Dan Loeb’s Third Point said its bets on Prudential, Ray-Ban maker EssilorLuxottica and Sony were a drag in the first quarter and contributed to a 16% decline on investments along with a bad bet on the aerospace sector.
The New York-based hedge fund has held talks with Prudential about ways to improve its performance and believes it may explore separating its U.S. business, according to Third Point’s first-quarter letter to investors Thursday.
Third Point said it also planned to launch an opportunistic structured-credit fund in May to take advantage of recent market dislocation. In under three weeks, the firm said there was a price decline in structured credit that took over nine months during the last financial crisis.
“Structured credit markets were first slow to respond to the pandemic. However, following a persistent equity sell-off and increasing pressure on levered buyers, these markets repriced dramatically in March,” the firm said.
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Third Point expects a second wave of opportunities, particularly in commercial mortgage-backed securities and collateralized loan obligations. In the next two to three months, these markets should see the direct impact of the global economic shutdown with increased payment deferrals and elevated corporate defaults in these bonds.
“We believe that it is currently too early to wade into these markets,” the firm said.
Third Point said its activism portfolio was down 18% during the quarter, buoyed somewhat by holdings in Nestle, Campbell Soup and Baxter International.
Its recent investment in U.K. insurer Prudential declined 27% in the quarter. Nothing about the decline changes its outlook for the company and the value it sees in spinning off its U.S. business, Jackson National, Third Point said.
Prudential is one of the most undervalued securities in its portfolio because there is a negative value ascribed to Jackson, despite it being a $20 billion business, Third Point said.
The firm has been talking with the company about its views in recent weeks, and believes the company is exploring all options to create value, including the full separation of Jackson.
“While we appreciate the inherent complexity of such a transaction and the nature of the market environment, we believe that it is imperative that management work with urgency toward our shared goal,” it said.
EssilorLuxottica also got hit with a “one-two punch” with the outbreak of COVID-19, Third Point said. Not only did the company see its retail stores close but it also has a large manufacturing base in Italy, which has been hit hard. It expects sales to recover when things return to normal. The crisis will also create urgency to unlock the synergies promised in the merger that created the company, Third Point said.
Sony, meanwhile, is well-positioned to weather the downturn in its more cyclical businesses with a large cash position and large equity stakes that could be easily monetized, the firm said.
“This market environment is a very good one for investors to do a self-awareness check,” an expert says.
It said its fundamental and event portfolio fell 28% due to a series of aerospace investments, including Raytheon Technologies, Airbus and Air Canada.
“Put simply, we got aerospace wrong and were not hedged adequately to protect against coronavirus-driven losses,” it said.
Third Point was also critical of U.S. Fed’s COVID-19 response, in particular its purchasing of high-yield bonds including “fallen angels” and ETFs.
“This does nothing to support an economic recovery but will simply prop up asset prices in the short-term and perhaps offer a reprieve to market participants who profited handsomely for years by using excessive debt to give the illusion of high returns,” Third Point said.
