A Look At Third Avenue Funds Annual Report, October 2013

by: John Alford

Today I am borrowing from contributor Holmes Osborne's playbook and if he later chimes in on Third Avenue, I look forward to reading his analysis.

I've been investing in Third Avenue Value Fund (MUTF:TAVFX) for many years, and like Holmes appreciate getting the quarterly and annual reports. For those who aren't invested in any of their mutual funds, the latest annual report is available on the Fund website. It is an interesting read for reasons I will highlight in this short article.

Martin Whitman's Quarterly Investing Lesson

The first part of every quarterly and annual report is a short letter from Martin Whitman, founder and long-time manager of Third Avenue. These letters have served as a quarterly lesson in valuing securities, investing and financial outlook for many, myself included. I have often found myself quoting back ideas or even specific points from these letters. This annual report is no exception. Marty discusses the difference in market analysis and investment analysis. While I won't argue the differences or merits of investing vs. trading as I know there are many successful traders on this forum that far outpace my abilities as an investor! I will state that Marty and his managers all take a long-term investing mindset even if some investments work out more quickly than expected. This month's letter also focuses on seeking out large discounts from Net Asset Value, or NAV, in investing decisions and seeking company management that seeks to unlock this value in a rational manner. This strikes at the heart of Martin Whitman's philosophy and is well summarized in his most recent letter.

Third Avenue Value Fund (TAVFX)

The first mutual fund Martin Whitman built Third Avenue around, the Third Avenue Value Fund, is a large investor in value investments worldwide. As the current fund manager states, the fund normally walks in while others rush out. This annual report is interesting in that instead of selling holdings to meet redemptions as was the case last year, long time positions were reduced due to appreciation and as the fund team writes "we also built up a war chest of cash to use for opportunities as they arise". This is a good sign, as quarterly outflows in 2012 and into 2013 caused decisions primarily based on raising cash and secondarily on investment merits. Significant holdings that the management team sold included:

  • Cheung Kong Holdings (OTCPK:CHEUY)
  • Henderson Land Development Co., Ltd. (OTCPK:HLDCY) (still a top ten holding)
  • Tejon Ranch Co. Common (NYSE:TRC)
  • Wheelock & Co., Ltd. (still the number one holding of the fund)

The only new position for the fund for the quarter was in Vodafone (NASDAQ:VOD) with a short analysis of the rationale for the investment, including the profitable sale of the 45% stake in Verizon (NYSE:VZ) and future opportunities in emerging markets. Positions in Pargesa Common (OTCPK:PRGAF) and three other holdings were increased and no positions were eliminated.

While this website is much more focused on individual stocks and ETFs, I have used Third Avenue Value as a core diversified holding in my IRA for many years and would recommend other investors consider this fund if they are seeking a value-oriented, independent thinking fund as part of their portfolio. Of course, your goals and needs may differ from mine, and your own research and decision-making are required, but I hope this overview helps you.

A Second Free Lesson-Resource Conversion

The management team ends the quarterly letter with a 3 and a half page description of resource conversion activities and how they affect the fund. I find this very helpful, for as they state:

"While seemingly an extraordinary event, companies regularly engage in some form or another of resource conversion over a business cycle."

If done well, these activities unlock value for investors. One way Third Avenue takes advantage of resource conversion activities is investing in companies where management is aligned with stockholder or debt investor interests-and they practice what they preach with most Third Avenue managers having significant stakes in the company and funds. I'll let you read the article on resource conversion, as they write clearly and succinctly enough my paraphrase wouldn't add value!

The Other Funds

The other Third Avenue Funds (Small Cap, Real Estate, International Value, and Focused Credit) also have quarterly letters in the booklet I received and the file I linked to above. While I currently do not have holdings in these funds, the quarterly reports are also educational and a good way to learn about specific sectors. I have to give credit where it is due-my current holdings in Realty Income (NYSE:O) and Hersha Hospitality Trust (NYSE:HT) preferred stock started from reading the Third Avenue Real Estate Fund quarterly report. As a novice to real estate investing and with no knowledge of distressed credits, these reports have been eye-opening. Others of you will find them enlightening even if you regularly track these markets-I would guess the "iron sharpening iron" saying would be more applicable as you could test and refine your ideas compared to what they write.

To borrow one more quote from Martin Whitman, "Best wishes for a happy, healthy, and prosperous New Year!"

Disclosure: I am long O, HT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long Third Avenue Value Fund (TAVFX).