeb had a 39% U.S. portfolio concentration in health care at the end of the first quarter and a top holding of Baxter International (BAX, Financial), which gained 19.4% year to date. (Second-quarter portfolios will file within the next several weeks, though any change in Baxter would have been reported as he owns 9.8% of the company.) This was canceled out by his second biggest position, drug manufacturer Allergan (AGN), which fell 25.5%.
His biggest winners and losers year to date are among smaller positions, with midstream oil and gas company Targa Resources (TRGP, Financial) up 60% and application software company Apigee Corp. (APIC) up 49%. On the other scale, Enphase Energy (ENPH) lost 46% and Signet Jewelers (SIG, Financial) fell 34%.
Loeb has also made a sizable bet on a shifting culture toward corporate investor activism in Japan. He had roughly 10% of his assets in these plays at the end of March, though he expected governance reforms at Japanese companies to evolve slowly. Two of them were disclosed in his recent letter: Fanuc (TYO:6954, Financial) and IHI Corp. (TYP:7013, Financial).
After meeting with Loeb, Fanuc’s management began a capital return program that comprised lifting dividends, canceling treasury shares and initiating share buyback plans. The price of Fanuc, which Loeb called “the Apple of Japan,” has declined 26% year to date.
Loeb has also been involved with IHI since 2013, a company he said “has failed to keep pace with a changing Japan.” A manufacturer of an array of products, Loeb expected the company to answer shareholder questions surrounding why it “continues to spend shareholder capital so irresponsibly.” Since January, the stock has fallen 16%.
Despite lackluster performance, Loeb is outperforming his well-known peers. David Einhorn (Trades, Portfolio)’s Greenlight Capital lost 3.4% in the second quarter and 1% for the year. Bill Ackman (Trades, Portfolio)’s Pershing Square also lost 3% in for the month and is down 20.4% for the year.
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