Although Dan Loeb’s Third Point is basking in January’s “goldilocks” investing environment, the firm has some concerns, both about the market and a proposed rule on proxy voting.
The New York-based hedge fund firm released its fourth-quarter 2019 investor letter on Thursday evening, telling investors that “friendly monetary conditions and a benign economic backdrop” had made for a favorable first few weeks of the year.
But the firm warned that this “goldilocks” environment could be easily upset by factors outside of its control. These concerns include the further spread of coronavirus, a derailment of China trade negotiations, escalating tensions in the Middle East, and the potential election of a “far-left” candidate in the United States presidential election.
Inflation was another concern for Third Point. While the firm noted that there are not “significant imbalances in the private sector” that could lead to a recession, it argued that a sudden turn in inflation could “lead to a backup in rates and cause market pain.”
As Institutional Investor previously reported, the Third Point Offshore Fund gained 17.1 percent in 2019, including a 2.2 percent gain in December. Those returns were bolstered by the firm’s investments in Sony Corporation and Campbell Soup Company, according to the January letter. The letter also said that the firm had reduced its net and increased its gross equity exposure by hedging activist positions and increasing individual shorts with the aim of delivering more alpha.
[II Deep Dive: After a Tough 2018, Third Point Fared Better Last Year]
Another issue addressed by the Third Point letter is a proposed amendment to the Securities and Exchange Commission’s proxy voting rules that would require the proxy voting companies like Institutional Shareholder Services and Glass Lewis to have their reports and recommendations fact-checked by the companies themselves before publishing. Third Point said it was “strongly opposed” to the rule, joining a number of other investors that have voiced their opposition.
“In our experience, the proxy advisory firms are well-prepared, sharp, and challenge our assumptions,” the letter said. “Sometimes they support our full slate but more often they do not.”
Pointing to a November Bloomberg story that showed that the SEC had received a number of “fishy” letters in support of the initiative, Third Point asked why the SEC would adopt a “cumbersome and costly solution when no one has demonstrated that a real problem exists.”
“This is the ‘swamp’ at its worst,” the hedge fund firm said in the letter. “We are strongly opposed to this proposed rule and to the tactics behind it.”