Manager Monday: Third Point LLC
Our latest Manager Monday looks at Third Point LLC, and discovers how they continue to outperform in the face of drastically increasing AUM.
Introduction to Third Point LLC
Even though often labeled an activist investor, or as Forbes put it, “a poster child for shareholder activism”, much of Dan Loeb’s Third Point is invested in passive trades. Nevertheless, the classification is justified due to a number of high-profile (Yahoo, Sony, Sotheby’s) campaigns often accompanied with thorough and critical letters to management. Now, his core bet is an activist campaign in Baxter International, part of a larger play on the pharmaceutical industry along with Amgen and Allergan. Most other securities in the portfolio, with a few small exceptions, do not have any activist intent disclosed. This post will look at Third Point’s ability to unlock and monetize value in both passive and active situations over the last 15 years.
As usual for our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions.
Third Point Grows Assets
Third Point’s public assets have grown drastically over the last two years and now hover between $11B and $12B making it the sixth largest activist manager in our list of 60.
Those familiar with Novus analysis frameworks know that managers have a few different ways of dealing with sharply increasing asset size. The first thing they can do is deploy the capital into new positions, increasing security count and decreasing concentration. To test that, let’s look at the number of positions Third Point held historically.
Looking at the number of positions over time we can see three different “regimes” in the portfolio. One clear observation would be that for a number of years Third Point operated at lower position counts (around 40) and dealt with the initial influx of assets by putting new capital to work in new positions in 2006-2008. During 2008, however, Dan Loeb cut much of his “extra” positions out of the portfolio and reverted to his original operating style of 40-50 names.
If assets are growing while position count remains relatively stable, one could assume that Loeb is putting the new money to work in many of the stocks that were in the portfolio already. This might inhibit his ability to sell out of those securities easily and would reflect on the liquidity profile of the portfolio. To test this we can look at how the 30-day liquidity of his portfolio has changed over the years.
Surprisingly, his portfolio is extremely liquid at 93% (upper quartile of all managers) and makes him one of the most liquid large activists we track. This reinforces the point that Third Point is not a pure activist manager and has many passive (and more liquid) investments. Liquidity profiles for large, pure activists such as Pershing Square and Icahn tend to be much lower. (Liquidity methodology)
This leaves one final lever the manager can pull in light of increasing AUM. They can start investing at higher market capitalization levels. Our prior analysis of over 1,000 managers found that this is in fact the preferred method of managers dealing with growing AUM. Third Point has been moving up the market capitalization spectrum, favoring Large and Mega cap names more recently:
And as a result, the average market cap of the stocks in their portfolio has increased:
Dissecting Third Point’s Skills
Moving up the market cap ladder is not necessarily a bad thing for Third Point. To understand the impact of this change we can use the Novus Framework, our proprietary attribution system, to gauge how returns were generated in different market cap buckets. The Novus Framework decompose returns into four components, the one shown below is “Security Selection.” It represents that portion of return generated above the market and market capitalization benchmarks due to selecting the right (or wrong) stocks within those buckets. (Methodology)
Security Selection in Market Cap (15 Years)
Security Selection in Market Cap (6 Years)
The results consistently point to an ability to generate alpha in large-caps, and less so anywhere else. The win/loss ratios by market cap reaffirm the same finding. (Methodology)
Win/Loss by Market Cap:
Earlier in the post we mentioned the healthy liquidity profile of the portfolio. But according to data the returns would only benefit from a little more illiquidity. Highest Win/Loss ratios for Third Point are found in the less liquid buckets. You guessed it. Those are the ones that most often contain activist positions.
Win/Loss by Liquidity Bucket:
Recent Market Turbulence
Many nervous investors await September updates from their managers as many print what most certainly is going to be a red quarter. But according to CNBC, Third Point was not down much more than the market. While we calcualte the long portfolio to be down about 800bps on the month, we figure his shorts contributed enough to print a relatively decent number, at least with respect to some of his peers. The below heatmap shows the allocation size (size of box) and alpha contribution (color) for Third Points portfolio in September. While Baxter, his largest position, is currently a detractor, the ultimate results of Third Point’s campaign remain to be seen.
Alpha drivers September 2015:
What makes a successful hedge fund manager? We believe that studying performance alone does not adequately answer the question. By looking at thousands of active manager portfolios, we peek under the hood of managers’ investment process and recognize patterns that lead managers to consistent outperformance. These patterns can be viewed as investment skill, or managers’ ability to generate alpha through certain repeatable methods.
In this article we use public ownership data and the Novus Alpha platform to evaluate three very distinct money managers. The three case studies aim to identify the driver of these managers’ success: investment skill.
What’s in the report?
- Analysis of a top long-short equity fund
- Analysis of a top sector specialist
- Analysis of a top long-only manager