Dan Loeb, one of the most respected activist hedge fund managers out there, is telling his clients how he positioned his portfolio for the administration of President Donald Trump.
"The U.S. Presidential election was the most significant event of the year and the most important paradigm shift since the financial crisis," Loeb wrote in the investor letter Wednesday. "Starting the morning after the election, we took immediate steps to reorganize the portfolio around investments that we believe will benefit from Trump's stated policy objectives."
Similar to billionaire investor Stan Druckenmiller, Loeb is optimistic on the U.S. economy under Trump.
"In the immediate term, we believe we will see an acceleration of economic growth at home. Electing a President who is seen as pro‐business (ignoring his protectionist views on global trade) has awakened animal spirits," he added.
To take advantage of Trump's agenda, Loeb increased his fund's financials exposure to 11.8 percent one month after the election, compared with its 4.4 percent exposure on Nov. 8.
"These [exposure] figures actually understate the magnitude of the shift, however, as we reallocated half our initial holdings from high multiple, FCF businesses in Payments, Ratings, and P&C (which traditionally outperform during periods of deflation), to more traditional reflationary exposures in Banks, Brokers, and, geographically, in Japan," he wrote. "Our conviction has only increased since we first initiated these investments; we have added exposure to each of the names in 2017."
Loeb cited positive tail winds for bank equities such as rising interest rates, increased fixed income and currency trading revenue, and the "operating leverage" inherent in financial companies. He said his bank stocks are valued at less than 10 times earnings and will be able to expand earnings per share at a "high-teens" percent growth rate going forward.
The hedge fund manager also discussed his Trump economic agenda expectations:
"Trump's election has accelerated the end of QE. The baton is now passing from the Fed to the Treasury, which will provide fiscal stimulus via comprehensive tax reform and infrastructure spending. We expect a significant reduction of corporate and individual taxes, the elimination of the interest rate deduction, and the removal of the deductibility of state and local income taxes from federal returns. To stimulate investment, we see an immediate deduction for capital spending and a dramatic pullback in government bureaucracy, red tape, and regulation."
Loeb's hedge fund Third Point Offshore was down 1.1 percent in the fourth quarter, bringing its performance for 2016 to 6.1 percent compared with the S&P 500's 12 percent return, according to the investor letter. From inception in December 1996 to the end of 2016 the fund generated annual net returns of 15.7 percent.
In regard to Loeb's investment strategy, Third Point materials describe its philosophy as "event-driven, value-oriented," with an "emphasis on special situation equities." The firm "seeks to identify situations where we anticipate a catalyst will unlock value."
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