Daniel Seth Loeb’s comments from the Third Point Reinsurance earnings call for the fourth quarter ended December 31, 2015. Below is the full audio and transcript via S&P Capital IQ including a lengthy Q&A with Morgan Stanley analyst.
Also Dan Loeb Q4
Daniel Seth Loeb – CEO Third Point Reinsurance
Thanks, John, and good morning, everyone. The Third Point Reinsurance investment portfolio managed by Third Point LLC returned 2.8% in the fourth quarter of 2015, net of season expenses, versus returns for the S&P and CS event-driven indices of 7% and minus 2.3%, respectively, for the quarter. The Third Point Reinsurance account represent approximately 13% of assets managed by Third Point LLC.
[drizzle]The market volatility that began during the third quarter remained through year-end and has continued thus far in 2016. During the second half of 2015, we repositioned our equity portfolio by further concentrating our long investments and adding additional short positions, capturing alpha on both sides of the portfolio while reducing overall net exposure. Our 5 largest portfolio positions were our top winners for the fourth quarter. The Third Point equity portfolio returned 7% on average exposure in Q4, roughly in line with the markets with significantly less exposure at risk. Healthcare and industrials and commodities were our strongest-performing sectors. Our sovereign credit book returned 16.3% on average exposure during the quarter. Performance was driven by returns from our largest credit position, Argentine government debt.
Our corporate credit book lost 3.8% on weighted average exposure in Q4, primarily due to investments in energy-related debt. Slight gains in our distressed portfolio were more than offset by losses in our performing credit positions. We have had only moderate exposure to corporate credit exposure for the past several years, but we expect this to increase in 2016.
The Third Point structured credit portfolio was down 80 basis points in Q4, the only negative quarter for the strategy last year. Our structured credit portfolio returned 16.4% on average exposure in 2015, handily outpacing the HFN hedge fund mortgage index returns of 3.7% for the same period. We have continued to diversify our portfolio beyond residential mortgages, which have driven returns since the financial crisis
[Operator Instructions] Our first question today is coming from Kai Pan from Morgan Stanley.
I have, first, a serious question for Dan. Dan, the market is volatile, starting in 2016. Do you see a recession? And how do you position the portfolio?
Daniel Seth Loeb
Thanks for your question. Yes, I mean, look, markets are volatile. We tried to kind of balance a respect for markets and volatility and short-term losses with — something we’ve been doing for 20 years, which is taking advantage of these times of volatility to establish positions in situations that we think will be worth more over the long term. And so we’re doing 2 things. One, we have hedges in place. But we’ve actually increased our net exposure over the course of the month as some of these selloffs have created silly prices for securities, and we’ve either added to some existing positions or established a couple of new positions. So as to your question about a recession, look, it’s along with the other things, like China, oil prices, Fed policy, et cetera, I mean that’s kind of on the top of people’s list as far as concerns go. We are looking at economic data. We are serving companies that are economically sensitive. And what we do see is weakness in companies with cyclical exposure, and we see the obvious things, companies with some — overleveraged companies in cyclical businesses that are also in — maybe in some peril. But as far as industrial companies, consumer companies, certainly healthcare companies, we are not seeing any sign of a recession. We see a lot of people that are on alert, but there haven’t really been any signs of recession. For me, they’re the economic data, the surveys, our individual conversations with companies.
Okay. In such an uncertain environment, do you see more or less opportunities for corporate activists?
Daniel Seth Loeb
It’s an interesting question. We have not undertaken any new activist opportunities. But I think what’s happening actually is a lot of companies have undertaken the sorts of operational improvements and more rational capital structure moves that is making it — I think that’s making it more difficult for activists because you don’t have as many blatantly underperforming companies because boards are holding the management teams more accountable. They’re getting a lot of pitches from bankers. So we’re not seeing — that’s not really what we’re focusing on. We’re really focusing on securities that are undervalued where we can make investments and be constructive and not have to take any kind of confrontational role with the management teams.
Okay. It looks like there are some — like a shift — significant shift in terms of some of the strategy in your portfolio, and for example, increase in the single name active shorts. I just wonder, does your investment team have experience? And also, are you adjusting the team’s mindset as well as process in — according to the shift in the strategies?
Daniel Seth Loeb
Yes. I wouldn’t call this a shift in strategy at all. For people who have known me since the ’90s, we have been very active short sellers for 20 years. I’ve personally been very active. In fact, if you look at our results in — going back in history, we were profitable into the mid-teens in 2000 and 2001 based on short positions that we had taken. So I wouldn’t call this a new strategy. I quoted another legendary investor, Julian Robertson, who, about 1 year or 2, said that short selling used to be a license to steal. And a couple of years ago, he said it had become a license to get hosed. I think that was sort of a — it was an understandable sentiment. It was so expensive to short sell. And I think as the conditions became better over the last year or so, we have gotten — we’ve increased our single name shorts. We continue to hedge the portfolio, and it has been very good source of alpha. But also importantly, it’s reduced volatility in the portfolio. And as I’ve said before, the value of reducing volatility, aside from lowering the blood pressure of our team and our investors, is it really gives you the opportunity when you have these big selloffs, like we’ve had this year, and you’re not doing as badly as the market or not as badly as your peers. It gives you the opportunity to, with a clear head, go in and make opportunistic acquisitions and purchases, which is exactly what we’ve been doing.
Okay, that’s great. And then in your fourth quarter letter, you’ve mentioned some of these values stock getting hard hit. Yet I noticed you initiated some of the new positions in your financials. Could you talk about it?
Daniel Seth Loeb
I didn’t understand. We did what around financials?
You initiated some positions in financials, new positions.
Daniel Seth Loeb
The only — we have one new position at a — in an insurance company. Other than that, we’ve — we think the banks will continue to be