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Robert Abbott
Robert Abbott
Articles (339)  | Author's Website |

Daniel Loeb’s Value-Seeking Journey

This guru investor has gone from being a brash activist to an observer of the really big picture

Over slightly more than two decades, Loeb’s Master Fund has returned average annual returns of 17.9%.

This investing guru is best known for his scathing letters to the CEOs of wayward firms, pointing out what he believed to be their failings, in strong language. In recent years, though, he appears to have focused more on what is called "event-driven, value-oriented investing." And, significantly, he is now looking beyond financial statements.

The election of Donald Trump as president has been one of those events, and Loeb has rushed to respond, making significant adjustments to his portfolio.

This article profiles the man and his company, as well as his investing philosophy, his current holdings and his performance.

This article is one in a semi-series examining the top stock-picking gurus (sometimes individuals and sometimes teams). The others are: David Tepper, Prem Watsa, Bill Ackman, Seth Klarman (by Rupert Hargeaves), Chuck Akre, Vanguard Health Care Fund, Yacktman Focused Fund, Jerome Dodson, Frank Sands, the Eaton Vance Worldwide Health Sciences Fund and PRIMECAP Management.

Who is Loeb?

The son of a lawyer and historian, Loeb was born (1961) and grew up in Santa Monica, California. Even as a child he spoke his mind apparently; a Business Insider bio reports that at age 12 he paid a classmate 25 cents a day to be his bodyguard.

He began his higher education at UC Berkeley (California), but after two years transferred to New York City’s Columbia University; he studied economics but also developed a love of literature and art. He actively and profitably traded stocks while in university, but in his senior year at Columbia blew his $120,000 in gains on one bad stock pick.

After graduating, he went to work at Warburg Pincus, a private equity firm in New York. That was followed by a turn in the music industry as director of corporate development at Island Records. Next came jobs at Lafer Equity Investors, Jefferies Group and Citicorp, and finally, his own firm.

Beyond his investing, Loeb is known as an art collector, an endurance athlete and philanthropist.

A broad, liberal arts perspective gives Loeb a different perspective than many other gurus, and helps us understand how his investing came to be influenced by more than financial statements.

What is Third Point LLC?

The New York hedge fund firm was founded by Loeb in 1995, and he has continued to lead it. It originally had an activist bent, but has evolved in an opportunistic direction.

The firm describes itself, on its website, as having an “event-driven, value-oriented investment style,” and that it tries to find situations where a catalyst will unlock shareholder value. Catalysts include events such as spinoffs and bankruptcies.

Third Point has enjoyed a great deal of success, but it has not always been a smooth ride for his investors, or for him. Note in this GuruFocus chart how his holdings practically collapsed during the 2008 financial crisis:

It also reports the firm invests in fixed income and ADR markets, as well as public equity, worldwide. And the company operates a reinsurance company, a closed-end investment company in the United Kingdom, and a venture capital arm that invests in startup technology, alternative energy, and clean technology.

Third Point is headquartered in New York City, with offices in California, Connecticut, Bangalore, Hong Kong and London.

This firm has many different moving parts that Loeb must manage or oversee. That should give him a broader perspective on the investing environment, as well as many irons in the proverbial fire.

Loeb’s investing philosophy

Many first heard of Loeb through his attacks on ineffective CEOs, particularly during the mid 2000s, as well as some made in 2013. He now appears to do less of this, but nevertheless, defended shareholder activism in an August 2015 letter.

The right kind of activism, that is. In the letter, he says he agrees with politicians and trade unionists that "hit and run" activists—those who make a quick buck while leaving companies and their employees worse off—are deplorable. Loeb said his firm is not one of those activists, and points to Third Point’s work in installing "visionary" leaders at Yahoo! Inc. (YHOO), Ligand Pharmaceuticals Inc. (LGND) and Sotheby’s (BID).

More often, in recent years, Loeb has focused on conventional research and analysis. In describing the Master Fund, he first notes that they have a research-driven strategy based on fundamental metrics.

With that research, they look for ‘event driven’ situations that could disrupt a stock’s pricing, either up or down.

Positive potential events might be restructurings, recapitalizations, management changes, or the sale of a company.

Negative potential events might be liquidity crises, losses in litigation, or exposure of irregularities (such as accounting irregularities).

Further, Loeb notes Third Point has the capacity to take large positions, which would allow it to influence the governance of target companies, which increases the likelihood an envisioned catalyst will occur.

He adds they apply this investment process across different strategies, industries, and geographic regions.

In the Fourth Quarter 2016 Investor Letter, Loeb articulated a new perspective on ‘event-driven’ issues: “ . . . the critical events driving market, sector, and individual security performance and valuations are increasingly political and economic in nature.”

Most conspicuously, Donald Trump was elected President of the United States, and Loeb thinks a sea-change is coming. He says he expects a transition from monetary stimulus to fiscal stimulus; the Treasury department will supplant the Federal Reserve as the central engine of the economy. He called the election, “the most important paradigm shift since the financial crisis.”

In response to the election event, Third Point increased financials from 4.4% to 11.8% of the total Master Fund in the first month after election day. And, he reports they’ve added exposure to each of those financial names in 2017. He adds, “This environment is undoubtedly better for active investing - just as active investing was considered to be on its deathbed.”

And one more transition in the evolution: a move toward big data. Forbes reported in December that Third Point had hired a key data-strategy specialist away from WorldQuant, another major hedge fund. Reportedly, WorldQuant called in the lawyers, but apparently a deal was made, allowing the specialist to work for Loeb and support the existing fundamentals research team. The combination of quantitative and fundamental strategies is termed ‘quantamental’.

There’s been an evolution in the investing philosophy of Daniel Loeb (Trades, Portfolio); he continues to be event-driven, but now is looking at a much broader spectrum of potential causes. Where he once looked to disrupt one company to stimulate a catalyst or event, he now looks to the political and economic spheres for broader disruptions.

Current holdings

As this GuruFocus chart shows, Third Point is heavily weighted in healthcare and financial services:

The top 10 holdings of the Master Fund, at the end of calendar 2016, were:

Although Loeb and Third Point more than doubled their exposure to financials in the dying days of 2016, they held only two names in the top ten: JPMorgan Chase and Bank of America.

Performance

This 10-year table shows annual results over the past decade:

Reviewing 2016 results in the Fourth Quarter 2016 Investor Letter, Loeb explained that while corporate and sovereign credit outperformed, the equity portfolio underperformed. The problem on the equity front involved two health care names, Allergan PLC (NYSE:AGN) and Amgen Inc. (NASDAQ:AMGN). He also cited ‘lackluster’ performance in structured credit.

The past four years have been uninspiring, and no doubt downright disappointing for his clients, with the Master Fund failing to keep up with the S&P 500. Allergan had been a top-three stock earlier in 2016, but had fallen right out of top ten by the fourth quarter.

Conclusion

Through the course of a 21-year career at Third Point, Daniel Loeb (Trades, Portfolio) has maintained his core belief in event-driven, value-oriented investing, and grounding the selection process in fundamental research.

At the same time, he has evolved throughout that career, moving from brash activism to more subtle activism, becoming increasingly aware of disrupters beyond the financial statements, and finally to dipping into quant strategies.

As noted, the last four years have disappointed. But, before that, and particularly right after the big loss in 2008, he came back with two very big years, both with positive returns of well over 30%. Those big years continue to serve him well today, maintaining his place in the pantheon of gurus who beat the benchmark over the long-term.

Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

Visit Robert Abbott's Website


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