(GuruFocus, June 22, 2009) According to his company’s website:
Martin Whitman is a veteran value investor with a long, distinguished history as a control investor. He is Co-Chief Investment Officer of Third Avenue Management LLC and has successfully identified value in securities for more than 50 years.
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. He has managed the flagship Third Avenue Value Fund since its inception and also manages the Third Avenue Value Fund (UCITS).
Through March 31, 2009, Third Avenue Value Fund returned 10.5% per year since its inception of November 1, 1990, as compared to S&P 500’s 7.6% during the same period.
Its annual return during the past 1, 3, 5,10, and 15 years are -44.8, -18.0, -4.4, 4.4, and 7.5% as compared to -38.1, -13.1, -4.8, -3.0, and 5.9%. The fund beats the benchmark index in longer term (5 year and above) but not in short term (three years and below).
Since April 30, 2009, The Net Asset Value (NAV) of Third Avenue Value Fund has increaded from $34.87 to $36.99 per share, and increase of 6.7%, outperforming the S&P 500 index (873 to 893 point, or increase of 2.3%).
The daily quoted NAV may not reflect the true value of the underlining investment as a good portion of the portfolio is invested in corporate debts. Martin Whitman prides himself in investing in securities that are “cheap and safe”, and right now he finds it in the distressed debt. He disclosed in the latest quarterly report that his holdings,
The Forest City Seniors, GMAC Seniors, MBIA Surplus Notes and Standard Pacific Seniors were acquired at prices that reflect, on average, yields to maturity well in excess of 25%.
The distressed debts are subjected to mark-to-market accounting, and their fluctuated daily quoted values impact the NAV of the fund. In the end, however, the debts get paid, and hopefully the Fund is made whole. Martin Whiteman thinks the loans was acquired with 85 to 95% of confidence that the loans would remain to be a performing loan.
A Case Against MBIA (MBI)
In the quarterly report, Martin Whitman spent quite a bit of time on the case against MBIA. First, he does not think the investment in the MBIA Surplus Notes continues to remain 85% to 95% certain a performing loan in the future unless the prevail in a law suit:
At the time of acquisition, Fund Management believed that the probability that each loan would remain a performing loan was in a range of 85% to 95%. That remains true for Forest City, GMAC and Standard Pacific. Unfortunately, that may no longer be true for MBIA Surplus Notes. On February 19 th, MBIA announced as a fait accompli an asset stripping transaction under which MBIA Insurance Corporation, the issuer of the MBIA Surplus Notes, transferred without any consideration over $5 billion of assets and all the profitable going concern activities of MBIA Insurance Corporation to a second tier subsidiary of MBIA’s parent company. If this asset stripping transaction stands, the MBIA Surplus Notes surely will have suffered a very material permanent impairment. As a result, Third Avenue brought suit in Delaware Chancery Court seeking to undo the asset stripping transaction and policyholders have brought suit in Federal Court in New York’s Southern District with claims not dissimilar from those of Third Avenue. Litigation outcomes are always hard to predict, but Martin Whitman seems to have a strong case.
If Third Avenue prevails, either after trial or via settlement, the odds will become strong that MBIA Surplus Notes will remain a performing loan over its lifetime. Meanwhile, for the immediate future, say through January 2010, the Surplus Notes seem likely to remain a performing loan, albeit a lot less likely than would be the case had there been no asset stripping.
Martin Whitman also gave a very negative appraisal to the MBIA management:
A final word on MBIA… In addition to the $362,167,000 principal amount of Surplus Notes, Third Avenue also owns 19,349,845 shares of MBIA parent company common stock. Probably the toughest thing we do as Fund Management is appraisals of portfolio company managements. Generally Fund Management seems to do a good job, but this is an area of our “safe and cheap”, approach where Fund Management probably screws up more than in any other single area. MBIA management certainly is a big disappointment to TAVF. Aside from the legal ramifications of the asset stripping, it seems to us that the transaction sullies the MBIA name in a field where it is utterly important to be viewed by otential policy holders as a company run honorably and with integrity. Understandably, MBIA wanted to separate its sound, profitable, domestic municipal bond business from its unsound, unprofitable structured finance business. There is no question in Fund Management’s mind that through consultation with the relevant parties, adequate protections for this separation could have been accomplished, and still can be accomplished, without the asset stripping; and with leaving adequate protection for the policyholders and creditors of MBIA Insurance Corp. Without apparently ever contacting any policyholder or creditor, MBIA management chose to proceed with its asset stripping ideas.
Hong Kong Property Stocks
As of April 30, 2009, approximately 39% of the Third Avenue Value Fund’s assets were invested in the common stocks of companies based in Hong Kong. Among them, are the companies unfamiliar to the US investors but very familiar to the Hong Kong investors Cheung Kong Holdings, Hang Lund Group, Henderson Land Development, Wharf Holdings, and Wheelock. Martin Whitman thinks these companies are strongly capitalized and very attractively valued, and they are very well poised to take advantage of opportunities presented by the current global recession and credit crunch.
Common Stock Activities
Whitman disclosed in the quarterly report that despite the fund has a positive cashflow in the month of April, 2009, they still had to sell some stocks in order to maintain a cash position in excess of 5%. Quoting from the quarterly report:
. Here is a brief overview of the stocks mentioned here and traded in the US market:
Management reluctantly sold the Fund’s positions in Hutchison Whampoa Common, St. Joe Common and Suncor Common. The sales of MGIC Common and Radian Common reflect a view that both companies may be suffering permanent impairments, as the U.S. housing market continues to deteriorate. Datascope Common was sold in a take-over transaction at a profit.
Suncor Energy (SU)
Suncor Energy is a world leader in mining and extracting crude oil from the vast oil sands deposits of northern Alberta. Suncor Energy Inc. has a market cap of $26.2 billion; its shares were traded at around $27.96 with a P/E ratio of 11.5 and P/S ratio of 0.9. The dividend yield of Suncor Energy Inc. stocks is 0.7%. Suncor Energy Inc. had an annual average earning growth of 21.8% over the past 5 years.
Martin Whitman acquired one million shares of SU in 3Q04 when the stock ended around $16. Despite the stock declined from over $70 per share in mid of 2008, Whitman’s sale price enabled him to book a profit in this stock when he sold out all the shares in 1Q09.
St. Joe Company (JOE)
St. Joe Company is one of the Southeast's largest real estate operating companies. The company own a large acreage of land in the panhandle of Florida. The St. Joe Company has a market cap of $2.29 billion; its shares were traded at around $24.75 with and P/S ratio of 8.7. The St. Joe Company had an annual average earning growth of 5.4% over the past 10 years.
Martin Whitman initiated a position of 617,900 shares in 3Q01and over the years has acquired a large position of 8.5 million shares through 3Q04. But in 1Q09, he had to sell them all in waves of redemption.
MGIC Investment Corporation (MTG)
MGIC Investment Corporation is a holding company which through its wholly owned subsidiary Mortgage Guaranty Insurance Corporation is the leading provider of private mortgage insurance coverage in the United States to the home mortgage lending industry. MGIC Investment Corp. has a market cap of $455.3 million; its shares were traded at around $3.64 with and P/S ratio of 0.3.
Martin Whitman sold his entire 2 million shares of MTG in 1Q09 and he thinks that company may suffer permanent impairments
Radian Group (RDN)
Radian Group Inc. is the parent company of Radian Guaranty Inc. The company provides private mortgage insurance and risk management services to mortgage lenders nationwide. Radian Group Inc. has a market cap of $194.1 million; its shares were traded at around $2.37 with and P/S ratio of 0.1. The dividend yield of Radian Group Inc. stocks is 0.4%.
Martin Whitman reduced his Third Avenue Value Fund holding in RDN by 25.45% to 7.9 million shares. Shares owned by other funds in the Third Avenue family are also reduced by 21% to 11.6 million shares.
Martin Whitman is a patient investor. He has turned his portfolio barely and is waiting for the better days of the markets: market in the US as well as in Hong Kong. His portfolio activities are driven by liquidity concerns and to a less degree, by recognition of investment mistake made in the past.