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SEMI-ANNUAL REPORT
(Unaudited)
April 30, 1997
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Third Avenue Value Fund
Dear Fellow Shareholders:
At April 30, 1997, the unaudited net asset value attributable to the 34,188,530
common shares outstanding of the Third Avenue Value Fund ("TAVF" or the "Fund")
was $26.86 per share. This compares with an unaudited net asset value of $27.27
per share at January 31, 1997, and an unaudited net asset value of $22.42 per
share at April 30, 1996, as adjusted for subsequent distributions. At May 15,
1997, the unaudited net asset value was $28.11 per share.
QUARTERLY ACTIVITY
During the second quarter of fiscal 1997, the Fund established new positions in
9 issues, increased its holdings of 12 securities, reduced its positions in 2
issues, and eliminated holdings in 5 investments:
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$50,000,000 notional amount U.S. Dollar-Japanese Yen Swap
(the "Swap")
1,000,000 shares American Government Income
Fund, Inc. ("AGIF Common")
375,400 shares Boston Communications
Group, Inc. Common Stock
("BCG Common")
51,500 shares FDP Corp. Common Stock
("FDP Common")
272,500 shares Glenayre Technologies, Inc. Common
Stock ("Glenayre Common")
500,000 shares Nissan Fire & Marine Insurance Common Stock
("Nissan Common")
88,500 shares Physio-Control International Corp.
Common Stock ("Physio Common")
53,600 shares Sparton Corp. Common Stock
("Sparton Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
1,446,000 shares The Sumitomo Marine & Fire
Insurance Co., Ltd. Common Stock
("Sumitomo Common")
INCREASES IN EXISTING POSITIONS
$21,384,661 FHLMC-GNMA Inverse Floater due
6/17/20 ("Inverse Floater")
100,000 shares American Physicians Service Group,
Inc. Common Stock ("APSG
Common")
25,000 shares Financial Security Assurance Holdings
Ltd. Common Stock ("FSA Common")
146,200 shares First American Financial Corp.
Common Stock ("FAF Common")
638,900 shares FSI International, Inc. Common Stock
("FSI Common")
28,000 shares J & J Snack Foods Corp. Common Stock
("J & J Common")
13,300 shares John Nuveen & Co., Inc. Class A
Common Stock ("Nuveen Common")
100,000 shares Silicon Valley Group, Inc. Common
Stock ("SVGI Common")
500,000 shares Stewart Information Services Corp.
Common Stock ("Stewart Common")
82,000 shares Texas Micro Inc. Common Stock
("Texas Micro Common")
394,600 shares Tokio Marine & Fire Insurance Co.,
Ltd. American Depository Receipts
("Tokio ADRs")
9,100 shares Weis Markets, Inc. Common Stock
("Weis Common")
POSITIONS REDUCED
$4,150,000 Kmart Debentures ("Kmart Credits")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS REDUCED (CONTINUED)
169,400 shares Piper Jaffray Companies, Inc. Common
Stock ("Piper Common")
POSITIONS ELIMINATED
$1,538,324 Combined Investors Mortgage Debt
("Combined Mortgage Debt")
100,000 shares Digital Equipment Corp. Common Stock
("DEC Common")
119,200 shares Emerging Markets Infrastructure Fund,
Inc. ("EMIF Common")
85,000 shares Fischer Imaging Corp. Common
Stock ("Fischer Common")
12,103 shares Silicon Graphics, Inc. Common Stock
("Silicon Graphics Common")
During the quarter, there was a real bear market in small-cap, high-tech issues.
Securities prices cratered. TAVF used this market situation to invest funds into
the common stocks of a number of extremely well-capitalized small-cap, mostly
high-tech issuers. These acquisitions encompassed APSG Common, BCG Common, FDP
Common, Glenayre Common, J&J Common, Sparton Common , SVGI Common and Texas
Micro Common. The Fund strayed slightly from its criterion that these small-cap
issuers should be extremely strongly financed when it acquired a position in
Physio Common, a manufacturer of heart defibrillators. This company's balance
sheet seems OK but not superstrong. Physio appears to have a reasonably good
competitive and product position in defibrillators, a key emergency device when
sudden cardiac arrest, a major cause of death in this country, occurs. There is
a school of thought that defibrillators ought to become as common as, say, fire
extinguishers. If they do, and if Physio maintains its competitive position,
Physio Common ought to become a very interesting long-term holding for the Fund.
The Fund also added to its positions in FAF Common, FSA Common, Nuveen Common,
Weis Common and Stewart Common during the quarter. TAVF acquired its relatively
large block of Stewart Common at the end of April at a price representing a
slight discount from market. TAVF now owns approximately 15% of the outstanding
Stewart equity capitalization.
Since the cash flows for AGIF Common and the Inverse Floaters come solely from
U.S. Government Bonds or U.S. Government Agency Bonds, these investments equate
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to an alternative use of cash for TAVF. On a reasonable worst case basis, the
yield to maturity, to call, or to tender on these commitments ought to be around
8%; on a base-case basis, the returns ought to be better, maybe a 10% yield to
call, tender or maturity.
The investments in Combined Mortgage Debt and Kmart Credits matured. The Fund
closed out its position in DEC Common because operations continue to be
disappointing. DEC probably is an attractive acquisition candidate but we sold
anyway. Fischer Common was sold because operating results have been
disappointing and Fischer no longer enjoys a strong financial position. Silicon
Graphics Common was an inconsequential position which had been received as part
of the consideration paid by Silicon Graphics to acquire Cray Research. The
disposition of a portion of our holdings of Piper Common was a continuation of
the sales program started during the prior quarter.
Even though I have no specific evidence, I am more convinced than ever that
massive securities frauds have to be taking place in a number of largely
unregulated stock markets in emerging countries. In those countries, direct
investments with local partners is tough enough. Passive security investments
without regulatory controls has to be impossible. Note that it was securities
fraud that precipitated the recent revolution in Albania. Because of this
distrust of emerging markets, TAVF sold its position in EMIF Common.
The April 30 quarter was an interesting one for its effects on various portfolio
holdings. Takeovers at substantial premiums above market were announced for five
companies whose common stocks the Fund holds: Alex. Brown, Destec Energy,
Security Capital, Security-Connecticut and Tencor Instruments.
THE JAPANESE NON-LIFE INSURERS
At April 30, TAVF held almost $48 million market value of the equity securities
of three Japanese non-life insurance companies - $37 million in Tokio ADRs, $9
million in Sumitomo Common and almost $2 million in Nissan Common. Viewing these
companies as if they were closed-end investment companies with their portfolios
of marketable securities valued at market, Tokio ADRs at April 30, 1997 were
trading at a 53.2% discount from March 31, 1996 Net Asset Value ("NAV"),
Sumitomo Common at a 58.7% discount from March 31, 1996 NAV and Nissan Common at
an 81.3% discount from March 31, 1996 NAV. NAVs will have fallen for all three
issuers since March 31, 1996 because the Japanese stock market is down. Yet the
current discounts will remain huge and also highly unusual. For example,
according to the Wall Street Journal listing of closed-end investment companies,
none of the approximately 600 closed-end investment companies existing in the
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United States sell at a discount of as much as 35%. The average U.S. closed-end
probably trades at a discount of under 15%. Nor do any of the U.S. closed-ends
seem to have "hidden assets". Tokio and Sumitomo, to my knowledge, own
substantial amounts of real estate worth substantial premiums over book carrying
values. Virtually none of the U.S. closed-ends have profitable operations.
Tokio, Sumitomo and Nissan all run profitable insurance underwriting businesses
without taking into account investment incomes.
David Barse and I spent 4 days in Japan at the end of March visiting insurance
companies, investment banks, a Big Six accounting firm, and a commercial bank.
In a sense, the trip was a boondoggle because mostly we asked the wrong
questions, and while we saw a lot of the right people, we did not see enough of
them, especially officials of the Ministry of Finance ("MOF") and the non-life
insurance industry trade association. (The boondoggle aspect of the trip is not
a TAVF problem because EQSF Advisers, Inc., TAVF's investment adviser, picked up
the entire cost of the trip). The primary purpose of the trip at its outset was
to determine if Tokio was as high a quality issuer as we thought it was and if
Tokio ADRs were selling as cheaply as we thought they were. In other words, was
the extensive analyis of Tokio which I wrote about in the TAVF report for the
first quarter of fiscal 1997 essentially valid? David and I really didn't have
to take a 13,000 mile flight each way to find out that our basic analysis was
valid, that Tokio was even higher quality than we thought originally, and that
Tokio ADRs, based on static fundamentals, was a dirt cheap equity.
The key questions David and I should have been asking revolve around how, if at
all, Tokio and other non-life insurers might redeploy their billions of dollars
of surplus-surplus away from their plain vanilla Property and Casualty ("P&C")
businesses in the years just ahead. Virtually all of these surplus-surplus
assets are in marketable securities, both performing loans and passive,
non-control, common stock positions. We do not know if anyone at Tokio,
Sumitomo, or Nissan is even thinking in redeployment terms, except that both
Tokio and Sumitomo brought new life insurance subsidiaries into operation in
October 1996.
It seems inconceivable to me that a Tokio, or Sumitomo, or Nissan situation
could exist for very long in the United States in the 1990s. In this country
managements, promoters and investment bankers would be all over these companies
(and their regulators such as the MOF) to undertake one or more of various
actions to arbitrage between the low stock market prices for the equities and
the huge amounts of surplus-surplus. These other actions would encompass
management, or leveraged, buyouts; having the companies enter new businesses
such as Money Management either through direct entry or by acquisitions;
acquisition by others of control of these companies, either friendly or hostile;
joint ventures with non-Japanese insurers and others; and/or causing the
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companies to make massive distributions to shareholders, perhaps by buying-in
common stocks via open market purchases, tender offers, or cash mergers.
On reflection, my experience in Tokyo was sort of a time-warp bringing me back
to what the capital markets climate was in the United States 30 or 40 years ago.
Then there existed a plethora of well-financed companies, run by competent
managements who had little or no equity stakes in the businesses and whose
interests focused strictly on the day -to- day operations of their enterprises;
quite oblivious to how the surplus resources in their companies might be
redeployed.
Japan is, however gingerly, entering the "Big Bang" era in which financial
institutions are to be increasingly deregulated. As a result of the "Big Bang",
P&C underwriting ought to become increasingly competitive as Japanese life
insurance companies start to write P&C, foreign insurers battle for market
share, and price competition becomes a factor in the P&C industry starting in
July 1998. How, if at all, will Tokio, Sumitomo, Nissan and others redeploy
their surplus assets as a logical concomitant of the "Big Bang"? I don't know.
Interestingly enough, the non-life insurers such as Tokio, Sumitomo and Nissan
seem to be the only financial institutions in Japan which are capital rich,
based in part on the gigantic amount of unrealized capital gains in their common
stock portfolios. The other financial institutions, especially the commercial
banks, appear to be woefully capital short, based mostly on the gigantic amount
of unrealized and realized losses in their loan portfolios.
Japan remains a country with a very high savings rate and an aging population
increasingly interested in retirement plans. Money management could be a rather
attractive business for a number of non-life companies which are already
experienced in managing large portfolios of marketable securities. Further,
Tokio, Sumitomo and Nissan, among others, can call on large, experienced sales
forces which have traditionally marketed P&C personal lines which have
significant savings components; both Tokio and Sumitomo are extremely pleased
with the results so far from their October 1996 entries into life insurance.
TAVF is thinking of becoming slighty proactive in exploring the possibilities of
having one or more non-life companies set up investment subsidiaries whose
assets would consist of a portion of its parent's surplus marketable securities.
The common stock of this subsidiary might then be distributed to non-life
company shareholders, at which point the non-life company would jump start its
way into money management as the investment adviser to a publicly traded
investment company. To start, the Fund has asked legal counsel to prepare a
memorandum exploring the regulatory and income tax implications of having a
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non-life company do something along these lines. Such a course would certainly
be in the spirit of the "Big Bang". Is something like this do-able? Probably
not, at least for several years, but it certainly seems worthwhile to explore
preliminarily from a TAVF point of view.
Insurance operations are, of course, not divorced from asset redeployments. For
most P&C activities there is a relative ease of exit. Ease of exit is one of the
characteristics that contributes to making the equities of certain well-managed
financial institutions attractive. If certain lines of business, say auto
physical damage, become unattractive, a P&C company can stop writing new
business, and run-off, and/or reinsure, the old book. It seems hard for anyone,
including the managements of Tokio, Sumitomo and Nissan, to know in 1997 how the
competitive forces to be introduced by the "Big Bang" will play out. If
overcapacity and cut-throat pricing start to be characteristic of certain lines,
the better run companies in the non-life industry will take actions involving
asset redployments and not just stick to day-to-day operations. Suffice to say,
the companies in which TAVF has invested have more than adequate financial
resources to both look at new areas for investment and to gracefully retire from
lines of business that might, on a long-term basis, become too competitive.
When we wrote about Tokio in the January 1997 TAVF Shareholder Report, we cited
a number of specific risks for Tokio and for the ADRs. These enumerated risks
were operating risks, lack of information risks, regulatory risks, transaction
risks, non-diversification risks, political risk, market risk and currency risk.
During the April 1997 quarter, the Fund reduced, for a one-year period, currency
risk by entering into the Swap. In simplest form, and on a notional basis, the
Swap involves having TAVF long $50 million U.S. Treasuries paying in U.S.
dollars and short $50 million Japanese government bonds requiring service in
Japanese Yen. Within the Swap, there is a positive interest carry of 5.62% so
that interest income to the Fund will be about $2.8 million over the one-year
period. If the Yen weakens, it will take fewer U.S dollars to close out the Swap
and at the same time TAVF would receive fewer U.S. dollars on the sale of
Yen-denominated assets such as the Tokio, Sumitomo and Nissan equities. Thus the
hedge against currency risk. If the Yen strengthens, there should be unrealized
capital gains in the portfolio of Japanese equities offset by realized, ordinary
losses on the Swap.
The investments in Sumitomo Common and Nissan Common probably represent a
step-down in quality from Tokio ADRs. However, if good things happen, Sumitomo
Common and Nissan Common may well have more upside potential. More importantly,
for each of the three issues, the quality seems plenty good enough.
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TAVF, INDEX FUNDS AND EXCESS RETURNS
TAVF competes with Index Funds for investor dollars. The Fund, over its six year
history, appears to have outperformed any relevant Index, or Index Fund, over
the long term and on average, although TAVF has not outperformed Indexes
"consistently".
The justification for the existence of Index Funds is grounded in academic
finance theory - to wit, the Efficient Market Hypothesis ("EMH"), and to a
lesser extent, Efficient Portfolio Theory ("EPT"). The underlying tenet driving
EMH and EPT is that no one outperforms any market consistently. Consistently
means all the time. Therefore, according to EMH, an Outside, Passive, Minority
Investor ("OPMI") is best served by investing in a low expense, low turnover
vehicle that tries only to match the performance of a market segment or index -
to wit, an Index Fund. After all, for EMH and EPT, the very definition of market
efficiency is that no OPMI can earn excess returns consistently. Why go to the
expense and trouble, therefore, of having managed portfolios? According to EMH,
it is a waste of time to attempt to analyze on a fundamental basis Tokio ADRs.
The kindest thing anyone can say about EMH is that it overgeneralizes. Probably,
the most realistic thing anyone can say about EMH is that it is extremely sloppy
science. For analytic purposes, the overgeneralizations of EMH can be subsumed
in four beliefs which seem to make up the very essence of EMH:
1) The one way to measure investment results is to measure performance
as achieved CONSISTENTLY on a total return basis.
2) All relevant information is incorporated in a security's market
price at any given moment. New information is reflected in a
security's market price instantaneously.
3) There exists a universal price equilibrium which reflects value for
all purposes all of the time.
4) Only one market, the OPMI market, measures the cost of capital.
HOW TO MEASURE INVESTMENT RESULTS
Of course, no one outperforms any market consistently, i.e., all the time. No
fundamentalist with an IQ over 75 even tries to outperform a market
consistently. To do so would result in unsound speculation since the
fundamentalist, instead of identifying the underlying value of a business and
its securities, would be required to concentrate on trying to figure out what a
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market price for a security might be by identifying what is popular at the
moment, or what is about to become popular. However, many intelligent investors
do outperform markets and indexes, over the long term and on average though few,
if any, do it consistently.
For EMH, the failure to outperform markets consistently is cited as overwhelming
proof that the OPMI market is efficient. Efficiency is defined as the failure of
market participants to earn excess returns consistently. The underlying problem
here for EMH is that it proves too much. EMH describes OPMIs who, like
academics, are chartist-technicians. A chartist-technician is a market
participant who derives conclusions from the study of market prices and the
study of the behavior of securities markets. EMH seems valid for a narrow
special case rather than for all OPMI investing. EMH seems valid where the
following conditions exist:
1) the participants in the market are short-term traders seeking to
maximize a risk-adjusted total return consistently, which return is
realizeable daily in cash by sale to a market.
2) the instruments in which investments are made are analyzed by
reference to a very limited number of computer programmable
variables. These instruments, in the securities field, encompass the
following:
a) credit instruments without credit risk;
b) derivative securities including options, warrants and
convertibles;
c) risk arbitrage securities where risk arbitrage is defined as
investing in situations where there is likely to be relatively
determinant workouts in relatively determinant periods of time;
and
d) any security being analyzed by an OPMI who is entirely focused on
securities prices and the behavior of markets to the exclusion of
trying to know anything fundamental about a company and the
securities it issues.
Further, there are many OPMI markets where participants' goals are something
other than total return, whether consistent, on average, or long term. Probably,
more OPMI money is seeking reasonable cash return from interest and dividends
than are seeking total return from cash return plus appreciation. The EMH
literature tends to view Total Return as the unitary goal of OPMIs.
THE ROLE OF INFORMATION IN TAVF'S MARKETS
TAVF is an OPMI without access to superior information. In EMH it is postulated
that corporate insiders frequently have superior information. According to EMH,
no OPMI without access to superior information can outperform a market
consistently.
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The Fund, of course, seems to have outperformed the market, or any relevant
index, by a fairly wide margin over the long term and on average. TAVF has,
indeed, earned excess returns. As far as I can tell, the reason why the Fund has
done so well has nothing to do with an availability of superior information.
Rather, it has to do with TAVF having the ability to use available information
in a superior manner.
How has available information been used by TAVF in a superior manner? Instead of
concentrating on current and forecasted price-earnings ratios, the Fund is
concentrated first and foremost in common stock investing on the quality of
resources controlled by the business, and secondarily, on the quantity of
resources. Instead of worrying about the near-term outlook, TAVF focuses on the
long-term outlook, say over the next 3 to 7 years. How a company's quarterly
earnings as reported compare with consensus forecasts tends to be highly
important to traders and short-run speculators; the same numbers are a matter of
indifference for TAVF. Instead of trying to predict where a security might sell
in an OPMI market, the Fund tries to figure out what the business might be worth
were it either private or a takeover candidate. In the analysis of credit
instruments with credit risk, TAVF's research is covenant driven to the
exclusion of a concentration on quantitative analysis.
It is understandable that proponents of EMH would have virtually no conception
that different market participants use the same information in different ways,
and that even when they use the same information in the same way, they are
likely to weigh individual items of information quite differently in coming to
investment conclusions based on the available mix of information. EMH proponents
are chartist-technicians with a trading mentality. They seem totally untrained
in fundamental analysis. They seem to have little institutional background. Or,
as is stated in the preface to the leading academic text, Principles of
Corporate Finance by Brealey and Meyers: To understand EMH, Algebra is more
important than Financial Accounting.
THERE IS NO UNIVERSAL PRICE EQUILIBRIUM
There is absolutely no evidence extant that the price of a common stock traded
in an OPMI market multiplied by the number of common shares outstanding plus the
value of senior securities outstanding establishes the value of a business for
all purposes. In contrast, William F. Sharpe, a Nobel Laureate and a firm
believer in Index Funds, states on Page 67 of the Third Edition of his book,
Investments, "Every security's price equals its investment value at all times".
If Professor Sharpe really believes this, I own a bridge that goes to Brooklyn
which I would like to sell to him.
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The facts are that there are all sorts of values for a business or common stock
depending on who you are and what you are doing and how you opt to analyze. The
worth of a common stock is one thing if you are an OPMI trader. It is something
else if you are seeking to put together a leveraged buy-out. The price a venture
capitalist will pay to finance a start-up company is only a small fraction of
what the price for that company's common stock would be in an Initial Public
Offering ("IPO"). The insiders' ideas of the basic worth of a common stock
issuable as the consideration for an acquisition frequently will have no
relationship to the market price of the common stock in the OPMI market. Control
common stock tends to be a different commodity than OPMI common stock with
rather completely different valuations. Control common stock has different
pricing than OPMI common stock not only because values are attributed to the
benefits of control, but also, and more importantly, a control person will look
at different factors in valuing a common stock than will an OPMI trader, and
insofar as the same factors are considered, weights to the factors will be quite
different. In analyzing a company or a common stock, control persons tend to be
a lot more like TAVF than they are like traders seeking to maximize a
risk-adjusted total return consistently.
OPMI market prices can be either a realization figure or an indicator of value
or both. They frequently are not a good indicator of value. They never are a
universally useful indicator of value, Professor Sharpe, and EMH believers,
notwithstanding.
MYRIAD MARKETS EXIST; THE OPMI MARKET IS JUST ONE MARKET
A market is defined as an arena in which participants reach agreement as to
price, and other terms, which each of the participants believes are the best
reasonably achievable under the circumstances.
Myriad markets exist, divided into capital markets and other markets. Capital
markets include OPMI markets for debt and equity, bank debt markets, private
claims markets, debtor-in-possession lending markets, capital infusions into
companies markets, leasing markets and real estate markets. Other markets
include markets for top management compensation, consensual plan markets,
settlement of stockholder litigation markets and vendor-vendee markets.
The cost of capital for each of these markets has no necessary, close
relationship to capital costs in OPMI markets although there exists intra-market
competition, e.g., should an issuer market a new debt issue publicly rather than
privately. (Here, incidentally, the decision is based on all terms and
conditions, not just price as measured by interest rates--something that seems
to receive no recognition in EMH).
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EFFICIENT MARKETS MEAN THAT EXCESS RETURNS WILL BE EARNED IN CERTAIN MARKETS
Insofar as external forces impose strict disciplines on a market, it becomes
difficult for market participants to earn excess returns. However, insofar as
external disciplines are lax, or non-existent, efficiency has to mean that
excess returns will be earned. That is simply part of the definition of a market
where each participant tries to do as well as they reasonably can under the
circumstances.
Who or what are these external forces imposing disciplines on markets? The list
includes the following:
Competition among buyers and sellers
Boards of Directors
Government Regulators
Creditors
Rating Agencies
Vendors
Customers
Labor Unions
Communities
Litigations and Courts
Taxing Authorities
Control, non-management, shareholders
It appears difficult for OPMI traders, given the strict external disciplines
imposed upon them, to earn excess returns over the long term or on average. It
seems well nigh impossible for them to earn excess returns consistently.
Given competition among buyers and sellers, a strict regulatory frame-work and a
virtual absence of promotional edges in the forms of superior information,
trading edges, or payments to traders of fees, commissions and expenses, OPMI
traders face a situation that is a simulation of what economists call pure and
perfect competition. Transactions take place at that price determined by the
intersection of an upward sloping demand curve and a downward sloping supply
curve. No participant in this market has an edge. None have superior
information, none by their trading activity can influence market prices, and
none get any promoters' edges.
Interestingly enough, regulators, including the Securities and Exchange
Commission, and Self-Regulatory Organizations, have had to erect an elaborate
police state in order to create the conditions of pure and perfect competition
where OPMI traders are likely to be precluded from earning excess returns. This
seems a special case rather than a description of most markets.
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An examination of other markets shows that excess returns are earned rather
persistently. These other markets include the following:
The market for top management compensation. Boards of Directors
impose little or no external discipline.
The market for Investment Company management fees. Competition in the
industry rarely seems to take the form of price competition.
Closed-end managements are insulated in office by numerous
shark-repellents despite sometimes poor performance and stock prices
that represent meaningful discounts from net asset values.
Securities salespersons' compensations when marketing IPOs where the
salespersons can offer exclusive products which are designed to be
easy sells and where sales compensation is many times larger than is
the case for securities traded in secondary markets.
Market makers and Stock Exchange Specialists.
Investment Bankers rendering fairness opinions.
LBO promoters and other hedge fund operators.
Excess returns, theoretically, cannot exist insofar as the value of an asset is
determined solely by reference to what can be earned on that asset. The argument
lacks practical significance. It would be a real one if it could be argued that
the value of any asset is always accurately and fully reflected for all purposes
in OPMI market prices. There is no evidence that this is so. Believing that it
is so defies readily observable common sense.
I will write you again when the quarterly report for the period to end July 31,
1997 is published.
Sincerely yours,
/s/Martin J. Whitman
- --------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
Welcome to the Third Avenue family's newest fund, Small-Cap Value, which
commenced operations on April 1, 1997. At April 30, 1997, the unaudited net
asset value attributable to the 766,110 common shares outstanding of Small-Cap
Value was $10.05, compared with the Fund's opening net asset value at April 1,
1997 of $10.00. At May 15, 1997, the unaudited net asset value attributable to
the 1,121,235 common shares outstanding was $11.10.
Writing Small-Cap Value's first shareholder letter, I thought it might be
appropriate to briefly spotlight Small-Cap Value's raison d'etre. While we will
continue to employ the same value-oriented discipline that pervades the
investment process at Third Avenue Value Fund ("TAVF"), our flagship fund,
Small-Cap Value will focus solely on the equity securities of smaller companies.
In this regard, Small-Cap Value is distinct from its sister fund, TAVF, which
can, and does, invest in the debt and equity of both large and small companies.
Small-Cap Value also may concentrate its holdings to a higher degree than TAVF.
QUARTERLY ACTIVITY
In its first month of operations, Small-Cap Value established positions in the
common stocks of eight companies, representing 56% of the fund's net assets, as
follows:
NUMBER OF SHARES ISSUE
50,000 Boston Communications Group, Inc.
Common Stock ("BCG Common")
35,000 Financial Security Assurance Holdings Ltd.
Common Stock ("FSA Common")
10,200 First American Financial Corp.
Common Stock ("FAF Common")
50,000 FSI International, Inc.
Common Stock ("FSI Common")
77,500 Glenayre Technologies, Inc.
Common Stock ("Glenayre Common")
72,500 Shiva Corp. Common Stock
("Shiva Common")
- --------------------------------------------------------------------------------
14
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<PAGE>
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[LOGO]
NUMBER OF SHARES ISSUE
17,000 Skyline Corp. Common Stock
("Skyline Common")
25,000 Value City Department Stores, Inc.
Common Stock ("Value City Common")
Shareholders of TAVF will recognize at least a few familiar names from the list
above, including FSA, FAF, and FSI. The price of FSA Common, one of TAVF's
long-time holdings, declined to attractive buying levels in April on
perceptions, I believe, that it would be victimized by problems in the
sub-standard auto business, to which it supplies credit enhancement; and the
perception, perhaps, that higher interest rates would hurt the company's earning
power. FSA protects itself in the former case with heavy over-collateralization
and by adjusting fee levels to the point where it should not suffer any major
setbacks stemming from the sub-standard sector's problems. On the contrary,
demand for credit enhancement actually should increase as a result of problems
in the sub-standard auto business, boosting demand for FSA's services. With
regard to higher interest rates, a trade-off exists. Higher rates mean that the
current market value of FSA's bond portfolio falls, but that the company's
future investment income will grow. FAF Common also declined to attractive
buying levels, following a slowdown in real-estate (refinancing) activity in the
first quarter. FSI remains on track in its chemical management business, though
challenges remain with regard to the introduction of new products in its other
businesses and with improving capacity utilization of its recently expanded
plant and facilities.
New names include BCG Common, Glenayre Common, Skyline Common, Shiva Common and
Value City Common. With respect to the high-tech names--BCG, Glenayre and
Shiva--Small-Cap Value took advantage of a bear market in the small-cap,
high-tech sector to acquire these common stocks at prices well below our
estimate of those companies' private market values. BCG and Glenayre, both
providers of equipment and services to the wireless telecommunications industry,
face different sets of challenges. BCG's challenge, as I see it, is one of
building new businesses as growth in its core business flattens. One of its
newest businesses, prepaid wireless services, looks particularly interesting.
Glenayre's challenge looks quite different. It faces stiff competition from
Motorola and others at the same time that its core domestic paging business has
stalled. With skill and luck, Glenayre can grow its non-paging businesses as
well as its overseas businesses to offset a declining domestic business. Shiva,
a provider of data networking gear, specifically remote access equipment, has
seen its market cap fall in the past year to around $300 million from over $2
billion a year ago. Despite its award-winning technology, Shiva has lost market
share to data networking behemoths, Cisco Systems and Ascend Communications,
- --------------------------------------------------------------------------------
15
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[LOGO]
primarily on the basis of price/performance issues. And while I expect the data
networking "pie" to continue to grow at healthy rates, it's unclear whether
Shiva will have the wherewithal to compete effectively. With a new pricing
strategy, new management, including a newly-elected president, and assistance
from its strategic partner, Northern Telecom, Shiva may just make it as a going
concern. If not, Shiva may end up as part of a larger organization in what is a
rapidly consolidating industry.
Skyline and Value City are two decidedly "low-tech" issues. Skyline, a maker of
manufactured housing and recreational vehicles, appears to be very
conservatively run and is a veteran of the manufactured housing business. Two
trends characterize the manufactured housing industry today: growth and
consolidation. The growth in the industry, which has outpaced that of site-built
homes, stems from improving quality, attractive pricing and better acceptance
among lenders, albeit mortgage financing for manufactured housing is nowhere
near as attractive for home-owners as are the long-term mortgages available for
site-built housing. Consolidation has become more important in this fragmented
industry, as some participants integrate vertically, while others scoop up the
numerous "mom and pops" with no critical mass.
Value City, an operator of approximately 95 off-price retail stores with nearly
$1 billion in revenues, appears extraordinarily cheap, and is guided by industry
veteran Jay Schottenstein. At current prices, shareholders are paying less than
$0.30 for every dollar of company revenues.
A WORD ABOUT SPECULATIVE EXCESS
Most of the growth stories that have gripped Wall Street in the past 50 years
have had underlying merit, whether the stories involved titanium, uranium,
bio-medicals, or electronics. The problem with the story stocks, though, has
been that investor-speculators paid too much for the issues, acquiring them at
the times they were most popular. In the past year or two, speculative excesses
have manifested themselves most prevalently in the market prices for common
stocks of many high-technology companies, particularly in the IPO markets.
Beginning six to nine months ago, a veritable bear market for many small-cap,
high-tech issues began, in which market capitalizations shrank by as much as 40%
to 80%. Caught in the middle were many mutual fund managers, most of whom were
"momentum" investors. It isn't that the companies they bought lacked merit, it
is that they priced the common stock issues too high, with little regard for the
issuer's staying power or financial strength.
How do we at Third Avenue differ? Our investment mantra at Third Avenue has
been, and will continue to be, "safe and cheap." We want our companies
- --------------------------------------------------------------------------------
16
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<PAGE>
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[LOGO]
well-capitalized--and in the case of high-tech issues, extraordinarily
well-capitalized--to ensure staying power during times of disappointment and
duress. Our focus on financial strength is the safe part.
The cheap part comes from pricing the security properly. We, as buy and hold
investors who do not engage in short-term trading, have always maintained that
the less you pay for a security, the less the investment risk and the greater
the potential reward. In the case of high-tech issues, we like to pay no more
than what we believe first or second stage venture capitalists pay, meaning a
modest premium over the net asset value of the company. In reality, for
high-tech issues, we probably end-up paying a bit more than a venture
capitalist, but we also get an investment in a well-financed company, which is
already public.
In essence, we like to buy growth without paying for it. Typically, this means
that we have to live through a period of short-term pain as the companies we buy
progress through a transition, reinvent themselves, or search for a new means to
create value. We could not otherwise get our kind of pricing. We try not to
"pay" for growth, and the dismal short-term outlook of many of our companies
tends to reflect that fact.
I look forward to writing you again when we publish our next quarterly report
dated July 31, 1997.
Sincerely,
/s/Curtis R. Jensen
- -------------------
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
- --------------------------------------------------------------------------------
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES--1.39%
<S> <C> <C> <C> <C>
2,111,482 Olympic Automobile Receivables Trust
Series 1995-E CTFS, Subordinated Bond,
5.95% due 6/15/02 $ 2,101,920
3,941,987 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 3,930,595
6,754,108 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 6,756,901
----------
TOTAL ASSET BACKED SECURITIES
(Cost $12,876,980) 12,789,416 1.39%
---------
- --------------------------------------------------------------------------------------------
BANK DEBT--0.20%
Oil 1,845,419 Cimarron Petroleum Corp. (c) (d) 1,864,645 0.20%
----------
TOTAL BANK DEBT (Cost $1,864,645) 1,864,645
----------
- --------------------------------------------------------------------------------------------
CORPORATE BONDS--0.23%
Membership 1,505,898 Thousand Trails, Inc.,
Sports &
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 1,287,543 0.14%
----------
Retail 850,000 Kmart Corp., 8.54%, 5/08/97 854,250 0.09%
----------
TOTAL CORPORATE BONDS
(Cost $1,978,754) 2,141,793
----------
- --------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS--4.31%
2,889,650 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1635 K, Inverse Floater
6.60134% due 12/15/08 (e) 2,005,648
5,000,000 Federal Home Loan Mortgage Corp.
Collateralized Mortgage Obligation,
Series 1518 G, Inverse Floater
3.62% due 5/15/23 (e) 2,180,950
21,384,661 Federal Home Loan Mortgage Corp.-
Government National Mortgage Association
Collateralized Mortgage Obligation,
Series 61 SA, Inverse Floater
12.625% due 6/17/20 (e) 21,972,739
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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18
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
GOVERNMENT AGENCY BONDS (CONTINUED)
<S> <C> <C> <C> <C>
2,058,631 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-129 S, Inverse Floater
4.13787% due 8/25/08 (e) $ 1,339,675
6,600,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-229 SB, Inverse Floater
5.68335% due 12/25/08 (e) 4,713,390
300,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-221 SG, Inverse Floater
2.80349% due 12/25/08 (e) 181,737
2,683,270 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SK, Inverse Floater
7.57544% due 2/25/09 (e) 2,080,259
3,000,000 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-13 SM, Inverse Floater
8.28986% due 2/25/09 (e) 2,100,450
6,191,950 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1993-210 SA, Inverse Floater
0.00% due 11/25/23 (e) 2,309,288
1,696,925 Federal National Mortgage Association
Collateralized Mortgage Obligation,
Series 1994-72 SB, Inverse Floater
2.19375% due 4/25/24 (e) 704,834
----------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $35,998,942) 39,588,970 4.31%
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
19
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS--54.29%
<S> <C> <C> <C> <C>
Annuities & 163,300 John Nuveen & Co., Inc. Class A $ 4,796,937
Mutual Fund 272,000 Liberty Financial Companies, Inc. 10,710,000
Management & 300,000 SunAmerica, Inc. 13,800,000
Sales -----------
29,306,937 3.19%
-----------
Apparel 150,000 Kleinerts, Inc. (a) 2,587,500 0.28%
Manufacturers -----------
Building Products 44,000 Central Sprinkler Corp. (a) 814,000
& Related 125,000 Cummins Engine Co., Inc. 7,015,625
50,000 H.B. Fuller Co. 2,681,250
33,200 Tecumseh Products Co. Class A 1,792,800
98,600 Tecumseh Products Co. Class B 5,127,200
-----------
17,430,875 1.90%
-----------
Business 43,200 Capital Southwest Corp. 2,943,000 0.32%
Development -----------
Companies
Closed-End Bond
Funds 1,000,000 American Government Income Fund, Inc. 5,000,000 0.54%
-----------
Cogeneration 176,900 Destec Energy, Inc. (a) 3,692,787 0.40%
Services & -----------
Small Power
Producers
Computer & 100,000 Novell, Inc. (a) 756,250 0.08%
Software -----------
Depository 53,000 Astoria Financial Corp. 2,073,625
Institutions 218,500 Carver Bancorp, Inc. (a) (b) 2,157,688
62,500 First Colorado Bancorp, Inc. 1,000,000
149,227 Glendale Federal Bank (a) 3,712,022
53,480 Glendale Federal Bank Warrants (a) 735,350
10,000 Letchworth Independent Bancshares Corp. 350,000
10,000 Letchworth Independent Bancshares Corp.
Warrants (a) 130,000
34,783 Peoples Heritage Financial Group, Inc. 1,091,317
80,000 Security Capital Corp. (a) 7,120,000
-----------
18,370,002 2.00%
----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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20
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Financial 100,000 AMBAC Inc. $ 6,475,000
Insurance 244,100 Enhance Financial Services
Group, Inc. 9,397,850
750,000 Financial Security Assurance
Holdings Ltd. 24,281,250
120,000 MBIA Inc. 11,685,000
-----------
51,839,100 5.65%
-----------
Food 328,000 J & J Snack Foods Corp. (a) 4,182,000
Manufacturers 95,000 Premark International, Inc. 2,327,500
& Purveyors 172,200 Sbarro, Inc. 4,864,650
109,100 Weis Markets, Inc. 3,054,800
-----------
14,428,950 1.58%
-----------
Foreign Issuers- 85,917 LaSalle Re Holdings, Ltd. 2,384,197 0.26%
-----------
Bermuda
Foreign Issuers 500,000 Nissan Fire & Marine Insurance 1,713,813
- -Japan 1,446,000 The Sumitomo Marine &
Fire Insurance Co., Ltd.(a) 8,898,637
750,000 Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 36,937,500
-----------
47,549,950 5.18%
-----------
Forest Products 54,400 St. Joe Corp. 3,950,800 0.43%
-----------
Holding Companies 50,000 Aristotle Corp. (a) 168,750
21,400 White River Corp. (a) 1,348,200
-----------
1,516,950 0.17%
-----------
Insurance Holding 189,978 ACMAT Corp. Class A (a) (b) 2,968,406
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 5,424,766
50,000 Fund American Enterprises
Holdings, Inc. 4,993,750
5,490 Sen-Tech International Holdings, Inc.
(a) (c) 1,749,718
-----------
15,136,640 1.65%
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Life Insurance 138,000 ReliaStar Financial Corp. $ 8,349,000
107,600 Security-Connecticut Corp. 4,963,050
-----------
13,312,050 1.45%
-----------
Manufactured 89,000 Liberty Homes, Inc. Class A 923,375
Housing 40,000 Liberty Homes, Inc. Class B 445,000
10,800 Palm Harbor Homes, Inc. (a) 264,600
-----------
1,632,975 0.18%
-----------
Medical Supplies 81,400 Acuson Corp. (a) 1,973,950
& Services 342,300 Datascope Corp. (a) 6,161,400
88,500 Physio-Control International Corp. (a) 1,106,250
90,750 St. Jude Medical, Inc. (a) 2,949,375
-----------
12,190,975 1.33%
-----------
Membership Sports 237,267 Thousand Trails, Inc. (a) (f) 481,949 0.05%
-----------
& Recreation
Clubs
Mortgage 152,800 CMAC Investment Corp. 5,806,400 0.63%
Insurance -----------
Motor Vehicles & 50,000 Ford Motor Co. 1,737,500 0.19%
-----------
Cars' Bodies
Real Estate 31,000 Consolidated-Tomoka Land Co. 503,750
176,400 Forest City Enterprises, Inc. Class A 7,629,300
3,750 Forest City Enterprises, Inc. Class B 161,250
10,000 Royal Palm Beach Colony
Limited Partnership Units (a) 9,062
-----------
8,303,362 0.90%
-----------
Real Estate 480,336 Koger Equity, Inc. 7,505,250
Investment Trusts 846 Public Storage, Inc. 22,736
16,300 Public Storage Properties XVI, Inc. 326,000
5,200 Public Storage Properties XVII, Inc. 100,100
15,000 Public Storage Properties XVIII, Inc. 294,375
----------
8,248,461 0.90%
----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1)NET ASSETS
- ------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Security Brokers, 177,150 Alex Brown, Inc. $11,404,031
Dealers & 111,800 Jefferies Group, Inc. 5,184,725
Flotation 335,000 Legg Mason, Inc. 15,912,500
Companies 225,100 Piper Jaffray Companies, Inc. 3,629,737
787,500 Raymond James Financial, Inc. 18,407,812
161,941 Ryan, Beck & Co., Inc. (b) (c) 688,249
-----------
55,227,054 6.01%
-----------
Semiconductor 25,000 AG Associates, Inc. (a) 118,750
Equipment 200,000 Applied Materials, Inc. (a) 10,975,000
Manufacturers 555,700 Electro Scientific Industries,
Inc. (a) (b) 15,490,138
1,070,000 Electroglas, Inc. (a) (b) 16,986,250
1,200,000 FSI International, Inc. (a) (b) 14,400,000
200,000 KLA Instruments Corp. (a) 8,900,000
150,000 Photronics, Inc. (a) 5,193,750
400,000 Silicon Valley Group, Inc. (a) 8,225,000
169,200 Tencor Instruments (a) 7,508,250
218,700 Veeco Instruments, Inc. (a) 6,834,375
262,500 Zygo Corp. (a) 5,840,625
-----------
100,472,138 10.94%
-----------
Title Insurance 761,200 First American Financial Corp. (b) 24,263,250
945,800 Stewart Information Services Corp. (b) 18,088,425
-----------
42,351,675 4.61%
-----------
Venture Capital 87,000 AFC Cable Systems, Inc. (a) 1,914,000
200,000 American Physicians Service
Group, Inc. (a) (b) 1,125,000
127,000 Analogic Corp. 3,714,750
375,400 Boston Communications Group, Inc. (a) 1,970,850
163,500 Evans & Sutherland Computer Corp. (a) 3,801,375
51,500 FDP Corp. 347,625
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
23
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
COMMON STOCKS, LIMITED PARTNERSHIP UNITS AND WARRANTS (CONTINUED)
<S> <C> <C> <C> <C>
Venture Capital 272,500 Glenayre Technologies, Inc. (a) $ 2,690,937
(continued) 140,600 H & Q Life Sciences Investors (a) 1,634,475
154,800 Integrated Systems, Inc. (a) 1,489,950
300,000 Interphase Corp. (a) (b) 2,025,000
293,000 Mountbatten, Inc. (a) (b) 2,563,750
53,600 Sparton Corp. (a) 448,900
612,000 Texas Micro, Inc. (a) 1,530,000
306,900 Vertex Communications Corp. (a) (b) 6,483,262
-----------
31,739,874 3.47%
-----------
TOTAL COMMON STOCKS,
LIMITED PARTNERSHIP UNITS AND
WARRANTS (Cost $333,298,501) 498,398,351
-----------
- --------------------------------------------------------------------------------------------
PREFERRED STOCK--0.13%
Depository 20,000 Glendale Federal Bank Convertible,
Institutions Non-Cumulative, 8.75%, Series E 1,232,500 0.13%
Total Preferred Stock (Cost $500,000 1,232,500
----------
INVESTMENT
AMOUNT ($)
- --------------------------------------------------------------------------------------------
OTHER INVESTMENTS--0.39%
Foreign Currency Bear Stearns Currency Swap, 474,987 0.05%
Swap Contracts Termination Date 4/15/98 (c) (h)
Insurance 3,136,000 Head Insurance Investors LP (c) 3,136,000 0.34%
Holding -----------
Companies
TOTAL OTHER INVESTMENTS
(Cost $3,136,000) 3,610,987
-----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
U.S. TREASURY BILLS--39.84%
<S> <C> <C> <C> <C>
11,000,000 U.S. Treasury Bill 5.06%, 5/1/97 $11,000,000
3,500,000 U.S. Treasury Bill 4.75%, 5/8/97 3,496,767
35,000,000 U.S. Treasury Bill 4.99%, 5/15/97 34,932,149
1,870,000 U.S. Treasury Bill 5.05%, 5/15/97 (g) 1,866,328
44,000,000 U.S. Treasury Bill 5.03%, 8/21/97 43,301,280
106,000,000 U.S. Treasury Bill 5.10%, 8/28/97 104,216,020
54,000,000 U.S. Treasury Bill 5.28%, 9/4/97 53,029,080
65,000,000 U.S. Treasury Bill 5.20%, 9/11/97 63,757,850
52,915,000 U.S. Treasury Bill 5.64%, 4/2/98 (g) 50,203,106
-----------
TOTAL U.S. TREASURY BILLS 365,802,580 39.84%
(Cost $365,802,580) -----------
TOTAL INVESTMENT PORTFOLIO--100.78% 925,429,242
(Cost $755,456,402) -----------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (0.78%) (7,193,627)
-----------
NET ASSETS - 100.00% $918,235,615
(Applicable to 34,188,530 ============
shares outstanding)
</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 common stock of these
issuers).
(c) Restricted/fair valued 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 valued.
(g) Securities segregated for future Fund commitments.
(h) The Fund is selling 6.3 billion Yen and paying an interest rate of 0.70%
in exchange for 50 million U.S. Dollars and an interest rate of 6.32%.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
25
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT APRIL 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE % OF
OR UNITS ISSUES (NOTE 1) NET ASSETS
- --------------------------------------------------------------------------------------------
COMMON STOCKS--56.15%
<S> <C> <C> <C> <C>
Financial 35,000 Financial Security Assurance
Insurance Holdings Ltd. $ 1,133,125 14.72%
-----------
Manufactured 17,000 Skyline Corp. 359,125 4.66%
Housing -----------
Semiconductor 50,000 FSI International, Inc. (a) (b) 600,000 7.79%
-----------
Equipment
Manufacturers
Retail 25,000 Value City Department Stores, Inc. (a) 212,500 2.76%
-----------
Title Insurance 10,200 First American Financial Corp. (b) 325,125 4.22%
-----------
Venture Capital 50,000 Boston Communications Group, Inc. (a) 262,500
77,500 Glenayre Technologies, Inc. (a) 765,312
72,500 Shiva Corp. (a) 666,094
-----------
1,693,906 22.00%
-----------
TOTAL COMMON STOCKS--56.15% 4,323,781
(Cost $4,486,478) -----------
CASH AND OTHER ASSETS
LESS LIABILITIES--43.85% 3,376,090
-----------
NET ASSETS--100.00% $ 7,699,871
(Applicable to 766,110 ===========
shares outstanding)
</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 common stock of these
issuers).
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
26
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 1997
(UNAUDITED)
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND
--------- ----------
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of
$657,854,613 and $3,557,891, respectively) $812,765,058 $ 3,398,656
Affiliated issuers (identified cost of
$97,601,789 and $928,587, respectively) 112,664,184 925,125
------------ ------------
Total investments (identified cost of
$755,456,402 and $4,486,478, respectively) 925,429,242 4,323,781
Cash and cash equivalents (Note 1) 599,130 3,147,434
Receivable for fund shares sold 4,252,579 404,630
Dividends and interest receivable 708,397 --
Receivable for securities sold 220,335 --
Deferred organizational costs (Note 1) -- 65,126
Other assets 137,199 27,069
------------ ------------
Total assets 931,346,882 7,968,040
------------ ------------
LIABILITIES:
Payable for securities purchased 11,465,793 204,413
Payable for fund shares redeemed 690,287 507
Payable to investment adviser 655,547 4,255
Accounts payable and accrued expenses 279,954 58,994
Payable to affiliates (Note 3) 19,686 --
Commitments (Note 6) -- --
------------ -----------
Total liabilities 13,111,267 268,169
------------ -----------
Net assets $918,235,615 $ 7,699,871
============ ===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par
value, 34,188,530 and 766,110 shares outstanding,
respectively $738,700,439 $ 8,031,136
Accumulated undistributed net investment income
(loss) 4,067,022 (8,291)
Accumulated undistributed net realized gains
(losses) from investment transactions 5,495,314 (160,277)
Net unrealized appreciation (depreciation) of
investments 169,972,840 (162,697)
------------ -----------
Net assets applicable to capital shares
outstanding $918,235,615 $ 7,699,871
============ ===========
Net asset value, offering and redemption price
per share $26.86 $10.05
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1997
(UNAUDITED)
THIRD AVENUE THIRD AVENUE
VALUE FUND SMALL-CAP VALUE FUND*
----------- -------------------
INVESTMENT INCOME:
Interest-unaffiliated issuers $ 8,641,134 $ --
Dividends-unaffiliated issuers 2,797,392 --
Dividends-affiliated issuers 284,612 --
Other income 222,193 --
----------- ----------
Total investment income 11,945,331 0
----------- ----------
EXPENSES:
Investment advisory fees (Note 3) 3,309,148 3,927
Transfer agent fees 237,809 2,838
Administration fees (Note 3) 168,297 921
Registration and filing fees 107,159 4,717
Reports to shareholders 97,382 691
Service fees 90,730 --
Custodian fees 47,216 460
Miscellaneous expenses 45,604 317
Accounting services 44,247 1,841
Legal fees 43,283 --
Insurance expenses 31,765 67
Directors' fees and expenses 30,388 3,866
Auditing and tax consulting fees 27,325 3,069
Amortization of organizational expenses
(Note 1) -- 874
----------- ----------
Total operating expenses 4,280,353 23,588
----------- ----------
Expenses waived and reimbursed (Note 3) -- (15,297)
----------- ----------
Net expenses 4,280,353 8,291
----------- ----------
Net investment income (loss) 7,664,978 (8,291)
----------- ----------
REALIZED AND UNREALIZED GAINS (LOSSES)
ON INVESTMENTS:
Net realized gains (losses) on
investments-unaffiliated issuers 7,015,750 (71,236)
Net realized losses on investments-
affiliated issuers -- (89,041)
Net change in unrealized appreciation on
foreign currency swap contracts
(Note 7) 474,987 --
Net change in unrealized appreciation
(depreciation) on investments 62,680,675 (162,697)
----------- ----------
Net realized and unrealized
gains (losses)on investments 70,171,412 (322,974)
----------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $77,836,390 $ (331,265)
=========== ==========
* Third Avenue Small-Cap Value Fund commenced operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
STATEMENT OF CHANGES IN NET ASSETS
THIRD AVENUE
THIRD AVENUE SMALL-CAP
VALUE FUND VALUE FUND*
-------------------------- -------------
FOR THE FOR THE
SIX MONTHS FOR THE PERIOD
ENDED YEAR ENDED
04/30/97 ENDED 04/30/97
(UNAUDITED) 10/31/96 (UNAUDITED)
------------ ----------- ------------
OPERATIONS:
Net investment income (loss) $ 7,664,978 $ 11,780,896 $ (8,291)
Net realized gains (losses) on
investments--unaffiliated issuers 7,015,750 734,777 (71,236)
Net realized gains (losses) on
investments--affiliated issuers -- 3,347,022 (89,041)
Net change in unrealized appreciation
on foreign currency swap contracts 474,987 -- --
Net change in unrealized
appreciation (depreciation)
on investments 62,680,675 45,559,872 (162,697)
------------ ------------ ----------
Net increase (decrease) in net
assets resulting from operations 77,836,390 61,422,567 (331,265)
------------ ------------ ----------
DISTRIBUTIONS:
Dividends to shareholders from net
investment income (13,987,148) (6,118,869) --
Distributions to shareholders from
net realized gains on investments (3,539,470) (2,245,595) --
------------ ------------ ----------
(17,526,618) (8,364,464) 0
------------ ------------ ----------
Capital share transactions:
Proceeds from sale of shares 368,835,044 273,608,965 9,603,460
Net asset value of shares issued in
reinvestment of dividends and
distributions 15,121,007 7,089,926 --
Cost of shares redeemed (92,877,549) (79,632,018) (1,572,324)
------------ ------------ ----------
Net increase in net assets resulting
from capital share transactions 291,078,502 201,066,873 8,031,136
------------ ----------- ----------
Net increase in net assets 351,388,274 254,124,976 7,699,871
Net assets at beginning of period 566,847,341 312,722,365 --
------------ ----------- ----------
Net assets at end of period
(including undistributed net
investment income (loss) of
$4,067,022, $10,389,192 and
$(8,291), respectively) $918,235,615 $566,847,341 $ 7,699,871
============ ============ ===========
* Third Avenue Small-Cap Value Fund commenced operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
(UNAUDITED)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Trust (the "Trust") is an open-end management investment company
organized as a Delaware business trust pursuant to a Trust Instrument dated
October 31, 1996. The Trust currently consists of two separate investment
series; Third Avenue Value Fund and Third Avenue Small-Cap Value Fund (each a
"Fund" and, collectively, the "Funds"). At the close of business on March 31,
1997, shareholders of Third Avenue Value Fund, Inc., a Maryland corporation
which was incorporated on November 27, 1989 and began operations on October
9, 1990, became shareholders of Third Avenue Value Fund. Third Avenue
Small-Cap Value Fund commenced investment operations on April 1, 1997. Each
Fund seeks to achieve its investment objective of long-term capital
appreciation by adhering to a strict value discipline when selecting
securities. While both Funds pursue a capital appreciation objective, each
Fund has a distinct investment approach.
Third Avenue Value Fund seeks to achieve its objective by investing in a
portfolio of equity securities of well-financed companies believed to be
priced below their private market values and debt securities providing
strong, protective covenants and high, effective yields.
Third Avenue Small-Cap Value Fund seeks to achieve its investment objective
by investing at least 65% of its assets in a portfolio of equity securities
of well-financed companies having market capitalizations of below $1 billion
at the time of investment and believed to be priced below their private
market values.
ACCOUNTING POLICIES:
The policies described below are followed consistently by the Funds in the
preparation of their financial statements in conformity with generally
accepted accounting principles.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association
of Securities Dealers' Automated Quotation System ("NASDAQ") are valued at
the last quoted sales price or, in the absence of closing sales prices on
that day, securities are valued at the mean between the closing bid and asked
price. Temporary cash investments are valued at cost, plus accrued interest,
which approximates market.
The Funds may invest up to 15% of their total assets in securities which are
not readily marketable, including those which are restricted as to
disposition under applicable securities laws ("restricted securities").
Restricted securities and other securities and assets for which market
quotations are not readily available are valued at "fair value", as
determined in good faith by the Board of Trustees of the Funds, although
actual evaluations may be made by personnel acting under procedures
established by the Board. Such securities had a total fair value of
$13,602,621 or 1.48% of net assets, at April 30, 1997, of Third Avenue Value
Fund. Among the factors considered by the Board of Trustees in determining
fair value are the type of security, trading in unrestricted securities of
the same issuer, the financial condition of the issuer, the Fund's cost at
the date of purchase, the percentage of the Fund's beneficial ownership of
the issuer's common stock and debt securities, the operating results of the
issuer, the discount from market value of any similar unrestricted securities
of the issuer at the time of purchase and liquidation values of the issuer.
SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis. Dividend
income is recorded on the ex-dividend date and interest income, including,
where applicable, amortization of premium and accretion of discount on
investments, is accrued daily, except when collection is not expected.
Realized gains and losses from securities transactions are reported on an
identified cost basis.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ORGANIZATIONAL COSTS:
Organizational costs of Third Avenue Small-Cap Value Fund are being amortized
on a straight line basis over five years from commencement of operations.
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income to shareholders and distributions from
realized gains on sales of securities are recorded on the ex-dividend date.
FEDERAL INCOME TAXES:
The Funds have complied and intend to continue to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies. Therefore, no Federal income tax provision is required.
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing
and non-interest bearing accounts.
2. SECURITIES TRANSACTIONS
PURCHASES AND SALES:
The aggregate cost of purchases, and aggregate proceeds from sales and
conversions of investments from unaffiliated and affiliated issuers (as
defined in the Investment Company Act of 1940, as amended, ownership of 5% or
more of the outstanding common stock of the issuer) for the period ended
April 30, 1997 were as follows:
PURCHASES SALES
--------- -----
Third Avenue Value Fund:
affiliated $97,601,789 ---
unaffiliated 11,267,077 $39,427,055
Third Avenue Small-Cap Value Fund:
affiliated 2,451,767 1,434,140
unaffiliated 3,859,225 230,098
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT ADVISORY SERVICES AND DISTRIBUTION AGREEMENT
Each Fund has an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms
of each Investment Advisory Agreement provides for a monthly fee of 1/12 of
.90% (an annual fee of .90%) of the total average daily net assets of each
Fund, payable each month. Additionally, under the terms of each Investment
Advisory Agreement, the Adviser pays certain expenses on behalf of the Funds,
which are reimbursable by the Funds, including salaries of non-officer
employees, rent and other miscellaneous expenses. Amounts reimbursed with
respect to non-officer salaries and rent are included under the caption
Administration. At April 30, 1997, Third Avenue Value Fund had a payable of
$19,686 for reimbursement of expenses paid by affiliates. Whenever, in any
fiscal year, a Fund's normal operating expenses, including the investment
advisory fee, but excluding brokerage commissions and interest and taxes,
exceeds 1.9% of the first $100 million of such Fund's average daily net
assets, and 1.5% of assets in excess of $100 million, the adviser is
obligated to reimburse such Fund in an amount equal to that excess. No
expense reimbursement was required for Third Avenue Value Fund for the period
ended April 30, 1997. The Adviser reimbursed Third Avenue Small-Cap Value
Fund $15,297 for the period ended April 30, 1997.
4. RELATED PARTY TRANSACTIONS
BROKERAGE COMMISSIONS:
Martin J. Whitman, the Chairman and a director of the Funds, is the Chairman
and Chief Executive Officer of M.J. Whitman Holding Corp., which is the
parent of both M.J. Whitman, Inc., a registered broker-dealer and M.J.
Whitman Senior Debt Corp., a dealer in the trading of bank debt and other
private claims. For the period ended April 30, 1997, Third Avenue Value Fund
and Third Avenue Small-Cap Value Fund incurred total brokerage commissions of
$266,770 and $11,414, respectively, of which approximately $233,533 and
$11,239 was earned by M.J. Whitman, Inc.
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVESTMENT SECURITIES:
At April 30, 1997, Third Avenue Value Fund owned the following affiliated
securities:
SECURITY NAME SHARES OWNED % OF OUTSTANDING STOCK
- ------------- ------------ ---------------------
ACMAT Corp. Class A 189,978 6.74%
American Physicians 215,800 (along with an 5.37%
Service Group, Inc. affiliated
company)
Carver Bancorp, Inc. 218,500 9.44%
Danielson Holding Corp. 803,669 5.23%
Electro Scientific Industries, Inc. 555,700 6.39%
Electroglas, Inc. 1,070,000 6.09%
First American Financial Corp. 761,200 6.45%
FSI International, Inc. 1,200,000 5.33%
Interphase Corp. 300,000 5.46%
Mountbatten, Inc. 293,000 11.59%
Ryan, Beck & Co., Inc. 161,941 5.01%
Stewart Information Services Corp. 945,800 15.12%
Vertex Communications Corp. 306,900 6.86%
At April 30, 1997, the Funds together owned 771,400 shares of First American
Financial Corp., representing 6.54% of its outstanding common stock.
At April 30, 1997, the Funds together owned 1,250,000 shares of FSI
International, Inc., representing 5.55% of its outstanding common stock.
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Transactions in Capital Stock were as follows:
THIRD AVENUE
SMALL-CAP
THIRD AVENUE VALUE FUND VALUE FUND
------------------------------- -------------
FOR THE FOR THE
SIX MONTHS ENDED FOR THE PERIOD ENDED
APRIL 30, 1997 YEAR ENDED APRIL 30, 1997
(UNAUDITED) OCTOBER 31, 1996 (UNAUDITED)
-------------- --------------- --------------
Increase in Fund shares:
Shares outstanding at
beginning of period 23,364,688 14,524,055 0
Shares sold 13,734,836 12,005,739 925,231
Shares reinvested from
dividends and
distributions 584,726 325,226 0
Shares redeemed (3,495,720) (3,490,332) (159,121)
---------- ---------- --------
Net increase in Fund shares 10,823,842 8,840,633 766,110
---------- ---------- --------
Shares outstanding at end of
period 34,188,530 23,364,688 766,110
========== ========== ========
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS
Third Avenue Value Fund has committed a $5,000,000 capital investment to Head
Insurance Investors LP of which $3,136,000 has been funded as of April 30,
1997. Securities valued at $52,069,434 have been segregated to meet the
requirements of the commitments to Head Insurance Investors LP and for the
terms of the foreign currency swap contract with Bear Stearns.
7. FOREIGN CURRENCY SWAP CONTRACTS
Third Avenue Value Fund entered into foreign currency swaps denominated in
Japanese Yen. A swap is an agreement that obligates two parties to exchange a
series of cash flows at specified intervals based upon or calculated by
reference to changes in specified prices or rates for a specified amount of
an underlying asset. The payment flows are usually netted against each other,
with the difference being paid by one party to the other.
Risks may arise as a result of the failure of another party to the swap
contract to comply with the terms of the swap contract. The loss incurred by
the failure of a counterparty is generally limited to the net payment to be
received by the Fund, and/or the termination value at the end of the
contract. Therefore, the Fund considers the creditworthiness of each
counterparty to a swap contract in evaluating potential credit risk.
Additionally, risks may arise from unanticipated movements in foreign
exchange rates or in the value of the underlying securities.
Fluctuations in the value of open swap contracts are recorded daily as net
unrealized gains or losses. The Fund realizes a gain or loss upon termination
or reset of the contracts. The statement of operations reflects net
unrealized gains on these contracts. At April 30, 1997, the Fund had an
outstanding foreign currency swap contract with Bear Stearns that commits the
Fund to pay 6.3 billion yen in exchange for 50 million U.S. dollars on April
14, 1998. The Fund will pay 0.70% interest on the 6.3 billion yen and Bear
Stearns will pay 6.32% interest on the 50 million U.S. dollars.
8. ANNUAL MEETING OF STOCKHOLDERS
The Annual Meeting of Stockholders of Third Avenue Value Fund, Inc. was held
December 13, 1996 for purposes of considering and acting upon the matters set
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
forth in the Proxy Statement and summarized below. A quorum was represented
at the Meeting and the voting results are also set forth below.
A. ELECTION OF A BOARD OF TRUSTEES:
FOR WITHHOLD AUTHORITY
--- ----------------
Phyllis W. Beck 18,401,834 122,305
Tibor Fabian 18,405,378 118,761
Gerald Hellerman 18,407,176 116,963
Marvin Moser, MD 18,399,554 124,585
Donald Rappaport 18,406,726 117,413
Myron M. Sheinfeld 18,396,429 127,710
Martin Shubik 18,405,150 118,989
Charles C. Walden 18,401,461 122,678
Martin J. Whitman 18,406,649 117,490
B. SELECTION BY THE BOARD OF TRUSTEES OF PRICE WATERHOUSE LLP TO AUDIT THE
ACCOUNTS OF THE TRUST FOR THE FISCAL YEAR ENDING OCTOBER 31, 1996:
FOR AGAINST ABSTAIN NOT VOTED
--- ------ ------- ---------
18,294,829 76,870 152,440 3,942,294
C. APPROVAL OF THE PROPOSED AGREEMENT AND ARTICLES OF MERGER, WHICH PROVIDE FOR
A CONVERSION OF THE FUND FROM A MARYLAND CORPORATION TO A DELAWARE BUSINESS
TRUST:
FOR AGAINST ABSTAIN NOT VOTED
--- ------ ------- ----------
11,291,740 208,284 594,898 10,371,511
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THIRD AVENUE TRUST
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
Third Avenue
SMALL-CAP
THIRD AVENUE VALUE FUND VALUE FUND
---------------------------------------------------- -----------
FOR THE FOR THE
SIX MONTHS PERIOD
ENDED ENDED
APRIL 30, 1997 YEARS ENDED OCTOBER 31, APRIL 30, 1997*
----------------------------------- ---------------
(UNAUDITED) 1996 1995 1994 1993 1992 (UNAUDITED)3
---------- ---- ----- ----- ----- ----- ----------
Net Asset Value,
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning of Period $24.26 $21.53 $18.01 $17.92 $13.57 $12.80 $10.00
------- ------ ------ ------ ------ ------ ------
Income from Investment
Operations:
Net investment income
(loss) .25 .53 .38 .29 .18 .19 (.01)
Net gain on securities
(both realized and
unrealized) 3.07 2.76 3.53 .16 4.77 .64 .06
------ ------ ------ ------ ------ ------ -------
Total from Investment
Operations 3.32 3.29 3.91 .45 4.95 .83 .05
------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investment income (.57) (.41) (.25) (.22) (.24) (.02) (.00)
Distributions from
realized gains (.15) (.15) (.14) (.14) (.36) (.04) (.00)
------ ------ ------ ------ ------ ------ ------
Total Distributions (.72) (.56) (.39) (.36) (.60) (.06) (.00)
------ ------ ------ ------- ------- ------ ------
Net Asset Value,
End of Period $26.86 $24.26 $21.53 $18.01 $17.92 $13.57 $10.05
====== ====== ====== ====== ======= ====== ======
Total Return 13.79%2 15.55% 22.31% 2.56% 37.36% 6.50% .50%2
Ratios/Supplemental
Data:
Net Assets, End of
Period
(in thousands) $918,236 $566,847 $312,722 $187,192 $118,958 $31,387 $7,700
Ratio of Expenses o
to Average Net
Assets
Before
expense
reimbursement 1.16%1 1.21% 1.25% 1.16% 1.42% 2.32% 5.42%1
After expense
reimbursement -- -- -- -- -- -- 1.90%1
Ratio of Net Income
to Average Net
Assets
Before
expense
reimbursement 2.08%1 2.67% 2.24% 1.85% 1.45% 1.71% (5.42%)1
After expense
reimbursement -- -- -- -- -- -- (1.90%)1
Portfolio Turnover
Rate 8%2 14% 15% 5% 17% 31% 38%2
Average Commission
Rate Paid .0356 .0318 n/a n/a n/a n/a .0350
1 Annualized
2 Not Annualized
3 The per share amounts reflected above for the Third Avenue Small-Cap Value
Fund are not reflective of the Fund's operations as disclosed in the
Statement of Operations due to the timing of capital stock transactions
during the period.
* Third Avenue Small-Cap Value Fund commenced operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
</TABLE>
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BOARD OF TRUSTEES
Phyllis W. Beck
Tibor Fabian
Gerald Hellerman
Marvin Moser
Donald Rappaport
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
525 B Street 101 Carnegie Center
San Diego, CA 92101-4492 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
