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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
THIRD QUARTER REPORT
(Unaudited)
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July 31, 1997
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At July 31, 1997, the unaudited net asset value attributable to the 41,936,016
common shares outstanding of the Third Avenue Value Fund ("TAVF", "Third Avenue"
or the "Fund") was $31.69 per share. This compares with an unaudited net asset
value of $26.86 at April 30, 1997, and an unaudited net asset value of $21.81
per share at July 31, 1996 as adjusted for subsequent distributions. At August
19, 1997, the unaudited net asset value was $31.72 per share.
QUARTERLY ACTIVITY
During the third quarter of fiscal 1997, the Fund established new positions in 7
issues, increased its holdings of 12 securities, reduced its positions in 4
issues, and eliminated holdings in 6 investments:
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$1,311,315 Montgomery Ward Trade Claim
("Montgomery Ward Trade Claim")
$50,000,000 notional Japanese Yen Out-of-the-Money
Put Option ("Put Option")
$20,000,000 CGA Group, Ltd. Securities
("CGA Units")
2,500,000 shares Mitsui Marine & Fire Insurance Co., Ltd.
Common Stock ("Mitsui Common")
25,000 shares NCR Corp. Common Stock
("NCR Common")
70,700 shares Risk Capital Holdings, Inc. Common
Stock ("Risk Capital Common")
3,045,508 shares Tejon Ranch Co. Common
Stock ("Tejon Common")
INCREASES IN EXISTING POSITIONS
30,000 shares FDP Corp. Common Stock
("FDP Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
53,500 shares First American Financial Corp.
Common Stock ("First American
Common")
30,000 shares Forest City Enterprises, Inc. Class A
Common Stock ("Forest City
Common")
328,250 shares FSI International, Inc. Common Stock
("FSI Common")
169,200 shares KLA-Tencor Corp. Common Stock
("KLA Common")
1,013,000 shares Nissan Fire & Marine Insurance
Common Stock ("Nissan Common")
180,000 shares Physio-Control International Corp.
Common Stock ("Physio Common")
79,268 shares ReliaStar Financial Corp. Common Stock
("ReliaStar Common")
100,000 shares Silicon Valley Group, Inc. Common Stock
("Silicon Valley Common")
29,900 shares Stewart Information Services Corp.
Common Stock ("Stewart Common")
201,400 shares Tecumseh Products Co. Class B Common
Stock ("Tecumseh Common")
200,000 shares The Sumitomo Marine & Fire Insurance
Co., Ltd. Comon Stock
("Sumitomo Common")
POSITIONS REDUCED
$1,743,456 AAA Rated Asset Backed Securities
("Structured Notes")
$16,436,351 Inverse Floaters ("Inverse Floaters")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS REDUCED (CONTINUED)
$501,872 Thousand Trails, Inc. PIK Notes
("Thousand Trails Notes")
78,800 shares Piper Jaffray Companies, Inc. Common
Stock ("Piper Common")
POSITIONS ELIMINATED
$850,000 Kmart Debentures ("Kmart Credits")
$50,000,000 notional amount U.S. Dollar-Japanese Yen Swap
(the "Swap")
176,900 shares Destec Energy, Inc. Common Stock
("Destec Common")
36,500 shares Public Storage Properties Common Stock
("PSP Common")
107,600 shares Security-Connecticut Corp. Common Stock
("Security-Connecticut Common")
169,200 shares Tencor Instruments Common Stock
("Tencor Common")
During the quarter, TAVF continued to expand its presence in the Japanese
non-life insurance industry by acquiring a new position in Mitsui Common as well
as increasing holdings of Nissan Common and Sumitomo Common. The Fund is, in
effect, betting that in the years ahead these Japanese companies will put their
huge amounts of surplus-surplus not needed for insurance operations into other
areas, say money management; or that new, control, ownership will take over one,
or more, of these companies. Each company's surplus-surplus consists almost
wholly of performing loans and passive investments in marketable common stocks.
The immediate outlook for these companies as insurance operations seems fairly
dismal as it does for the other Japanese non-life issue held by the Fund, Tokio
Marine & Fire Insurance Co., Ltd. American Depository Receipts ("Tokio ADRs").
In its Japanese investments, the Fund has been trying to ameliorate currency
risk caused by possible dramatic fluctuations in the value of the Japanese Yen
relative to the U.S. Dollar. During the quarter TAVF closed out the Swap and
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replaced it with the Put Option. The Swap fluctuated in value daily as
Yen-Dollar relative prices changed. The Put Option provides no protection to the
Fund unless the Yen weakens to a rate of 126 to the Dollar or weaker; then it
provides precisely the same protections as the Swap. (The Yen currently trades
at about 116 to the Dollar). While owning the Swap, TAVF suffered an ordinary
loss arising out of currency fluctuations of approximately $4 million, net. The
total cost for the Put Option was $302,500. Since the Fund is trying only to
guard against a dramatic devaluation of the Yen which would persist, rather than
being involved with day-to-day currency fluctuations, the Put Option seems to
make a lot more sense for TAVF than the Swap ever did. Live and learn.
Our cost basis for Montgomery Ward Trade Claims is less than 40 cents per dollar
of claim. While Montgomery Ward very well may not survive as a going concern, in
the normal course of events there seems to be enough value in the Montgomery
Ward Estate so that TAVF ought to earn a satisfactory return. There may be
considerable reorganization risk in Montgomery Ward Trade Claims, which would
arise if pre-petition creditors, including trade claimants, failed to pursue
vigorously that which they ought to be entitled to under the current Montgomery
Ward Chapter 11 Reorganization case.
Tejon Common is an investment in properties which seem to have very good
potential but which will take a long time, say over five years, to work out.
Together with Third Avenue Small-Cap Value Fund, 26% of the outstanding Tejon
Common has been acquired from an existing holder in a non-SEC registered private
placement. I think the transaction was priced right for the Third Avenue Funds,
- - $131/2 per share, equal to a 25% discount from the trading price of Tejon
Common on the American Stock Exchange and an all-in cost of under $650 an acre.
Tejon Ranch is a huge, debt-free, real estate development, agricultural,
livestock, mineral rights (small) play based on the fee ownership of 270,000
contiguous acres of land located about 60 miles north of Los Angeles, California
and 30 miles south of Bakersfield. The properties most susceptible to early
development are the 16 miles of frontage Tejon Ranch owns on both sides of
heavily traveled Route I-5, the main highway between Los Angeles and San
Francisco. Despite the huge potential, there are a lot of uncertainties involved
with Tejon Ranch. Suffice to say, though, I like the Tejon management a lot,
their plans and their way of thinking.
Like Tejon Common, the CGA Units represent a non-SEC registered investment,
though in the case of CGA, the Fund acquired newly-issued securities. CGA is a
start-up business which will engage essentially in providing credit-enhancements
for real estate mortgages - a sort of specialized version of those credit
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enhancers whose common stocks are in the TAVF portfolio; AMBAC, Enhance, FSA and
MBIA. Real estate lending seems to be a treacherous business but I do have a lot
of confidence in the CGA management team. If things go anywhere near plan, there
could be an attractive Initial Public Offering ("IPO") bail-out for the Fund
several years down the road.
Despite the roaring bull market, a few common stocks became available to TAVF
during the quarter at prices that seemed cheap. Purchases encompassed NCR
Common, Risk Capital Common, FDP Common, First American Common, Forest City
Common, FSI Common, Physio Common, Silicon Valley Common, Stewart Common and
Tecumseh Common. The Fund's holdings of ReliaStar Common and KLA Common were
increased in connection with the acquistions by these companies in merger
transactions of Security-Connecticut Common and Tencor Common respectively.
The principal position reduced during the quarter was the Fund's investment in
Inverse Floaters. The Inverse Floater issue eliminated seemed to carry interest
rate risk. Predicting interest rates is not something I, or the people
associated with the Fund, are particularly good at. The Structured Notes were
subject to normal amortization. Thousand Trails Notes were tendered pursuant to
a cash tender offer. The Kmart Credits matured. Destec Common and PSP Common
were cashed out in merger transactions. Piper Common was sold as part of our
long-standing program to reduce our interest in that issue.
THE TAVF APPROACH TO CORPORATE VALUATION
The Third Avenue investment approach seems quite distinct from that of most
other mutual funds; even others who, like the Fund, claim to be buy and hold
value investors. In a nutshell, TAVF emphasizes the primacy of a Resource
Conversion Approach ("Resource Conversion") in most valuations of equity
securities. Almost all other money managers emphasize the primacy of a Going
Concern Approach ("Going Concern") in most corporate and securities valuations.
The key factor for Third Avenue in a Resource Conversion analysis is the quality
and quantity of resources existing in a business at the time of analysis; I.E.,
a "what is" approach focusing on an adjusted balance sheet. The key factor for a
Going Concern analyst is an estimate of future flows, whether those flows are
cash or earnings; I.E., a "what will be" approach focusing on estimated income
accounts.
Going Concern is the bedrock for business valuations in just about all
literature about finance, including Generally Accepted Accounting Principles
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("GAAP"), academic finance as embodied in the Efficient Market Hypothesis
("EMH"), and fundamental analysis as embodied in the writings of Benjamin Graham
and David Dodd, their predecessors and their successors (collectively, "G&D").
The best analysts embracing Going Concern, for example G&D, do not ignore
Resource Conversion (just as TAVF does not ignore Going Concern in its corporate
valuations). G&D's connection to Resource Conversion seem to come mostly in the
context of being aware of liquidating values. G&D point to the attraction of
acquiring common stocks at prices below liquidating value, especially prices
below net, net current assets. Net, net current assets refers to net current
asset value after deducting all GAAP liabilities, both short term and long term.
The least sophisticated analysts, E.G., EMH, believe that Resource Conversion is
the exclusive value determinant anytime values can be measured by trading prices
in markets populated by Outside Passive Minority Investors ("OPMIs"). In all
other cases, Going Concern is the value determinant. Thus, for academics a
Resource Conversion emphasis for corporate valuations is adopted by requiring
that performing loans held in corporate portfolios be valued at market. In
general, EMH operates on the assumption that financial results for all
corporations other than investment companies are to be measured strictly by
Going Concern standards; while portfolio results for an investor in those
corporations' securities are to be measured strictly by Resource Conversion
standards. This academic approach is not helpful at all for a Third Avenue type
corporate analysis.
The underlying force driving Going Concern is the strict going concern
assumption. Corporations are seen in Going Concern as devoted essentially to the
same day-to-day operations they have always conducted within the same industries
in which they have always operated; managed and controlled as they always have
been managed and controlled; and financed pretty much as they always have been
financed. Up until the early 1990's this strict going concern assumption
accurately described the environment existing in the electric utility industry.
It never described accurately most U.S. corporations whose securities are
publicly traded. The strict going concern assumption no longer seems appropriate
even for electric utilities.
Certain conclusions follow logically if one grants the strict going concern
assumption. First, among buy and hold fundamentalists there is a primacy of the
income account, and a consequent denigration of the balance sheet for corporate
valuation purposes. (Further, among traders not engaged in risk arbitrage, I.E.,
situations where there will be relatively determinant workouts in relatively
determinant periods of time, the income account is supreme; short term movements
in common stock prices, after all, are likely to be heavily influenced by
changes in reported earnings and not influenced at all by changes in book
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values). Further, G&D point out that the past earnings record of a corporation
usually is the best tool for estimating earnings for the years just ahead over a
business cycle or growth phase. If one grants the strict going concern
assumption, G&D are absolutely right about the relative importance of the past
earnings record as a tool for predicting future earnings.
Third Avenue believes that the strict going concern approach is utterly
unrealistic. Most companies whose securities are publicly traded will always
combine elements of the going concern and elements revolving around the
conversion of corporate resources to other uses, other ownership, other control
and other financing or refinancing. In the Fund's view, few U.S. corporations
are going to go for as long as five years without being involved in resource
conversion activities-mergers and acquisitions; changes of control; management
buyouts; massive share repurchases; major financings, refinancings or
reorganizations; sales of assets in bulk; spin-offs; investing in new ventures
in other industries; and corporate liquidations. G&D describe these resource
conversion activities as non-recurring events. For TAVF, there is nothing
non-recurring about them.
Both going concern considerations and resource conversion considerations are
important in most corporate valuations. Indeed, in most situations going concern
considerations and resource conversion considerations are related intimately to
each other, derived from, modified by, and a function of, each other. The
current sales value of an asset is determined frequently by what it is believed
that asset can be caused to earn. Much of the "what is" value for many, if not
most corporations probably was created by past going-concern prosperity. Third
Avenue, in its valuation approach, does not subscribe to a primacy of Resource
Conversion over Going Concern in its evaluation of equity securities because of
a view that Resource Conversion is more important or more commonplace
necessarily in the overall economic scheme of things. Rather, the Fund
subscribes to a primacy of Resource Conversion because it seems to provide the
Fund with superior tools of analysis for the types of buy and hold investments
of interest to Third Avenue. Emphasizing Resource Conversion makes it easier for
the Fund to identify publicly traded securities that meet the Fund's twin
objectives for an investment-"safe" and "cheap".
People who focus on Going Concern tend to believe that value creation is a
function of just one factor- estimated free cash flows appropriately
capitalized: EMH; or estimated earnings appropriately capitalized: G&D. For
Third Avenue, corporate values are derived from one, or more, of four, separate,
but often related, sources:
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1) Free cash flow from operations. A minority of going concerns
generate excess cash flows from operations which become available to
service a company's capitalization. TAVF holds substantial positions in
the common stocks of companies engaged in money management, an industry
with a strong tendency to produce free cash flows. While no corporation
would undertake a specific project unless it were believed that the
project, as a stand alone, would produce cash flows with a positive net
present value, it seems probable that most profitable going concerns
actually do not create free cash flows, but rather create earnings
because the nature of good going concern operations is to expand by
acquiring large amounts of assets that have to be financed by obtaining
outside capital.
or
2) Earnings from operations. Earnings are defined as the creation of
wealth while consuming cash. This seems to be what the vast majority of
prosperous going-concerns do, and all growing economies do. In general,
since earnings result in the consumption of cash, earnings cannot have
any independent value unless they are also combined with access to
capital markets, whether such access is to credit markets, equity
markets, or both.
and/or
3) Conversion of assets to higher uses and/or other ownership or
control; and/or the financing of asset acquisitions or the refinancing
of liabilities. These activities sometimes take the form of Mergers and
Acquisitions ("M&A"), contests for control, Leveraged Buy-outs
("LBOs"), the restructuring of troubled companies, and acquiring
securities in bulk through cash tender offers, exchange offers, and the
use of corporate proxy machinery. The vast majority of equity
securities held by Third Avenue were acquired at prices which we
believed represented substantial discounts from an adjusted Net Asset
Value ("NAV"). The long term exit strategies for such investments
include a multiplicity of Resource Conversion and Going Concern
possibilities encompassing redeploying existing surplus assets to uses
with higher returns than are currently being realized (Tokio ADRs and
Carver Federal Bank Common Stock); having new ownership which would pay
substantial premiums over NAV to acquire these companies (depository
institutions might acquire regional broker/dealers and financial
insurance companies); use the existing asset base to create large, new
NAVs (Forest City Enterprises, Tejon Ranch and St. Joe Paper); or use
the existing asset base to realize markedly improved earnings and
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Return on Equity ("ROE") during the next up cycle for a growth industry
(semi-conductor equipment common stocks, Cummins Engine, or Tecumseh
Products).
and
4) Have access to capital markets on a super attractive basis. It seems
probable that more corporate wealth, and, certainly wealth for
financiers, is created by this route than any other. Groups accessing
capital markets on a super attractive basis include those financing
many M&As as well as LBOs; and those taking advantage of the pricing
available relatively frequently in the market for IPOs. Third Avenue
tries to select equity securities for its portfolio which have been
issued by companies which will be attractive acquisition candidates for
others at prices well above those existing in OPMI markets such as the
New York Stock Exchange and NASDAQ. The Fund believes that most
acquirers of control positions analyze the same way Third Avenue
analyzes- there exists for them a primacy of Resource Conversion and
like the Fund an emphasis on the quality of NAV rather than the
quantity of NAV. Further, Third Avenue also invests from time to time
in private placements at prices close to NAV where the exit strategy,
after a few years of growth in NAV, is to sell a new issue of common
stock in an IPO at a substantial premium price above that future NAV.
This is the analysis behind TAVF's investment during the quarter in CGA
Units.
As I have pointed out in previous letters, each investment the Fund makes has
something wrong with it, and we spend a lot of time trying to figure out what is
wrong and worrying about it. We make investment commitments when, in our
judgment, what is right seems to outweigh strongly, what is wrong. One of the
more important areas where there are trade-offs between right and wrong is in
the differences that arise when emphasizing Resource Conversion and
de-emphasizing Going Concern. Frequently, what is right for Resource Conversion
is wrong for Going Concern, and vice versa. Here are a few examples:
Japanese non-life insurers: Viewed as investment trusts whose principal
assets are performing loans and passive investments in marketable
common stocks, these well financed issuers seem inordinately attractive
from a Resource Conversion point of view since they are trading at
discounts from an adjusted NAV of anywhere from 30% to 70% if one does
not deduct a potential liability for income taxes on unrealized gains.
Viewed from a Going Concern point of view, however, these issues hardly
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appear attractive at all selling at 20 times or more reported earnings.
The outlook for existing operations is very clouded since for the first
time, this sheltered industry is going to face real competition,
especially price competition, concomitant with the "Big Bang" reforms
taking place as part of the deregulation of financial institutions in
Japan.
Retailing Industry: From a Resource Conversion point of view, retail
inventories are a current asset convertible into cash within twelve
months. From a Going Concern point of view, retail inventories are an
illiquid fixed asset of the worst sort. If a retail business, say
Sears, is to remain a going concern it will have to keep its aggregate
level of inventories relatively constant or even expanding. These
assets are subject to fashion swings, markdowns, shrinkage and
obsolescence. Third Avenue's positions in retail equities are small. In
our view, common sense here dictates that a Going Concern analysis
ought to take precedence over a Resource Conversion analysis. Put
otherwise, TAVF is not particularly enchanted with the G&D approach
toward favoring companies that happen to be in retailing because these
common stocks are trading at prices below GAAP net, net current assets;
most of the time that type of pricing for retail equities impresses us
as "cheap" but not "safe".
Forest City Common: As a Resource Conversion, the company's huge
portfolio of income producing real estate properties, carried for GAAP
purposes as a fixed asset, is very much a current asset, probably
salable at close to appraisal values "over the phone". Third Avenue
acquired its interests in Forest City essentially because those
interests were available at steep discounts from what we thought the
appraised values of the income producing properties were. The Resource
Conversion analysis, though, was incomplete. As a practical matter,
Forest City has many Going Concern attributes, one of which is that the
best properties are not for sale and that as a going concern Forest
City will dedicate cash flows from its successful properties to support
cash drains from its poorer projects. Also, as a Going Concern
investment builder, Forest City has been super successful in creating
Resource Conversion values over the years. Hopefully, Forest City cash
flows will continue to be devoted to Going Concern value creation.
Fixed Income Portfolios of Performing Loans: The TAVF portfolio is
growing in size and the Fund has no interest bearing debt in its
capitalization. The same is true for the investment portfolios of the
various U.S.-based insurance companies in whose common stocks TAVF has
invested. All of these insurance company portfolios are invested
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essentially in performing loans. Viewed as a Resource Conversion, the
various portfolio values are mostly carried at market value, I.E.,
marked to market. If interest rates rise, the market value of the
portfolios go down. Viewed as a Going Concern, though, as interest
rates go up, future investment income increases more than would
otherwise be the case as new funds, as well as maturing funds, are
invested at interest rates that provide increased returns. If interest
rates do rise, I think the insurance companies probably will be
benefited more by the Going Concern effect than they will be harmed by
the Resource Conversion effect. (There seems to be a knee-jerk reaction
in the general market that higher interest rates are bearish
universally; that is just what that general sentiment is; - a knee-jerk
reaction. Some companies would be helped by higher interest rates, some
harmed, albeit most of the Fund's equity portfolio where the underlying
companies are cash-rich probably will be helped).
While the Fund does not ignore Going Concern in the analysis of securities,
there is no question that Third Avenue places primary emphasis on Resource
Conversion. This emphasis results in certain advantages and disadvantages. The
advantages for the Fund in emphasizing Resource Conversion seem to be about as
follows:
It is a relatively non-competitive activity. Most money managers seem
to concentrate on forecasting earnings or cash flows.
The businesses are easier to analyze. TAVF does not get involved in
common stocks unless the businesses are extremely well financed and we
can understand what they do. This is our basic criteria for "safe". As
to "cheap", TAVF tries not to pay more than 50 cents for each $1 dollar
we think the company is worth as a private company or a takeover
candidate. The Fund uses certain preliminary "rules of thumb" to
ascertain "cheap" when acquiring common stocks:
Small Cap- High Tech: usually pay no more than an 80% premium over book
value on the theory that this is the "normative" price a first stage
venture capitalist would pay if the venture capitalist were financing
the enterprise DE NOVO. As compared with venture capitalists, Third
Avenue is creating positions in companies which are already public and
which are cash-rich. On the other hand, the Fund has no elements of
control over the companies in which it invests and Third Avenue
research has to rely more on the public record and less on "due
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diligence" investigations involving insider information. Because public
records tend to be so good, the Fund probably has an information
advantage compared with many venture capitalists financing many
privately owned businesses.
Financial Institutions: buy at a discount from adjusted book values
(insurance companies); at a discount from stated book values
(depository institutions); or at a discount from tangible book values
plus 2% to 3% of assets under management (broker/dealers and other
money managers)
Real Estate Companies: buy at a discount from appraisal values.
Insofar as long term, future earnings are to be forecast, estimating
returns that might be earned on a realistic asset base is probably as
good, or better, a tool than is a corporation's past earnings record,
albeit one is not a substitute for the other. The analyst ought to use
both tools a good deal of the time.
Aside from those times when a corporation, or its control shareholders,
are seeking access to equity markets, usually an occasional occurrence,
American business seems to be run much more with a Resource Conversion
emphasis than with a Going Concern emphasis. This is certainly true for
virtually all privately owned companies not seeking to go public, and
is probably true, also, for most of the better run public companies.
Most corporations, where managements do not have their eye wholly on
OPMI stock prices, seek to create wealth in the most income tax
efficient manner. The most inefficient tax way to create wealth is to
have reportable operating earnings, a Going Concern emphasis; while the
most efficient tax way to create wealth is to have unrealized (and,
therefore mostly unreported) appreciation of asset values, a Resource
Conversion emphasis.
There is a high level of comfort for a buy and hold OPMI investor such
as Third Avenue, when investing in the equities of companies which
enjoy strong financial positions. Not only does the cushion of a strong
balance sheet make buy and hold investments feasible, but insofar as
these strong financial positions are not dissipated, it makes it
relatively easy for Third Avenue to average down when stock prices
plummet.
We believe that Third Avenue is less likely to be victimized by
securities frauds and securities promoters than are other investors.
The Fund will have a fair number of unsatisfactory investments because
sometimes we misanalyze and because the future is mostly unpredictable.
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Losses, though, because of management or control group malfeasance or
outright fraud are probably a lot less likely for the Fund than for
many other institutional investors who rely on insider forecasts of the
future and insider statements unsupported by public records as the
principal weapons in their analytical arsenal.
Third Avenue's emphasis on Resource Conversion carries a number of
disadvantages. These seem to be about as follows:
While trying to avoid investment risk, Third Avenue, in almost all its
purchases, assumes a lot of market risk, I.E., the risk that stock
prices in OPMI markets will plunge. In almost all investments by the
Fund the immediate earnings outlook is anywhere from poor to uncertain
(see the Japanese non-life insurers). Certainly the immediate earnings
outlook is almost never good. The OPMI market seems efficient enough so
that there exists a trade-off Third Avenue's investment criteria are
met because the prospects are poor for those factors of the most
immediate importance to participants in the OPMI market. The Fund is
pretty much stuck with buying what is unpopular when it is unpopular.
The managements the Fund deals with tend to be very conservative,
non-promotional types, frequently indifferent to what Wall Street
thinks or does. There is a certain "efficiency" in this because these
management groups, by and large, are not seeking near-term access to
equity markets.
The Fund ignores factors that are important in the management of many
portfolios; E.G., dividend payouts and marketability of individual
securities.
Resource Conversion seems largely unrelated to, or the antithesis of,
certain short-term measures important to other analysts; Return on
Assets, ROE, or EVA, Economic Value Added. Indeed, TAVF rejects as a
tool of analysis any system which assumes that there exists a
substantive consolidation between the interests of the corporation,
itself, and the interests of those OPMIs who emphasize short-run prices
in securities markets. EVA bottoms on an assumption of a substantive
consolidation between the company and short-run OPMIs.
Using Resource Conversion there seem to be a much more limited pool of
eligible investments than exists under Going Concern.
Resource Conversion is unsuitable as an investing technique where the
money manager is operating with borrowed money or is otherwise heavily
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influenced by daily marks to market. Resource Conversion is also
unsuitable for traders who treat securities investing as one more
casino game.
To be successful at Resource Conversion, it seems to take not only a
fair amount of training in fundamental corporate valuation but also a
fair amount of knowledge about securities law and regulation, financial
accounting and income taxation; say, enough knowledge in these areas to
be an intelligent client in dealing with full-time securities law,
accounting or income tax professionals.
Resource Conversion is not particularly relevant for portfolios, or
portions of portfolios, investing in credit instruments without credit
risk for the purposes of either obtaining assured streams of cash
income or speculating on changes in interest rates.
As a final comment, it ought to be noted that TAVF does not invest as if it were
in competition with other mutual funds. Rather our goal is to minimize
investment, but not market, risk while earning, on average, and over the long
term, a compound annual rate of return of 20% regardless of what other funds, or
the general market, have as rates of return. For TAVF to continue to have this
type of long term return, we are going to have to be both good and lucky. The
benefits of Resource Conversion notwithstanding, it won't be easy.
I will write you again when the Annual Report for the year to end October 31,
1997 is published.
Sincerely,
/s/ Martin J. Whitman
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Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES - 0.84%
<S> <C> <C> <C>
1,838,255 Olympic Automobile Receivables Trust
Series 1995-E CTFS, Subordinated Bond,
5.95% due 6/15/02 $ 1,841,877
3,616,635 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 3,660,287
5,609,231 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 5,637,022
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TOTAL ASSET BACKED SECURITIES
(COST $11,123,338) 11,139,186 0.84%
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- -------------------------------------------------------------------------------------------
BANK DEBT - 0.17%
Oil 1,778,717 Cimarron Petroleum Corp. (c) (d) 1,797,943 0.14%
----------
Retail 1,311,315 Montgomery Ward Trade Claim (c) 468,517 0.03%
----------
TOTAL BANK DEBT (Cost $2,266,460) 2,266,460
----------
- -------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.55%
Foreign
Issuers-
Bermuda 6,428,575 CGA Special Account Trust (c) 6,428,575 0.48%
----------
Membership
Sports &
1,004,026 Thousand Trails, Inc.,
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 878,522 0.07%
----------
TOTAL CORPORATE BONDS
(COST $7,240,915) 7,307,097
----------
- -------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS - 1.90%
2,889,650 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1635 K, Inverse Floater
6.20321% due 12/15/08 (e) 2,324,319
5,000,000 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1518 G, Inverse Floater
3.80% due 5/15/23 (e) 2,615,550
4,948,310 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1960 SB, Inverse Floater
11.25% due 5/15/27 (e) 4,931,882
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS - (CONTINUED)
<S> <C> <C> <C>
2,058,631 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-129 S, Inverse Floater
4.33972% due 8/25/08 (e) $ 1,564,333
6,600,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-229 SB, Inverse Floater
5.41706% due 12/25/08 (e) 5,490,474
300,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-221 SG, Inverse Floater
2.94025% due 12/25/08 (e) 210,171
2,683,270 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SK, Inverse Floater
7.2205% due 2/25/09 (e) 1,982,641
3,000,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SM, Inverse Floater
7.90145% due 2/25/09 (e) 2,463,030
6,191,950 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-210 SA, Inverse Floater
0.00% due 11/25/23 (e) 2,861,610
1,696,925 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-72 SB, Inverse Floater
2.38125% due 4/25/24 (e) 847,716
----------
TOTAL GOVERNMENT AGENCY BONDS
(COST $19,103,523) 25,291,726 1.90%
----------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - 57.65%
<S> <C> <C> <C>
Annuities & Mutual Fund 163,300 John Nuveen & Co., Inc. Class A $ 5,317,456
Management & Sales 272,000 Liberty Financial Companies, Inc. 14,110,000
300,000 SunAmerica, Inc. 18,150,000
----------
37,577,456 2.83%
----------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) 2,700,000 0.20%
----------
Building Products 44,000 Central Sprinkler Corp. (a) 891,000
& Related 125,000 Cummins Engine Co., Inc. 9,812,500
50,000 H.B. Fuller Co. 2,581,250
33,200 Tecumseh Products Co. Class A 1,867,500
300,000 Tecumseh Products Co. Class B (b) 16,050,000
----------
31,202,250 2.35%
----------
Business Development 43,200 Capital Southwest Corp. 3,196,800 0.24%
Companies ----------
Closed-End Bond Funds 1,000,000 American Government Income Fund, Inc. 5,375,000 0.40%
----------
Computer & Software 25,000 NCR Corp. (a) 801,562
100,000 Novell, Inc. (a) 757,810
----------
1,559,372 0.12%
----------
Depository Institutions 53,000 Astoria Financial Corp. 2,557,250
218,500 Carver Bancorp, Inc. (a) (b) 2,622,000
62,500 First Colorado Bancorp, Inc. 1,128,906
149,227 Golden State Bancorp. Inc. 4,234,316
53,480 Golden State Bancorp. Inc. Warrants (a) 929,215
10,000 Letchworth Independent Bancshares Corp. 392,500
10,000 Letchworth Independent Bancshares Corp.
Warrants (a) 160,000
34,783 Peoples Heritage Financial Group, Inc. 1,386,972
80,000 Security Capital Corp. (a) 7,840,000
----------
21,251,159 1.60%
----------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - (CONTINUED)
<S> <C> <C> <C>
Financial Insurance 100,000 Ambac Financial Group, Inc. $ 8,518,750
244,100 Enhance Financial Services Group, Inc. 12,205,000
750,000 Financial Security Assurance
Holdings Ltd. 31,312,500
120,000 MBIA Inc. 14,160,000
----------
66,196,250 4.98%
----------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 5,166,000
& Purveyors 95,000 Premark International, Inc. 2,998,438
172,200 Sbarro, Inc. 4,638,638
109,100 Weis Markets, Inc. 3,559,387
----------
16,362,463 1.23%
----------
Foreign Issuers- 838,710 CGA Group, Ltd. (a) (b) (c) 4,193,550
Bermuda 85,917 LaSalle Re Holdings, Ltd. 2,867,480
912,442 St. George Holdings, Ltd. Class A (a) (b) (c) 91,244
7,549 St. George Holdings, Ltd. Class B (a) (b) (c) 755
----------
7,153,029 0.54%
----------
Foreign Issuers-Japan 2,500,000 Mitsui Marine & Fire Insurance Co., Ltd. 17,166,376
1,513,000 Nissan Fire & Marine Insurance 7,501,103
1,646,000 The Sumitomo Marine & Fire Insurance 12,581,328
Co., Ltd. (a)
750,000 Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 47,437,500
----------
84,686,307 6.37%
----------
Forest Products 54,400 St. Joe Corp. 4,664,800 0.35%
----------
Holding Companies 50,000 Aristotle Corp. (a) 150,000
21,400 White River Corp. (a) 1,412,400
----------
1,562,400 0.12%
----------
Insurance Holding 189,978 ACMAT Corp. Class A (a) (b) 2,992,153
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 7,032,104
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - (CONTINUED)
<S> <C> <C> <C>
Insurance Holding 50,000 Fund American Enterprises
Companies (continued) Holdings, Inc. $ 5,312,500
5,490 Sen-Tech International
Holdings, Inc. (a) (c) 1,749,718
----------
17,086,475 1.29%
----------
Life Insurance 217,268 ReliaStar Financial Corp. 16,661,740 1.25%
----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 912,250
40,000 Liberty Homes, Inc. Class B 405,000
13,500 Palm Harbor Homes, Inc. (a) 362,813
----------
1,680,063 0.13%
----------
Medical Supplies 81,400 Acuson Corp. (a) 2,141,837
& Services 342,300 Datascope Corp. (a) 7,466,419
268,500 Physio-Control International Corp. (a) 3,893,250
90,750 St. Jude Medical, Inc. (a) 3,703,734
----------
17,205,240 1.30%
----------
Membership Sports & 237,267 Thousand Trails, Inc. (a) (f) 667,313 0.05%
Recreation Clubs ----------
Mortgage Insurance 152,800 CMAC Investment Corp. 7,210,250 0.54%
----------
Motor Vehicles & 50,000 Ford Motor Co. 2,043,750 0.15%
Cars' Bodies ----------
Real Estate 31,000 Consolidated-Tomoka Land Co. 527,000
206,400 Forest City Enterprises, Inc. Class A 10,848,900
3,750 Forest City Enterprises, Inc. Class B 201,797
480,336 Koger Equity, Inc. 9,336,531
846 Public Storage, Inc. 25,116
10,000 Royal Palm Beach Colony Limited
Partnership Units (a) 7,656
</TABLE>
19
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - (CONTINUED)
<S> <C> <C> <C>
Real Estate (continued) 3,045,508 Tejon Ranch Co. (b) (c) $53,677,079
-----------
74,624,079 5.61%
-----------
Reinsurance Companies 70,700 Risk Capital Holdings, Inc. (a) 1,511,213 0.11%
-----------
Security Brokers, 177,150 Alex. Brown, Inc. 14,747,737
Dealers & 111,800 Jefferies Group, Inc. 7,280,975
Flotation Companies 335,000 Legg Mason, Inc. 20,581,563
146,300 Piper Jaffray Companies, Inc. 3,136,306
787,500 Raymond James Financial, Inc. 22,689,844
161,941 Ryan, Beck & Co., Inc. (b) (c) 850,190
-----------
69,286,615 5.21%
-----------
Semiconductor 25,000 AG Associates, Inc. (a) 184,375
Equipment 200,000 Applied Materials, Inc. (a) 18,375,000
Manufacturers 555,700 Electro Scientific Industries, Inc. (a) (b) 27,785,000
1,070,000 Electroglas, Inc. (a) (b) 33,838,750
1,528,250 FSI International, Inc. (a) (b) 26,553,344
369,200 KLA-Tencor Corp. (a) 22,359,675
150,000 Photronics, Inc. (a) 8,250,000
500,000 Silicon Valley Group, Inc. (a) 15,500,000
218,700 Veeco Instruments, Inc. (a) 10,825,650
262,500 Zygo Corp. (a) 9,253,125
-----------
172,924,919 13.01%
-----------
Title Insurance 814,700 First American Financial Corp. (b) 34,522,913
975,700 Stewart Information Services Corp. (b) 22,258,156
----------
56,781,069 4.27%
----------
Venture Capital 87,000 AFC Cable Systems, Inc. (a) 2,490,375
200,000 American Physicians Service
Group, Inc. (a) (b) 1,275,000
127,000 Analogic Corp. 4,635,500
</TABLE>
20
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS - (CONTINUED)
<S> <C> <C> <C>
Venture Capital 375,400 Boston Communications Group, Inc. (a) $ 5,114,825
(continued) 163,500 Evans & Sutherland Computer Corp. (a) 4,680,187
81,500 FDP Corp. 652,000
272,500 Glenayre Technologies, Inc. (a) 5,484,063
140,600 H & Q Life Sciences Investors (a) 1,801,437
154,800 Integrated Systems, Inc. (a) 2,631,600
300,000 Interphase Corp. (a) (b) 2,625,000
293,000 Mountbatten, Inc. (a) (b) 3,076,500
53,600 Sparton Corp. (a) 616,400
612,000 Texas Micro, Inc. (a) 1,874,250
306,900 Vertex Communications Corp. (a) (b) 8,056,125
-----------
45,013,262 3.40%
-----------
TOTAL COMMON STOCKS,
LIMITED PARTNERSHIP UNITS AND
WARRANTS (Cost $425,118,546) 766,183,274
-----------
- -------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 0.81%
Depository Institutions 20,000 Golden State Bancorp Convertible,
Non-Cumulative, 8.75%, Series A 1,410,000 0.11%
----------
Foreign Issuers- 200,000 CGA Group, Ltd., Series A (a) (b) (c) 5,000,000
Bermuda 171,429 CGA Group, Ltd., Series B (a) (b) (c) 4,285,725
----------
9,285,725 0.70%
----------
TOTAL PREFERRED STOCK (Cost $9,785,725) 10,695,725
----------
INVESTMENT
AMOUNT ($)
- -------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 0.28%
Foreign Option Contracts Japanese Yen May 1998 Put Options (c) (g) 545,000 0.04%
Insurance Holding 3,136,000 Head Insurance Investors LP (c) 3,136,000 0.24%
Companies ----------
TOTAL OTHER INVESTMENTS
(COST $3,438,500) 3,681,000
----------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1997
(UNAUDITED)
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------
U.S. TREASURY BILLS - 37.35%
<S> <C> <C> <C>
1,885,000 U.S. Treasury Bill 4.86%, 8/7/97 (h) $ 1,883,473
44,000,000 U.S. Treasury Bill 5.03%, 8/21/97 43,877,166
106,000,000 U.S. Treasury Bill 5.10%, 8/28/97 105,594,550
54,000,000 U.S. Treasury Bill 5.28%, 9/4/97 53,730,466
65,000,000 U.S. Treasury Bill 5.20%, 9/11/97 64,615,426
45,000,000 U.S. Treasury Bill 4.95%, 10/9/97 44,577,900
45,000,000 U.S. Treasury Bill 5.01%, 10/16/97 44,532,000
48,000,000 U.S. Treasury Bill 5.19%, 11/6/97 47,356,320
13,000,000 U.S. Treasury Bill 5.12%, 12/11/97 12,760,670
27,000,000 U.S. Treasury Bill 5.13%, 1/8/98 26,394,930
52,915,000 U.S. Treasury Bill 5.64%, 4/2/98 51,098,957
-------------
TOTAL U.S. TREASURY BILLS 496,421,858 37.35%
(Cost $496,421,858) -------------
TOTAL INVESTMENT PORTFOLIO - 99.55% 1,322,986,326
(Cost $974,498,865) -------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.45% 5,960,888
-------------
NET ASSETS - 100.00% $1,328,947,214
(Applicable to 41,936,016 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $31.69
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(c) Restricted/fair value securities.
(d) Interest accrued at a current rate of prime + 2%.
(e) Inverse floater coupon rate moves inversely to a designated index, such as
LIBOR or COFI, typically at a multiple of the changes in the relevant index
rate.
(f) 130,095 shares restricted/fair value securities.
(g) 50 million U.S. Dollar notional amount may be exercised on or before May 27,
1998 to sell Japanese Yen at a strike price of 126.
(h) Security segregated for future Fund commitment.
22
<PAGE>
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At July 31, 1997, the unaudited net asset value attributable to the 4,055,226
common shares outstanding of the Third Avenue Small-Cap Value Fund ("Small-Cap
Value") was $12.03, compared with the Fund's unaudited net asset value at April
30, 1997 of $10.05. As of August 19, 1997, the unaudited net asset value
attributable to the 5,052,972 common shares outstanding was $12.09.
QUARTERLY ACTIVITY
In its first full quarter of operations, Small-Cap Value established new
positions in the common stocks of 10 companies, and added to 7 of its 8 existing
positions. None of our positions were reduced or sold during the quarter.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
94,600 Alico, Inc. Common Stock
("Alico Common")
50,000 Bel Fuse Inc. Common Stock
("Bel Fuse Common")
58,000 CapMAC Holdings Inc. Common Stock
("CapMAC Common")
703,000 Nissan Fire & Marine Insurance
Common Stock ("Nissan Common")
160,000 PictureTel Corp. Common Stock
("PictureTel Common")
8,400 Sparton Corp. Common Stock
("Sparton Common")
183,900 Summa Four, Inc. Common Stock
("Summa Common")
200,000 Tejon Ranch Co. Common Stock
("Tejon Common")
334,100 ValueVision International, Inc. Class A
Common Stock ("ValueVision Common")
23
<PAGE>
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
37,300 Xircom, Inc. Common Stock
("Xircom Common")
INCREASES IN EXISTING POSITIONS
5,300 Financial Security Assurance
Holdings Ltd. Common Stock
("FSA Common")
13,800 First American Financial Corp.
Common Stock ("FAF Common")
86,150 FSI International, Inc. Common
Stock ("FSI Common")
26,500 Glenayre Technologies, Inc.
Common Stock ("Glenayre Common")
37,500 Shiva Corp. Common Stock
("Shiva Common")
15,400 Skyline Corp. Common Stock
("Skyline Common")
166,300 Value City Department Stores, Inc.
Common Stock ("Value City Common")
Small-Cap Value experienced strong flows of new money during the quarter,
finishing with $48.8 million in Net Assets, up from $7.7 million in Net Assets
at April 30, 1997. Small-Cap Value had approximately 57% of its funds invested
at quarter's end. As we have stated on numerous occasions, we are not market
timers, and we pay little attention to general market conditions, except insofar
as the markets give us opportunities. More simply put, the level of cash DOES
NOT reflect an attempt at so-called "market timing." The fact is, we have no
view about the direction of the market.
Rather, the current cash levels reflect our price-sensitive buy discipline. In
some cases, for example, Sparton Common and Xircom Common, we were only able to
establish small, toe-hold positions before the prices of these securities
quickly moved away from levels we considered "cheap." We are very reluctant to
stray from our discipline, regardless of general market conditions.
Small-Cap Value made a significant commitment to Tejon Common and a smaller
commitment to Alico Common, both of which represent long-term opportunities in
24
<PAGE>
real-estate development. Tejon, an agribusiness company, owns 270,000 contiguous
acres (about one-third the size of the state of Rhode Island) located
approximately one hour north of Los Angeles. Tejon currently has plans to
develop some of its frontage along I-5, one of the busiest highways in
California. Small-Cap Value acquired its Tejon position from the Times Mirror
Company in a privately negotiated transaction at a discount to the market price.
Alico, Inc., is another agribusiness company whose primary asset is nearly
165,000 acres of land in Florida. Alico has not, as yet, undertaken a major
development program other than some small, piecemeal sales of its properties.
Both Tejon and Alico appear to be well-financed, though any significant
development plans may require access to outside sources of capital. Given time
and proper management and development, both of these properties probably hold
values well above the values as reflected by the current stock prices.
Small-Cap Value's other major commitment during the quarter involved Nissan
Common. Founded in 1911, Nissan Fire and Marine writes insurance in a variety of
lines and is one of the 12 largest non-life insurance companies in Japan. Auto
policies accounted for nearly 55% of Nissan's net premiums written during 1996.
With roughly $2.7 billion of net premiums written, Nissan is seen as a
"second-tier" player, whose higher cost structure puts it at a disadvantage
vis-a-vis its larger rivals. Roughly speaking, Nissan's investment portfolio,
marked-to-market, is on the order of 6 or 8 times the firm's entire market
capitalization, making the common stock appear extraordinarily cheap at current
levels. Will the deregulation just starting to take root in Japan's financial
markets heighten competition and pressure Nissan's operations? Almost certainly.
Will those same forces push the firm to use its significant assets more
resourcefully, or to seek a partner? Perhaps.
Small-Cap Value made other, less significant commitments, including PictureTel
Common; Summa Common; ValueVision Common; and CapMAC Common. I was initially
drawn to PictureTel, a leading videoconferencing company, after hearing comments
made by a well-known airline CEO who suggested that videoconferencing was his
greatest competitive fear (I.E., using videoconferencing, people located in
different cities would work together just as well as if they were in the same
place, obviating the need to fly). Years of promise in the videoconferencing
industry are inching toward reality. With greatly improved picture quality and
reliability and lower pricing, videoconferencing finally appears to be ready to
go "mainstream" and market research suggests the market is poised to grow
rapidly. Such trends have attracted new and fiercer competition, however,
encouraged consolidation, and fundamentally changed the economics of the
business, particularly for PictureTel. Whether PictureTel can thrive in these
crosscurrents remains to be seen. Summa is a provider of switches used in
25
<PAGE>
various telecommunications networks. With cash and equivalents comprising more
than 70% of the firm's current market capitalization, investors are paying
little for the actual business, which is in the midst of a product transition
and is being guided by a new management team. ValueVision operates the
third-largest home shopping network, owns television stations and a direct
marketing operation and has various minority investments in related activities.
The company appears to be well financed and, based on at least some of their
experiences, management looks like they are pretty good media investors. CapMAC
is a financial guarantor, providing credit enhancement and financial advisory
services in the structured finance and asset-backed markets. Though smaller than
most of its rivals, CapMAC has demonstrated a knack for creativity, and has
developed several attractive strategic alliances, particularly internationally.
A WORD ABOUT "PERFORMANCE" INVESTING
It strikes me that our value investing philosophy at Third Avenue Funds is not
particularly well suited to those investors who care singularly about
"performance," especially short-term performance. We are now, have always been,
and always will be value investors, not performance investors, guided by the
principles we write about here in our shareholder letters.
What is value investing? Value investing means different things to different
people. Some folks, for example, define value investing as purchasing common
stocks whose price:earnings (P:E) multiples are less than the company's
projected earnings growth rate.
For us at Third Avenue, value investing, in part, means investing in companies
at a discount to what a reasonable, informed business person would pay for a
business I.E., the private market value ("PMV"). To do so, we try and evaluate
businesses as a business buyer might, for example, when studying the potential
purchase of an entire company, or as a control investor might when thinking
about creative uses of a company's assets. In this sense we bring an activist
mentality to what is, for all intents and purposes, a passive investing
activity. We are, in effect, much more like Main Street than Wall Street.
Our approach to value investing, however, while not necessarily better or worse
than any other approach, does not always lend itself well to so-called "good
performance." Performance investing is a lot about taking a view of general
market conditions, with a focus on beating a specified index. In contrast, at
Third Avenue, we focus on trying to assess a company's private market value,
more or less oblivious to general market conditions, but assume the MARKET risk
that goes along with buying at a discount to PMV. To make "good performance" our
26
<PAGE>
sole goal, it seems to me, would require us to speculate about the prices at
which securities might sell in a market populated by outside, passive minority
investors - in other words, to take a view about the direction of the stock
market. We can not have such a view since taking such a view would result in
unabashed speculation on our part, a practice we won't employ with our money or
yours.
I look forward to writing you again when we publish our Annual Report dated
October 31, 1997.
Sincerely,
/s/ Curtis Jensen
- -----------------
Curtis Jensen
Co-manager, Third Avenue Small-Cap Value Fund
27
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES % OF
OR UNITS ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
COMMON STOCKS - 56.96 %
<S> <C> <C> <C>
Financial Insurance 58,000 CapMAC Holdings Inc. $1,616,750
40,300 Financial Security Assurance
Holdings Ltd. 1,682,525
----------
3,299,275 6.76%
----------
Foreign Issuers-Japan 703,000 Nissan Fire & Marine Insurance 3,485,311 7.15%
----------
Manufactured Housing 32,400 Skyline Corp. 824,175 1.69%
----------
Media 334,100 ValueVision International, Inc.
Class A (a) 1,524,331 3.12%
----------
Real Estate 94,600 Alico, Inc. 1,939,300
200,000 Tejon Ranch Co. (b) (c) 3,525,000
----------
5,464,300 11.20%
----------
Retail 191,300 Value City Department Stores, Inc. (a) 1,554,312 3.19%
----------
Semiconductor 136,150 FSI International, Inc. (a) (b) 2,365,606 4.85%
Equipment ----------
Manufacturers
Title Insurance 24,000 First American Financial Corp. (b) 1,017,000 2.09%
----------
Venture Capital 50,000 Bel Fuse Inc. (a) 806,250
50,000 Boston Communications Group, Inc. (a) 681,250
104,000 Glenayre Technologies, Inc. (a) 2,093,000
160,000 PictureTel Corp. (a) 1,580,000
110,000 Shiva Corp. (a) 1,196,250
8,400 Sparton Corp. (a) 96,600
183,900 Summa Four, Inc. (a) 1,310,288
37,300 Xircom, Inc. (a) 484,900
----------
8,248,538 16.91%
----------
TOTAL COMMON STOCKS
(Cost $ 24,617,746) 27,782,848
----------
</TABLE>
28
<PAGE>
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
U.S. Treasury Bills - 38.93%
<S> <C> <C> <C>
19,000,000 U.S. Treasury Bill 4.91%, 8/7/97 $18,986,376
-----------
TOTAL U.S. TREASURY BILLS 18,986,376 38.93%
(Cost $18,986,376) -----------
TOTAL INVESTMENT PORTFOLIO--95.89%
(Cost $43,604,122) 46,769,224
----------
CASH AND OTHER ASSETS
LESS LIABILITIES--4.11% 2,006,981
----------
NET ASSETS--100.00% $48,776,205
===========
(Applicable to 4,055,226
shares outstanding)
NET ASSET VALUE PER SHARE $12.03
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers--as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers.)
(c) Restricted/fair value securities.
29
<PAGE>
BOARD OF TRUSTEES
Phyllis W. Beck
Tibor Fabian
Gerald Hellerman
Marvin Moser
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Martin J. Whitman
OFFICERS
Martin J. Whitman
Chairman, Chief Executive Officer, President
David M. Barse
Chief Operating Officer, Executive Vice President
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
FPS Services, Inc.
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (tollfree)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIANS
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
North American Trust Company Custodial Trust Company
225 Broadway 101 Carnegie Center
San Diego, CA 92101 Princeton, NJ 08540-6231
[LOGO]
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-6685
Toll Free (800) 443-1021
Fax (212) 888-6757
www.mjwhitman.com
