Third Avenue Value Fund Reports on Investment Insight in its 2015 Semi-Annual Report

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Jul 04, 2015

Martin Whitman (Trades, Portfolio) recently released his semi-annual shareholder report for the Third Avenue Value Fund which detailed the fund’s primary investment focus areas and notable trading activity for the first six months of the year through April 30, 2015.

Martin Whitman (Trades, Portfolio) is the founder of Third Avenue Management (Trades, Portfolio). He is also chairman of the board and the firm’s lead portfolio manager. The Third Avenue Value Fund is also managed by Chip Rewey, Yang Lie, Michael Lehmann and Victor Cunningham. The Third Avenue Value Fund is an international portfolio focused on value stocks. It has two share classes, the institutional fund (TAVFX) and the investor fund (TVFVX).

In its semi-annual report management’s commentary focused on three key investment areas for the fund. The three investment areas of focus for the fund included overcapitalized financial companies, energy opportunity companies and U.S. residential housing companies.

In the first half of the year all three investment areas performed well for the fund. In the financial sector the fund’s two largest holdings were Bank of New York Mellon (BK, Financial) and Comerica (CMA, Financial). As of April 30, Bank of New York Mellon accounted for 5.57% of the fund while Comerica accounted for 5.53%. In the financial sector the management team continues to closely monitor lending rates as the Federal Reserve moves closer to an interest rate increase. In the first half of the year the 10-year treasury has fluctuated considerably given uncertainty surrounding the Federal Reserve’s timing for an interest rate hike. On April 30 it reached a low of 2.03%. Fluctuations in the treasury rate significantly affect the bank’s lending revenue which is a key factor of focus for the sector. As interest rate risks continue to remain a factor for banks, the Third Avenue Value Fund’s management team continues to hold on to firms that are highly capitalized. Both Bank of New York Mellon and Comerica passed the Federal Reserve’s March stress test and are found to be strongly capitalized which has helped their investment returns in the first half of the year.

In energy, the management team’s largest holding is Devon Energy (DVN, Financial). As of April 30, it accounted for 4.12% of the Third Avenue Value Fund’s holdings. In energy the management team is focused on prudent management of energy balance sheets as oil prices continue to take their toll on the sector. Devon Energy divested assets in the first half of the year to add cash to its balance sheet which has been an industry best practice for many firms as oil prices continue to remain at new lows.

In U.S. residential housing the largest sector holdings are Cavco Industries (CVCO, Financial) and Weyerhaeuser (WY, Financial). As of April 30, Cavco accounted for 5.06% of the Third Avenue Value Fund while Weyerhaeuser accounted for 4.21%. In the housing sector the management team continues to closely watch data on housing starts, which has been weak. While housing starts continue to remain low the team is bullish on housing in general given favorable lending opportunities and improving trends in the sector overall. Cavco and Weyerhauser are two companies Third Avenue Management (Trades, Portfolio) favors in the sector for their strong management teams.

While these three investment areas were the main focus for the Third Avenue Value Fund in the first half of the year the management team also made two significant notable trades. The team sold its entire stake in Target (TGT, Financial) after the stock gained from renewed confidence following the appointment of its new CEO, Brian Cornell, who also exited operations in Canada helping to further increase the stock’s price. Additionally, the fund sold all of its shares in Daiwa Securities, a Japanese brokerage firm. Improvements in the value of Daiwa since the firm first bought shares in July of 2012 helped the fund to realize an internal rate of return of approximately 88%.

The investment team’s continued focus on the long-term has paid off for the fund which has posted strong returns for the three-year and five-year periods. It finished the first half of the year with $1.84 million in assets under management. Additionally, it also posted strong investment returns for the three-year and five-year periods as noted in the table below.

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