As I get older, I am amazed at the lack of knowledge of reporters writing at major newspapers. In today’s Wall Street Journal is a prime example. While I might be seen as splitting hairs and a little OCD, we live in a precise business and the distinctions are important.
In the story “Loeb Vanishes at Snap, Back to Alibaba” there are numerous misunderstandings by the reporter. For most people, these distinctions don’t matter but if you plan on a career on Wall Street, it is best you understand how things work. The reporter is discussing positions listed on Third Point LLC’s 13F filing. For starters, 13F filings are often misunderstood. But it is easy to learn about them as the SEC has a lot of information about 13F filings on its website.
In the WSJ story the reporter states, “The holdings were disclosed Friday in the 13F filing, a quarterly requirement for investors managing more than $100 million. The report offers a snapshot of the fund’s largest stockholdings as of June 30.” This is not exactly true. First, 13Fs are not required to be filed by every investor managing more than $100 million and second, the filing might not offer a snapshot of a funds largest holdings.
If we look at the SEC website, it describes who must file a 13F:
Q. Who must file Form 13F?
A. Institutional investment managers that use the United States mail (or other means or instrumentality of interstate commerce) in the course of their business and that exercise investment discretion over $100 million or more in Section 13(f) securities must file Form 13F.
The subtlety here is the phrase, “…that exercise investment discretion over $100 million or more in Section 13(f) securities…” Most people don’t understand what a Section 13(f) security is which is the crux of the matter. What exactly is a 13(f) security? The SEC provides us with that answer:
Q. What are “Section 13(f) securities”?
A. These are securities that may be reported on Form 13F. A list of these securities – called the Official List of Section 13(f) Securities – is available shortly after the end of each calendar quarter on the SEC’s website, at http://www.sec.gov/divisions/investment/13flists.htm. Section 13(f) securities are equity securities of a class described in Section 13(d)(1) of the Securities Exchange Act.
We could go into what exactly a security described in Section 13(d)(1) of the Securities Exchange Act is, but let’s just take a shortcut and define it as a security on the “Official List of Section 13(f) Securities”. The next logical question would be – what is the “Official List”? As luck would have it, the SEC defines that too:
A. The Official List of Section 13(f) Securities primarily includes U.S. exchange-traded stocks (e.g., NYSE, AMEX, NASDAQ), shares of closed-end investment companies, and shares of exchange-traded funds (ETFs). Certain convertible debt securities, equity options, and warrants are on the Official List and may be reported. But see Section 13(f)(4) (referring to equity securities of a class referred to in Exchange Act section 13(d)(1)) and exemptive rules 12a-4 and 12a-9 under the Exchange Act.
But then, the SEC goes on to say:
Securities that are not on the Official List should not be reported on Form 13F. See, e.g., Rule 13f-1(c) under the Securities Exchange Act. For example, shares of open-end investment companies, i.e., mutual funds, are not included on the list and, therefore, should not be reported on Form 13F.
What the SEC is saying is that a security should only be reported on Form 13F if it is on the list. So when the reporter made the statement, “The holdings were disclosed Friday in the 13F filing, a quarterly requirement for investors managing more than $100 million.” There is a subtle, yet important, inaccuracy – a 13F is only required if the investor manages more than $100 million of 13F securities. This means that the investor can be managing a lot more than $100 million of equity securities but if they aren’t on the 13F list, they aren’t reported. To see what securities are on the list we can simply go back to the SEC website:
When we click on the current list, it pulls up a 522 page pdf file. The reporter in their story states, “Nestle wasn’t mentioned in the 13F, but Mr. Loeb’s firm disclosed in June a $3.5 billion stake in the European packaged food giant.” Wasn’t mentioned? A holding isn’t mentioned, rather, it is required to be listed or should not be listed. Let’s look up Nestle on the 13F list:
We see that Nestle is not on the list. As we quoted from the SEC website above, “Securities that are not on the Official List should not be reported on Form 13F.” So its not that Nestle wasn’t mentioned, its that Nestle is not supposed to be included on the list.
When the reporter goes on to say, “The report offers a snapshot of the fund’s largest stockholdings as of June 30.” This statement is incorrect – there could be other large stockholdings (such as Nestle) that are not required to be listed on the 13F filing. So the 13F doesn’t provide a snapshot of the fund’s largest stockholdings, rather it provides a snapshot of the fund’s largest holdings required to be filed on Form 13F.
To get an idea of what is not disclosed on Form 13F, we first look to Third Point’s most recent ADV Part 1 filing with the SEC which can be accessed from the SEC Investment Adviser Public Disclosure Website.
When we click on the “Get Details” tab we simply click on the “View Latest Form ADV filed” tab:
Which pulls up Third Points most recent ADV Part 1 filing in a pdf file and under Item 5 we see their total assets under management as of March 30, 2017 (the date of the filing):
The amount disclosed is $19.4 billion. Since the Third Point’s 13F for the period ending March 31, 2017 totals $10.2 billion (shown below), That means that Third Point manages an additional $9.2 billion of securities that are not disclosed on Form 13F.
These assets could be in the form of cash, debt, or equity securities. We don’t know. But what we do know is that there are equity holdings such as Nestle that comprise part of that $9.2 billion.
There is another issue I have with the story. The reporter starts off the story by saying, “Billionaire investor Daniel Loeb’s Third Point LLC exited his investment of Snap Inc…” Let’s dig a little deeper.
On Third Points 13F filing made on May 12,, 2017 for the period ending March 31, 2017, the total amount of 13F securities was approximately $10.2 billion. And as we stated above, on Third Point’s ADV filing as of March 30, 2017 they listed assets of $19.4 billion. On the 13F for the March quarter end, Third Point listed a holding in Snap Inc. of $50.7 million. Of the $10.2 billion this represents 4.9%, of $19.4 billion, this represents 2.6%. So Snap was not a huge position to begin with. But even this small position might be deceiving. I’m not an expert in options but maybe it was part of a covered call strategy where Third Point sold calls on Snap and bought the stock? It’s entirely possible that when Snap went public that the options were absurdly priced. If Third Point sold call options but bought stock to hedge, this could explain the position on their Form 13F.
The bottom line – be skeptical of what you read in the paper. Question everything.
The views, opinions, and interpretations expressed are those of the authors and do not necessarily represent the views of their respective firms, the individuals who have been referenced, nor any firms with whom they may be affiliated.