Daniel Loeb
's Third Point hedge fund, which has $10.1 billion in assets
under management, has achieved a 21.2% year-to-date return,
compared to 16% for the S&P 500. This is after gaining 3.6%
in December, outpacing the S&P's 0.9%. The outperformance was
driven by his best-performing investments: Greek government
bonds, Yahoo! Inc. (
YHOO
) and American International Group (
AIG
). Loeb describes his firm as event-driven value investors.
Greek Government Bonds
Loeb picked up a position in Greek government bonds in the third
quarter as he earned a 35% return on average capital investing in
European credit in the second and third quarters of 2012. He
attributed his success in the troubled area to two tenants of his
investing rules.
First, he looks for credit situations where his expectations are
not extremely high, but not as low as the market either. He has
used this perspective to make money not only in Europe, but in
his subprime mortgage-backed security positions, Chesapeake (
CHK
) performing credit trade, and others throughout his fund's
history.
Second, he seeks to deeply understand the situations he invests
in, even better than other market participants. In the case of
Europe, he and his team spent 12 to 18 months and significant
resources to grasp fully the mechanics of the sovereign debt
crisis, with the assistance of other academic, political and
economic advisors.
After all of the effort, he called Greece "the most stubborn and
opaque piece of the European puzzle." Yet he believed the market
was overreacting to the possibility of a Greek default.
Loeb describes the steps leading up to the decision to invest in
the country in his
third quarter letter
:
"In order to fully evaluate the potential remaining upside in
the GGB Strip, we sent our well-traveled European credit analyst
to Athens. Our meetings convinced us that Greek officials
strongly believe that the painful Troika program implementation
is a far superior option to leaving the Euro. On that trip we
also discovered several "green shoots" emerging in the Greek
fiscal position which also appear to be widely ignored by the
broader market. Greece has demonstrated impressive spending
controls, with its 2012 budget largely on track despite a
significant shortfall in receipts due to worse than anticipated
economic conditions. While Greece is still grossly overleveraged
at 170% debt to GDP and the Strip price appears to anticipate
another restructuring which will subordinate private creditors,
we believe another PSI is highly unlikely given the Strip's air
tight documentation, governed by UK law, which explicitly ranks
it pari passu with the debt held by the Troika. Even in the event
there was a large scale restructuring where both private and
official creditors took haircuts of 15% to 25%, it is likely the
Strip would still appreciate significantly from 20 as exit yields
of 10% to 12% would be reasonable given the country's reduced
leverage as a result of any restructuring.
A clear commitment to keeping Greece inside the EU, combined with
resolute program compliance, some amount of Official Sector
Involvement ("OSI") and a bottoming out in the Greek economy
should move the Strip from trading at assumed recovery levels to
bonds priced on a yield basis."
Loeb must have disposed of a large amount of Greek government
bonds recently, as they appeared in his top positions listed in
November and are not among his top five in December.
Yahoo! Inc. (
YHOO
)
Loeb has planted 23% of his portfolio into largest position Yahoo
since opening the position in the third quarter of 2011 when
shares traded for about $14 each on average. After moving
sideways for most of 2012, the stock began moving up in
September, eventually gaining 26% over the past year. It trades
for $19.86 on Friday, with a P/E of 6.03, P/B of 1.5 and P/S of
4.6.
YHOO
data by GuruFocus.com
Loeb and Third Point representatives joined the Yahoo board in
May. Since then, Yahoo was able to reach an agreement for
privately held Chinese Internet company Alibaba to repurchase
half of Yahoo's position in it, settle a patent lawsuit against
Facebook (
FB
) and replace the CEO after finding embellishments in his resume.
The search engine company has been led by former Google executive
Marissa Mayer since July 16, 2012. In its first quarterly
financial report under her leadership, it increased revenue 2%
year over year to $1.089 billion, excluding acquisition costs.
GAAP revenue declined 1% to $1.202 billion. GAAP net earnings
declined to $298 million, from $3.16 billion a year previously.
Yahoo in the third quarter closed the first stage of selling its
stake in Alibaba back to the company. As a result, it received
$7.6 billion in pre-tax proceeds, $6.3 billion in cash and $800
million in preferred in shares and $550 million for a license
agreement. Yahoo will return $3.65 billion in after-tax proceeds,
or 85% of the net cash proceeds, to shareholders.
The company's cash position in the third quarter improved to $9.4
billion from $2.5 billion at year-end 2011.
AIG (
AIG
)
Loeb has allocated 15.2% if his portfolio into second-largest
holding AIG. He started the position in the second quarter with
2.25 million shares for $31 each on average, then added 21.25
million shares for $33 each on average the next quarter.
In a sudden turn of events, AIG went from Loeb's "top loser" in
November, to his third "top winner" in December. The massive
insurance corporation's stock price has increased almost 52% over
the past year. It trades for $36.32 on Friday, near a one-year
high, with a P/E of 1.9, P/B of 0.6 and P/S of 0.8.
AIG data by GuruFocus.com
Loeb had the opportunity to purchase shares of AIG, the world's
largest insurance organization, in March at what he believes was
a discount to intrinsic value due to the U.S. Treasury's "forced"
(or "non-economically-motivated) selling of its stake in the
company. Second, he believed that AIG's buybacks from the
Treasury created substantial capital return that offered downside
protection. Third, the government reducing its stake increased
its index weighting, which he believed would force
index-sensitive investors to buy more shares.
He then began to view the investment as a "post-reorg equity
newly emerged, with all of the attendant upside," and bought more
shares in the Treasury's second and third quarter offerings.
He commented on his short- and long-term expectations for the
company in his third quarter letter:
In the near term, we believe AIG's continued portfolio
optimization should free up additional excess capital that,
subject to regulatory approval, likely can be returned to
shareholders. In December, AIG's lockup in its listed, non-core
Asian life insurance business, AIA, will expire, allowing the
company to monetize its unencumbered 13.7% interest worth some
USD $6.1 billion at recent market valuations. Further, we believe
the sale, spin, or listing of ILFC, AIG's aircraft lessor
subsidiary, will not only generate $5+ billion in excess capital
but also simplify the group's structure, reducing cost of
capital.
Longer term, we believe the company's operational turnaround will
help AIG realize its intrinsic value, as Chartis, AIG's property
and casualty arm, improves its return on equity to the targeted
10 - 12% by 2015. To achieve this ROE target, Chartis's
management, led by the talented Peter Hancock, is emphasizing
international and shorter tail consumer property lines, while
investing in new policy administration and back office systems.
We believe this ROE target is achievable, and view the early
evidence as promising: a ~300 bps year-over-year improvement in
Chartis' Q2'12 ex-cat loss ratio to 65.2% and a ~100 bps
year-over-year increase in consumer share of premiums to 39% in
Q2. We are further encouraged that Chartis' turnaround has the
wind at its back with the mid to high single digit pricing growth
in the property and casualty insurance industry.
After owning 92% of the company about two years ago, the U.S.
government finished selling its remaining AIG shares about a week
ago.
For the third quarter, the company reported net income of $1.9
billion, compared to a net loss of $4 billion the same time in
2011. Revenue rose to $14.99 billion from $14.74 billion the same
time last year, and book value jumped to $62.83 per share from
$21.95 per share the same time last year.
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