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Third Point Q1 2013 Investor Letter

Third Point Q1 2013 Investor Letter

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Published by Devon Shire
Third Point Q1 2013 Investor Letter
Third Point Q1 2013 Investor Letter

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Published by: Devon Shire on Apr 12, 2013
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04/12/2013

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1
 
April10,2013
First 
Quarter
2013
Investor
Letter
Important 
Note
to
Our
Investors
and
Unintended
Recipients
Third 
Point’s
Quarterly 
Letters
are
designed 
to
inform
our 
investors
about 
recent 
 portfolio
developments
and 
 provide
our 
views
of 
the
market 
environment.
Our 
letters
are
not 
investment 
recommendations
 for 
the
 general 
 public.
The
legal 
disclaimer 
makes
clear 
that 
we
may 
trade
in
and 
out 
of 
 positions
discussed 
at 
any 
time
and 
undertake
no
duty 
to
update
anyone,
except 
to
the
extent 
we
are
required 
to
make
 filings
with
the
SEC.
Investors
who
choose
to
take
action
based 
on
our 
investment 
ideas
do
so
at 
their 
own
risk.

Review
and
Outlook 
ThirdPointstartedtheyearstrongly,deliveringsolidrisk‐adjustedreturnsforourpartnersbyfindingcompellingevent‐driveninvestmentsineachofourmainareasoffocus.Wepreviouslyhighlightedthatweexpect2013tobeafavorableyearforThirdPoint’sbreadandbutterevent‐driveninvestingstyle.Duringthefirstquarter,wegeneratedalphaprimarilyfromselectspecialsituations,continuedstrongperformancefromYahoo,goodtradinginfinancials,andmany“singlesanddoubles”acrosssectorsandstrategies.Thusfarin2013,weseeinvestorshunkereddownintwocamps.Inthefirst,wefindinvestorswhobelieveinarecovery,seeincreasingflowsintoriskassets,arelongthemarket,andinclinedtorideoutdownturns.Intheothercamp,bearsareconcernedaboutdisintegrationinEurope,dampenedcorporateprofitexpectations,slippingglobaleconomicindicators,andpoormarketinternalsthatfavorsafetyovergrowth.Theseinvestorsareanxiousbutbuyingdefensivestockstoavoidmissingarallyintoequities.Consistentwithourapproachoverthepastfewquarters,wehaveapproximatelyhalftheequityexposureofthemarketandvaryournetandgrossdynamically.Wearecontinuingtofindinterestingevent‐drivenopportunitiesinequities,creditandcurrencies.
Quarterly
Results
SetforthbelowareourresultsthroughMarch31,2013:
ThirdPointOffshoreFundLtd.S&P500
 
2013FirstQuarter&YTDPerformance9.0% 10.6%AnnualizedReturnSinceInception*17.9% 6.5%
*
 
Returnfrominception,December1996forTPOffshoreFundLtd.andS&P500.
 
 
2
 
ThetopfivewinnersforthequarterwereYahoo!Inc.,JapaneseMacro,AmericanInternationalGroupInc.,VirginMedia,andHerbalifeLtd.ThetopfivelosersfortheperiodwereGold,ShortA,ShortB,ShortC,andGreekGovernmentBonds.AssetsundermanagementatMarch31,2013were$11.7billion.Thefundsarehardclosedtoallinvestorsandnotacceptingnewcapital.
Select 
Portfolio
Positions:
Updates
Japanese
Macro
WevisitedJapanlastAprilfollowingtheBankofJapan’s(“BOJ”)announcementofanewpolicyoftargetinga1%annualinflationrate.WerecognizedfrompastexperiencethatmeaningfulquantitativeeasinginJapancouldprovideopportunitieslikeour“don’tfighttheFed”investmentsin2009‐10andEuropeansovereigndebttradesin2012.MeetingswithacademicsandgovernmentofficialslastAprilconvincedusthatthearticulated“changes”weremorerhetoricalthanpracticalatthetime,butalsorevealedthatmanyJapaneserealizedwholesaleshiftswouldbenecessarytopullthecountryoutofthedeepdoldrumsithadenteredafterthetsunamiandsubsequentnuclearcatastropheof2011.Despitereturningdisappointedthatthistime
wasn’t 
different(yet),wehaddevelopedanunderstandingofthesignalsthatwouldindicatethestartofaparadigmshiftifthetimecame.Inthefallof2012,werecognizedasacriticalcatalysttheincreasinglikelihoodofatransitiontoleadershipbytheLiberalDemocraticParty,ledbyShinzōAbe.InstatementsleadinguptohiselectionasPrimeMinister,AbehadarticulatedreflationarypoliciesdramaticallydifferentthantheBOJ’srecentinitiatives.Accordingly,weestablishedapositionspeculatingthattheJapanesecurrencywouldbedevaluedaggressivelyandequitieswouldriseonceAbetookoffice.Wesizedthepositiondecisivelyafterconcludingtheinvestmenthadhighlyasymmetricoutcomes.The“Abe‐nomics”catalystshaveplayedoutessentiallyasweanticipated,andhisapproachhasbeenmetwithunusualpublicsupportfromtheJapanese.OuroptimismwasreinforcedbytheappointmentofHaruhikoKurodaastheGovernoroftheBOJonFebruary27.ByanalyzingGovernorKuroda’sspeechesandpapersoverthepasttwodecades,werecognizedhimasaproponentofradicalchange,structuralreform,and“dovish”monetarypolicy.Anotherimportantcatalystwasthe(grumbling)acquiescencebyWesternpowersthroughoutQ1asJapanbeganassertingitscasefordevaluingitscurrency.DespitemassivemarketspeculationandanalreadysignificantmoveintheYen,potentialQEmeasuresweresimplyspeculativeuntillastweek’sfirstKuroda‐ledBOJmeeting.We
 
 
3
 
increasedourpositionaheadofthemeeting,rejectingthemarketconsensusthattheupsidewasalreadybakedintoanypolicymovesthatmightbeannounced.Aswehadhoped,theGovernorsmanagedtoexceedeventhehighestofexpectationswiththeirinitialactions,tickingalloftheboxesweanticipatedandaddingothers.ThestepsamountedtoacompleterebootoftheJapanesemonetaryexperiment.Theimpactofthisboldplanshouldbefar‐reaching,notonlyforJapanesecompaniesbutalsoforJapan’stradingpartners.Perhapsmostimportantly,fromaThirdPointprocessandframeworkperspective,wehavelearnedthatinenvironmentswhereQEandgovernmentinterventionarecriticalengines,ourcatalyst‐drivenapproachallowsustofindcompelling“macro”opportunities.Webelievethereisstillvalueinourinitialcurrency/indextradereflectingthisimportantstructuralinflectionpointandalsohavetakenselectedpositionsinsinglenamestocksthatwebelievewillbenefitfromthispolicyshift.
Equity
Position:
International
Paper
(IP)
InternationalPaperisacorepositioninourportfolio,whichwesizedupduringtheFirstQuarter.IPhasacompellingcaseforownershipbuoyedbyexcellentsectorandseculartailwinds.Withacurrentmarketcapitalizationof~$20billion,IPisthelargestplayerinthehighlyconsolidatedNorthAmericanContainerboard(“NACB”)industry,whichbenefitsfromstrongpricingpowerdespiteflatvolumesduetonearly100%operatingrates.In2009andagainin2011,IPtookonsubstantialleveragetoacquireassetsthatdramaticallyincreasedIP’srevenuemixtowardsNACB.Afteracomplexintegrationprocess,thisyearNACBwillgenerateatleast60%ofIP’stotalEBITDAand75%ofallNorthAmericanEBITDA.This“new”IPshouldproducestrongandstablefreecashflow,allowingincreasedcapitalreturntoshareholdersandvaluationuplift.AidedbytheseimportantNACBtailwinds,IPhasmultiplenear‐termcatalysts.Themostimmediateshouldcomebytheendofthismonthwhenthemarketlearnsiftheindustry’slatestpriceincreasehasbeenofficiallysanctioned.Proceedsfrompost‐mergerassetsalescombinedwithIP’srobustproformafreecashflowshouldcompleteIP’smulti‐yeardeleveraging,whichhasreduceddebtby~$10billionoverthelastfouryears.Withacleanerbalancesheetandnoopportunitiesforfurtheracquisitions,webelieveIP’sconsistentcashflowswillbereturnedincreasinglytoshareholdersthroughbuybacksanddividendincreases.Evenusingstressedassumptions,IPshouldgenerate+$2.00FCFpershare,andweexpectthedividendwilleventuallyrisetothislevel.Finally,wearealwayskeenlyattunedtoacompany’smanagementteamanditsincentives.In2014,IPmandatestheretirementofitsCEOJohnFaraci.Duringhisdecade‐longtenure

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