Martin Whitman

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Third Avenue Funds

Background and bio

Martin J. Whitman, is the Founder of Third Avenue Funds, a family of Value Mutual Funds. Martin Whitman is a veteran value investor with a long, distinguished history as a control investor. He has successfully identified value in securities for more than 50 years.

Mr. Whitman founded the predecessor firms to Third Avenue Funds in 1986 and M.J. Whitman LLC, a full-service broker-dealer affiliated with Third Avenue Management, in 1974.

Mr. Whitman served as a Distinguished Management Fellow at Yale School of Management for over 30 years. He received a Masters degree in Economics from the New School for Social Research and graduated from Syracuse University magna cum laude. Syracuse University’s Whitman School of Management is named in his honor.

Mr. Whitman is an honorary member of the Board of Trustees of Syracuse University. He also serves on the Board of the Institute for National Security Studies, an external institute of Tel Aviv University.

Whitman’s wife, Lois Whitman, is the founder and director of the Children’s Rights Division at the international rights monitoring organization Human Rights Watch. A social worker and attorney by training, she has led the division since 1994.

Investment record

The Third Avenue Value Fund (TAVFX). From inception in November 1990 through October 2007, his fund has returned an annualized average of 16.83%. In the same period, the S&P 500 index returned an average 12.33% annually. However, over the past five years performance has deteriorated. Since 2009 the fund has only returned 8.8% annualized, or 35.8% compounded. The S&P 500 has returned 89.4% over the same period.

Whitman handed over the management of the $3.2 billion Third Avenue Value Fund to longtime co-manager and protégé Ian Lapey on March 1 2012. He remains chairman of Third Avenue Management.

Whitman, upon stepping down, planned to manage a private, concentrated value fund for accredited investors, funded by a portion of his holdings in Third Avenue Value Fund.

The value funds strategy has changed since Whitman left. Upon leaving, the fund’s top ten positions accounted for 68% of assets, the new leadership wanted to add some diversification to the mix. Unfortunately, Whitman’s departure followed a period of underperformance by the fund. The fund lost about 45% in 2008, and was hit with redemptions, In the five years through Feb. 8 2012 it lost nearly 3.8% on average per year.

The poor performance was due to the fund’s overweight position in Hong Kong real estate and holding companies, around 68% of assets were in Asian stocks.

Upon taking over the fund, Ian Lapey slashed the fund’s stake in Hong Kong-listed property stocks. The fund’s top 10 holdings now represent 52% of assets, down from nearly 70%. During 2012 the fund rebounded by 27.2%, helped by the Hong Kong holdings, which outperformed. Still, the fund continues to lose investors. Investors withdrew $1.1 billion from Third Avenue Value during 2012, following $1.2 billion of redemptions during 2011. At the beginning of 2013 the fund’s assets stood at $2.7 billion, down from $5 billion when Mr. Lapey was appointed co-manager in July 2009. According to the funds latest fact sheet, the value of assets under management has fallen to $2.2 billion at the end of September 2014.

Third Avenue Value Fund Q4 commentary from Gurufocus.

Investment Philosophy

From the Third Avenue website:

We are opportunistic investors.

Security selection is driven primarily by the bottom-up analysis of individual opportunities. Portfolios rarely resemble benchmarks or other actively managed products. This differentiation creates the opportunity for uncorrelated returns.

Third Avenue’s investment culture fuels, refines, and channels our investment professionals’ passions for discovery, analysis and original thinking. Flexible investment mandates open up for them a wider universe of investment possibilities. We encourage and reward the intellectual curiosity and hard work essential to finding overlooked ideas. Third Avenue’s portfolio managers and analysts have the independence, intellectual freedom and a clear mandate to uncover opportunity wherever it exists. As we are not beholden to benchmarks, we have greater freedom to pursue the long-term value opportunities that make our approach to investing distinct. We offer discerning clients a set of powerful, original strategies effective in playing core or specialized, precise roles in an overall investment portfolio.

Contrarian Investing in a Consensus-Driven World

You will often find us walking in when others are running out, just as you will find us judiciously selling what has suddenly come into fashion. We view market panics as buying opportunities while our price-conscious investment discipline mitigates the risk that we will follow the crowd into unsustainable momentum. We are encouraged when we arrive at an opportunity first or when we recognize quality and value that others have overlooked or have failed to understand. We believe that many investment analysts eschew opportunities that require work to understand. We enthusiastically perform that work. Our deep understanding of our investments gives us confidence to stray far from the herd.

Absolute Value in Every Investment

We are price conscious. What we pay determines what we can earn. When acting as non-control equity investors, we seek to purchase equities in financially strong companies at a significant discount to our estimate of intrinsic value. When we invest in stressed or distressed debt, we seek to own the “fulcrum security,” which is the security in the capital structure that can achieve maximum return while also possessing the most senior claim to a company’s assets, cash flow or reorganized equity. We look beyond income statements and cash flows to the balance sheet, deciphering what it means rather than what it says. We also look off balance sheet to further investigate the company’s true financial condition. We analyze a company’s complete capital structure, identifying which of its securities hold the greatest potential to unlock and deliver the company’s intrinsic value. We not only value a company “as is,” but use our understanding of each business to make a reasonable assessment of the potential for the value of the enterprise to grow over time. Each of these elements contributes to a deeper understanding of a company’s long-term prospects and investment potential.

What We Look For

One proven value philosophy guides each of our investments. We seek to invest in safe companies that are cheaply priced:

Key criteria are as follows:

Safe Companies

  • Strong Finances: High-quality assets with conservative and appropriate leverage
  • Competent Management: Proven track record and interests aligned with outside, passive, minority shareholders
  • Understandable Business: Comprehensible business model with meaningful financial information readily available
  • Sound Political and Regulatory Environment: Presence of a legal framework that protects a business and shareholder rights

Cheaply Priced

  • Significant Discount to Intrinsic Value: Priced substantially below a conservative estimate of the business’ value as a private entity or takeover candidate
  • Attractive Growth Prospects: Potential for attractive growth in the value of a company’s net assets over the next 5 years

We analyze companies from the bottom up, reviewing all public documents, speaking with outside experts and contacts, identifying value and risk drivers and interviewing management before making an investment decision.

We analyze the quality and quantity of resources existing in a business, rather than its projected future revenues and earnings. We think that the current balance sheet is the best, albeit not the only, measure of a company’s value. Predictions based on future operating earnings do not capture the possible impact of corporate events such as mergers and acquisitions, changes of control, management buyouts, share repurchases, refinancings, reorganizations, asset sales, spin-offs, investments in new ventures and corporate liquidations.

Our stringent research gives us conviction in our best ideas, allowing us to establish concentrated positions.

We invest only in companies that we believe have the potential to create value for our clients over the long term, withstanding cyclical downturns and evolving as leaders among their competition. Our long-term focus minimizes portfolio turnover and enhances the tax efficiency of our funds and private portfolios.

Quotes from  Martin Whitman

Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise.”

“We attracted a lot of market timers and asset allocators. I don’t need those … amateurs in my fund.”

“In the financial world it tends to be misleading to state, “There is no free lunch.” Rather the more meaningful comment is, “Somebody has to pay for lunch.”

“Earnings are vastly overrated. Look at the title of my new book, Value Investing: A Balanced Approach (John Wiley & Sons). No smart businessman treats one accounting number as more important than another. They are all part of the whole. The goal of any business person is to create wealth, and except on Wall Street, profits are viewed as the least desirable way to create wealth because of the income-tax disadvantage. It’s a lot easier to look at the quantity and quality of resources a company has than to forecast its earnings. If you have good management, it will convert those resources into something of value.”

“I think it’s easier than trying to play the market and forecast the market’s gyrations. Most investors are outlook-conscious. I’m price-conscious. I have this easy way of measuring price, quantity and quality. Everything is in the balance sheet–the only way you know whether you’ve covered all the bases is to look at the balance sheet.”

Holdings

Top ten holdings as of August 2014

  1. Daiwa Securities Co., Ltd. (8601.Japan)
  2. Comerica Inc (NYSE:CMA)
  3. KeyCorp (NYSE:KEY)
  4. Weyerhaeuser Co (NYSE:WY)
  5. Symantec Corp (NASDAQ:SYMC)
  6. Vodafone Group PLC (NASDAQ:VOD)
  7. AGCO Corp (NYSE:AGCO)
  8. White Mountains Insurance Group Ltd (NYSE:WTM)
  9. Pargesa Holding SA (PARG.Switzerland)
  10. Brookfield Asset Management Inc (BAM.A.Canada)

(Note form 13F-HR does not include cash balances.)

Third Point’s current holdings according to Gurufocus.

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