Annual Report & Audited Financial Statements for the Period Ended 31 December 2023

22 April 2024

Third Point Investors Limited (the "Company")

ANNUAL REPORT & AUDITED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED 31 DECEMBER 2023

Third Point Investors Limited, the London-listed, multi-strategy investment company managed by Third Point LLC (the “Investment Manager”), is pleased to announce its full-year results for the year ended 31 December 2023.

Financial Key Points

The Company produced a 4.0% NAV total return, and a -5.8% result on a share price basis. This compares with a 24.4% return for the MSCI World Index and a 26.3% return for the S&P 500 Index over the same period.
While this represents a disappointing result, the Investment Manager repositioned the portfolio more towards high conviction and concentrated investment exposures, which led to a material improvement in performance in the second half of the year, when the NAV return outperformed broad market indices.
This improved performance has continued in 2024, with the Company generating an 8.7% NAV return in Q1 2024 and 17.6% over the prior six months to 31 March 2024.

Portfolio Key Points

While market strength broadened out as the year continued, 2023 was defined by relatively narrow leadership, with the so-called “Magnificent Seven” accounting for nearly half of the S&P 500’s full-year gains.
Against this backdrop, Third Point underperformed the market for the full year, with its short equity positions weighing on performance, as well as more value-oriented long equity positions generally lagging the high-flying growth stocks that carried the market-cap weighted indices.
However, performance in the equity portfolio was very much a “tale of two halves” for the Company. The Investment Manager retained conviction in some of the same holdings that underperformed the market in the first half, and several of these positions ended up rebounding in the second half, leading to better performance.
Third Point also restructured its single name short equity portfolio to be far more diversified across industry, market cap, and factor profile, while tightly limiting risk in names with high short interest. This revised strategy yielded alpha in the second half, while also providing far less volatile returns during the major short squeezes, witnessed in both July and December 2023.
Meanwhile, both Corporate Credit and Structured Credit generated positive returns consistently throughout the year, adding valuable uplift to Third Point’s overall portfolio.
Third Point sees a constructive backdrop in 2024, having addressed the issues that contributed to underperformance and also expects market forces to reward its approach to investing as the macroeconomic picture stabilises.
The Investment Manager expects prospective returns to be driven by: a more stable interest rate environment, which should create more corporate activity, expanding opportunities for Third Point to engage with companies; Third Point’s long-term investment horizon, which it believes will continue to be a benefit in complex event-driven situations and mispriced high-quality companies; and active trading around idiosyncratic credit events and taking advantage of forced selling in the market in times of heightened stress.

Operational Key Points

Discount Management

During the year, the discount to NAV widened from 15.4% to 23.3%, reflecting the disappointing NAV total return and the challenging environment across the wider investment trust sector. The discount has since tightened to around 18% at the current time.
The Board has made strenuous efforts to seek to narrow the discount both via a substantial share buyback programme, and by offering a 25% stock tender at a 2% discount to NAV (the “Redemption Offer”) in 2024 and 2027, the former of which has now been triggered.
In 2023, the Company bought back approximately 2.6 million shares, equivalent to $51.2 million in value, which was accretive to the Company’s NAV by 44 cents per share. Over the last five years, the Company has bought back 16.6 million shares for $311.1 million, which has been accretive by $2.13 per share.
The Company will not repurchase shares for the duration of the 2024 Redemption Offer. However once the results of the Redemption Offer have been announced, the Company may repurchase up to US$20 million of shares over the balance of 2024 if, in the Board’s view, it is in the best interests of the Company and shareholders to do so.

Redemption Offer

As the average discount to NAV at which the shares traded in the six month period to 31 March 2024 was more than 10%, the Board is offering shareholders the opportunity to tender shares for redemption at a 2% discount to NAV in April 2024. The Redemption Offer is for up to 25% of the Company’s issue share capital.
The full details of the 2024 Redemption Offer are set out in a circular which was sent to shareholders earlier this month. The deadline to submit a redemption notice is 1pm UK time on 8 May 2024.

Master Fund Redemptions

As was detailed in the 2023 Interim Report, during the year there was a change to the Investment Manager’s policy regarding redemptions from the Master Fund in respect of illiquid holdings in private investments. Under the new policy, redemptions will be settled approximately 93% in cash and 7% in participation notes, the latter reflecting the pro rata share of legacy private positions in the Master Fund.
This percentage in participation notes will increase as redemptions from the Master Fund are affected via tenders and the use of the buyback programme. Assuming the Redemption Offer is fully subscribed, the holding in privates through these participation notes will increase from 7% to 9%, all other things being equal.
Any realisation from the private portfolio will be reinvested in the Master Fund and will reduce the Company’s overall exposure to participation notes.

Governance

All resolutions at the June 2023 AGM were passed.
The Board noted that Resolution 7 concerning the reappointment of Josh Targoff was opposed by over 20% of eligible votes cast. As a result, pursuant to UK Corporate Governance Code, the Board was required to engage directly with shareholders who voted against his appointment and report back to the market.
Following this engagement, the Board’s Nomination & Remuneration Committee recommended to the Board that Mr. Targoff not be proposed for re-election to the Board at the next AGM in 2024, after which the Board will be comprised wholly of Independent Non-Executive Directors. However, the Board value highly Mr. Targoff’s contribution to the efficient management of the Company and he will continue to attend Board and relevant Committee meetings as an observer.

Future Strategy for the Company

In conjunction with the Board’s ongoing efforts to address the Company’s discount to NAV, the Board is pleased to announce the appointment of Dimitri Goulandris and Liad Meidar as directors, as soon as practicable. Their relevant experience is in markets, mergers and acquisitions, and asset management, and they will bring important new perspectives to the Board at this time.
Mr. Goulandris and Mr. Meidar have been introduced by Third Point, but the Board has satisfied itself after due enquiries, including taking references using Cornforth Consulting, that they are independent of the Investment Manager. Both new directors will be put forward for re-election at the annual general meeting of the Company to be held in May 2024, and the Board will recommend that shareholders vote in favour of both their respective elections.
The expanded Board will create a Strategy Committee (“Committee”) comprised of the two new directors and Richard Boléat, chaired by Mr. Goulandris. The Committee will be responsible for commencing a full review to consider how the Company may best deliver value to shareholders going forward. The review will be concluded within a six-month period (the “Strategy Review”).
The Strategy Review will be charged with evaluating all possible options, including offensive M&A opportunities, investment strategy mixes, corporate continuation votes or further tenders, and potentially other innovative options. The Committee will seek shareholder consultation and input.
At the conclusion of the Strategy Review, the Committee will present its finding to the Board. If approved by the Board, the outcome will then be reported by the Board to shareholders, and any recommended new proposals will be put to shareholders and voted on by them as appropriate.
If at the conclusion of the Strategy Review there are no new proposals recommended by the Board to shareholders, the Board expects that, in due course, it will invite shareholders to vote on the continuation, or otherwise, of the Company.
Under those circumstances, the Board will take into account the performance of the Company over the relevant period based on NAV per share and other metrics that it considers appropriate in determining whether to recommend voting in favour of the continuation resolution.

Rupert Dorey, Chair of the Company, commented:

“The Board has been responsive to shifting market forces and structural issues that have been affecting TPIL and the investment trust sector. By authorising share buybacks, working with the Investment Manager to increase transparency in its reporting, and the implementation of exchange facility and tender offer programmes, we have made decisions that we believe are in the best interests of the Company and the shareholder base as a whole.

“The addition of two new Directors with different skills and experience and the Strategy Review should give shareholders further opportunities to profit from their investment in the Company.”

Media Enquiries

Charles Ryland / Henry Wilson

charles.ryland@buchanancomms.co.uk / Tel: Tel: +44 (0)20 7466 5107

henry.wilson@buchanancomms.co.uk / Tel: +44 (0)20 7466 5111

Notes to Editors

About Third Point Investors Limited

www.thirdpointlimited.com

Third Point Investors Limited (LSE: TPOU) was listed on the London Stock Exchange in 2007 and is a feeder fund that invests in the Third Point Offshore Fund (the Master Fund), offering investors a unique opportunity to gain direct exposure to founder Daniel S. Loeb’s investment strategy. The Master Fund employs an event-driven, opportunistic strategy to invest globally across the capital structure and in diversified asset classes to optimize risk-reward through a market cycle. TPIL’s portfolio is 100% aligned with the Master Fund, which is Third Point’s largest investment strategy. TPIL’s assets under management are currently $600 million.

About Third Point LLC

Third Point LLC is an institutional investment manager that actively engages with companies across their lifecycle, using dynamic asset allocation and an ethos of continuous learning to drive long-term shareholder return. Led by Daniel S. Loeb since its inception in 1995, the Firm has a 43-person investment team, a robust quantitative data and analytics team, and a deep, tenured business team. Third Point manages approximately $11.2 billion in assets for sovereign wealth funds, endowments, foundations, corporate & public pensions, high-net-worth individuals, and employees.

Third Point Investors Limited (“TPIL”) offers a unique access point to Daniel Loeb’s Third Point LLC and its strong track record of delivering returns for investors since 1995. Third Point LLC adopts an active and engaged approach to global investing for investors wishing to diversify their portfolios. Unconstrained in style and free of benchmark confinement, Daniel Loeb’s investment speciality is to pivot opportunistically across asset classes, seeking to optimise risk-adjusted returns over the longer term.

Why Third Point Investors?

Exposure to the flagship

Third Point Master Fund As a UK-listed Company, TPIL offers UK investors a unique and efficient access point to Third Point LLC’s flagship Master Fund, which has delivered attractive risk-adjusted returns to investors since its inception in 1995.

Different pillars of investment strategy

The Third Point LLC (“Third Point” or the “Investment Manager”) investment strategy centres on four distinctive pillars: activism; fundamental and event-driven equities; credit; and private markets (ventures). CIO Daniel Loeb is responsible for overall capital allocation across these strategies, according to his reading of market conditions.

Unconstrained and agile

The Investment Manager opportunistically pivots across asset classes, capital structure and geographic domicile according to where it sees good potential risk-adjusted returns. It is not a benchmark-driven fund and therefore it provides what it believes is a differentiated approach and outcome for global investors seeking diversification.

Constructivist engagement

Third Point aims to derive long-term value through various forms of constructivist engagement with companies in which it invests. It also pursues event-driven opportunities, identifying misunderstood catalysts such as M&A and special situations that we believe will unlock value.

Always striving to improve

The Investment Manager’s cultural philosophy values teamwork and improvement. It respects the Japanese business concept of Gemba Kaizen, which takes into consideration the skills of the entire organisation, with the understanding that even the smallest of adjustments will create value over time.

Governance

TPIL is a Guernsey-domiciled, London-listed investment company which is a member of the Association of Investment Companies (AIC) in the UK. A majority of independent directors on a board is an important hallmark of good UK governance practice.

Historical Performance

As at 31 December 2023

Annualised Historical Performance (%)
	1 Year	3 Year	5 Year	10 Year	Since TPIL Inception
Third Point Investors Limited (NAV)	4.0	-0.9	8.1	5.6	7.3
Third Point Investors Limited (Share Price)	-5.8	-2.7	6.9	3.6	6.1
S&P 500 Index	26.3	10.0	15.7	12.0	9.4
MSCI World Index	24.4	7.8	13.4	9.2	6.9

Net Asset Value per Share

4.0%

2023: $25.43

2022: $24.46

Share Price

-5.8%

2023: $19.50

2022: $20.70

Chairman’s Statement

Dear Shareholder,

During 2023, TPIL returned 4.0% on a NAV basis and -5.8% on a share price basis. This compares with returns of 24.4% and 26.3% for the MSCI World Index and S&P 500 Index, respectively, over the same period. This clearly represents a disappointing result following on from 2022, after which the Investment Manager re-positioned the portfolio. This entailed a move towards more high conviction and concentrated investment exposures, focussed on core areas of competency such as deep value, event driven and activist strategies. These changes were allied to Third Point’s deep strength in both traditional and structured credit markets. The re-positioning led to a material improvement in performance in the second half of the year, when the NAV return outperformed both the MSCI World Index and the S&P 500 Index.

Credit has remained a steady and reliable low risk, low volatility performer. The more concentrated equity exposure combined with greater discipline in short equity and hedge positions resulted in a sharp turnaround in overall equity attribution. This moved from -3.9% on a gross basis in the first half of the year to +7.3% in the second half.

While adverse geopolitical and economic events during 2023 continued to plague market sentiment, the expectation that a mild US recession was imminent proved unfounded. US economic statistics continued to be strong.

The dramatic third quarter rout in the bond markets was propagated by a belief – which proved unfounded – that the Fed would need to cut rates to stave off recessionary risks.

Real interest rates moved sharply upwards in the third quarter, from around 1.5% to 2.5%, putting an end to the dovish monetary policy of previous years. The interest rate landscape is returning to comparative historical norms.

Portfolio Drivers

During 2023, credit was the largest source of returns delivering 4.1% gross at the portfolio level. Of this, 2.3% was from Corporate Credit and 1.8% from Structured Credit. In absolute terms, the Corporate Credit portfolio returns of 18% exceeded those of the ICE Bank of America High Yield Index by 4%, as a result of active trading and security selection. Returns on Bank and Telecom credits proved to be particularly rewarding, with attractive capital structure arbitrage opportunities being exploited successfully.

The Structured Credit portfolio generated a 7.5% return in the year and outperformed the Bloomberg US Aggregate Index by over 2%. This was attributable to the effective hedging of interest rate risk, as well as taking advantage of technical opportunities in reperforming residential mortgage loan securities, and in the shorter duration auto and student debt sectors.

Gross equity returns were 3.2% in 2023. Overall, event driven strategies contributed 5.9% to gross return, while activist and hedging strategies detracted -0.4% and -2.3% respectively. The majority of the equity returns were achieved in the second half. Significantly, a modification in single name short equity positions to a more diversified pan-industry strategy assisted in limiting risk in certain stocks, yielding more consistent alpha with lower overall volatility.

TPIL continues to have around half of its net equity exposure to AI themed equities such as Microsoft, Amazon and Meta, in addition to concentrated positions in a diversified portfolio of companies it considers undervalued such as Danaher, PCG and UBS. These companies are anticipated to benefit from more positive news on lower inflation and lower rates in due course and some from upcoming catalyst events.

Net equity exposure during the year varied between 40% and 70%, ending the year at the higher end of the range. Exposure to corporate and structured debt remained between 40-45% during the year.

The Privates portfolio, including the Participation notes, detracted -0.8% on a gross basis at the portfolio level. There have been a limited number of liquidity events to date.

Discount Management

During the year the discount to NAV widened from 15.4% to 23.3%. Most of the investment trust sector has been subject to widening discounts in 2023, averaging around 15% on a market capitalisation-weighted basis.

The Board has made strenuous efforts to seek to narrow the discount both via a substantial share buyback programme, and by offering a 25% stock tender at a 2% discount to NAV in 2024 and in 2027. The $50m one-year buyback programme commenced in September 2022 and was renewed in September 2023 with a further $25m available for buybacks until April 2024. Despite some success in stabilising the discount in the first half of 2023 at around 15%, it has widened to around 23% before tightening to around 18% at the current time.

During 2023, the Company bought back 2.6 million shares equivalent to $51.2 million of value, which was accretive by $0.44c to NAV per share. Over the last five years the Company has bought back 16.6 million shares for $311.1 million, which has been accretive by $2.13 per share.

The Company will not repurchase any of its Shares for the duration of the Redemption Offer (see below). Once the results of the Redemption Offer have been announced, the Company may repurchase up to US$20m of Shares over the balance of 2024 if, in the Board’s view, it is in the best interests of the Company and Shareholders to do so.

Borrowing Facility

In June 2023, the Company repaid its $150 million borrowing facility from J.P. Morgan in full, ahead of its technical maturity in August 2023. The Company now has no structural leverage.

Redemption Offer

On 1 April 2021, the Board announced the implementation of two potential Redemption Offer opportunities, on 31 March 2024 and 31 March 2027 for Shareholders to tender shares for redemption if the average market price of the Shares has been more than 10 per cent. And 7.5 per cent. below NAV, respectively, for the six-month period preceding each Redemption Offer Date. The average discount to NAV at which the Shares traded in the six month period to 31 March 2024 was more than 10% and, accordingly, the Board is offering Shareholders the opportunity to tender Shares for redemption.

The Redemption Offer is for up to 25 per cent. of the Company’s issued share capital. Eligible Shareholders will be able to decide whether to tender some or all of their Shares within the overall limits of the Redemption Offer (but tenders in excess of a Shareholder’s Basic Entitlement will only be accepted to the extent that other Shareholders tender less than their Basic Entitlement).

The full details of the Redemption Offer are set out in a Circular which was sent to shareholders earlier this month.

Master Fund Redemptions

In the 2023 Interim Report, I detailed a change to the policy for redemptions from the Master Fund in respect of the Company’s illiquid holdings in Private investments. Under the new policy, redemptions from the Master Fund will be settled approximately 93% in cash and 7% in participation notes. The participation notes, as a percentage of the Company’s net assets, will increase as redemptions from the Master Fund are affected via tenders and use of the buyback programme. Assuming the Redemption Offer is fully subscribed, the holding in Privates will increase from 7% to 9% all other things being equal. Any realisation from the Privates portfolio will be reinvested in the Master Fund and will reduce the Company’s overall exposure to participation notes. This policy was introduced to allow the Investment Manager to manage the underlying portfolio more effectively, by offering a more stable platform for investors by permitting the Manager to focus on its core strategies.

Governance

All resolutions at the June 2023 AGM were passed. The Board noted that Resolution 7 concerning the reappointment of Josh Targoff was opposed by over 20% of eligible votes cast. As a result, pursuant to the UK Corporate Governance Code the Board was required to engage directly with shareholders who voted against his appointment and report back to the market within six months.

The Board engaged with, and sought feedback from, a wide variety of investors. This exercise indicated significant shareholder sentiment that the Board should be composed exclusively of independent directors, as is consistent with the vast majority of investment trusts listed on the London Stock Exchange.

Following a review, the Nomination & Remuneration Committee recommended to the Board that Mr. Targoff not be proposed for re-election to the Board at the next AGM, after which the Board will be comprised wholly of Independent Non-Executive Directors. However, the Board values highly Mr. Targoff’s contribution to the efficient management of the Company and he will continue to attend Board and relevant Committee meetings as an observer.

Future Strategy for the Company

As a Board we believe that TPIL offers a valuable access point to a set of differentiated strategies in equities and credit in a London-listed vehicle.

Investors have bought into the Company on the basis of Dan Loeb and Third Point’s long-term performance track record. Returns in 2023 have been disappointing against the strength of the S&P 500 Index, which has been largely driven by the concentrated outperformance of tech stocks.

In response to this, Dan Loeb held meetings with investors in June 2023 and again in March 2024 to outline his investment ideas in more detail. These meetings were well received by those who attended.

The Board is encouraged by the recent strong performance of the Investment Manager, with the Company generating an 8.7% NAV return in Q1 2023 and 17.6% over the prior six months to 31 March 2024. While past performance is not a predictor of future gains, the Board notes that the Investment Manager’s long-term track record, along with its flexible and opportunistic strategy, incorporating a broad range of equity and credit tools, can deliver favourable risk-adjusted returns in the current environment. Firstly, engaging in active trading around idiosyncratic credit events and acting as a provider of liquidity in times of heightened stress. Secondly, taking advantage of complex event driven situations in what are perceived to be mispricing opportunities in high quality companies, and finally catalyst driven corporate/activist opportunities.

Notwithstanding the recent strong performance, a meaningful discount to NAV persists. Discounts to NAV – and investor concern about them – is an issue throughout the listed fund sector and, with the intention to be proactive and creative in facing this, the Board has been working with the Investment Manager to explore further options for the Company.

In conjunction with these efforts, the Board is pleased to announce the appointment of Dimitri Goulandris and Liad Meidar as directors, to take place as soon as practicable. Their relevant experience is in markets, mergers and acquisitions, and asset management, and they will bring important new perspectives to the Board at this time. Mr. Goulandris and Mr. Meidar have been introduced by Third Point, but the Board has satisfied itself after due enquiries, including taking references using Cornforth Consulting, that they are independent of the Investment Manager and they have each confirmed to the Board that they understand the responsibilities of directors to act solely in the interest of the Company and thus of all Shareholders. In accordance with the Company’s Articles of Incorporation, both new directors will be put forward for election at the annual general meeting of the Company to be held in May 2024, and the Board will recommend that Shareholders vote in favour of both their respective elections.

The expanded Board will create a Strategy Committee (“Committee”) comprised of the two new directors and Richard Boléat, chaired by Mr. Goulandris. This Committee will be responsible for commencing a full review to consider how the Company may best deliver value to Shareholders going forward, which will be concluded within a six-month period from the time the Committee is launched (the “Strategy Review”). The Strategy Review is not a formal sale process and the Company is not inviting offers for the Company to be acquired. The Committee will be charged with evaluating all possible options, including offensive M&A opportunities, investment strategy mixes, corporate continuation votes or further tenders, and potentially other innovative options. It will have the power to hire outside advisors as necessary so that it can consider the broadest range of possibilities. As part of the Strategy Review, the Company will seek shareholder consultation and input.

At the conclusion of the Strategy Review, the Committee will present its findings to the Board. If approved by the Board, the outcome will then be reported by the Board to Shareholders, and any recommended new proposals will be put to Shareholders, and voted on by them as appropriate. If at the conclusion of the Strategy Review there are no new proposals recommended by the Board to Shareholders, the Board expects that, in due course, it will invite shareholders to vote on the continuation, or otherwise, of the Company. Under those circumstances, the Board will take into account the performance of the Company over the relevant period based on the NAV per Share and other metrics that it considers appropriate in determining whether to recommend voting in favour of the continuation resolution.

Summary

The Board has been responsive to shifting market forces and structural issues that have been affecting TPIL and the investment trust sector. By authorising share buybacks, working with the Investment Manager to increase transparency in its reporting, and the implementation of exchange facility and Redemption Offer programmes, we have made decisions that we believe are in the best interests of the Company and the shareholder base as a whole.

The addition of two new Directors with different skills and experience and the conduct of the Strategy Review should give shareholders further opportunities to profit from their investment in the Company. In the meanwhile, my colleagues and I would like to thank shareholders for their continuing support.

Rupert Dorey

Chairman

19 April 2024

PORTFOLIO

Investment Manager’s Review

Strategy Performance

As stated in the Chairman’s Statement, for the 12 months ended 31 December 2023, Third Point Investors Limited’s net asset value (“NAV”) per share increased by 4.0%, while the corresponding share price fell 5.8%. This compares with the MSCI World Index and S&P 500 Index returns of 24.4% and 26.3%, respectively. The Company’s share price return included the effects of the discount to NAV widening from -15.4% to -23.3%.

After a bruising 2022, in which inflation took hold and tight monetary policy reigned, it was difficult to predict the force with which markets snapped back in 2023. While not without moments of uncertainty – including the regional bank crisis in March and lingering concerns about the economy tipping into a recession – 2023 turned out to be a strong year for headline equity performance. This had roots in moderating inflation and surprisingly strong job growth, making it more likely that the U.S. Federal Reserve would pivot from rate hikes to rate cuts in 2024. While the buoyancy broadened out as the year wore on, 2023 was defined by relatively narrow leadership: the so-called “Magnificent Seven” of Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla accounted for nearly half of the S&P 500’s full year gains, and the tech-focused NASDAQ advanced by more than 50%. Underscoring this dynamic, the S&P 500 Index returned 26.3% for 2023, while the S&P 500 Equal Weighted Index returned 13.9%.

Against this backdrop, Third Point underperformed the broader market for the full year, with its short equity positions (-8.0% gross contribution to return for the Master Fund) weighing on performance, as well as more value-oriented long equity positions (11.2% gross contribution to return) generally lagging the high-flying growth stocks that carried the market-cap weighted indices. Both Corporate Credit (2.3% gross contribution to return) and Structured Credit (1.8% gross contribution to return), meanwhile, contributed consistent, positive returns throughout the year. Finally, as the public listing timeline for many venture companies continued to be extended, the Private portfolio (-0.8% gross contribution to return) saw modest markdowns.

2023 Performance Review

Equities

Performance in the equity portion of the portfolio was very much a “tale of two halves”. Short equity positions were generally challenged during the market’s strength in 1H, especially in January 2023, when the same higher growth, non-profitable technology stocks that were punished in 2022 came roaring back to life. On the long side of the equity portfolio, several event-driven positions provided conservative guidance during the first half of the year (including Danaher, IFF and Bath & Body Works). In addition, a couple of holdings (Fidelity National Information Services and AIG) were exposed to the financial sector during the Silicon Valley Bank failure in March and the short-lived contagion that followed.

In assessing the lessons learned from this period, Third Point’s efforts in 2023 to improve performance involved significant analysis and scrutiny of not just what it invests in, but how it invests. When the firm thinks about its competitive advantages in today’s investing landscape, duration, concentration, and an event-driven focus are top of its list.

On the long side of the equity portfolio, Third Point’s best outcomes have been in deeply researched names that represent a large portion of firm capital. Some of these investments have involved significant engagement with the company to improve performance and enhance returns. Having deep fundamental conviction has afforded Third Point with the patience to see these investments through, even when markets or factors cause temporary underperformance. Realising this was the case with several of its underperforming long positions in the first half of the year, the firm retained conviction in these names, which set the stage for the long equity portfolio’s outperformance in the second half of the year. First half laggards such as Danaher and Bath & Body Works delivered far better performances in the second half of the year.

Third Point applied a similar analytical framework to single name short-selling – focusing more on the how rather than the what. Analysis of historical results revealed some telling data on shorts: namely, the track record of identifying alpha-generating shorts has been excellent, but the monetisation of those ideas has been suboptimal, in part due to the extreme volatility in heavily shorted stocks that caused the firm to shorten duration. Third Point addressed this by restructuring its single name short portfolio to be far more diversified across industry, market cap, and factor profile, while tightly limiting risk in names with high short interest. This revised strategy not only yielded alpha since being implemented mid-year, but returns have also come with far less volatility, even during the major short squeezes witnessed in July and December of 2023.

Corporate Credit and Structured Credit

Both Corporate Credit and Structured Credit portfolios generated consistent, positive returns throughout the year, adding valuable ballast to Third Point’s overall portfolio.

Corporate credit generated approximately 18% gross return on assets in 2023, driven by active trading and security selection. First half performance was driven by successful investments in cruise lines and taking advantage of the March market selloff by buying regional banks and Credit Suisse/UBS debt securities, a joint venture with Third Point’s equity team that lead to a successful UBS equity investment. Second half performance was driven by exposure to healthcare and telecom credits, as well as a significant tailwind from the “everything rally” during the last two months of the year. The high yield market generated 9% of its total 13.5% annual performance during the last eight weeks of the year. While it was more difficult to generate alpha during this period, Third Point increased its corporate credit exposure to its 2023 peak near the October lows and so generated excellent returns on that basis.

The telecom sector is one of the largest in the credit markets and lately one of the most dynamic. During 2023, Third Point initiated sizeable positions in several names, with total exposure exceeding 5% of total fund NAV. The firm believes the sector is interesting because of a significant valuation derating due to concerns about competition with fixed wireless products (offered by wireless phone providers) and fibre upgrades by legacy and other carriers. This will likely impact credits differently depending on their technology, geography, and pre-existing competitive picture, creating a wealth of opportunities. These telecom positions were also important drivers of performance in 2023. For example, Frontier second lien bonds were up 24% on a price basis from the summer lows in addition to generating a 10% current yield in 2023.

Meanwhile, Third Point’s Structured Credit portfolio also outperformed the market in 2023, generating approximately 8% gross return versus the Bloomberg US Aggregate index’s 5.5% return. Each of the individual strategies within the portfolio were positive except marketplace loans, which were only 1.5% of the Master Fund NAV and experienced some mark-to-market losses based on perceived recessionary concerns. Reperforming securities in the residential mortgage space, comprising about 14% of NAV, delivered the largest contribution to return for the year. Firmness in the residential mortgage sector was led by strong continued credit performance and resilient home prices, which counteracted the negative effect of interest rate volatility on longer duration assets. Interest rate hedges were also a positive contributor, and Third Point actively traded the portfolio throughout the year.

Outlook

In Equities, Third Point sees a constructive backdrop in 2024, having addressed some of the issues that contributed to underperformance in 2023 and expects market forces to reward its approach to investing as the macroeconomic picture stabilises. While assets have certainly priced in some of the good news on inflation and rates, Third Point still believes headline equity market multiples exaggerate the valuation most companies are trading for and continues to find what it believes are high-quality companies trading at reasonable valuations. The firm expects prospective returns to be driven by: 1) a more stable interest rate environment, which should create more corporate activity, expanding opportunities for Third Point to invest in “self-help” situations or those that require more active engagement, and 2) Third Point’s duration as a holder, which it believes will continue to be a benefit in both complex event-driven situations, and mispriced, high quality companies. On the long side, going forward, Third Point expects to further concentrate the portfolio in its highest conviction names. On the short side, Third Point is encouraged by the results of imposing tighter risk parameters, and expects to increase the size of its single name short equity portfolio.

In Corporate Credit, the high yield market has been supported over the last few years by favourable supply and demand drivers that we believe are fading. The post-COVID recovery generated a significant volume of upgrades to credits that had been downgraded to high-yield during the pandemic, resulting in a net negative supply. Nearly all these names have been upgraded and returned to investment grade, so this impact is behind us. Second, new issue volumes have slowed to a relative trickle in the face of interest rate volatility as issuers were hesitant to look foolish locking in high rates or were holding out in the hope that rates would decline. Interest rates are stabilising and private equity is adjusting to the new environment, which should lead to higher new issuance. Third, larger private credit firms are competing very aggressively with public markets for new deals, making loans that would be very challenging to complete in the public markets and even offering issuers the ability to pay interest in kind. Third Point expects this source of capital to begin to dry up, as the vast sums of money raised in the last two years are spent and these investors begin to face widespread credit issues in their existing portfolios which were largely created during a period of trough interest rates and peak economic activity. Much like private equity, the expectation is that a vintage year will be an important driver of private credit performance.

On a fundamental basis, the impact of higher rates has the potential to create widespread credit stress in high yield. According to a recent Bank of America study, 40% of all B/CCC issuers (roughly half the market) will be free cash flow negative as they refinance maturing debt with more expensive debt due to higher interest rates. It is also worth noting that this analysis, done at the beginning of 2024, assumed that the U.S. Federal Reserve would cut interest rates by 250 basis points as was being projected by the market at the time. It is becoming more probable that that the Fed cuts do not match those expectations or, if they do, they are accompanied by economic weakness which would hamper corporate cash generation. This may or may not lead to large increases in defaults, but it is difficult to see how there will not be increasing credit stress. Third Point is equally happy investing in stressed performing debt as it is investing in distressed credits – the firm’s returns in both are relatively similar, so it expects to be busy either way. In Third Point’s view, credit will remain attractive for an extended period, with continuing periods of volatility generating good entry points.

In Structured Credit, Third Point remains constructive on the residential mortgage sector, and it comprises 65% of the firm’s exposure in this asset class. The U.S. mortgage market encompasses housing with $43 trillion of market value with only $13 trillion of mortgage debt. House prices were up close to 5% last year. While it’s fair to expect some price declines if rates fall and housing turnover increases, there is a significant amount of equity in borrowers’ hands.

Looking ahead to 2024, the banking crisis last March caused banks to try to optimise their portfolios and sell the easiest, shortest duration assets that are capital intensive. Third Point estimates there are $65 billion of consumer loans that banks want to sell over the next few years where unlevered loans are yielding 15% with capital appreciation upside. Spreads in structured credit look appealing versus public corporate credit and so Third Point expects that with more investors looking at structured credit for yield, spreads will tighten across many collateral types, particularly commercial mortgage-backed securities (CMBS) where real estate security selection is critical. The long-awaited opportunity in commercial real estate (CRE) looks more promising this year, as lower rates and a maturity wall of CRE debt should finally shake loose some distressed securities.

Third Point LLC

Portfolio Analysis

As at 31 December 2023

Exposure

Portfolio Detail1 Long Short Net

Equity

Activism/Constructivism 8.2% -2.3% 5.9%

Fundamental & Event 82.3% -17.5% 64.7%

Portfolio Hedges2 0.0% -0.2% -0.2%

Total Equity 90.4% -20.0% 70.4%

Credit

Corporate & Sovereign 17.4% -0.3% 17.2%

Structured 25.0% -0.1% 24.9%

Total Credit 42.4% -0.3% 42.1%

Privates 7.8% 0.0% 7.8%

Other3 0.0% 0.0% 0.0%

Total Portfolio 140.6% -20.3% 120.3%

Exposure

Equity Portfolio Detail1 Long Short Net

Equity Sectors

Consumer Discretionary 16.1% -3.0% 13.1%

Consumer Staples 0.2% -0.7% -0.5%

Utilities 14.1% -2.8% 11.2%

Energy 0.9% -0.1% 0.8%

Financials 17.7% -3.8% 13.8%

Healthcare 6.5% -2.1% 4.4%

Industrials & Materials 17.5% -4.6% 12.8%

Enterprise Technology 10.0% -2.0% 8.0%

Media & Internet 7.6% -0.7% 6.9%

Portfolio Hedges2 0.0% -0.2% -0.2%

Total 90.4% -20.0% 70.4%

1 Unless otherwise stated, information relates to the Third Point Offshore Master Fund L.P. Exposures are categorised in a manner consistent with the Investment Manager’s classifications for portfolio and risk management purposes.

2 Primarily broad-based market and equity-based hedges.

3 Includes currency hedges and macro investments. Rates and FX related investments are excluded from the exposure figures.

The sum of long and short exposure percentages may not visually add to the corresponding net figure due to rounding.

Net equity exposure is defined as the long exposure minus the short exposure of all equity positions (including long/short, arbitrage, and other strategies), and can serve as a rough measure of the exposure to fluctuations in overall market levels. The Investment Manager continues to closely monitor the liquidity of the portfolio and is comfortable that the current composition is aligned with the redemption terms available to the Company by virtue of its holding of Class YSP shares.

Investment Team

Daniel S. Loeb

CEO & CIO

Daniel S. Loeb is CEO of Third Point LLC, founded in 1995. Daniel has served on five publicly traded company boards: Ligand Pharmaceuticals; POGO Producing Co.; Massey Energy; Yahoo!; and Sotheby’s. Daniel’s philanthropic activities are driven by principles of individual human rights, including fighting against inequality and discrimination and for policies that lead to greater economic opportunity for all. Daniel graduated from Columbia University with an A.B. in economics in 1983, endowed the Daniel S. Loeb Scholarship for undergraduate study there, and received the school’s John Jay Award for distinguished professional achievement. In October 2020, he was awarded the Alexander Hamilton Award for his philanthropic service by the Manhattan Institute.

Ian Wallace

Partner & Head of Credit

Ian Wallace joined Third Point in 2009. Prior to joining Third Point, Ian was the Managing Member of River Run Management, LLC, which he founded in 1999. River Run was a hedge fund focused on high yield and distressed investments and the firm shared office space with and partnered with Third Point on many successful distressed investments from 2000-2004. From 1989 to 1998, Ian was a Managing Director with Oak Hill, an affiliate of the Robert M. Bass Group. Prior to Oak Hill, Ian was a Vice President in the High-Yield Research group at First Boston, and a staff accountant at Arthur Andersen & Co. Ian graduated from the University of Washington with a B.A. in Business Administration.

Shalini Sriram

Managing Director & Head of Structured Credit

Shalini Sriram is the Head of Structured Credit at Third Point and sits on the firm’s risk committee, overseeing a range of investments from residential and commercial mortgage-backed securities to the intersection of consumer finance and technology. Prior to joining Third Point in 2017, Shalini invested in structured credit at Scoggin Capital. From 2006 to 2012, Shalini was an Executive Director at Morgan Stanley, and Head of ABS CDO and RMBS trading. From 2002 to 2006, Shalini was an associate at Banc of America Securities on a proprietary ABS trading desk where she first structured and then traded CDOs. Shalini received a B.A. in Economics cum laude in three years from Wellesley College and an MBA from Columbia Business School.

Rob Schwartz

Managing Partner, Third Point Ventures

Since June 2000, Rob has been Managing Partner of Third Point Ventures, the Menlo Park, California based venture capital arm of Third Point LLC. Rob is presently a director of NextSilicon, Verbit, Sysdig, Kentik, Kumu Networks, Aryaka, R2 Semiconductor, YellowBrick Data, Ushur, and Trullion. Previously, for 23 years, he was the President of RF Associates North, a privately held communications semiconductor manufacturer’s representative firm. Rob holds a multi-discipline engineering degree from the University of California at Berkeley.

GOVERNANCE

Directors

Rupert Dorey (Chairman)

Rupert is a Guernsey resident and has over 35 years of experience in financial markets. Rupert was at CSFB for 17 years from 1988 to 2005 where he specialised in credit related products, including derivative instruments where his expertise was principally in the areas of debt distribution, origination and trading, covering all types of debt from investment grade to high yield and distressed debt. He held a number of positions at CSFB, including establishing CSFB’s high yield debt distribution business in Europe, fixed income credit product coordinator for European offices and head of UK Credit and Rates Sales. Since 2005 he has been acting in a non-executive directorship capacity for a number of Hedge Funds, Private Equity & Infrastructure Funds, for both listed and unlisted vehicles. He is former President of the Guernsey Chamber of Commerce and is a member of the Institute of Directors. Rupert has extensive experience as both Director and Chairman of exchange listed and unlisted funds. He has served on boards with 18 different managers, including Apollo, Aviva, Cinven, CQS, M&G and Partners Group.