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Third Avenue Management Comments on Dundee Corporation

December 19, 2013 | About:
Holly LaFon

Holly LaFon

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During the quarter the Fund established a meaningful position in shares of Dundee Corporation (TSX:DC.A), a Toronto-based holding company run by founder Ned Goodman. Having cut his teeth in investing at Brookfield Asset Management's predecessor company in the 1960s and Beutel Goodman which he co-founded in 1967, Goodman would go on to found Dundee in 1991. Goodman has been a magnificent allocator of capital at Dundee, building businesses and 11 investing in public and private companies. The uncertain macro backdrop post-Financial Crisis has given Goodman a penchant for hard assets rather than paper assets, resulting in a unique collection of investments, ranging from financial services and real estate to metals, mining, energy and agriculture businesses, including control of the largest organic beef operator in North America with more than 12,000 head of cattle. While past performance is no guarantee of future results, Dundee has generated an impressive 18% annualized return for its shareholders over the past twenty years.To understand Dundee requires a look past its income statement, where historical reported results are volatile and muddied by consolidated financials of entities no longer owned or consolidated, as well as gains on the sale of underlying securities and businesses, including the 2011 sale of a controlling stake in Dundee Wealth to Bank of Nova Scotia for C$1.4 billion and the spinout of a majority interest in Dundee Real Estate Company earlier this year. Today, Dundee's enterprise value is close to the value of its public securities holdings, net of a modest amount of debt. "Free" are the company's private investment portfolio and private subsidiaries, carried at book value, which together are close to half of Dundee's market value. While there is certainly an element of "key man risk," as any eventual successor will have enormous shoes to fill, we think hard asset values, values of publicly traded securities and a significant discount to our estimate of net asset value provide a meaningful margin of safety for the investment.We have followed Ned Goodman and Dundee for a number of years, as a like-minded operator and investor with significant ownership aligning his interests with those of his shareholders. The position reflects a true collaboration with our investment team colleagues. Vic Cunningham provided much of the recent legwork, while Ryan Dobratz offered key insights into the real estate assets and their valuations.Legg Mason is a premier mutual fund complex that dates back to the 1980s. While the firm has recently suffered significant asset outflows in the wake of subpar investment returns, the company has retained a strong franchise (with several well-known brands under its umbrella), a diversified asset mix, and a sound balance sheet. Under new leadership, the business appears to be on the mend and capital allocation continues to be favorable—management has repurchased $1.2 billion of shares in the past three years (shrinking the share count by more than 20%) and has been increasing the dividend. Moreover, the relative investment performance among its stable of investment managers is beginning to improve. While the company is still under-earning its potential in our view, its cash flows remain strong, aided by a large deferred tax asset resulting from net operating losses generated in prior periods. Fund management initiated its position in Legg Mason Common at an implied free cash flow yield of about nine percent, and we believe the company's cash flows could increase markedly in the near future if performance and asset flows continue to improve.From Dundee Corporation's fourth quarter 2013 commentary.

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