Whitman And The Third Avenue Value Fund Down But Not Out

By Eric Fox | April 08, 2009 AAA

The Third Avenue Value Fund, run by noted value investor Marty Whitman, still maintains impressive long-term out performance, although the fund has taken a beating the last year as Whitman stuck with and even increased his large bet on financials.

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The Third Avenue Value Fund has outperformed the S&P 500, its benchmark, since the fund started operations in 1990, and also on a five-, 10- and 15-year basis. The fund's recent track record lags the benchmark, as the fund was down 45.6% in 2008 while the S&P 500 was only down 37%.

Whitman is a value investor, and his investment philosophy is simply stated in the literature of the fund. They are bottom up stock pickers, looking for strong balance sheets, good management, a business that is simple to understand, and that operates in a sound political and regulatory environment. Of course, price is one of the most important facets of the investment process, and Whitman's team looks for stocks selling at a discount to intrinsic value, with the prospect of growth in net assets over the long term. (Find the investing "sweet spot" by combining these two styles, read Where Top Down Meets Bottoms Up.)

One of Whitman's largest bets is on MBIA Insurance (NYSE:MBI), the embattled bond insurer, which was 5.7% of assets at the end of 2008. The fund owns both common stock and surplus notes. Whitman was a loyal shareholder of MBIA Insurance for years, and stuck with the company during the credit crisis, as other Wall Street players started to bash the company and its smaller competitor, Ambac Financial Group (NYSE:ABK). He even went head to head with Bill Ackman, who runs Pershing Square Capital Management, who made a very public case against the company.

Whitman is now in litigation with MBIA Insurance after the company announced plans to split off its municipal bond business from the rest of the company.

The fund's largest holding is Cheung Kong Holdings at 11.2% of assets. Cheung Kong Holdings is part of a conglomerate based in Hong Kong that has interests in a range of different businesses. The fund invests frequently in stocks outside the U.S. It owns 5% of Posco (NYSE:PKX), the American depositary receipt, a steel company in South Korea. The company announced in late 2008 that it was spending $4.4 billion in 2009 to expand capacity and revamp some of its equipment.

The fund also has a position in Bank of New York Mellon (NYSE:BK), considered generally to be one of the safer banks in our financial system. A little more controversial might be the fund's position in Nabors Industries, Ltd., (NYSE:NBR), a land driller in which Whitman has a board seat. This stock has been pummeled by the fall in commodity prices and is down 75%. This business is intensely cyclical and it was fairly apparent that the industry was bubbling up. In my opinion, it's hard to justify that the stock was selling below intrinsic value when it was at $50.

The Bottom Line
Whitman still has most of his track record intact. When the market recovers, the positions he built during the bear market will swing the rest of his track record far above his benchmark. (Read about the success of those who helped individual investors achieve high returns Top Five All-Time Mutual Fund Managers.)

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