An “obsession” around balance sheet strength and debt is creating a new wave of investment bets for the influential Wall Street hedge fund run by Daniel Loeb.
This could extend to his $US11bn ($17bn) Third Point fund putting more pressure on companies to force through asset sales.
The comments by Loeb in his latest quarterly update to investors, comes as the hedge fund boss is scheduled to headline the Sohn Hearts & Minds investment conference in Sydney on Friday. All the proceeds of the conference go to medical research.
With real interest rates firmly in positive territory and now sitting at the highest level since the global financial crisis, Loeb’s Third Point fund has narrowed in on how companies are refinancing debt. Indeed, some may even struggle as borrowing costs soar.
“It is hard to overstate the market’s current obsession with balance sheet strength,” Loeb tells investors.
“This is a growing area of focus for the investment team, as major systematic moves generally create great idiosyncratic opportunities that can only be uncovered through old-fashioned fundamental research”.
Investment returns will be found by distinguishing the companies that have “real leverage problems versus perceived leverage problems,” he said.
This involves narrowing in on asset sale opportunities, capital structures, and cash flow statements, Loeb says.
In recent years, Loeb has made high profile pushes agitating for changes at a string of companies including Disney, Nestle and Shell.
Loeb launched Third Point in 1996 and the fund had some of its best returns after betting on troubled Greek bonds during the Euro crisis of early last decade.
Third Point has seen a rare stumble this year after missing much of the initial boom in AI-backed tech stocks.
Loeb’s flagship offshore fund returned minus 3.9 per cent in the calendar year to date. This compares to the MSCI World Index of 11.6 per cent and the S&P 500’s total return of 11.6 per cent.
Third Point has delivered average annualised returns of 12.7 per cent after fees since inception, compared to 7.1 per cent for the MSCI World Index.
Returns were minus 0.9 per cent for the September quarter, with gains in Third Point’s long exposure fund offsetting losses in the hedge fund bets.
The top stocks were UBS, Vistra Corp Shell and Danaher Corp. This was offset be exposure to Pacific Gas & Electric Co, tech major Microsoft Corp, Hertz and Luxury brands business LVMH.
With bond market sell-off in recent months driving wild swings in stocks, Loeb believes the market reaction to macro developments was still “rational”.
This resulted in the continued underperformance of unprofitable growth stocks, highly-levered companies, and bonds proxies like utilities, real estate and consumer staples.
This article was originally posted by The Australian here.
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