Below are some key highlights from Third Point's latest Q2 letter, in which we find that Dan Loeb, despite some early market turbulence and thesis drift, has again managed to do what 95% of his peers have been unable to do, outperforming the S&P YTD and returning 10.7% through June 30, up 4.6% in the second quarter.
From the Second Quarter 2017 Investor Letter:
Review and Outlook
During the second quarter of 2017, Third Point earned +4.6% in the Offshore Fund,
bringing total returns for the year to +10.7%. We have generated alpha through good stock
picking in an environment that has proven unpredictable, but favorable for our
In our January letter to investors, we shared our view that 2017 would be a year
characterized by reflation globally, an end to central bank easing, and a US economy juiced
up by the Trump administration’s increased fiscal spending and tax reform. So far, none of
these predictions has come to pass. In April’s investor letter, we noted that actions out of
Washington would be delayed or even denied, but explained that we remained fully
invested because we believed that the emergence of synchronized global growth was more
important than the fading “Trump Trade”.
We were correct on this point and during the second quarter, we reduced investments in
bank financials, exited reflationary macro trades, and reoriented the portfolio towards
investments in companies that benefit from low inflation. Europe, which we highlighted as
a source of opportunity in our Q1 Letter, has been a bright spot. Our exposure there is
higher than it has been since 2010, led by our recently announced investment in Nestlé.
Our portfolio is well balanced across equity sectors but with declining exposure to credit
Looking ahead to the second half of the year, we still believe that central banks will be
important drivers of action. While it might be too early to say that the key central banks
have turned hawkish, their tone is changing and they are well past the point where any hiccup in the market will prompt increased accommodation. In the US, current weak levels
of inflation and poor CPI and retail sales reports present a quandary for the Fed. Based on
her recent remarks, Janet Yellen does not seem likely to advocate drastic action. However,
we do believe that the Fed will begin balance sheet reduction shortly but that the next rate
hike will be on hold until growth and inflation accelerate.
Economic growth in the US has been generally disappointing, particularly relative to
expectations. Markets, on the other hand, have been helped by better performance
globally, which also explains why non-US market performance has been strong. We believe
that US growth will pick up in the second half, driven by seasonality and other factors.
However, the US economy will continue to have an overhang until Congress and the
President show they can get major legislation passed this year. With substantial corporate
tax reform promised but not delivered, companies are sitting on their cash hoards and their
M&A plans, waiting for clarity.
Despite the market run-up, we continue to find compelling investment opportunities,
particularly with global growth intact. However, not all stocks that have appreciated are
trading at fair value and accordingly, we are also finding opportunities to hedge the
portfolio with single name shorts that we believe are overpriced.
More in the full letter below, which includes Loeb's commentary on Third Point's investments in Baxter, Alibaba, and Blackrock.