Third Avenue Management recently launched a new mutual fund on August 31, 2009. Normally, it is difficult to get information about a new fund as soon as it opens. However, the company provided information about the fund and its objectives in its recent shareholder letter for Q4 2009, which was able to help me in writing this article.
Third Avenue’s opening of a new fund is noteworthy because the fund family has not opened a new fund in over a decade. What makes this announcement even more noteworthy is that the fund will be a credit fund titled, Third Avenue Focused Credit Fund. This is the first fund to be operated by Third Avenue management which is not an equity fund.
The fund manager will is Jeff Gary. He only joined Third Avenue in 2009, however he has more than 20 years of experience in the field of distressed debt, credit and high yield strategies investing. Gray states that the fund was opened now because Third Avenue sees opportunities in credit, which has not existed in over 20 years.
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Grey lists the following differences between his fund and other credit funds
1. The Fund utilizes a value-oriented investment
process that relies on extremely thorough and
intensive fundamental research;
2. We focus our capital on our highest conviction ideas
based upon our fundamental credit research – the
Fund will normally have 50-70 investments;
3, The Fund has an opportunistic mandate that can
invest in any part of the credit spectrum;
a. Bank loans, high-yield bonds, busted converts or
b. Invest in the security with the best upside
potential versus downside risk;
4. The investment team must identify an event or
catalyst to drive value and the security price higher.
The investment objective of the Fund is long-term total
return, which may include investment returns from a
combination of sources including capital appreciation, fees
and interest income. Third Avenue’s goal is for the Fund to
achieve top quartile ranking within the universe of highyield/
Grey categorizes the fund’s investments into five different categories of credit:
1. Performing bonds and loans that have low risks of default.
2. Stressed Performing Credits this consists of companies with higher uncertainties that mature within the next two years.
3. Capital infusions including Rescue, debtor in possession, and exit financing
4. Distressed performing credits where the firm believes the market is assuming a higher risk of default, than truly exists.
5. Cases of debt-equity restructuring inside or outside of court, such as CIT unsecured senior bonds due in 2010
Grey believes that there are many opportunities in these areas due to inefficiencies in the credit markets that have increased in recent years due for three main reasons:
1. A significant increase in the size of the opportunity set to choose from
2. A meaningful decrease in the number of credit research professionals
3. An increase in the amount of time and expertise required to research
Below are some statistics of the funds including their top ten holdings, and what categories of credit they hold.
TOP 10 LARGEST INVESTMENTS
Intelsat Jackson Holdings 3.4%
TXU Corp 3.4%
Murray Energy Corp 2.8%
HCA Inc. 2.7%
Digicel Group Ltd. 2.7%
Compton Petroleum 2.6%
Hertz Corp. 2.6%
World Color Press Inc. 2.6%
Top 10 Holdings 28.6%
TOP 5 LARGEST SECTORS
Metals & Mining 7.5%
Top 5 Industries 40.6%
PORTFOLIO SORTED BY BOND VERSUS LOAN
First-Lien Secured Bonds 11%
Second-Lien Secured Bonds 6%
Unsecured High-Yield Bonds 32%
Total First-Lien Secured Terms Loan 23%
Total Invested 72%
Total Portfolio 100%
PORTFOLIO SORTED BY PERFORMING/STRESSED/
Performing High-Yield Bonds 32%
Performing Bank Loans 4%
Capital Infusions and Debt-for-Equity 36%
Total Invested 72%
Total Portfolio 100%
One thing that disappoints me about the new fund is the that Martin J Whitman will not be involved in its management. Whitman announced earlier this week that he plans to scale back his duties at Third Avenue Funds. I am disappointed because Whitman in addition to being an excellent stock picker, is also an expert in distressed debt. Whitman recently wrote a book on distressed debt titledDistress Investing: Principles and Technique . While I have read Whitman’s other books on investing, I have not had a chance to read this one yet. However, I have heard from colleagues that it is a good read, and he appears to be a guru in these areas.
However, I think despite Whitman’s lack of involvement in the fund it is worth a look for any value investor considering investments in distressed debt and other areas of credit. Third Value Funds has provided excellent returns in the past and I think they want to keep this reputation as they expand into credit. In addition, I looked at Grey’s full resume on Third Venue’s website, and he seems extremely qualified to run this fund.