Third Point Investors (TPOU) has released its annual results for the 12 months ending 31 December 2023.
- TPOU generated a NAV total return of 4.0% and a negative share price total return of -5.8%. This compared to the 24.4% return for the MSCI World Index and a 26.3% return for the S&P 500 Index over the same period.
- TPOU’s manager acknowledges the underperformance of the trust as disappointing, but also highlights that TPOU saw a significant improvement in its relative performance in the second half of the year, as well as in the first quarter of 2024.
- TPOU attributes its full year underperformance to its short equity positions and value-orientated long positions. The latter of which underperformed in a market that was largely driven by the ‘magnificent seven’ stocks. However the same stock which underperformed in the first half outperformed over the second.
- The manager also restructured its single name short equity portfolio to be far more diversified, while tightly limiting risk in names with high short interest. This also improved performance in the second half.
- TPOU’s discount widened from 15.4% to 23.3% over the period, a reflection of the trust’s performance. The board made efforts to manage TPOU’s discount, repurchasing 2.6m shares, equal to $51.2m in value.
- As the average discount to NAV at which the shares traded in the six month period to 31 March 2024 was more than 10%, the board will offer shareholders the opportunity to tender shares for redemption at a 2% discount to NAV in April 2024. The redemption offer is for up to 25% of TPOU’s issue share capital.
- During the year there was a change to the policy regarding redemptions from the Master Fund in respect of illiquid holdings in private investments. Under the new policy, redemptions will be settled approximately 93% in cash and 7% in participation notes, the latter reflecting the pro rata share of legacy private positions in the Master Fund.
- The board will implement a strategy review over the coming year, to explore further options for TPOU in light of the meaningful discount the trust has traded on. The board has appointed two new directors to assist in this. The strategy review is not a formal sale process and TPOU is not inviting offers for the trust to be acquired. The strategy review committee will be charged with evaluating all possible options, including offensive M&A opportunities, investment strategy mixes, corporate continuation votes or further tenders, and potentially other innovative options.
TPOU’s managers commented:
“In Equities, Third Point sees a constructive backdrop in 2024, having addressed some of the issues that contributed to underperformance in 2023 and expects market forces to reward its approach to investing as the macroeconomic picture stabilises. While assets have certainly priced in some of the good news on inflation and rates, Third Point still believes headline equity market multiples exaggerate the valuation most companies are trading for and continues to find what it believes are high-quality companies trading at reasonable valuations.
“In Corporate Credit, the high yield market has been supported over the last few years by favourable supply and demand drivers that we believe are fading. The post-COVID recovery generated a significant volume of upgrades to credits that had been downgraded to high-yield during the pandemic, resulting in a net negative supply. Nearly all these names have been upgraded and returned to investment grade, so this impact is behind us.
“On a fundamental basis, the impact of higher rates has the potential to create widespread credit stress in high yield. According to a recent Bank of America study, 40% of all B/CCC issuers (roughly half the market) will be free cash flow negative as they refinance maturing debt with more expensive debt due to higher interest rates. It is also worth noting that this analysis, done at the beginning of 2024, assumed that the U.S. Federal Reserve would cut interest rates by 250 basis points as was being projected by the market at the time. It is becoming more probable that that the Fed cuts do not match those expectations or, if they do, they are accompanied by economic weakness which would hamper corporate cash generation.
“Looking ahead to 2024, the banking crisis last March caused banks to try to optimise their portfolios and sell the easiest, shortest duration assets that are capital intensive. Third Point estimates there are $65 billion of consumer loans that banks want to sell over the next few years where unlevered loans are yielding 15% with capital appreciation upside. Spreads in structured credit look appealing versus public corporate credit and so Third Point expects that with more investors looking at structured credit for yield, spreads will tighten across many collateral types, particularly commercial mortgage-backed securities (CMBS) where real estate security selection is critical. The long-awaited opportunity in commercial real estate (CRE) looks more promising this year, as lower rates and a maturity wall of CRE debt should finally shake loose some distressed securities.”