2Q 2014 Shareholder Letters

Transcription

Third Avenue Funds
Portfolio Manager Commentary
April 30, 2014
Third Avenue Value Fund
Third Avenue Small-Cap Value Fund
Third Avenue real Estate Value Fund
Third Avenue international Value Fund
Third Avenue Focused Credit Fund
This publication does not constitute an offer or solicitation of any transaction in any securities.
Any recommendation contained herein may not be suitable for all investors. Information
contained in this publication has been obtained from sources we believe to be reliable, but cannot
be guaranteed.
The information in these portfolio manager letters represents the opinions of the individual
portfolio manager and is not intended to be a forecast of future events, a guarantee of future
results or investment advice. Views expressed are those of the portfolio manager and may differ
from those of other portfolio managers or of the firm as a whole. Also, please note that any
discussion of the Funds’ holdings, the Funds’ performance, and the portfolio managers’ views are
as of April 30, 2014 (except as otherwise stated), and are subject to change without notice.
Certain information contained in the following letters constitute “forward-looking statements,”
which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,”
“expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives
thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or
comparable terminology. Due to various risks and uncertainties, actual events or results or the
actual performance of any fund may differ materially from those reflected or contemplated in such
forward-looking statement.
Third Avenue Funds are offered by prospectus only. Prospectuses contain more complete
information on advisory fees, distribution charges, and other expenses and should be read
carefully before investing or sending money. Please read the prospectus and carefully consider
investment objectives, risks, charges and expenses before you send money. Past performance is
no guarantee of future results. Investment return and principal value will fluctuate so that an
investor’s shares, when redeemed, may be worth more or less than original cost.
If you should have any questions, please call 1-800-443-1021, or visit our web site at:
www.thirdave.com, for the most recent month-end performance data or a copy of the Funds’
prospectus. Current performance results may be lower or higher than performance numbers
quoted in certain letters to shareholders.
M.J. Whitman LLC, Distributor. Date of first use of portfolio manager commentary:
May 30, 2014.
T hird Ave nue Value fund
T hird Ave nue sm all- c ap Value fund
T hird Ave nue Re al estate Value fund
T hird Ave nue inte r national Value fund
T hird Ave nue foc use d c re dit fund
seco nd Q UA RT eR p o RT fo lio mA nAg eR co mm enTARy
april 30, 2014
THiRd AVenUe fUnds
poRTfolio mAnAgeR commenTARy
_____________________________________________
cHAiRmAn’s leTTeR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THiRd AVenUe VAlUe fUnd (TAVfX, TVfVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
THiRd AVenUe smAll-cAp VAlUe fUnd (TAscX, TVsVX) . . . . . . . . . . . . . . . . . . . . . . . . 11
THiRd AVenUe ReAl esTATe VAlUe fUnd (TAReX, TVRVX). . . . . . . . . . . . . . . . . . . . . . . 16
THiRd AVenUe inTeRnATionAl VAlUe fUnd (TAViX, TViVX) . . . . . . . . . . . . . . . . . . . . 21
THiRd AVenUe focUsed cRediT fUnd (TfciX, TfcVX) . . . . . . . . . . . . . . . . . . . . . . . . . . 28
letter from the chairman
(Unaudited)
“sudden death” securities short-run considerations tend
to be the only factor that makes sense. This lack of
interest, especially by traders and finance academics, is
understandable. “Sudden death” exists where an
investment situation will come to a definitive end in a
relatively short period of time, say, call options are to
expire or a merger transaction is to conclude. “Sudden
death” securities and situations include options and
warrants, risk arbitrage, short maturity credits, many
credits likely to suffer a money default, heavily margined
portfolios, and situations where the investor and his
advisers know little, or nothing, about the companies in
which they invest. in contrast, emphasis on determining
intermediate to long-term values and dynamics is a
necessary approach in value investing, control investing,
most distress investing, credit analysis, and first and
second stage venture capital investing.
Dear Fellow Shareholders:
High Frequency Trading (“HFT”) has been on the front
pages of the financial press ever since the publication
earlier this year of Michael lewis’ book, Flash Boys. The
book demonstrates once again how difficult it is to
prosper as an investor in markets where longer-term
fundamental analysis of companies and securities are
ignored. The ways most market participants who lack
specific knowledge about individual companies and the
securities they issue can prosper seems to encompass at
least one of the three factors:
1.) Front running, which is the principal topic of Flash
Boys. Have information about buy or sell order flows
before such orders are executed, and place your
order before the other orders are executed.
2.) Obtaining and using inside information either about
prospective market events or corporate events or
announcements.
it is extremely hard to use most conventional security
analysis – see Graham & Dodd – and be focused on
determining underlying fundamental values for common
stocks. This is because in most conventional analysis, four
factors tend to be so overemphasized for non-control
investors that they lose sight of underlying, long-term
values and the underlying dynamics of businesses. These
four areas of overemphasis in conventional investment
approaches seem to be as follows:
3.) Getting large compensation off the top in the form
of commissions, management fees incentive fees,
interest income on credit balances, fees for order
flows, and /or trading spreads.
Understandably 100% of high frequency traders, as well
as the vast majority of other market participants (with
the exception of those engaged in risk arbitrage), have
little or no interest in becoming knowledgeable about
individual companies and individual securities. after all,
fundamental, underlying, factors seem to have no impact
on immediate security prices.
1.) a belief in the primacy of periodic earnings in
determining value or prices whether those periodic
earnings are cash flows from operations or
accounting earnings from operations. There
probably is no one factor in the accounting cycle that
deserves primacy in the analysis of an individual
company, but if there were, the one i’d pick would
be credit worthiness, rather than earnings, certainly
subsequent to the 2008 financial meltdown.
Most market participants just are not in a position to
make determinations about intermediate to long-term
fundamental values, which requires a detailed study of
companies and the securities they issue. rather, most
market participants have to be short-run oriented.
Virtually all of academic finance involves only the study
of markets and market prices; for academics the study of
companies and the securities they issue tends to be
somebody else’s business. For those involved with
2.) a belief in short termism. if one is acutely conscious
of securities price fluctuations – whether hourly,
daily, weekly, monthly or annually one, per se, has to
be focused on the short-term. if the market
1
letter from the chairman (continued)
(Unaudited)
view unless the particular security and issuing
company are examined in depth? admittedly, the
market for equities where “sudden death”
conditions dominate tends to be highly efficient but
the problem faced by academics, traders and
conventional analysts is that they apply valid
reasoning for “sudden death” situations to all
investments. Traders are not equipped to conduct
such examinations in the secondary market; value
investors and active investors are. if you are a high
3.) a belief that top-down considerations, such as
frequency trader who makes, say, ten trades a day,
predicting the business cycle, the Dow-Jones
how can you possibly have fundamental knowledge
industrial average, inflation, and interest rates, are
about the securities you are trading? Someone like
far
more
important
Warren
Buffett
probably
investment considerations
undertakes no more than ten
“many
equities
in
Third
than are bottom-up factors,
new investments a year – forget
such as the strength of
Avenue portfolios are the
about 10 a day.
corporate financial positions,
common
stocks
of
wellaccess to capital markets,
according to Flash Boys, investors
earnings, or the price financed companies which are are being ripped off by High
discount for a common stock selling at meaningful discounts Frequency Traders who, on any
from net asset value (“NaV”).
trade, front run for a profit of, say
from readily ascertainable
The actual times when top
1¢ to 5¢ a share. While this view
down factors seem to have
nAV. such securities seem to has validity in regard to average
been
actually
more
it is an utterly immaterial
deliver a great deal of long- traders,
important than bottom-up
consideration for buy-and-holdterm safety to holders.”
considerations for long-term
investors, such as those managing
investors seem to have been
Third avenue portfolios. For most
few and far between – say,
of the securities in those buy-and1929, 1933, 1937, 1969, 1974, 1987, 2000 and
hold portfolios, the average holding period is anywhere
2008.
from two years to five years. incurring an extra 5¢ trading
cost every two to five years is just not relevant to a
4.) There is a belief that securities markets reflect a
portfolio’s performance. Day traders, who are involved
price equilibrium. at any time, the prices for
with five to ten trades a day, in contrast, are vitally affected
securities are right (i.e., efficient) and will change
by trading costs.
only as the market digests new information. What
participant believes that the market knows more
about a particular security than he or she does, that
participant ought to place great weight on security
prices and the short term. The guts of value
investing and control investing, however, revolve
around the conviction that the market participant
knows more about the security than the market
does. The opposite is true for traders as well as most
other market participants.
nonsense! For the value investor, as well as the
control investor, most prices are wrong most of the
time and most short-run price changes are merely
random walks. How can one gauge whether a price
is right from an intermediate to long-term point of
Many equities in Third avenue portfolios are the common
stocks of well-financed companies which are selling at
meaningful discounts from readily ascertainable NaV.
Such securities seem to deliver a great deal of long-term
safety to holders. i believe, based on several studies, that
2
letter from the chairman (continued)
(Unaudited)
There is a common view that HFT serves an economic
purpose in creating liquidity in the market place. in my
experience, high levels of liquidity tend to result in grossly
inefficient market prices with no association to underlying
corporate values. Stock market buying bubbles and panic
market crashes almost always have as one component
large, large trading volumes. With electronic trading, HFT
has taken over the role that used to belong to floor
specialists who maintained orderly markets in individual
securities by standing ready to buy or sell as needed. HFT
traders, like specialists, see the order book and their
activities seem to have been highly profitable for both.
The essential differences between HFT and the specialist
is that HFT assumes no responsibility and is not required
to buy when there is a plethora of sellers, or to sell when
there is a plethora of buyers. HFT can just walk away;
specialists never could just walk away.
at least 80% of the time for at least 80% of the
companies, NaVs will be larger in the next reporting
period than in the prior reporting period. While these
increases in NaV don’t guaranty a profitable, long-term
investment, they seem to put the odds in the investors’
favor. performance will be satisfactory over the long term
unless the price discounts from NaV widen and stay
widened. These steady, long-term increases in NaV
explain much of the satisfactory performance of many
Exchange Traded Funds (“ETFs”). Third avenue differs
from ETFs because it strives, through intensive
examination, to restrict such NaV investments to
companies which have promise of increasing NaVs, over
the longer term, by not less than 10% compounded
annually, after adding back dividends.
Don’t overestimate the importance of HFT, and all
trading, in trying to understand Wall Street. While trading
may involve a larger population of market participants
than other activities, it is among the least important
activities conducted in the financial community. More
important activities probably are control investing,
distress investing, credit analysis, as well as first and
second stage venture capital investing combined with
initial public Offerings (“ipOs”). incidentally for ipOs, it
seems as if most gross spreads for equities range
between 4% to7%, quite possibly resulting in far higher
profit margins for those actively involved with ipOs than
is the case for HFT. There are few, if any, activities on Wall
Street which are not highly profitable for sponsors and
promoters. HFT, in my opinion, serves no useful social or
economic purpose but the profits it delivers to promoters
are hardly unique on Wall Street.
i shall write you again after the fiscal period to end July
31, 2014.
Sincerely yours,
Martin J. Whitman
Chairman of the Board
3
Third Avenue Value fund
(Unaudited)
number of shares
positions decreased (continued)
The following summarizes Third avenue Value Fund’s
(the “Fund” or “TaVF”) investment activity during the
quarter:
7,994,112 shares
Chong Hing Bank ltd. Common
Stock (“Chong Hing Common”)
1,325,000 shares
Daiwa Securities Group, inc.
Common Stock (“Daiwa
Common”)
280,000 shares
Devon Energy Corp. Common
Stock (“Devon Common”)
478,701 shares
investor aB Class B Common
Stock (“investor aB Class B
Common”)
number of shares
new position
253,642 shares
aGCO Corp. Common Stock
(“aGCO Common”)
positions increased
27,215 shares
alleghany Corp. Common Stock
(“alleghany Common”)
130,000 shares
apache Corp. Common Stock
(“apache Common”)
683,056 shares
rHJ international Common Stock
(“rHJ Common”)
255,000 shares
Encana Corp. Common Stock
(“Encana Common”)
1,284,500 shares
Sycamore Networks inc. Common
Stock (“Sycamore Common”)
15,000 shares
pOSCO aDr Common Stock
(“pOSCO Common”)
401,900 shares
4,175,000 shares
Vodafone Group plC Common
Stock (“Vodafone Common”)
Toyota industries Corp. Common
Stock (“Toyota industries
Common”)
position eliminated
1,278 shares
White Mountains insurance
Group, ltd. Common Stock
(“White Mountains Common”)
positions decreased
583,862 shares
Verizon Communications inc.
Common Stock (“Verizon
Common”)
100,000 shares
Bank of New York Mellon Corp.
Common Stock (“Bank of New
York Common”)
385,000 shares
Brookfield asset Management
inc. Class a Common Stock
(“Brookfield Common”)
25,692 shares
Cavco industries inc. Common
Stock (“Cavco Common”)
708,000 shares
Cheung Kong Holdings ltd.
Common Stock (“Cheung Kong
Common”)
discUssion of QUARTeRly AcTiViTy
Fund Management initiated a position in the common
stock of aGCO Corp. (“aGCO”) during the quarter. aGCO
is a pure-play agricultural company dedicated to farm
machinery, grain storage solutions and protein
production equipment. it is a global company with sales
generated across the following geographies: 23% U.S.,
53% Europe, 23% latin america and 1% asia pacific. it
maintains an investment grade balance sheet, is highly
cash generative, and has been consistently profitable.
Despite these appealing characteristics, the current
valuation is depressed due to short-term concerns.
portfolio holdings are subject to change without notice. The following is a list of Third avenue Value Fund’s 10 largest issuers,
and the percentage of the total net assets each represented, as of april 30, 2014: Cavco industries, inc., 5.56%; posco (aDr),
5.40%; Henderson land Development Co., ltd., 5.29%; Wheelock & Co., ltd., 4.86%; Covanta Holding Corp., 4.45%; Bank of
New York Mellon Corp., 4.36%; Hang lung Group ltd., 3.90%; Devon Energy Corp., 3.89%; apache Corp., 3.83%; and Total
S.a., 3.76%.
4
Third Avenue Value fund (continued)
(Unaudited)
agricultural spending drives aGCO’s top-line and it is
primarily driven by farm income. Farm income has grown
rapidly in the U.S. over the past five years and many are
projecting that spending growth will slow down or decline
in the near term. This is putting pressure on agriculturalrelated companies like aGCO (See aGCO’s valuation
history below).
america exceeds other geographies as well. Higher
protein demand and the potential for productivity
improvement outside the U.S. should provide tailwinds
for agricultural spending even if U.S. farm incomes are
challenged. aGCO is well positioned to take advantage.
in addition, outside the U.S. and Europe, between 10%
to 15% of annual grain harvest is wasted due to
insufficient storage capacity. aGCO’s grain storage
products are a very important part of the solution for this
fundamental problem. With aGCO’s strong market
positions in areas such as latin america, it should have
ample ability to grow sales over the long haul.
Agco 10-year Valuation History
TEV to LTM EBITDA
16
14
12
10
8
although not a central part of our thesis, given aGCO’s
healthy market position outside the lucrative U.S.
markets, it could be an appealing target for larger
competitors who are interested in expanding its footprint
outside the U.S.
6
4
2
0
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
NYSE:AGCO - TE V/LTM EBITDA
Source: Capital iQ
Note: Hi: 8.2X, low: 2.0X, average: 7.3X
Fund Management also increased its positions in several
common stocks during the quarter:
although we agree that agricultural spending will likely
be challenged in the near term, there are mitigating
factors to combat slowing end-market activity. First,
aGCO’s exposure to North america is only 23%, which
trails peers by wide margins. Over half of aGCO’s sales
are in Europe. There seems to be less risk in Europe, as
farm incomes have been more stable when compared to
U.S. farm incomes. Second, aGCO’s operating margins are
lower (8%) than peers and management is focused on
improving them to double digit rates. Management’s
potential to improve margins provides a cushion to
sluggish sales. Finally, management has responded to the
attractive valuation by implementing a $500 million stock
buyback program (roughly 10% of current market
capitalization) and has been aggressively purchasing
shares at current prices.
•
Oil and gas exploration and production (“E&p”)
companies (Encana Common and apache
Common). Shares of both companies were
purchased below our estimates of net asset value,
despite generally improving business fundamentals,
particularly for natural gas. The common stocks of oil
and gas exploration and production companies
accounted for 14.5% of the Fund’s net assets at
quarter end.
•
The position in posco common was increased
slightly at about a 50% discount to book value.
Despite excess capacity and pricing pressure in the
global steel industry, particularly in China, posco’s
steel business continues to perform relatively well as
evidenced by its 7% operating margin in both 2013
and the first quarter of 2014. The company
continues to have a strong financial position, and its
recent investments in non-steel businesses should
start to contribute more meaningfully over the next
couple of years, particularly in energy (more on this
What we find most interesting is how the short-term
concerns seem to be overshadowing attractive long-term
agricultural trends. as economies develop, per capita
protein demand tends to grow. productivity in North
5
(Unaudited)
•
•
later in this letter). posco common accounted for
5.4% of the Fund’s net assets at quarter end.
end, cash and equivalents accounted for about 14% of
the Fund’s net assets.
property and casualty insurance companies
(alleghany Common and White Mountains
Common). Both companies have generated solid
(high single digit) annual book value growth since
the Fund invested in 2012 despite a challenging
environment characterized by low interest rates and
competitive underwriting. Shares of both
companies, which account for 3.1% of the Fund’s
assets in total, were purchased at modest discounts
to book value.
lARgesT posiTion UpdATe – cAVco
The Fund’s largest position is the common stock of Cavco
industries inc., which represented 5.6% of the Fund’s net
assets as of quarter end. Since Cavco is not a household
name, we thought it would be helpful to discuss the
history of the investment and why we are so excited
about its future.
The Cavco investment originated during the 2008
financial crisis. Fleetwood Enterprises, a leading producer
of manufactured homes and recreational vehicles (“rVs”)
had filed for bankruptcy, and its announcement of the
sale of its rV business in a bankruptcy auction indicated
that the manufactured housing business could be
available on similar terms. Fund Management had long
followed the manufactured housing industry and knew
that Fleetwood had a strong brand name and reputation
as a quality manufacturer. Fund Management contacted
Joe Stegmayer, the Chairman and CEO of Cavco, to
discuss the situation and learned that Cavco was also
interested in the Fleetwood manufactured housing
business. Fund Management had known Joe Stegmayer
for many years, dating back to when he was president of
industry leader Clayton Homes, and had tremendous
respect for his managerial capabilities. Cavco was a small
(three plants) regional manufactured housing producer
based arizona. Under Joe Stegmayer’s prudent
management, the company had maintained generally
profitable operations and a strong, debt free balance
sheet during the long industry downturn (See
Manufactured Housing Shipments chart that follows on
the next page). Therefore, the company was in position
to consider acquisitions. However, given Fleetwood’s
considerably larger size, Cavco wanted a financial partner
for the acquisition, and, hence, we formed a 50-50 joint
venture company (“Fleetwood Homes”) to purchase the
Fleetwood assets. The Fund and Cavco each contributed
$35 million to fund the joint venture.
additional shares of Vodafone Common were
purchased following the completion of the
company’s sale of its 45% stake in Verizon Wireless
to Verizon. This transaction resulted in a significant
distribution to shareholders consisting mostly of
Verizon common stock and also of cash. Fund
Management elected to sell the Verizon shares
owing to concerns about slowing growth and
increasing completion in the US along with the
company’s leveraged balance sheet. Vodafone has a
very strong financial position and is well positioned
to benefit from consolidation in the European
telecommunication market and growth in emerging
markets. Vodafone Common accounted for 2.5% of
the Fund’s net assets at quarter end.
The majority, 77%, of the Fund’s Chong Hing Common
position was accepted for tender by Yuexiu Financial
Holdings, part of the Yue Xiu Group, a Chinese company.
as discussed in the 2013 year end letter, Fund
Management was very pleased with the price of this
transaction (2.4 times book value, including a special
dividend), particularly considering that the shares had
been purchased below book value.
Fund Management also trimmed several positions that
had appreciated or were non-core holdings. at quarter
6
(Unaudited)
trough of 50,000 in 2009-2010. The twenty year average
shipment level of 183,000 is more than triple the current
level. One factor that should drive a more significant
industry recovery is improved financing availability.
Following the burst of the easy credit driven industry boom
in the late 1990s, most manufactured housing lenders
exited the industry. However, recent performance of
manufactured home mortgages underwritten over the last
ten years, including those by the finance subsidiary that
Cavco purchased from palm Harbor, has been healthy
(much better than sub-prime site built mortgages). Freddie
Mac’s recent announcement of a program to purchase the
debt of manufactured housing community developers is a
positive sign, and we expect more financing options to
become available for the industry. The paucity of financing
in the manufactured housing industry is reflected in its
share of the overall housing market. Between 1980 and
2000, manufactured housing accounted for 29% of new
home sales. This percentage fell to about 10% from 20042006 during the sub-prime site built boom and has recently
increased to only about 12%. With the overall housing
market still depressed, we believe the manufactured
housing industry will benefit over the next several years
from gaining share in an increasing overall market.
Fleetwood’s manufactured housing assets, consisting
mostly of seven manufacturing plants, were purchased
by our joint venture for $26 million in august 2009 at a
bankruptcy auction. The only other bidder for the assets
was Clayton Homes, which is now owned by Berkshire
Hathaway. Under the terms of our joint venture
agreement, Cavco operated the assets. impressively,
despite continued industry weakness, Cavco was able to
operate Fleetwood profitably in 2010. Therefore, when a
larger, vertically integrated competitor, palm Harbor,
experienced financial distress in 2010, Fund Management
was willing to make an additional contribution to the joint
venture ($36 million) to pursue this attractive expansion
opportunity. after much negotiation and diligence on
palm Harbor, the Fleetwood Homes joint venture agreed
to provide debtor in possession (“Dip”) financing for palm
Harbor’s November 2010 bankruptcy filing. in 2011,
Fleetwood Homes rolled this Dip loan into a purchase of
substantially all of palm Harbor’s assets for $84 million at
another bankruptcy auction. These assets consisted
mostly of five manufacturing facilities, 49 retail outlets
and 100% of the common stock of profitable insurance
and finance subsidiaries that had not filed for bankruptcy.
in 2013, the Fund sold its stake in the Fleetwood Homes
joint venture to its partner, Cavco, in exchange for
approximately 21% of Cavco’s common stock. The sale
price equated to a 29% premium to our cost, but, more
importantly, the Fund received Cavco stock at $49 per
share, compared to $78 as of quarter end. Fund
Management wanted to take Cavco common stock as
opposed to cash because we believe the company’s longterm prospects are very attractive.
manufactured Housing shipments
400,000
350,000
300,000
250,000
200,000
150,000
100,000
Despite the strong recent appreciation of Cavco common,
we believe that there is still considerable upside as the
company benefits from the acquisitions of Fleetwood and
palm Harbor and a manufactured housing industry
recovery. as the chart below illustrates, the manufactured
housing industry remains extremely depressed. 2013
industry shipments of 60,000 are only slightly above the
201
0
201
2
200
6
200
8
200
2
200
4
199
2
199
4
199
6
198
8
199
0
198
4
198
6
0
199
8
200
0
50,000
Source: Manufactured Housing institute.
Cavco’s recent financial results demonstrate the
operating leverage inherent in its business model. Unlike
7
(Unaudited)
Hong Kong compAnies UpdATe
site built homebuilders, manufactured home producers
do not need to invest in land. The production
environment is controlled and cost efficient ($42 per
square foot, compared to $86 per square foot for the site
built industry). Cavco’s facilities are currently operating at
a capacity utilization of only 43%, indicating that sales
could expand significantly without additional capital
investment. in fiscal 2014 (March 31st year end), Cavco’s
revenues, operating income and earnings per share
increased 18%, 30% and 173%, respectively, as the
company gained market share and benefited from the
modest industry recovery. We believe that the Company
will continue to generate substantial earnings growth
over the next several years, as the industry continues to
recover. Finally, Cavco’s strong balance sheet with $73
million of cash and no debt (excluding non-recourse
finance subsidiary debt) positions the company to make
additional acquisitions or investments to drive further
growth. Cavco’s management team, led by Chairman and
CEO, Joe Stegmayer, has proven to be very capable in
both making and integrating acquisitions.
Our Hong Kong companies recently reported strong full
year 2013 financial results. The table below summarizes
these results and also includes balance sheet, valuation
and insider ownership data for our four significant
investments in Hong Kong real estate and investment
companies, which accounted for 17% of the Fund’s assets
at quarter end. Commercial leasing income (primarily
generated from owning office buildings and shopping
centers) increased between 6.8% and 14.4%, and
residential property development margins ranged from
22.9% to 60.4%. The healthy results in these two core
businesses drove net asset value growth (including
dividends) of 8.4% to 11.2% in 2013.
Despite this positive business performance, the stock
performance for these companies has been weak over
the last year. as a result, the discounts to net asset value
have widened and are considerably larger than historical
averages. These wider-than-historical discounts seem to
more than compensate for widely publicized headwinds
facing the Chinese economy and the residential property
markets in Hong Kong and China. additionally, each
company continues to have a very strong financial
position and a management team with an impressive
Hong Kong ReAl esTATe And inVesTmenT compAnies
common
12 months 2013
net
stock
price to nAV
prop dev leasing
nAV
debt to insider
price
nAV (1) _______
current _________
10 yr. Avg ______
margin growth
(4) ______
capital ownership
_____
_______
______ growth
_________
_________
Cheung Kong Holdings $132.00 $155.72
85%
95%
36.9%
6.8%
10.3%
2.3%
43%
Hang lung Group (2)
$42.05
$52.28
80%
110%
60.4%
12.0%
9.8%
7.0%
37%
Henderson land
Development
$46.20
$82.77
56%
84%
22.9%
14.4%
8.4%
14.6%
66%
Wheelock (3)
$31.90
$81.98
39%
64%
24.9%
13.3%
11.2%
17.4%
59%
Note: prices and position sizes as of april 30, 2014. all ﬁgures in Hong Kong dollars.
(1) reported Net asset Value as of 12/31/13.
(2) leasing growth excludes disposal of non-core properties. Overall leasing growth was 8%.
(3) Excludes Wharf's net debt (non-recourse to Wheelock) and Wheelock properties' net cash.
(4) annualized; includes dividends
Source: Bloomberg, Company reports
8
(Unaudited)
long-term track record and significant insider ownership.
as value investors, the wide gap between intrinsic value
and stock price is very attractive, particularly compared
to the U.S. where markets are at or near record highs.
had $1.6 trillion in assets under management and $27.9
trillion of asset under custody and/or administration, as
of March 31, 2014. The businesses seem separable and
more valuable on a sum-of-the-parts basis. The asset
management business with its iconic Dreyfus Funds and
stable of boutique managers could certainly be a standalone entity or would seem to attract interest from
strategic or financial buyers. BK has been in the news
recently given more shareholder scrutiny of its operating
efficiency. recently, there have been news reports that
BK could be looking to sell its Corporate Trust unit, which
has been a detractor due to the run-off of high-margin
securitizations.
poTenTiAl, bUT noT necessARy, cATAlysTs
You can hardly pick up a newspaper or turn on the news
these days without seeing another mergers and
acquisitions (“M&a”) transaction headline. Global M&a
volume, per Bloomberg data, increased 51% year-to-date
through april and 118% in april alone. activity was strong
in all of the major regions, with year-to-date volume up
45% in the U.S., 50% in Europe and 80% in asia. Headlines
of activities by various activist
symantec
investors too are all the rage. at
“except in the case of risk
Third avenue, we avoid activism
Symantec operates in security
arbitrage, we do not invest software and iT storage
unless it is necessary. We would
rather discuss opportunities to
management businesses with its
expecting an imminent
create shareholder value with a
well-known brands, such as
catalyst, as typically such
company’s management team
Norton. recently, it has
a catalyst would preclude
first, rather than be paper tigers.
experienced
management
However, we have and will engage
turnover,
with
its
second CEO
the kind of pricing, i.e.,
in activism if the need arises. if we
terminated by the Board in as
discount to net asset
put
on
our
investment
many years. The surprise
value, that we look for.”
banker/private equity-type hats,
announcement was due to what
we see an array of shareholder
appears to be slower than
value creating opportunities that
expected execution of a
could be generated amongst our portfolio companies.
previously announced new strategy. The company had
We have outlined a few examples below. Except in the
already started to embark on its new strategy to improve
case of risk arbitrage, we do not invest expecting an
growth capabilities, including restructuring the sales force
imminent catalyst, as typically such a catalyst would
and eliminating duplicative organizational and operating
preclude the kind of pricing, i.e., discount to net asset
structures. While not central to our original investment
value, that we look for. Could any of these activities come
thesis, we have long thought that the company’s
to bear? We do not know for certain, but fortunately we
businesses seem separable and saleable. Strategic firms
do not need them to happen for the investments to be
could be potentially interested in its various businesses,
successful over the long term.
though it could also be interesting to private equity firms
given the strong cash flow characteristics of the business.
bank of new york mellon
BNY Mellon (“BK”) participates in two businesses – asset
management and investment servicing. The company
9
(Unaudited)
Toyota industries
new outside directors added. His focus is on enhancing
the existing business via organic growth and reducing
leverage, whereas the prior CEO’s focus was more about
empire building. Despite the weakness in the steel
business due to macroeconomic challenges, posco has a
substantial non-steel business. For example, via its stake
in Daewoo international, posco participates in the profits
of Daewoo’s Myanmar gas field which is just starting to
ramp up. The field began production in June 2013 and
was producing only 20% of potential production capacity
in the fourth quarter of 2013. posco expects the project
to provide 150 billion KrW in pre-tax income in 2014,
growing to KrW300 billion in 2015. posco also has
potential growth opportunities from its Engineering and
Construction business and opportunities to divest noncore assets. recent media reports suggest the company
seeks to raise 2 trillion won by selling assets and is seeking
to make an initial public offering of some of its affiliates
including posco Energy, posco Engineering and posco
Specialty Steel.
perhaps because it has “Toyota” in its name or perhaps
because it spun out Toyota Motor years ago, many people
view Toyota industries as largely an automotive parts type
company. it is, but also derives around 50% of operating
income from its material handling equipment business,
where it is the global market share leader. The company
also has a logistics segment and a textiles machinery
business. The company is profitable and growing and,
furthermore, has an attractive investment securities
portfolio, the value of which exceeds Toyota industries’
current market value. The businesses are separable but
not likely saleable (perhaps if it were not a Japanese
company). Changes in corporate governance are afoot in
Japan. The government is working on new corporate
governance rules requiring independent directors, or in
the absence of that, an explanation of deviations. Further,
Japan is working on a Stewardship Code to encourage
institutional investors to disclose their proxy votes and
engage in dialogue with companies on issues that could
impact long-term share value. a new stock index, the JpXNikkei 400, highlights this new focus. To be included in
the index, companies must meet certain corporate
governance and profitability requirements.
looking forward, we remain pleased with the current
portfolio and optimistic about prospects for future
growth. at a p/B of 0.88, as of april 30, 2014, the Fund is
undervalued compared to the MSCi World index at 2.08.
We look forward to writing you again after the third fiscal
quarter of 2014. Thank you for your continued interest
and support of the Fund.
posco
posco recently experienced a change in management.
The new CEO, Oh-joon Kwon, started in March 2014. He
had previously been the Chief Technical Officer. His stated
mission is to reform the company and, to that end, four
out of five board members have been replaced and three
Sincerely,
Third avenue Value Fund Team
ian lapey, lead portfolio Manager
Michael lehmann
Yang lie
Victor Cunningham
10
Third Avenue small-cap Value fund
(Unaudited)
67,864 shares
Electro Scientific industries, inc.
Common Stock (“ESi Common”)
25,940 shares
J&J Snack Foods Corp. Common
Stock (“J&J Snack Foods Common”)
201,793 shares
Orbital Sciences Corp. Common
Stock (“Orbital Common”)
199,289 shares
pioneer Energy Services Corp.
Common Stock (“pioneer Common”)
new positions
230,241 shares
236,800 shares
actuant Corp. Class a Common
Stock (“actuant Common”)
Segro plC Common Stock
(“Segro Common”)
200,997 shares
159,500 shares
Cooper Tire & rubber Co.
Common Stock (“Cooper Tire
Common”)
Wacker Neuson SE Common
Stock (“Wacker Common”)
51,477 shares
Weight Watchers international,
inc. Common Stock (“Weight
Watchers Common”)
During the quarter, Third avenue Small-Cap Value Fund
(“Small-Cap Value” or the “Fund’) initiated seven new
positions and eliminated its holdings in 11 companies. at
april 30, 2014, Small-Cap Value held positions in 79
common stocks, the top 10 positions of which accounted
for approximately 22% of the Fund’s net assets.
number of shares
or Units
79,947 shares
DigitalGlobe, inc. Common Stock
(“DigitalGlobe Common”)
140,089 shares
Exlservice Holdings, inc. Common
Stock (“Exlservice Common”)
167,865 shares
Forestar Group, inc. Common
Stock (“Forestar Common”)
657,466 shares
Genpact ltd. Common Stock
(“Genpact Common”)
125,063 shares
prosperity Bancshares, inc.
Common Stock (“prosperity
Common”)
positions eliminated
126,959 shares
american Eagle Outfitters, inc.
Common Stock (“american Eagle
Common”)
113,200 units
ap alternative assets rDUs
(“ap alternative Units”)
25,879 shares
Bel Fuse inc. Class B Common
Stock (“Bel Fuse Common”)
216,449 shares
Cloud peak Energy, inc. Common
Stock (“Cloud peak Common”)
The Small-Cap team’s efforts during the quarter
continued to bear fruit with the addition of seven new
names to the portfolio. Two of these new positions,
Forestar Common and Cooper Tire Common, were
identified by colleagues from our sister funds. The team
exited eleven positions during the period, reflecting our
view that the holdings no longer provided an adequate
margin of safety or had limited growth prospects over the
coming years. a discussion of selected activity, used to
illustrate our investment approach, follows below.
AcTUAnT
We view Wisconsin-based actuant as an industrial “miniconglomerate” distinguished by its operational strength,
broadly respected brands and deep distributor
relationships. Historically acquisitive, the company
manufactures highly specialized industrial products,
everything from hydraulic tools for the construction, rail
and power generation industries, to pipeline connectors
and concrete tensioners for the oil and gas industry, to
smaller motion control systems used by truck, auto and
portfolio holdings are subject to change without notice. The following is a list of Third avenue Small-Cap Value Fund’s 10 largest
issuers, and the percentage of the total net assets each represented, as of april 30, 2014: HCC insurance Holdings, inc., 2.67%;
axiall Corp., 2.63%; JZ Capital partners, ltd., 2.51%; Unifirst Corp., 2.15%; Emcor Group, inc., 2.05%; progress Software Corp.,
2.04%; Tetra Tech, inc., 2.01%; World Fuel Services Corp., 1.94%; legg Mason, inc., 1.94% and Enersys, inc., 1.92%.
11
Third Avenue small-cap Value fund (continued)
(Unaudited)
•
agricultural vehicle Original Equipment Manufacturers
(“OEMs”). Management’s efforts to diversify the business
have expanded the company’s presence into 30
countries, dampened the cyclicality of many of its
industrial end markets and provided an entre into the
rapidly evolving energy sectors where long-term growth
prospects appear robust.
The company’s many strengths, which we feel vastly
outweigh any of the noted setbacks, along with recently
sluggish share performance, could easily attract the
attention of a strategic or financial buyer.
actuant’s shares appear to have fallen out of favor,
however, owing to (i) sluggish top-line results in the
industrial segment and disappointing margins within the
energy group, as reported in the company’s most recent
fiscal quarter; (ii) lingering doubts about the sustainability
of acquisition-led growth (management recently had to
write-down some of the goodwill on the company’s
balance sheet); and (iii) uncertainty created by the start
of a recent management transition.
genpAcT And eXlseRVice
Fund Management added to its growing sub-portfolio of
Business process Outsourcing (“BpO”) companies with
the acquisition of Genpact Common and ExlService
Common. The investment cases, in a nutshell, are similar:
both company’s stocks underperformed the broader
equity markets in 2013 as management’s forecasted
growth, while solid, did not meet relatively high
expectations, thus, disappointing investors. Genpact,
founded as the captive offshore outsourcing business for
General Electric, has the added challenge of finding new
revenue sources as it weans its way off of its former
parent. However, both BpO companies benefit from
healthy longer term demand trends for outsourcing, with
services ranging from accounting functions, supply chain
and procurement assistance as well as information
technology services. Each company enjoys long-term
customer contracts that generate a high proportion of
recurring revenues. Strong balance sheets and ample
cash generation provide the financial flexibility we seek
in our investments as well as a meaningful cushion should
business conditions deteriorate. in one sign of that
flexibility, soon after we initiated our position in Genpact
Common, the company announced a Dutch auction
tender offer for nearly 7.5% of its shares outstanding,
ultimately completed at a 20% premium to the Fund’s
cost basis. The Fund acquired shares of Genpact and
ExlService at 7%+ free cash flow yields, equating to 20%
discounts from our mid case estimates of Net asset Value.
While we acknowledge these challenges, we believe the
valuation has been overly-discounted in the public
markets, that recent results are not indicative of longerterm prospects and that markets ignore a number of
important elements relevant to an investment in the
company’s stock, including:
•
Management has generally been viewed as good
capital allocators and has not been afraid to change
course when the circumstances so required. For
example, they recently divested the company’s
lower-margin, commoditized electrical business at a
reasonable valuation, while using the sale proceeds
to both pay down debt and repurchase stock at what
we consider attractive levels.
•
The company’s financial strength, the best in years,
ought to provide wide flexibility for growth initiatives
as well as for returns of capital via share repurchases
and dividends.
•
The company consistently generates high quality
earnings as reflected by the company’s prodigious
cash generation. Management’s internal incentives,
anchored to cash generation and returns on capital,
only serve to reinforce this characteristic.
at current levels, which approximate the Fund’s cost
basis, shares trade at a reasonably attractive 7.5%
free cash flow yield (pre-acquisition spending), a
level which we feel provides adequate downside
protection and translates to a roughly 15% to 25%
discount to intrinsic value.
12
(Unaudited)
pRospeRiTy bAncsHARes
estimates. Should business conditions remain unchanged
in the periods ahead, we believe prosperity Common has
limited downside. in spite of the currently depressed
earnings, prosperity continues to earn a respectable 8%
to 9% return on equity, a reasonable level given the
relatively low-risk approach embraced by management.
The addition of prosperity Common expanded the Fund’s
bank basket to six holdings. Houston-based prosperity
Bancshares is a bank holding company operating with a
traditional community banking mindset, a far cry from
the behemoth money center banks that have been
exposed as too big to manage, too big to regulate and
just plain too conflicted. it appears that management
runs a tight ship: the company has been profitable every
year since its formation, even during the massive
economic downturn in Texas in the late 1980’s and during
the 2008/2009 financial crisis. Historically the company
has grown by making opportunistic acquisitions of banks
and branches around Texas. During 2008, for example,
the bank acquired $3.6 billion of deposits and certain
assets of Franklin Bank from the Federal Deposit
insurance Corporation, as receiver. Management’s wellmanaged, bolt-on acquisition strategy along with superb
efficiency and conservative underwriting have produced
an enviable track record, with adjusted book value1
compounding at mid-teens rates over the past five, ten
and fifteen years. Our analysis suggests that management
has an ample runway to continue doing more of the
same. prosperity’s operational record, based on asset
quality, capital adequacy and profitability recently drew
the attention of Forbes Magazine2, which named it as
“america’s Best Bank.”
disposiTions
as noted above, the Fund’s dispositions reflect the team’s
view that valuations or fundamentals had changed to a
degree that put capital at risk of permanent impairment,
thus necessitating a sale. With few exceptions, the sales
came on the heels of a disciplined process as well as
profitable outcomes. For example, we sold Orbital
Common after a little more than a year’s time while
nearly doubling the Fund’s investment. Subsequent to
our sales, Orbital became the subject of a takeover bid
by a strategic acquirer whose offer price represented only
a modest premium above the Fund’s last sale prices,
corroborating the team’s valuation work. The Fund also
benefited mightily from its two year holding of J&J Snack
Foods Common. Originally purchased at approximately
11x operating income, the shares traded closer to 17x
operating income by the time the Fund exited. Combined
with a 25% increase in pre-tax earnings during that
period, the impact on the share performance was
explosive. We chose to take advantage of the huge
expansion in the earnings multiple, which we felt was
unjustified by likely longer-term business economics or
private market values for like businesses.
at their present valuation, which approximates 15x 2014
earnings, the shares may not appear obviously
undervalued. We note, however, that prosperity’s current
earnings power is significantly depressed, we think more
temporarily than not, by the presence of a high
proportion of low-rate assets, e.g., government securities
now on the books. Should interest rates and economic
conditions gradually “normalize,” the company’s earning
power will undoubtedly grow and the true multiple of
earnings will be a much more favorable 12x-13x, per our
1
2
pRogRess RepoRT – yeAR-To-dATe peRfoRmAnce
For the year-to-date period ending in april 30th the
Fund’s institutional Class returned-1.09%. its benchmark,
the russell 2000 Value index returned -0.84%. The table
below outlines the top contributors and detractors for
the period.
For computational purposes, our analysis adjusts book value by adding back dividends.
prosperity had won the Forbes award in 2011 as well.
13
(Unaudited)
Top contributors
Top detractors
Susser Holdings
progress Software
Compass Minerals
Blucora, inc.
iCF international
rofin-Sinar Technologies
Big lots
Dundee Co.
appreciated, at least thus far in 2014. The share price
decline ought to be viewed as a widening of an already
attractive discount: from an analytical standpoint
investors are getting many of Dundee’s underlying
businesses and investments for “free”. accordingly, we
added significantly to our position as the share price
declined.
positive contributions to the Fund were led by the
announced takeover in late april of Susser Holdings at a
looKing foRwARd
nearly 40% premium to market prices. The takeover is
The Fund’s performance is illustrative of a broader
bittersweet: we are happy to have a knowledgeable
phenomenon pervasive across U.S. equity markets, and
buyer confirm our investment thesis3 and to attain what
more so in the small-cap space. as a result of the five year
we believe is full value for the stock, but sorry to see a
bull market, share prices have advanced ahead of the
high-quality compounder go away. in other cases, prior
developments of the actual
period laggards such as Compass
Common and Big lots Common, “As value investors focused on businesses. investors seem to
have started to realize this and as
returned to investor favor based
the assets, balance sheet,
a result, broad based equity
on improving fundamentals at the
indices are flattish to negative.
management and actual
underlying company level.
investors have also become highly
businesses, as opposed to
perhaps the best part of our
sensitive to news, more
headline earnings numbers, specifically over-reacting to
performance report this period
relates to the Fund’s detractors, a
(seemingly) negative news. Such
we find these market
group of stocks that we continue
behavior generates opportunities
environments generate
to view favorably and that now
for the Fund, as we continue to
offers very attractive risk/reward
interesting investment
see the prices of solid businesses
characteristics. The team’s
falling dramatically. We cannot
opportunities.”
expectation is that the Fund will
help but welcome this dynamic.
benefit
as
company
as value investors focused on the
fundamentals, as opposed to investor sentiment, become
assets, balance sheet, management and actual
more of a driver of equity markets. Consider the example
businesses, as opposed to headline earnings numbers,
of Dundee, a holding company based in Toronto, Canada
we find these market environments generate interesting
with wealth management, real estate and resources
investment opportunities. Examples abound. in fact, as
holdings. Dundee’s share performance has been weak in
discussed above, some of the recent additions to the
the most recent period, though it is hard to pinpoint any
Fund came about as a result of such dislocations.
single business line or set of data points that accounts for
actuant’s share price dropped substantially as
that performance. While the company’s real estate
management announced moderation in the pace of the
exposure may weigh on the shares, its investments in
company’s growth. Genpact’s shares also suffered as a
resource-based and precious metals companies likely
result of lower forecasts. in both cases, market reactions
3
See the Fund’s letter dated July 31, 2013 for a discussion of our investment in Susser Common.
14
(Unaudited)
focused on short term earnings as opposed to longerterm business economics. activity during the quarter
helped position the Fund to benefit from these
opportunities. The Fund holds high quality companies
with attractive valuations, both from an absolute and
relative to benchmark perspective. in investing, you want
to be long (to own) what is in short supply. Today,
investor/speculators seem to be short on patience. as
such, we counsel patience. Our experience suggests that
patience pays, particularly when in short supply.
We look forward to writing you again when we publish
our Third Quarter report dated July 31, 2014. Thank you
for your continued support.
Sincerely,
Third avenue Small-Cap Value Fund Team
Curtis r. Jensen, lead portfolio Manager
Tim Bui
Charlie page
15
Third Avenue Real estate Value fund
(Unaudited)
Amount
positions eliminated
We are pleased to provide you with the Third avenue real
Estate Value Fund’s (the “Fund”) report for the quarter
ended april 30, 2014.
29,880,091 shares
Commonwealth property Office
Fund Common Stock
(“Commonwealth Office
Common”)
QUARTeRly AcTiViTy
292,265 shares
First potomac realty Trust
Common Stock (“First potomac
Common”)
16,127,367 shares
Taylor Wimpey plC Common
Stock (“Taylor Wimpey
Common”)
1
The following summarizes the Fund’s investment activity
during the quarter:
Amount
new positions
270,000 shares
Gecina S.a. Common Stock
(“Gecina Common”)
4,928,748
inmobiliaria Colonial S.a. rights
(“Colonial rights”)
950,000 shares
pHH Corp. Common Stock (“pHH
Common”)
7,062,422 shares
WM Morrison Supermarkets plC
Common Stock (“Morrison
Common”)
4,261
Weyerhaeuser Co. $28 put
Options Expiring 5/17/14
positions increased
13,493,849 shares
Dexus property Group Common
Stock (“Dexus Common”)
€4,000,000
iVG Finance B.V. Convertible
Bonds due 2017 (“iVG Bonds”)
2,200,000 shares
Millennium & Copthorne Hotels
plC Common Stock (“Millennium
Common”)
249,882 shares
post properties inc. Common
Stock (“post Common”)
832,386 shares
Starwood Waypoint residential
Trust (“Starwood Waypoint
Common”)
poRTfolio AcTiViTy
activity during the quarter included unique investments in
common stocks, distressed bonds, rights offerings, spinoffs and options – illustrating our persistent efforts to
employ our investment process to seek value in real estate
and real estate-related securities. New positions during the
quarter include three common stocks (Gecina Common,
pHH Common, and Morrisons Common), Colonial rights,
and put Options on Weyerhaeuser Common.
Gecina is a French real estate investment trust (“rEiT”)
with a diversified portfolio of 11 million square feet of
office and retail space and 7,700 apartments, as well as
healthcare and student housing assets. Gecina’s highquality asset portfolio is predominantly located in paris.
The company is conservatively financed, with a loan-tovalue ratio below 40%. Gecina Common has persistently
traded at a discount to NaV largely due to the perceived
overhang in the shareholder structure and
management’s lack of focus. Gecina hired a new
management team in 2013 and changed its strategy to
focus more on value creation as opposed to dividend
yield. Management is in the process of repositioning the
portfolio holdings are subject to change without notice. The following is a list of Third avenue real Estate Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of april 30, 2014: Newhall Holding Co. llC,
Class a, 4.88%; Forest City Enterprises, inc., Class a, 4.15%; Songbird Estates plC, 3.93%; Cheung Kong Holdings, ltd., 3.66%;
Weyerhaeuser Co., 3.47%; lowe’s Cos., inc., 2.90%; First industrial realty Trust, inc., 2.90%; Hammerson plC, 2.88%; Westfield Group, 2.80%; and Wereldhave NV, 2.52%.
1 investment activity excludes currency hedges.
16
Third Avenue Real estate Value fund (continued)
(Unaudited)
financial advisors to pursue a sale of the fleet business,
mortgage business, or both. Shortly thereafter, we
initiated a position in pHH Common at a discount to NaV
as we believe the value of the fleet business is not
properly reflected in the share price and that there is a
high probability that the two businesses will be separated
to realize value.
company as a paris office specialist. a Blackstone joint
venture recently gained control of 23% of the company
from purchasing a loan which was secured by the block
of Gecina’s shares (which was part of the perceived
“overhang” on the stock) and elected three
representatives to the board. We expect Blackstone’s
presence on the board to act as an additional catalyst to
refocus the portfolio, divest non-core assets, and
monetize some of the embedded value in the portfolio.
Of note, Gecina has €900mn of high street retail assets
in paris, much of which is on the Champs-Élysées. The
company also owns a €3.2bn apartment portfolio in paris,
a €1bn healthcare portfolio, and a rapidly growing
student accommodation portfolio, which could be sold
or spun out as it achieves scale.
WM Morrison Supermarkets plC (“Morrison”) is the
fourth-largest grocer in the UK operating over 450 stores
across the country that generate over £17bn of sales
annually. in addition to its core retail operations, Morrison
owns approximately 90% of its stores. The UK grocery
segment has been declining steadily over the past several
years due to a perfect storm of rising market share of
discounters, perceived changing shopping habits and the
impact of the downturn. as a result and following the
announcement of new round of price wars among big
grocers, Morrison’s shares have declined significantly this
year. During the quarter we took advantage of this market
dislocation and initiated a position in Morrison’s common
stock as we believe the company trades at a significant
discount to its liquidation value. Morrison’s owned real
estate has a book value of ~£9bn compared to its £7bn
enterprise value. The company’s owned stores tend to be
smaller than peers at an average size of approximately
45k sf / store, making them more desirable for alternative
use. in our view, Morrison is likely to unlock value through
the monetization of its real estate assets. in March, the
company announced the results of its strategic review
and outlined a repositioning focused on free cash flow
generation. it also announced it will be monetizing up to
£1bn of owned real estate. Furthermore, the company is
an attractive take-private candidate due to its low
leverage and real estate portfolio.
pHH Co. is a US-based specialty finance company that
operates two distinct businesses as it provides mortgage
origination and servicing activities as well as fleet
management services in the US and Canada. Spun out of
Cendant (now avis) in 2005, pHH is one of the largest
providers of outsourced, private-label mortgage
origination services. it is also the 8th largest mortgage
servicer in the US in a space that we believe could be ripe
for consolidation. The company’s fleet business provides
fleet management services to a number of Fortune 500
companies and is a dominant player in the space with
significant market share. The Fund had previously owned
pHH Common originally purchasing the shares after it
was spun-out at a price that represented a discount to a
conservative estimate of NaV and later sold (at a profit)
when the share price more closely reflected the
underlying value of the businesses. Nearly 10 years later,
the shares look interesting once again as pHH Common
has languished recently in a lackluster mortgage
origination environment, and the company has been
under pressure by activists to realize value for
shareholders by selling or spinning off the fleet
management business as a result. initially, management
had been resistant to the idea; however, in March the
company announced that it had retained legal and
as outlined in detail in last quarter’s letter, The Fund
acquired Colonial Common in anticipation of participating
in the company’s €1.3 billion rights offering, which would
de-lever it balance sheet and set the company on a clear
path to growth. During the quarter, Colonial distributed
the rights to shareholders. Each right allowed the owner
17
(Unaudited)
poRTfolio posiTioning:
to purchase 13 shares of Colonial stock for €0.43 per
share. The rights traded publicly for 10 days. The Fund
took advantage of market mispricing by purchasing 1.4
million additional rights at a substantial discount to
intrinsic value. after quarter-end, the Fund exercised its
4.9 million rights and acquired nearly 65 million
additional shares of Colonial Common.
The Fund ended the quarter with the following
allocations: North america, 40%; United Kingdom, 16%;
asia-ex Japan, 13%; australia, 6%; Europe, 6%; and Cash
and equivalents, 20%. as outlined in last quarter’s letter,
the Fund’s invested capital remains concentrated in four
“pockets” of the real estate universe that still offer
tremendous value including:
During the quarter, Weyerhaeuser’s stock price declined
in value for what we believe to be non-fundamental
reasons, allowing the Fund to implement an options
strategy that it has frequently used in the past: writing
put options on existing or prospective holdings. in this
case, the Fund wrote put options on Weyerhaeuser
Common at $28 per share with a May 2014 expiry,
collecting approximately $1 per share in premium. if the
stock price falls below $28 prior to the put option
expiring, we are willing to add to the Fund’s position (at
a net price of $27 per share). if not, the premium received
represents nearly a 20% annualized return on cash.
(i)
Companies that have entitlements for new
developments in highly desirable markets along with
the balance sheets and management teams
necessary to provide new development as demand
for new product returns (e.g., Forest City Enterprises,
Westfield Group, Brookfield asset Management, and
Songbird Estates).
(ii) Companies that have strong ties to the U.S.
residential markets which are in the middle stages
of a long-awaited recovery and have the balance
sheets to withstand any sort of near-term volatility
(e.g., Newhall land, Weyerhaeuser, lowe’s, and
Brookdale).
The Fund also added to a number of other existing
positions during the quarter including: iVG immobilien
Bonds, Starwood Waypoint Common, Millennium
Common, post Common, and Dexus Common. Dexus, an
australian rEiT that is the pre-eminent owner of office
assets in australia, acquired Commonwealth property
Office (which was also a Fund holding) during the quarter
at a premium to net asset value and the Fund’s cost basis.
Dexus offered Commonwealth shareholders an option of
(i) cash or (ii) a combination of cash and stock. The Fund
elected to receive a combination of cash and stock as this
allowed the Fund to crystalize the gains on a portion of
the investment in Commonwealth while increasing the
Fund’s holdings in Dexus at a price that represented a
discount to a conservatively estimated net asset value for
the combined companies. The Fund also exited Taylor
Wimpey Common (due to valuation) and First potomac
Common (for portfolio management reasons) during the
quarter.
(iii) Smaller and mid-sized property companies that are
viewed as strategic platforms and could be acquired
by larger competitors or private equity funds as M&a
activity continues to accelerate back to more normal
levels (e.g., First industrial, Hammerson, Segro, post
properties, and Tanger Outlets).
(iv) Special Situation investments, most notably in
recently recapitalized companies that now have the
balance sheets and management teams necessary
to increase corporate value (e.g., Colonial, iVG
immobilien, Commonwealth rEiT (US), and Trinity
place Holdings).
The Fund continues to have higher than average cash
balances which should (i) provide a cushion to the extent
we experience any market dislocations, (ii) provide ample
dry powder and allow the Fund to increase its holdings
18
(Unaudited)
off its shopping center portfolio before year-end. after
the spin-off, Vornado shareholders will own a stake in (i)
a standalone shopping center rEiT that will own a highly
leased portfolio, provide very predictable cash flow
streams and offer some redevelopment potential and (ii)
a more focused rEiT that will own one of the highest
quality real estate portfolios in the US with class-a office
and retail in New York City and class-a office space in
Washington D.C., along with industry-leading growth
potential, given the below market leases in NY, vacancies
in DC, and development sites in Manhattan (e.g., 220
Central park South). Since the streamlining began and the
spin-off was announced, Vornado’s stock price has
responded favorably, but we still believe the value of
“spin-co” and “old-co” is worth more than what the
market is currently valuing Vornado at today.
Consequently Vornado remains a meaningful position in
the Fund.
in existing positions and establish new positions at more
attractive prices during a period of market turbulence,
and (iii) selectively increase existing positions and add
new names to the portfolio as prices allow.
spin-offs:
Four of the Fund’s portfolio companies recently
announced spin-offs of subsidiary companies to take
place in 2014. We also expect several other real estate
companies will be spinning-off portions of their portfolios
before year-end. Using history is a guide, spin-offs
typically yield superior results.
The concept of a spin-off is simple: a company that is
involved with two or more disparate business lines is
either (i) not getting credit for the value of its underlying
businesses or (ii) unable to dedicate the resources
necessary to allow for one of the businesses to be
appropriately supported, so the company elects to
separate the various businesses by spinning-off the
subsidiary to existing shareholders as a standalone
company. More often than not, this type of transaction
is conducted via a tax-free distribution where a
shareholder receives stock in the new entity (“spin-co”)
and retains an investment in the predecessor company
(“old-co”). after the spin-off is effectuated, each entity
will typically have its own management team, business
plan, capital allocation priorities, and capital structures in
order to support its operating and growth initiatives. This
tends to attract “dedicated” investors and results in more
focused companies that seem to be more disciplined
from an operational and capital allocation standpoint,
which results in higher multiples for each standalone
business. as a result, the combined market value of “spinco” and “old co” tends to be greater than the perceived
value of the original company prior to the separation.
Other spin-offs by the Fund’s portfolio companies include
(i) Westfield Group has announced that it will spin-off its
australian shopping center business as a standalone rEiT
and concentrate the remaining businesses around its US
and UK malls and development projects, (ii)
Weyerhaeuser will be spinning-off its homebuilding
subsidiary to shareholders and become a more focused
forest products company that will own the highest quality
timberland portfolio globally, and (iii) rayonier
announced it will be separating its cellulose fibers
business as a standalone company that will be named
rayonier advanced Materials, leaving rayonier inc. as a
company with a quality timberland portfolio with
significant higher-and-better-use potential in the
Southeast portion of the United States.
Spin-offs have picked up across most industries and
sectors, but disproportionately so in the real estate space,
as the large and influential dedicated investor base
continues to reward those companies that keep things
simple by focusing on a single property type with a higher
multiple, and thus lower cost of capital, than more
diversified property companies. if the companies are
an example of this playing out now is the Fund’s
investment in Vornado realty Trust. The company
recently began simplifying its business, which started with
non-core asset sales and now includes an even more
transformative change as the company will be spinning
19
(Unaudited)
shareholder that now has board representation, it is not
inconceivable that they look to separate the two
businesses. also, recent underperformance might force
pHH to accelerate the divestiture or separation of the
mortgage and fleet businesses.
single-property type companies in single markets,
sometimes the multiple is even higher. part of this
premium multiple is due to more focused companies
achieving better results over time. another reason is likely
due to portfolio managers preferring to make property
type and geographic allocations on their own instead of
putting those decisions in the hands of the management
teams of their respective companies. They therefore are
willing to pay a higher price for those streamlined
companies.
Other market forces may create opportunities for the
Fund to buy shares in recent spin-offs. For example, when
index funds receive shares of “spin-co”, they are more
often than not forced to sell the
shares since the company is not
“when investing in common
included in their composite
That is not necessarily the case
at Third avenue. When investing
stocks, we value the company’s index. Other actively managed
funds may be forced sellers as
in common stocks, we value the
assets, subtract all of the
they have restrictions in place on
company’s assets, subtract all of
the potential liabilities (both on potential liabilities (both on and number of holdings, limitations
and off the balance sheet) and off the balance sheet) and buy at on market cap, or other
stipulations as to what classifies
buy at meaningful discounts to
meaningful discounts to the net as
a “real estate” company. This
the net asset value remaining
asset value remaining for
requirement to sell typically
for shareholders. We have not
shied away from rolling up our shareholders. we have not shied creates downside pressure on
the shares of spun-off companies
sleeves and doing the work
necessary to understand some away from rolling up our sleeves and creates opportunities for
of the more diversified and and doing the work necessary to knowledgeable investors to
spin-off shares at
complex real estate and real
understand some of the more acquire
discounted prices. We expect
estate related companies
diversified and complex real
the Fund may have some
globally. Often these companies
opportunities to put some of its
trade at a discount to the sum
estate and real estate related
cash to work buying additional
of the parts of the various
companies globally.”
shares of spin-offs from current
businesses and, therefore,
portfolio holdings as well
comprise a large portion of the
as others.
investments in the Fund today. as a result, this push to
separate business and portfolios that is currently taking
We thank you for your continued support and look
place in the real estate space could be a big windfall for the
forward to writing to you next quarter.
Fund. it is our expectation that other companies in the
Sincerely,
Fund will announce spin-offs or divest non-core businesses
Third avenue real Estate Value Team
to surface value over the next 12-18 months. in fact, two
additions to the portfolio this quarter are prime candidates
Michael Winer Co-lead portfolio Manager
for upcoming spin-offs. as outlined above, Gecina is a
Jason Wolf Co-lead portfolio Manager
French rEiT that owns a high-quality office portfolio in
ryan Dobratz
France and also controls a very valuable collection of
residential properties in paris. With Blackstone as a large
20
Third Avenue international Value fund
(Unaudited)
specific actions, evolving industry dynamics and a wide
variety of resource conversion opportunities much more
so than a buoyant equity market or favorable
macroeconomic conditions.
Dear Fellow Shareholders,
in the most recent quarter, Third avenue international
Value Fund (the “Fund”) established two new positions,
increased one existing position, reduced 30 existing
positions and eliminated four positions.
new investments
Over recent months, many of our fellow shareholders
in the first quarter of 2011, the price of copper peaked
have asked what types of changes they should expect to
at roughly $4.62 per pound. During the first quarter of
the Fund following amit’s departure. First and foremost,
2014, the price of copper hit a low of approximately
please be assured that the process remains the same.
$2.92. a 37% drop over the three-year period is
The concentrated approach to long-term fundamental
something to note in itself but let us add some back of
value investing is embedded
the envelope math to illustrate
very deeply within the fiber of
“it is our hope that readers will what this means to a mining
Third avenue. in truth, it is the
company. in today’s world, the
appreciate that the fund is a
only thing we know how to do.
average copper mine produces
We also assure you that Third
a pound of copper for roughly
collection of idiosyncratic
avenue’s unique approach to
$1.50 of cash costs (net of
investments in which favorable credits for byproducts). if one
value investing, which results in
outcomes for our investments were to include the costs to
highly differentiated portfolios,
will persist as the driving force
are dependent upon company keep the mine running over
behind the Third avenue
time (sustaining capex), the
specific actions, evolving
international Value Fund. i,
figure rises to roughly $2.00 per
Matt Fine, have spent my
industry dynamics and a wide pound (again, net of credits for
entire professional career at
but let’s give them
variety of resource conversion byproducts),
Third avenue – i was raised
a break and use $1.50 for the
opportunities”
here, in a manner of speaking –
moment. The implication is that,
and have been a member of
at $4.62 per pound of copper
the Fund’s management team for more than a decade.
the average mine, which has cash costs of $1.50 per
Suffice it to say the approach will live on. That said, as we
pound would have had a cash margin per pound of
enter the final weeks of our manager transition, we have
roughly $3.12 in early 2011 only to see that margin
chosen to dedicate this shareholder letter exclusively to
reduced to $1.42 with copper at $2.92, a theoretical 54%
the portfolio and the activity within. in the course of this
decline in cash profit. in reality, the story is materially
letter, we will cover in detail two new investments, four
worse, as costs have risen significantly over the threeexited positions and five existing positions. it is our hope
year period making the profit decline even sharper. Stock
that readers will appreciate that the Fund is a collection
prices of companies in the industry have reacted as badly
of idiosyncratic investments in which favorable outcomes
as you might expect.
for our investments are dependent upon company
portfolio holdings are subject to change without notice. The following is a list of Third avenue international Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of april 30, 2014: Straits Trading Co., ltd.,
8.73%; Netia S.a., 6.79%; Weyerhaeuser Co., 3.97%; Sanofi, 3.79%; White Mountains insurance Group ltd., 3.46%; Munich re,
3.44%; Hutchison Whampoa ltd., 3.28%; allianz SE, 3.12%; pargesa Holding S.a., 3.11%; and Titan Cement Co., S.a., 3.00%.
21
Third Avenue international Value fund (continued)
(Unaudited)
quartile of the global cost curve, we believe Capstone
offers substantial downside protection. it is also worth
noting that, with the global dearth of mid-tier copper
projects in low-risk jurisdictions, Capstone’s portfolio
carries substantial scarcity value and could be attractive
to a number of strategic buyers; investors should not
overlook the company’s prospects for resource
conversion. The combination of Capstone and
antofagasta now comprises approximately 5% of the
portfolio by weight.
However, we have now arrived at a price for copper at
which a small but material portion of the industry is
unable to mine the metal for less than the price at which
the metal sells. While the metal could certainly decline
more in the short term, we believe the probabilities of
medium-term price increases materially outweigh the
probabilities of declines. Yet, as we sifted through this
industry, one in which we have historical experience, our
hope was to identify select companies that are cheap,
even assuming the price of copper stays right where it is,
and ones that are capitalized in a way that will sustain
them through periods of volatility.
Our second new position purchased during the quarter,
arcos Dorados, is the world’s largest McDonald’s
franchisee, holding the exclusive rights to own, operate
and grant franchises of McDonald’s restaurants in 20 latin
american countries. as we observed in our previous
quarterly letter, many emerging market economies and
currencies have faced significant headwinds; latin
america has been far from immune, and currencies
across the region have depreciated substantially since
2011. While all of arcos Dorados’ revenues are
denominated in a variety of local currencies, the company
reports its financial results in U.S. Dollars. Thus, local
currency weakness has had a severe negative impact on
arcos Dorados’ reported earnings and shares are down
some 60% over the past three years, as the depreciation
of most latin american currencies versus the U.S. dollar
has been a virtual one way street. What depreciating
currencies obscure, however, is arcos Dorados’
outstanding operating performance in local currency
terms, meaning before they are translated into U.S.
dollars, its reporting currency. Since 2011, the company’s
reported revenues have grown at a lackluster annual rate
of 5%, while reported EBiTDa growth has been essentially
flat. But in constant currency, arcos Dorados has grown
revenues and EBiTDa at very impressive annual rates of
15% and 12%, respectively. arcos Dorados’ depressed
valuation suggests that investors are not giving the
company credit for the high returns on capital it
continues to generate and the considerable increases in
business value it continues to create in constant currency
During the quarter, we initiated a second position in the
copper mining industry after having purchased shares of
antofagasta in the first quarter. Our new position is
Capstone Mining Corp., a mid-cap copper mining
company headquartered in Vancouver, British Columbia.
The company’s assets are located exclusively in politically
stable, mining-friendly jurisdictions in the americas and
the company is committed to operating solely in low-risk
geographies going forward. Capstone is, in a sense, a
project to build a mid-cap copper mining company by
strategically acquiring assets either undermanaged or too
small to be considered by larger mining companies. This
dynamic of acquiring underappreciated assets gives the
company a significant growth profile. its recent
acquisition of pinto Valley Mine is set to more than
double Capstone’s annual copper production in the
current fiscal year and has transformed the company.
importantly, the pinto Valley acquisition appears to have
been done at a very reasonable price and Capstone’s
growth has neither stretched its balance sheet nor
resulted in an expensive stock price; the company’s
balance sheet remains pristine post-acquisition, and
shares trade well below our estimate of net asset value
(“NaV”). We credit a strong and like-minded
management team with the company’s well-executed
acquisitions and its ability to grow while maintaining its
conservative financial position. Furthermore, with
producing assets that sit in the second-lowest cost
22
(Unaudited)
management. Small-scale share buybacks and increased
dividends were the response. While disappointing in its
scale, it can be said that some progress was made.
terms. investors are also overlooking an outstanding
management team, led by CEO Woods Staton; this team
has over time done an excellent job of restructuring the
company’s Mexican business, managing currency
exposure and coping with the challenges of doing
business in argentina and Venezuela in clever ways.
Furthermore, the long-term fundamentals of the latin
american market remain quite favorable; these
economies are home to rising incomes, a rapidly
expanding middle class and lots of young people – all
things that should be very good for arcos Dorados’ future
operating performance and, in turn, its shareholders.
as we write this letter, our initial asatsu investment thesis,
hinged upon what could be, is just as valid today as it was
years ago. The underwhelming approach to competing
within the advertising industry has persisted and the
company remains grossly overcapitalized. One might
rightly interpret our decision to sell as the team’s
resignation that there is a low probability of a satisfactory
outcome in the future. We may be proven wrong but that
is our sense of the probabilities today. Before turning
away from the discussion of asatsu, it is an opportunity
to note that there are many types of investment mistakes.
assuming we will continue to occasionally make
investment mistakes (a safe assumption), we prefer the
type in which we do not lose money and the primary cost
is the opportunity to have earned a satisfactory return on
our capital that was lost over those years. asatsu was this
type of mistake.
dispositions
During the quarter, we exited four positions. We will
devote much of this section discussing the disposition of
asatsu DK, a Japanese advertising company. it is
important to discuss investment mistakes as well as
successes. We acquired our first shares of asatsu DK in
2002, the Fund’s first year of operation. in a sentence,
our original thesis revolved around several attractive
dimensions: the company was grossly overcapitalized
with cash and securities, as an operating going-concern
in the highly competitive advertising industry it was
undermanaged and its portfolio of proprietary media
content could be turned into a profit center. Could
improvement be made in these areas of operations and
capital management, we had concluded the opportunity
to be quite attractive. in the ensuing years, several
members of our team visited with management, board
members, other large shareholders and peer investment
firms to exchange ideas and opinions. The advertising
industry went through cycles and the stock went up and
down. On several occasions the stock traded at a negative
enterprise value, meaning less than zero value was
imputed for all of asatsu’s operations, which comprise
one of the largest advertising agencies in Japan, the third
largest economy in the world. in recent years, Third
avenue and other shareholders redoubled efforts to
encourage a different approach to operational and capital
During the quarter we also disposed of both of our longheld gold mining positions, Newmont Mining and Kinross
Gold Corp. The deterioration of the price of gold over
recent years has not been kind to gold mining stocks, ours
included. a combination of a lack of confidence in our
own ability to predict an upward or downward
movement in the future price of gold and rising political
risks in indonesia and russia for Newmont and Kinross,
respectively, have contributed to our decision to sell.
These company and industry-specific factors combined
with the added attraction of realizing sizeable losses at a
time when we are mindful of neutralizing the tax impacts
of meeting Fund outflows associated with our portfolio
manager transition, made selling Newmont and Kinross
a fairly easy decision.
lastly, we exited our long-held position in Yuanta Financial
Holding Co. ltd. primarily based on the belief that we
have better uses for the capital in both new investment
23
(Unaudited)
similar transactions in austria and iceland would certainly
support this notion. While, the combination of Telefonica
Deutschland and E-plus would represent the largest
European wireless merger to date, and is thus receiving
heightened attention, the competitive landscape of the
German market should make the merger unusually
palatable from a regulatory perspective. The European
Commission is expected to rule on the merger in late
June. if the merger is approved, Telefonica Deutschland
will immediately conduct a large rights offering for the
purpose of funding the purchase of E-plus. We remain
optimistic that the merger will be approved. However, on
a status quo basis, meaning failing the completion of the
merger, Telefonica Deutschland remains an appealing
investment.
ideas as well as other investments already within the
Fund.
Our firm belief is that the result of all of this activity, both
the new investments and the redeployment of capital
from our exited positions, has strengthened the Fund in
important ways and improved its risk and return profile.
inside the portfolio
Turning to developments within our existing portfolio
holdings, we would like to share material developments
relating to a number of positions. in some cases, we have
made little mention of these positions since sharing our
theses at the time the investments were incepted. The
intention is to highlight a number of important
developments and provide some insight as to how these
investments have evolved. We will also share some
expectations looking forward.
With this backdrop, we have sized our position in
Telefonica Deutschland such that, if the merger is
permitted and the rights offering conducted, our
participation in the rights offering will make the
investment one of the largest in the portfolio. This is the
desired scenario and reflects our belief that the
combination of Telefonica Deutschland and E-plus
represents an extremely exciting investment proposition.
Telefonica Deutschland AG – We have owned Telefonica
Deutschland, the German wireless telecom services
provider, since the fall 2013. The investment outcome has
been positive over the roughly nine months of our
ownership. around the time this letter goes to print, the
company will pay its recurrent annual dividend, a yield of
nearly 8%. None of this is of much significance to our
investment thesis, which revolves in part around
Telefonica Deutschland merging with its rival E-plus, KpN’s
German subsidiary. What is important is that Telefonica
Deutschland and E-plus continue to iterate with European
Commission officials with regard to various remedies
sought by the Commission in order to permit the merger.
News flow would suggest that talks have been
constructive. Historically, there has been European
regulatory resistance to allowing the number of wireless
competitors within a given country to shrink, which this
transaction would do. Yet, it continues to be our view that
the regulatory environment must ease in order to spur
much needed investment and, indeed, there is strong
evidence to suggest that the regulatory tide is turning in
this direction. recent European Commission approval of
Vodafone Group – Our investment in Vodafone Group,
which like Telefonica Deutschland was originated in the
fall of 2013, has developed as we had hoped. Shortly
after our initial investment in Vodafone, the company
announced that it had reached a deal to sell its 45% stake
in Verizon Wireless to Verizon Group. This transaction
closed during this quarter, generating proceeds of
roughly USD 120 billion to Vodafone, in the form of cash
and shares of Verizon Group. The majority of the
proceeds were then in turn distributed to Vodafone
shareholders, including the Fund. post the distribution,
we own a shrunken Vodafone which, with the portion of
the sale proceeds it retained, has an improved balance
sheet and enhanced ability to invest in its business, both
organically as well as through M&a activity. Given the
shrunken size of Vodafone and its improved position, it
24
(Unaudited)
to acquire even more shares at the low subscription price
than we were entitled. We got just a few. To date this has
proved to be a good decision. Since the rights offering
announcement, the stock has appreciated by roughly
one-third and has been among the Fund’s best
performers in 2014.
is not surprising that rumors abound of various potential
acquirers having interest in Vodafone. The ultimate fate
for Vodafone may, indeed, be a merger or to be acquired
to form a larger company.
Nexans S.A. – Nexans has been a disappointing
investment for us but one that has been evolving quickly
over the last twelve months. When we purchased shares
in this global wire and cable manufacturer in mid-2010,
we were very conscious of the fact that it was materially
less profitable than its most direct competitor and, in
many ways, a less well-run company. That said, it was
inexpensive, a number of its business lines were suffering
cyclical lows and some progress was being made with
regard to its underwhelming management approach. as
time passed, the lack of ambition in management
persisted and operational difficulties appeared repeatedly
in the company’s most promising line of business, subsea
high voltage cables. Under increasing shareholder
pressure to pursue a broader and more ambitious
restructuring to improve profitability, management’s
willingness to take the painful but necessary steps has
grown. Yet, having borrowed to make an acquisition in
the U.S. in 2012 and suffering from reduced profitability
from its operational woes in subsea high voltage, the
company was strained to fund the considerable upfront
costs of this much needed restructuring. rather than put
the overdue restructuring off even further into the future,
the company’s board of directors preferred an
accelerated timeline and chose to ask shareholders to
subscribe to a rights offering in late 2013. Given the poor
performance which brought Nexans to that point of a
rights offering, you can imagine that the reaction from
shareholders was far from positive. While we were
unimpressed with the job done by management up to
that point, we were in favor of accelerating the
restructuring and were further influenced by the price to
which the stock had fallen. Based upon those
considerations, we chose to subscribe to the rights
offering. in fact, we oversubscribed to the offering hoping
recent developments have been partly responsible for
driving Nexans stock upward. Shareholders have taken
aim at the company’s embattled CEO and Chairman,
challenging the merit of him holding both positions. in
conjunction with the company’s mid-May annual
meeting, Nexans Chairman has decided to concede by
turning over the CEO position to the company’s COO,
who was widely understood to be the natural successor.
We view this set of developments very positively. Equally
important though is the increasingly prevalent rumor that
Nexans and its aforementioned closest competitor may
be in some form of merger discussion. This is an industry
which remains extremely fragmented globally and a
merger of two companies capable of rationalizing their
respective European operations, where there is material
overcapacity in various product lines, does have some
intuitive backing. To date these are mere rumors but, as
we mentioned earlier, this is a rapidly evolving
investment.
Vivendi S.A. – We originated our investment in Vivendi
slightly less than two years ago, in the summer of 2012.
Vivendi was at the time a wide-ranging global media and
telecom conglomerate. at the outset this investment was
very typical for us in the sense that it was a despised
company that had been undermanaged and was in need
of a new direction. it was very much a special situation
and, in our minds, would become a large-scale
liquidation. The investment was atypical in the sense that
its debt load was outside of our comfort level. Had we
believed it to be a going-concern with that level of
financial leverage we would not have made the
investment. it was our firm belief that large pieces of the
25
(Unaudited)
investments had been our only Brazilian investment. Over
the last several years, Brazilian equity markets have been
a global standout in terms of very poor performance. Gp,
which is a private equity fund management company, has
been among the Fund’s worst performing investments
over the last couple of years. The company’s woes
primarily relate to the Brazilian macro economy. in the
heyday of easy capital in Brazil, Gp made its initial public
offering and then proceeded to raise additional
permanent capital on multiple occasions on extremely
cheap terms. Much has changed since then and instead
of Gp being valued at multiples of its net asset value it is
now valued at roughly 40% discount to net asset value –
i.e., a liquidation of the company would produce a return
of approximately 67% above the current price.
admittedly, a macroeconomic and capital market
headwind makes it difficult to have highly profitable exits
from many of its private equity investments in order to
earn prodigious incentive fees as it did in the heyday, so
the world has legitimately changed from a private equity
business perspective. However, the company has been
able to execute a number of very nice dispositions and,
in any event, our liquidation value gives no value to future
income streams from the management and incentive
fees. The undervaluation is severe, but statistical
cheapness alone is not a great reason to buy or own an
investment. The lynchpin in the Gp investment is the
management team’s opportunistic approach to capital
markets. Just as the company issued equity when prices
were extremely high, the company has undertaken to buy
a large chunk of equity when prices are extremely low. in
the last five quarters, Gp has repurchased approximately
13% of its total outstanding shares. Buying shares
anywhere near 40% discount to net asset value is a
tremendous way to build shareholder value, independent
of the macroeconomic environment. This type of
undervaluation is unusual, even in Brazil, but is indicative
of the gloom that exists in Brazil today. Not only will we
hold our shares of Gp for the time being, we have been
searching for other similar values in Brazil of late.
company’s asset base would be sold, which would have
the dual-impact of deleveraging the company and
growing its underlying net asset value.
in the two years that have passed, Vivendi has sold its
controlling stake in activisionBlizzard, the world’s largest
producer of video games, in a management buyout. in
recent weeks, Vivendi closed on the previously
announced sale of its controlling stake in Maroc Telecom
to Etisalat of abu Dhabi. Even more significantly, SFr,
which is the second largest wireless telecom company in
France, as well as one of the primary sources of Vivendi’s
woes in recent years, became the subject of a bidding
war. a winner has been declared at a price quite
satisfactory to us. With the closing of this most recent
transaction, the deleveraging will be complete. The asset
dispositions were each difficult in their own way but
exceptional progress has been made and our strong
investment result reflects this progress.
Vivendi is preparing itself for large returns of capital to
shareholders in coming years which will shrink the
company. Vivendi will also continue to pursue the
disposition of GVT, its Brazilian telecom business. Should
GVT be disposed of, the shrunken business will be
reduced to one of the largest French television
businesses, Canal+, and the world’s largest music
business, Universal Music Group. We believe the
prospects for the winnowed down media business to be
quite good, particularly under Vivendi’s Chairman-to-be
Vincent Bollore. a completely deleveraged balance sheet
will also provide lots of flexibility with which to build
future value. in contrast to companies with growing
recurrent earnings per share, Vivendi has been a story of
creating shareholder value through resource conversion.
GP Investments – During the quarter, a small group of
Third avenue’s research and portfolio management team,
myself included, conducted a research trip in Brazil.
Where we travel does suggest something about where
we see potential opportunities. prior to this quarter, Gp
26
(Unaudited)
We hope this provides some insight into not only the
portfolio, but also the idiosyncratic bottom-up nature of the
drivers of performance within the portfolio. We will
continue to strive to further improve the risk-return profile
of the portfolio in quarters and years to come and look
forward to writing in detail about future investment activity.
i look forward to writing to you next quarter.
Sincerely,
Third avenue international Value Fund Team
Matthew Fine, Co-lead portfolio Manager
Finally, i would like to thank amit for his partnership over
the last decade, and wish him the best of luck in the
future.
i would like to thank all of our shareholders who have entrusted us with their investments during the 12 1/2 years since
the Fund’s inception and am grateful for the opportunity that you gave me to manage your money as a member of the
Third avenue team. i intend to continue to invest alongside you as your fellow shareholder in the Fund under Matt’s
watch following my departure. Given Matt’s experience working with me for more than a decade on the Fund, including
the last two years as co-portfolio Manager, i have every confidence that our investment is in good hands going forward.
Sincerely,
amit Wadhwaney, Co-lead portfolio Manager
27
Third Avenue focused credit fund
(Unaudited)
Dear Fellow Shareholders,
more senior securities are on the side of the board that
is up in the air, or “in the money,” while the other
securities are touching the ground, or “out of the money”.
The fulcrum is the security around which it all pivots, the
determinant of which securities have value (i.e., are up
in the air) and which ones do not (i.e., are touching the
ground).
For the year-to-date period ending our second fiscal
quarter, april 30, 2014, the Third avenue Focused Credit
Fund (“the Fund”) returned 8.30%1, versus 2.13% for
Morningstar’s High Yield Bond Category2 average, 3.95%
for the JpM HY US HY index and 0.96% for Morningstar’s
Bank loan Category3 average. The S&p returned 2.56%
for the period. The strong rally in Treasuries resulted in
higher quality bonds outperforming lower quality bonds.
investment grade bonds returned 4.14% (JpM iG), BB bonds
returned 4.23%, B returned 3.50% and CCC returned
3.71%.
as we scour the investment universe for ideas in the
distressed or restructuring securities space, we gravitate
towards this concept for a variety of reasons which we
discuss next. as you examine our portfolio, you will
usually find a number of holdings that we believe are
fulcrum securities.
THe fUlcRUm secURiTy: wHAT iT is And wHy iT
mATTeRs
“win-win” or the opposiTe of Rock and a Hard place
When properly chosen, the fulcrum security should
provide an agreeable outcome whether a company
enters restructuring or not. We like to shy away from
clichés, but the phrase “Win-Win” sounds overly optimistic,
so i would like to say the “Opposite of rock and a Hard
place.” Some of our readers may be familiar with Homer’s
Odyssey in which our heroes encountered a terrible
choice: Scylla and Charybdis, a sea monster and a
whirlpool. Neither option was really that good. Here, we
have the reverse scenario: the potential for an attractive
outcome in both cases. imagine if Odysseus was faced
with not a sea monster and a whirlpool, but instead,
seeing his wife or a nice lamb dinner.5 if a company avoids
a restructuring, then the investment in the fulcrum
long-time readers of our letters (and hopefully investors)
will be familiar with our usage of the term “fulcrum
security.” a quick primer or reminder can be helpful from
time to time. The fulcrum security is a concept long
entrenched in the investment philosophy of Third avenue
and written about by Marty Whitman over the years. He
defines the fulcrum security as “the most senior security
that will participate in the reorganization, where
participation means that the security will likely convert
into equity ownership in the restructuring.”4 it is the part
of the capital structure of a company that will control the
company in the event of a restructuring, usually as equity.
a see-saw provides the perfect analogy: the fulcrum is
the part of the device on which the board swings. The
1
2
3
4
5
The Fund's one-year and since inception (august 31, 2009) average annual returns for the period ended april 30, 2014 were
14.93% and 12.58%, respectively. past performance is no guarantee of future results. investment return and principal value
will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The Fund's total
operating expense ratio, gross of any fee waivers or expense reimbursements, was 0.91%, as of October 31, 2013. Current
performance results may be lower or higher than performance quoted. please call 1-800-443-1021, or visit our website at:
www.thirdave.com, for the most recent month-end performance data or a copy of the Fund's prospectus.
average year-to-date return of the 720 funds included in the Morningstar High Yield Bond Category, for the period ended april
30, 2014.
average year-to-date return of the 240 funds included in the Morningstar Bank loan Category, for the period ended april 30,
2014.
Whitman, Marty and Fernando Diz (2009) "Distress investing. principles and Techniques", Wiley Finance, page 234.
Or, to use an example closer to our lead pM's heart than Greek literature, think about archie (of the eponymous comic book)
and his enduring choice of Betty or Veronica. Neither is suboptimal.
28
Third Avenue focused credit fund (continued)
(Unaudited)
risk management for distressed and restructuring
securities.
security will likely be refinanced at par, and should
generate a very appealing combination of interest and
principal gain. However, if the company does need to
restructure, then the investment in the fulcrum would be
exchanged for equity in the new entity. Certainly, owning
a post-reorganization equity offers no guarantee of future
gains, but we view the fact that we can potentially access
that equity-upside as an added tool to our kit. The caveat
is that, ex ante, it is far from obvious which part of a
company’s capital structure will ultimately prove to be
the fulcrum security. and it is not possible to know with
certainty what the long-term economic value of any
entity is. Thus, the team spends a considerable amount
of time and effort in analyzing the capital structure and
valuing the companies we invest in so that, when the
Fund invests any portion of its portfolio in securities that
are distressed or may restructure, the Fund can benefit
in both scenarios (i.e., restructuring or not).
Time can be on our side, Thanks to liquidity Runway
liquidity runway does provide an exception to the prior
guideline, by the way. We view “liquidity runway” as the
amount of time a company can sustain its cash expenses
given its current operations, access to cash, and current
cash obligations. For our distressed investments, if a
company has a substantial amount of liquidity runway,
and we believe that management is in the process of
fixing its operations, we may choose to invest in a
segment of the capital structure that is not the fulcrum
at that precise time but likely would be further down the
road. This extra time provides additional coupon
payments plus optionality for the company to right its
ship. We take these coupon payments in conjunction with
future potential recoveries on a restructuring as key
determinants of the investment decision. We can refer to
our investment in Clear Channel to illustrate this concept.
Back in 2009, the Fund owned guaranteed notes which
may or may not have been the fulcrum at that point; we
were not sure. We were pretty sure, however, that
regardless of what happened, the company had several
years of runway to get their operations in order, and that
this time period created option value. as a result, we will
sometimes take a bit more insolvency risk in return for a
higher yield if we believe the company has the time to
sort out its issues. We can be patient, if we are being paid
for that patience.
The Highest yield palatable with any Restructuring Risk
another way to look at the fulcrum security is that it
provides the highest yield that is reasonably attainable in
a structure that could potentially go through a
restructuring. as a company approaches the zone of
insolvency, securities will trade at different yields due in
part to their seniority in the capital structure. There are
many options to choose from. The highest yielding
securities are attractive from a yield perspective, but this
yield is subject to the entity staying solvent, and the
principal will be at greater risk. if the company goes
bankrupt, a high yielding security at the bottom of the
capital structure could very likely pay zero. Conversely,
lower yielding securities sitting higher up in the capital
structure could be made whole, even in case of
bankruptcy, but would not generate as high a yield. We
choose to resolve this trade-off by investing in what we
believe to be the fulcrum security. Where we think the
fulcrum is will determine the level of yield with which we
are comfortable within a company facing distress. This
combination of yield and downside protection guides our
poRTfolio UpdATe
During this quarter there were major and quite public
developments in two of the longest dated holdings in the
Fund: Nuveen and Energy Future Holdings (“EFH”).
Coincidentally, both companies have a long history and
both were involved in large leveraged buyouts in 2007.
Nuveen’s leveraged buyout (“lBO”) was the largest one
in the asset management business and EFH’s is, to date,
the largest lBO in history. This portfolio update will focus
on these two events, as they have both been quite
29
Third Avenue Focused Credit Fund (continued)
(Unaudited)
option of the holder, and obviously no one would put
bonds at $101 when they were trading at $122. Nuveen
was among the top holdings of the Focused Credit Fund,
and thus, this transaction contributed substantially to
Fund performance.
prominent in the media and both stories illustrate key
aspects of our investment process.
Nuveen Investments
On April 14, 2014, Nuveen Investments, one of the
longest dated and largest holdings of the Fund, found a
suitor: TIAA-CREF. This acquisition will give TIAA-CREF
access to mutual funds, larger size, and a different client
base; and furthers the consolidation of the asset
management industry in the U.S. The deal closed at $6.25
billion. TIAA-CREFF absorbed the $4.5 billion debt,
implying equity value of $1.75 billion. The transaction
price implied a 12.5-14.5x EBITDA multiple depending on
your view on certain adjustments to EBITDA and
represented 2.8% of assets under management (“AUM”).
As a result of this transaction, and due to the strong credit
of the purchaser, Nuveen’s bonds traded up from $105
to $122. At that point we sold out of all of our bonds. The
term loan, $3.1 billion, did not trade up because it is
currently callable. The bonds in the Fund had years of call
protection and traded to a 3% yield. The bonds are
subject to a $101 change of control put, but that is at the
Nuveen Investments, a Chicago based, diversified
investment manager offers institutions and high net
worth individuals mutual funds, separate accounts and
other products. The firm dates back to 1898 and has
taken a variety of ownership structures ever since. The
latest came about as the result of a $5.8 billion leveraged
buyout at the peak of the market in 2007. At the time of
the acquisition by the private equity firm Madison
Dearborn, Nuveen managed $195 billion in assets.
Nuveen’s business has been, historically, focused on
municipal bonds (approximately 49% of AUM) and closed
end mutual funds (26% of AUM). However, over the
years, Nuveen has conducted several acquisitions.
Nuveen now owns seven brands, mostly in the fixedincome space but spanning a variety of strategies. The
brands are listed below in Exhibit 1.
Exhibit 1: Nuveen: Brands and Products
The LBO debt and interest payments weighted down
Nuveen’s balance sheet. The balance sheet continued to
suffer during the global financial crisis as credit markets
dried up. Nuveen executed several refinancing
transactions over the last few years to increase financial
flexibility, but failed to materially improve its debt profile.
The company also faced significant headwinds with the
departure of key personnel, institutional client outflows,
and headline risk in the municipal bond market as
concerns about defaults in Detroit and Puerto Rico bonds
increased in 2013.
Conversely, from a business standpoint Nuveen
presented a very compelling story: a perfect example of
a good company with a bad balance sheet. Management
has done an excellent job of broadening its product
30
(Unaudited)
is far from over and the final outcome is uncertain, this is
an appropriate juncture to review our strategy, the recent
events and implications over the EFH case and the Fund.
offerings and distribution channels. The company offers
over 200 funds in every major style box and over 80
different institutional strategies. They have also
successfully acquired a number of businesses, diversifying
the sources of its aUM while maintaining a substantial
exposure to fixed income, which has substantially lower
volatility than other asset classes. The team’s long-term
view was that Nuveen was a fundamentally valuable
company: it was a market-leading asset manager with
strong growth prospects, and also a very attractive
investment paying a 9.5% coupon. We view these types
of investments as stressed credit opportunities.
Most investors and the media have focused on the power
generation side of the lBO deal that originated EFH in
2007. The lBO was ultimately a hefty (almost $50 billion)
bet on natural gas. The expectation was that natural gas
prices would either remain constant or increase, thus
boosting the price of electrical power and the valuation
of the company. This thesis played out originally, as gas
prices rose from $6.42 per MMBtu to $13.11 per MMBtu
in 2008. However, the trend of hydraulic fracturing or
“fracking” boosted supply, leading to a scenario where
natural gas traded substantially lower, as low as $2.04 per
MMBtu in 2012, and ranging between $2.50 and $4.80
MMBtu since then. Soon enough, market participants
realized that once commodity hedges for EFH rolled off
in 2013-2014, the company would fail to meet its debt
obligations and would be in violation of its covenants.
The Fund has owned Nuveen debt since 2009, and has
opportunistically added to this position over the years. at
the time of the Tiaa-CrEF acquisition, the Fund owned
9.5% bonds which we were able to add in the high 80’s
dollar price with yields of 15% plus. These securities were
at the bottom of Nuveen’s capital structure. We felt
comfortable with our position as this would, in fact, be
the fulcrum security in case of restructuring, a low
probability event, in our view.
Our approach to EFH has been much broader. We view
EFH as a large bet on natural gas and a fundamentally
solid transmission and distribution (“T&D”) business,
intertwined. The focus on the generation side has
overshadowed a solid, steady and almost boring wire and
transmission business hidden within EFH. This business
has become the focus of our investment strategy.
Energy Future Holdings
a significant development impacted the portfolio on april
29, 2014: Energy Future Holdings (“EFH”), the electrical
utilities company headquartered in Texas and largest
leveraged buyout (“lBO”) in history, filed a long-awaited
bankruptcy in Delaware. as our shareholders know, the
Third avenue Focused Credit Fund has been actively
involved in the EFH capital structure for the last few years.
Over the past 12 months, we formed part of an ad hoc
committee that engaged in negotiations with EFH and
other stakeholders. One of the outcomes of these
negotiations was the restructuring Support agreement
(“rSa”) included in the filing, which represents a
compromise among the parties and outlines a roadmap
for the future of the company. Even though the process
Exhibit 2 illustrates the complex organizational structure
of EFH, and shows that there are two well defined silos:
Texas Competitive Electric Holdings (“TCEH”), and Energy
Future intermediate Holdings (“EFiH”). The generating
(luminent) and retail (TXU Energy) silo, while related to
the transmission and distribution business employs
different inputs, has dramatically different drivers of
profitability and, more importantly, different sensitivity
to the price of natural gas.
31
(Unaudited)
exhibit 2: efH organizational and ownership structure
Source: EFH disclosure in First Day hearing in Delaware bankruptcy court.
EFiH is a holding company that owns 80% of the equity
of Oncor, a regulated T&D business. T&D is a very steady
and predictable business, as one can accurately forecast
cash flow based upon expected capital expenditures. The
natural gas price has as little to do with T&D revenues as
the price of gasoline has to do with toll road revenues:
short-term volatility in pricing has no effect on revenues,
barring a sustained high price that changes usage
patterns. a stable T&D business in a demographicallyagreeable state, such as Texas, is an attractive business
that would typically be in the hands of long-term, low cost
capital investors. When enmeshed in a complicated
capital structure and obscured by daunting conditions at
an affiliated business, such a business became an unusual
and attractive value proposition.
The Fund has been involved in the EFH capital structure
in one form or another since practically its inception in
late 2009, as discussed above. in fact, portfolio manager
Joe Zalewski has lived and breathed this credit pretty
much since joining the Fund in 2009. Exhibit 3 illustrates
the evolution of the Fund’s positions in EFH over time and
across the three entities and capital structures.
as we remained focused on identifying the fulcrum
security in the very complicated capital structure, we
sought more equity-like exposure to Oncor, and built this
position as securities became available in the market.
32
(Unaudited)
exhibit 3: portfolio snapshots of Third Avenue focused
credit fund positions in efH capital structure
effect of this exchange was to allow the company to
remove the Guaranteed Notes at the parent that could
drag EFiH into a TCEH reorganization. Ultimately, the
company offered the exchange for all holders, leading to
substantially all of the bonds exchanged, save for a small
amount of holdouts. By December 2012, the Fund’s
position was a levered, dedicated investment in the EFiH
entity and, in our minds, the fulcrum security of a
theoretical EFiH restructuring. During the first quarter of
2013, we also traded all of our second lien secured bonds
for new EFiH unsecured notes. This amounted to
effectively a direct equity investment in Oncor, equity-like
returns in the case of refinancing and actual equity if the
entity needed to restructure. The Fund also owns a small,
speculative position in EFH legacy notes.
Source: Third avenue.
in October 2009, the Fund bought the first lien notes on
both the TCEH and EFiH silos based on a bullish view on
the Energy reliability Council of Texas (“ErCOT”) region.
This investment generated decent results. in February
2012, we changed positions quite dramatically, prompted
by EFiH’s announcement that it would issue 113/4%
second lien notes, with the proceeds to pay down a low
interest intercompany loan (approximately in the single
digits). EFiH was effectively planning to use high interest
debt to pay down low interest debt, leading us to assume
that there may be plans to sever financial ties between
the silos. Given our bullish view on Oncor, we welcomed
the opportunity to invest at a higher leverage level at
EFiH, with relative safety. We bought the second lien
notes and sold out of our first lien EFiH bonds to increase
our risk exposure, and sold out of our TCEH holdings. We
completed the position with EFH Guaranteed Notes at
the holding company, which had guarantees from both
TCEH and EFiH. Our expectation that the company could
come after these notes as it sought to split the entities
apart for separate restructurings panned out.
after EFH filed a Form 8K with the U.S. Securities and
Exchange Commission in March 2013, disclosing that its
discussions with TCEH creditors had broken down, we
joined an ad hoc committee of like-minded investors in
the EFiH Unsecured Notes. Third avenue believed that as
the fulcrum in the EFiH silo, holders of these bonds would
ultimately need to be there to negotiate with the parent
and the TCEH lenders in a restructuring. Over the next
five months, the group was involved in lengthy
negotiations which broke down and led to the company
making its November 2013 coupon payment. This
payment upset many senior creditors in the capital
structure but had the intended impact of resetting
expectations and erecting a framework for effectively
reaching the rSa. in January 2014, the company and
creditors re-engaged in discussions, this time considering
the option of a split of the two businesses. The april 1,
2014 coupon date passed and the company went into
grace period. Fulcrum creditors of both silos and the
parent negotiated with the company; soon thereafter, the
rSa was signed by all negotiating parties and formed the
basis of the april 29 filing. Many sophisticated private
equity firms and well-known distressed hedge funds
negotiated alongside us to consummate the rSa.
in December 2012, a group of holders exchanged parent
company guaranteed bonds along with parent legacy
bonds for new EFiH unsecured notes. The effect of this
would be moving down to the EFiH box in the capital
structure, where equity in Oncor resides. We were
pleased to see the company come after these guaranteed
notes, and we engaged with EFH on a second exchange
that would include our notes. Our view of the ultimate
33
(Unaudited)
lastly, the Fund is no longer actively seeking new
The main point of the plan is spin out the TCEH assets to
investors. at the present time, we believe the Fund is able
their creditors in a tax-free manner, without triggering tax
to operate well at its current size. We believe this
liabilities, while the Fund’s EFiH unsecured bonds would
approximate size range is appropriate in present market
convert into the new equity of EFH. as part of this rSa,
conditions. When investing in stressed and distressed
but subject to bankruptcy approval, the group has
opportunities, our size allows us to be big enough to have
pledged to proportionally backstop a $2 billion second
a seat at the restructuring table, yet nimble enough to
lien Dip which would be mandatorily convertible (along
invest in mid- cap opportunities. When and if market
with our existing unsecured notes) into the equity of
conditions change, we may reconsider whether to
newly reorganized and de-levered EFH. The Fund’s
continue to actively gather assets, which can often help all
holdings rallied materially on the heels of the filing of the
shareholders of the Fund by allowing us the flexibility to
rSa and the initiation of Chapter 11 proceedings. The
carry through on our overall investment strategy. Of course,
price increase reflects that the market is recognizing the
we appreciate the support of our
value of an unlocked,
when investing in stressed and current investors and that they
separated EFH with limited
potential tax consequences, distressed opportunities, our size have spent time researching our
Fund, and we continue to
the additional clarity that the
allows us to be big enough to
welcome your support.
filing imparted on the process
have a seat at the restructuring
as well as the further economic
as always, thank you for your
commitment that the rights
table, yet nimble enough to
investment in Third avenue
offering participants has made
invest in mid- cap opportunities. Focused Credit Fund. We look
to EFiH/Oncor.
forward to writing to you again
at the end of the next quarter.
We still do not know how this restructuring will turn out
and, as mentioned, there is an enormous amount of work
Sincerely,
ahead of us. Consistently, throughout this process, we
have maintained a positive view of the Oncor asset, while
Third avenue Focused Credit Team
seeking greater upside returns on investment. The
Thomas lapointe, lead portfolio Manager
process continues to have legal and regulatory hurdles
Joseph Zalewski
for a planned 2015 exit. Nonetheless, Third avenue is
Edwin Tai
thankful for the ingenuity and resolve of the other
Nathaniel Kirk
members of the ad hoc group and the tireless work of
legal and financial professionals at akin Gump and
Centerview partners, respectively during this process.
34
Board of TrusTees
Jack W. aber
Marvin Moser
david M. Barse
eric rakowski
William e. Chapman, II
Martin shubik
Lucinda franks
Charles C. Walden
edward J. Kaier
Martin J. Whitman
offICers
Martin J. Whitman — Chairman of the Board
david M. Barse — President, Chief executive officer
Vincent J. dugan — Chief financial officer, Treasurer
Michael a. Buono — Controller
W. James Hall — General Counsel, secretary
Joseph J. reardon — Chief Compliance officer
Transfer aGenT
BnY Mellon Investment servicing (u.s.) Inc.
P.o. Box 9802
Providence, rI 02940-8002
610-239-4600
800-443-1021 (toll-free)
InVesTMenT adVIser
Third avenue Management LLC
622 Third avenue
new York, nY 10017
IndePendenT reGIsTered PuBLIC aCCounTInG fIrM
PricewaterhouseCoopers LLP
300 Madison avenue
new York, nY 10017
CusTodIan
JPMorgan Chase Bank, n.a.
14201 dallas Parkway, 2nd floor
dallas, TX 75254
Third avenue funds
622 Third avenue
new York, nY 10017
Phone 212-888-5222
Toll free 800-443-1021
fax 212-888-6757
www.thirdave.com

2Q 2014 Shareholder Letters

Transcription

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