Investment Activity During the quarter the Fund established one new position and eliminated four positions — Sanofi (SNY, Financial), Munich Re (MUV2, Financial), Daiwa Securities (DSE, Financial) and Titan Cement (TITK, Financial). Additionally the Fund added to its positions in Petroleum Geo-Services (PGS, Financial), Antofagasta (ANTO, Financial), Capstone Mining (CS, Financial), Arcos Dorados (ARCO, Financial) and CNH Industrial (CNHI, Financial). We will begin with two of our dispositions.
Titan Cement
During the quarter we sold our remaining position in Titan Cement. We initially purchased shares in this family controlled Greek cement company in the height of the European sovereign crisis, meaning early 2011, prior to the world coming to be at peace with ballooning European sovereign debt loads and highly questionable credit worthiness. One of our primary attractions to Titan at that time was a South Florida-focused U.S. operation that had not yet recovered from the U.S. housing crisis. In the years of our ownership, Titan’s U.S. division did indeed show a considerable resurgence. Its Greek business, while macro-challenged, performed better than one might have guessed given the dire operating environment. The company’s operations in Egypt, however, were diminished as a result of large scale gas shortages in that country. After having realized a respectable IRR of 7.8%, our sense of the company’s cheapness has faded and simultaneously the path to further improvement in operating performance is more questionable. The growing prospect of Greek capital controls and potential disruption in the Greek equity market had some influence on our disposition which we completed prior to the Athens Stock Exchange closure in July.
Munich Re
During the quarter, the Fund also disposed of long-held Munich Re, which the Fund initially purchased prior to the Global Financial Crisis. As a well-capitalized historically prudent underwriter and manager of its enormous investment portfolio, the company survived the Global Financial Crisis as well as the subsequent European Sovereign Crisis relatively unscathed. With those experiences behind us, a long stretch of low levels of catastrophe-related losses in the industry has led to an oversupply of capital in the industry. Meanwhile capital continues to flood into the industry from financial investors and reinsurance pricing remains under pressure. Low pricing means low returns for the assumption of certain risks. In total we realized an IRR of 5.5% beginning in early 2008. We would like to return to quality companies in the insurance industry when some of the excess capital has been cleared out, premiums reflect a “harder” market and prices of equities are available at cheaper prices.
Amec Foster Wheeler PLC (AMFW, Financial)
During the quarter we established a single new position in the Fund, Amec Foster Wheeler PLC, which provides consulting, engineering and project management services to energy, power and process industries largely through reimbursable contracts. Engineering services typically represent only a small portion of the customer’s total project cost but are critical to the success of the project. Slightly over 60% of Amec Foster Wheeler’s revenue is driven by the more cyclical endmarkets, such as oil and gas and mining, but the remaining 40% should prove more stable in the current market environment. Amec and its management have a demonstrated history of compounding business value, maintaining strong returns, generating free cash flow and returning excess cash to shareholders. The company is in the process of integrating the recent transformational acquisition of Foster Wheeler, which added new capabilities in downstream oil and gas and further diversified the company’s geographic exposure. Our ability to purchase shares of Amec Foster Wheeler at a significant discount to our estimate of its business value results from a share price that tends to respond to movements in oil prices to a degree that overstates its business sensitivity to the price of oil. While it is not surprising that the stock has declined, we believe the less cyclical parts of the business will enable it to weather this storm better than most of its peers, who rely heavily upon upstream oil and gas spending.
Meanwhile, no credit appears to be bestowed upon the newly combined company for the considerable strategic benefits of combining Amec with Foster Wheeler. The two companies had a high degree of complementarity in terms of their respective upstream and downstream exposures, geographic exposures and customer exposures. Lastly, the company is progressing rapidly on its merger integration which will yield considerable cost synergies and improved operating performance. Amec was a 1.5% position in the Fund as of July 31.
In closing, today we see a number of excellent opportunities available to long-term patient investors. Increasingly so, the portfolio is being populated with investments that we believe offer very attractive long-term propositions. Unusually attractive opportunities have surfaced as a result of deteriorating sentiment that is divorced from fundamental attractiveness and long-term value in emerging markets, specific natural resources and the companies that produce them, as well as company-specific opportunities. An idiosyncratic portfolio results from our approach and we do not intend to respond to the “pace” of the broader market. We will continue to invest where deep value is present and remain very confident that the approach will yield the desired results.
Thank you for your continued interest in our quarterly reviews and we look forward to writing to you next quarter.
Sincerely,
Matthew Fine,
Lead Portfolio Manager
Third Avenue International Value Fund
