If you combine what legendary investor Martin Whitman’s quarterly letters into a book, it would be one of the greatest value investing classic. Every one of his quarterly letters would serve readers very well as a chapter for different aspects of value investing.
In his most recent quarter letter, Martin Whitman discussed what he sees as US credit worthiness continues to deteriorate and what he does to his fund facing this situation.
Martin Whitman Weighted His Fund Cash Holdings Toward the U.K. Rather Than the United States
As of July 31, 21% of Martin Whitman’s $11 billion Third Avenue Value Fund is in cash and equivalents. “Of this 21%, almost 58% was invested in United Kingdom Government issues, and a little over 42% was invested in U.S. Treasuries and similar instruments. Third Avenue has weighted its cash holdings toward the U.K. rather than the United States because TAVF obtains a better yield on U.K. instruments, and because of my belief that important parts of the U.S. economy, including the Federal Government, are likely to face a continued deterioration in credit-worthiness.” Wrote Martin Whitman. These “United Kingdom Government issues” are 207,000,000 pounds of United Kingdom Treasury Bills, yield 5.37%-5.82%, due 8/13/07-10/1/07 and 520,000,000 pounds of United Kingdom Treasury Bonds, yield 5.00%-7.25%, due 12/7/07-3/7/08. These UK Treasuries worth about $1.47 billion.
The reason Martin Whitman holds cash in UK rather than US is because “deteriorated credit-worthiness may well mean higher interest rates and a weaker dollar over the long term.”
Martin Whitman Owns More Overseas Stocks Than North American Stocks
Martin Whitman invests heavily in overseas. “At July 31, approximately 78.1% of Fund assets were invested in common stocks. Within the common stock portfolio, 54% of the market value were in non-North American issues, and only around 46% were in issues of companies whose principal areas of interest were the United States and Canada. Of the overseas issues, 53% were Hong Kong companies; 29% were Japanese companies; 10% was a South Korean company; and 8% were Western European companies.”
Why he likes invests in overseas? He wrote, “First, the overseas common stocks, appear to be much cheaper than U.S. issues, measured by estimated discounts from readily ascertainable NAVs. Second, the overseas common stocks appear to have much greater growth potential than their domestic counterparts, measured by the probabilities that over the next five to ten years, it will be easier for the foreign companies to increase readily ascertainable NAVs by at least 15% compounded annually.”
Hong Kong stock market seems to be less efficient, which allows the bottom up value investors like him to buy quality companies at lower prices. He wrote in the first quarter share holder letter, “Because The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”) seems to be relatively inefficient compared to U.S. equity markets, it is sometimes possible to acquire the equities of extremely well-financed companies at prices that represent substantial discounts from the discount prices at which the publicly-traded common stocks of shares owned in controlled subsidiaries are selling.” He calls the two stocks he bought recently Hang Lung Group Common and Henderson Investment Common “double discount” issues.
Martin Whitman has added significantly his positions in Hong Kong and Japan based companies. His top five holdings: Cheung Kong Holdings ( CHEUY.PK), Henderson Land Development ( HLDVF.PK), Toyata Industries ( TYIDF.PK), POSCO (PKX), and Forest City (FCE-A).
The Risks of Investing in Overseas
As a safe and cheap balance sheet investor, Martin Whitman is well aware of the risks involved in investing overseas. He summarized these risks as:
1) Changes of control seem out of the question, especially for each of the Hong Kong entities. Each of the businesses are majority owned by billionaire families. The market seems to be sort of efficient in that if changes of control were actually a possibility, it would be extremely unlikely that the common stocks would be available at the existing discount prices from NAV. Resource conversion activities over time in companies such as Cheung Kong, Henderson Land and Wheelock may be limited to the sale of subsidiaries, the sale of assets and massive refinancing. In the next several years, lots of income producing real estate located in Hong Kong, Mainland China and Singapore may be sold to captive Real Estate Investment Trusts (“REIT’s”) at very attractive prices.
2) Compared with the U.S., there is a relative lack of Securities Laws Protections in foreign countries for OPMIs such as TAVF.
3) Despite difficulties in the U.S., this country is characterized by more political stability than any of the other countries in which we have invested, with the possible exceptions of Sweden, Switzerland and Japan.
4) Third Avenue’s Hong Kong investments are in companies which have a large presence in Mainland China. Despite, and maybe because of, the rapid growth in the Mainland, there are large problems with corruption, pollution, and ineffective regulation of all sorts of activities.
5) The disclosures given us by the companies in which we have invested are generally terrific. Nonetheless, Fund management is a lot less familiar with the culture and nuances involved in these foreign investments than is the case for North American issuers.
The U.S. Remains the Best Place in the World to Invest in Individual Securities for a Bottom-up Investor
Macro factors point to a less optimistic outlook for the U.S. than for, say, Hong Kong or Mainland China. In spite of this, the U.S. remains the best place in the world to invest in individual securities for a bottom-up investor such as TAVF, other things being close to equal. The reasons that the U.S. remains such an attractive place to invest seem best summarized as
follows:
Relative political stability.
Continental economy.
Well-developed legal institutions and practice, even though the quality of the Federal judiciary appears to have deteriorated materially during the last six years.
Well-developed financial system, including great disclosure systems and well regulated markets.
Hard working, well-educated labor force.
World’s best university educational system.
The world’s most efficient distribution system.
Strong depository institutions.
Relatively honest, corruption free government.
A plethora of highly capable, responsible corporate managers.
In his most recent quarter letter, Martin Whitman discussed what he sees as US credit worthiness continues to deteriorate and what he does to his fund facing this situation.
Martin Whitman Weighted His Fund Cash Holdings Toward the U.K. Rather Than the United States
As of July 31, 21% of Martin Whitman’s $11 billion Third Avenue Value Fund is in cash and equivalents. “Of this 21%, almost 58% was invested in United Kingdom Government issues, and a little over 42% was invested in U.S. Treasuries and similar instruments. Third Avenue has weighted its cash holdings toward the U.K. rather than the United States because TAVF obtains a better yield on U.K. instruments, and because of my belief that important parts of the U.S. economy, including the Federal Government, are likely to face a continued deterioration in credit-worthiness.” Wrote Martin Whitman. These “United Kingdom Government issues” are 207,000,000 pounds of United Kingdom Treasury Bills, yield 5.37%-5.82%, due 8/13/07-10/1/07 and 520,000,000 pounds of United Kingdom Treasury Bonds, yield 5.00%-7.25%, due 12/7/07-3/7/08. These UK Treasuries worth about $1.47 billion.
The reason Martin Whitman holds cash in UK rather than US is because “deteriorated credit-worthiness may well mean higher interest rates and a weaker dollar over the long term.”
Martin Whitman Owns More Overseas Stocks Than North American Stocks
Martin Whitman invests heavily in overseas. “At July 31, approximately 78.1% of Fund assets were invested in common stocks. Within the common stock portfolio, 54% of the market value were in non-North American issues, and only around 46% were in issues of companies whose principal areas of interest were the United States and Canada. Of the overseas issues, 53% were Hong Kong companies; 29% were Japanese companies; 10% was a South Korean company; and 8% were Western European companies.”
Why he likes invests in overseas? He wrote, “First, the overseas common stocks, appear to be much cheaper than U.S. issues, measured by estimated discounts from readily ascertainable NAVs. Second, the overseas common stocks appear to have much greater growth potential than their domestic counterparts, measured by the probabilities that over the next five to ten years, it will be easier for the foreign companies to increase readily ascertainable NAVs by at least 15% compounded annually.”
Hong Kong stock market seems to be less efficient, which allows the bottom up value investors like him to buy quality companies at lower prices. He wrote in the first quarter share holder letter, “Because The Stock Exchange of Hong Kong Limited (“Hong Kong Stock Exchange”) seems to be relatively inefficient compared to U.S. equity markets, it is sometimes possible to acquire the equities of extremely well-financed companies at prices that represent substantial discounts from the discount prices at which the publicly-traded common stocks of shares owned in controlled subsidiaries are selling.” He calls the two stocks he bought recently Hang Lung Group Common and Henderson Investment Common “double discount” issues.
Martin Whitman has added significantly his positions in Hong Kong and Japan based companies. His top five holdings: Cheung Kong Holdings ( CHEUY.PK), Henderson Land Development ( HLDVF.PK), Toyata Industries ( TYIDF.PK), POSCO (PKX), and Forest City (FCE-A).
The Risks of Investing in Overseas
As a safe and cheap balance sheet investor, Martin Whitman is well aware of the risks involved in investing overseas. He summarized these risks as:
1) Changes of control seem out of the question, especially for each of the Hong Kong entities. Each of the businesses are majority owned by billionaire families. The market seems to be sort of efficient in that if changes of control were actually a possibility, it would be extremely unlikely that the common stocks would be available at the existing discount prices from NAV. Resource conversion activities over time in companies such as Cheung Kong, Henderson Land and Wheelock may be limited to the sale of subsidiaries, the sale of assets and massive refinancing. In the next several years, lots of income producing real estate located in Hong Kong, Mainland China and Singapore may be sold to captive Real Estate Investment Trusts (“REIT’s”) at very attractive prices.
2) Compared with the U.S., there is a relative lack of Securities Laws Protections in foreign countries for OPMIs such as TAVF.
3) Despite difficulties in the U.S., this country is characterized by more political stability than any of the other countries in which we have invested, with the possible exceptions of Sweden, Switzerland and Japan.
4) Third Avenue’s Hong Kong investments are in companies which have a large presence in Mainland China. Despite, and maybe because of, the rapid growth in the Mainland, there are large problems with corruption, pollution, and ineffective regulation of all sorts of activities.
5) The disclosures given us by the companies in which we have invested are generally terrific. Nonetheless, Fund management is a lot less familiar with the culture and nuances involved in these foreign investments than is the case for North American issuers.
The U.S. Remains the Best Place in the World to Invest in Individual Securities for a Bottom-up Investor
Macro factors point to a less optimistic outlook for the U.S. than for, say, Hong Kong or Mainland China. In spite of this, the U.S. remains the best place in the world to invest in individual securities for a bottom-up investor such as TAVF, other things being close to equal. The reasons that the U.S. remains such an attractive place to invest seem best summarized as
follows:
Relative political stability.
Continental economy.
Well-developed legal institutions and practice, even though the quality of the Federal judiciary appears to have deteriorated materially during the last six years.
Well-developed financial system, including great disclosure systems and well regulated markets.
Hard working, well-educated labor force.
World’s best university educational system.
The world’s most efficient distribution system.
Strong depository institutions.
Relatively honest, corruption free government.
A plethora of highly capable, responsible corporate managers.
