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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
FIRST QUARTER REPORT
(Unaudited)
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January 31, 1998
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At January 31, 1998, the unaudited net asset value attributable to the
56,456,356 common shares outstanding of Third Avenue Value Fund ("TAVF", "Third
Avenue" or the "Fund") was $31.50 per share. This compares with a net asset
value of $31.37 per share at October 31, 1997, and a net asset value of $26.70
at January 31, 1997, both adjusted for subsequent distributions to shareholders.
At February 23, 1998, the unaudited net asset value was $33.01 per share.
QUARTERLY ACTIVITY
During the first quarter of fiscal 1998, TAVF was relatively active on the buy
side. Material transactions encompassed establishing 8 new positions, increasing
holdings of 25 issues that already were in the Fund's portfolio and eliminating
two issues.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
451,300 shares 3Com Corp. Common Stock
("3Com Common")
365,000 shares Electronics for Imaging, Inc.
Common Stock ("EFII Common")
236,086 shares ESG Re, Ltd. Common Stock
(or L.P. equivalents) ("ESG Common")
498,100 shares Protocol Systems, Inc. Common Stock
("Protocol Common")
326,700 shares SpeedFam International, Inc. Common
Stock ("SpeedFam Common")
261,000 shares The Chuo Trust & Banking Co., Ltd.
Common Stock ("Chuo Common")
887,000 shares The Long-Term Credit Bank of Japan,
Ltd. Common Stock ("LTCB Common")
1,000,000 shares The Sakura Bank, Ltd. Common Stock
("Sakura Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
$7,963,023 Montgomery Ward Trade Claims
("Ward Trade Claims")
$50,000,000 One year Japanese Yen Put Options
("JPY Put Option")
300,000 shares Alexander & Baldwin, Inc. Common
Stock ("Alexander & Baldwin Common")
259,000 shares American Physicians Service Group,
Inc. Common Stock ("American
Physicians Common")
80,000 shares Boston Communications Group, Inc.
Common Stock ("Boston
Communications Common")
237,700 shares Electro Scientific Industries, Inc.
Common Stock ("Electro Scientific
Common")
119,100 shares Electroglas, Inc. Common Stock
("Electroglas Common")
949,650 shares FSI International, Inc. Common Stock
("FSI Common")
1,051,700 shares Glenayre Technologies, Inc. Common
Stock ("Glenayre Common")
95,000 shares H.B. Fuller Co. Common Stock
("Fuller common")
400,000 shares Koger Equity, Inc. Common Stock
("Koger Common")
61,000 shares Leucadia National Corp. Common
Stock ("Leucadia Common")
350,000 shares Mitsui Marine & Fire Insurance Co.,
Ltd. Common Stock ("Mitsui Common")
341,200 shares NCR Corp. Common Stock
("NCR Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
80,000 shares Physio-Control International Corp.
Common Stock ("Physio-Control
Common")
312,200 shares Planar Systems, Inc. Common Stock
("Planar Common")
25,000 shares Risk Capital Holdings, Inc. Common
Stock ("Risk Capital Common")
602,700 shares Silicon Valley Group, Inc. Common
Stock ("Silicon Valley Common")
150,000 shares Tecumseh Products Co. - Class A or
Class B Common Stock ("Tecumseh
Common")
1,651,000 shares The Chiyoda Fire & Marine Insurance
Co., Ltd. Common Stock ("Chiyoda
Common")
1,847,000 shares The Nissan Fire & Marine Insurance
Co., Ltd. Common Stock ("Nissan
Common")
1,395,000 shares The Sumitomo Marine & Fire
Insurance Co., Ltd. Common Stock
("Sumitomo Common")
100,000 shares The Tokio Marine & Fire Insurance
Co., Ltd. Sponsored ADR's ("Tokio
Common")
1,577,000 shares The Yasuda Fire & Marine Insurance
Co., Ltd. Common Stock ("Yasuda
Common")
420,100 shares Veeco Instruments, Inc. Common
Stock ("Veeco Common")
POSITIONS ELIMINATED
$30,420,425 Inverse Floaters
146,300 shares Piper Jaffray Companies Inc.
Common Stock ("Piper Common")
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During the quarter just ended, there were severe bear markets for two industry
groups which I believe have brilliant long-term potentials: U.S. high-tech and
Japanese non-life insurance. The Fund used these market dips to acquire various
common stock issues either for the first time or to expand its investments in
issues already held in the portfolio. These acquisitions during the quarter
encompassed 3Com Common, EFII Common, Protocol Common, SpeedFam Common, American
Physicians Common, Boston Communications Common, Electro Scientific Common,
Electroglas Common, Glenayre Common, NCR Common, Physio-Control Common, Planar
Common, Silicon Valley Common and Veeco Common, all high-tech companies. Third
Avenue also increased its common stock positions in Chiyoda, Mitsui, Nissan,
Sumitomo and Tokio, all Japanese non-life insurers.
Since TAVF expanded its position in Japanese equities materially, it seemed to
make sense to also expand the Fund's currency hedge between the Japanese Yen on
the one hand and the U.S. Dollar on the other. Accordingly, TAVF during the
quarter acquired an additional JPY Put Option.
An issue acquired de novo during the quarter was ESG Common, where shares were
acquired through a Private Placement, although the company subsequently made an
Initial Public Offering of shares. ESG reinsures medical coverages. The Fund
also increased existing positions in Ward Trade Claims, Alexander & Baldwin
Common, Fuller Common, Koger Common, Leucadia Common, Risk Capital Common and
Tecumseh Common.
One of the Fund's more successful investment programs occurred in the early
1990's when TAVF acquired the common stocks of U.S. depository institutions at
prices representing discounts from adjusted net asset value of 20% to 30%, and
where the institutions, for regulatory purposes, became well capitalized either
on their own, or because equity capital was being infused into the banks by
Third Avenue and others. TAVF would like to try to replicate its early 1990's
experience in the U.S. in Japan in 1998. During the quarter, TAVF got its feet
wet in Japanese depository institutions through small open-market purchases of
Chuo Common, LTCB Common and Sakura Common.
It seems problematical that TAVF will be able to make large scale investments
into Japanese banks simply because there seems to be a reluctance to sell equity
to TAVF at prices substantially below adjusted net asset value. However, we
continue discussions with Japanese banks. Everyone seems to appreciate that, for
Japan, TAVF money to solve the banking crisis is better than most other money
from outside the country. Third Avenue only seeks attractive investments for its
money. Others, say
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Citicorp or Barclays, would seek control, or elements of control; still an
anathema in the Japanese culture.
I continue to believe that the Fund can do an adequate job of "due diligence" so
that equity investments in Japanese banks would be reasonably safe. However, in
no way would such investments be as "safe and cheap" as TAVF's positions in
Japanese nonlife insurers, all of which seem to be grossly overcapitalized, and
whose common stocks seem to be selling on average at, at least, a 50% discount
from adjusted net asset value.
Japanese bank common stocks, though, might be a considerably more dynamic
investment than Japanese non-life common stocks. The more I deal with non-life
managements, the more I conclude that they are less than ideal managements from
an outside, passive, stockholder's point of view. These managements seem to be
strictly operations oriented, virtually oblivious to the terrific liquid
resources they hold as the only capital rich financial institutions in an
economy where all other financial institutions seem to be capital short. Also,
managements tend to think, and act, only in terms of benefits to the company,
itself, regardless of the effects on outside stockholders. A prime example of
this is well-capitalized Mitsui which this month raised additional capital by
marketing $320 million of a new issue of Mitsui Common at a discount of about
57% from net asset value, where net asset value is computed by using market
prices to value the Mitsui portfolio.
Hopefully, globalization and "Big Bang" reforms in Japan will result in non-life
managements adopting less parochial views about managing their businesses.
Mitsui management reminds me a lot of the highly competent operating managements
in control of many extremely well-capitalized U.S. companies in the early
1960's. As the U.S. capital markets became more efficient, these managements
became more stockholder conscious and more conscious of using the company's
surplus resources more productively. Perhaps similar things will occur for the
Japanese non-life insurance industry in the years just ahead. If so, TAVF will
have made quite judicious investments into the industry in 1997 and 1998.
Unfortunately, there are no guaranties, and there may not even be accurate
guesses.
The Fund finished exiting from Inverse Floaters during the quarter. The Inverse
Floaters proved to be a highly satisfactory investment. TAVF also eliminated its
holdings of Piper Common, another investment that provided Third Avenue with a
much above-average return. Piper is in the process of being acquired by U.S.
Bancorporation. Our early sale of Piper Common brings home forcefully my view
that TAVF analyses work a lot better on the buy side than they do on the sell
side.
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Third Avenue is going to continue to be a low turnover buy and hold fund --
i.e., a reluctant seller. The Fund sells in the open market, rather than waiting
for a takeover, when management suspects there might be a permanent impairment
of capital. Occasionally, TAVF does make a good sale, such as Apple Computer
common stock. More often, though, and especially for large cap companies, the
Fund sold prematurely; - i.e., Piper, Digital Equipment Corp. and Kemper
Financial. Over the years, Fund performance has been pretty good. However, I
suspect, but don't really know, that performance might have been even better if
Third Avenue had never sold anything in the open market. I suspect, further,
that the Fund's buy criteria are so conservative that the sell side should
continue to be used quite sparingly.
During the last quarter, I was asked to address the Seventh Annual Graham & Dodd
breakfast sponsored by the Columbia University Graduate School of Business.
Below is a reprint covering my talk at the breakfast.
GRAHAM & DODD BREAKFAST
November 13, 1997
I am especially honored to be a speaker at Columbia Business School's Seventh
Annual Graham & Dodd Breakfast. The writings of Benjamin Graham and David Dodd
in Security Analysis and The Intelligent Investor have had such a dramatic
influence on me: the way I invest; the way I think about finance.
Graham & Dodd, in the broad scheme of financial analysis, seems to be a case of
arrested development. Since the early 1960's, Modern Capital Theory as embodied
in the Efficient Market Hypothesis (EMH) and Efficient Portfolio Theory (EPT)
has taken over corporate finance. Graham & Dodd fundamentalism has virtually
disappeared so that the financial world seems utterly bereft of the important
scholarship that ought to exist to build upon the framework contained in the
works of Graham & Dodd (and probably Dewing and others before Graham & Dodd).
It is a shame that Graham & Dodd have been shunted aside for the last 30 years
or so. EMH and EPT are not at all useful tools for most value analysis, other
than risk arbitrage analysis, a small sized offshoot of value analysis. EMH and
EPT seem to be strictly technical-chartist approaches to studies of securities
while Graham & Dodd place some emphasis on fundamental analysis. A
technical-chartist approach is one where conclusions about securities are drawn
from studying the prices of securities and the behavior of securities markets.
Fundamentalism exists insofar as there is a focus (even though not always an
exclusive focus) on gaining insight into matters internal to the firm which
contribute to an assessment of the dynamics of
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the firms as well as the private, and/or takeover values of the business.
Fundamentalism also involves obtaining an understanding of the specific terms
existing for securities issued by a company.
EMH is a preferred approach useful where two "special case" conditions exist in
concert:
1) the solitary goal of a passive, non-control, "investor" is to maximize a
risk-adjusted total return consistently. Consistently means all the time. (It
seems to me, as it did to Benjamin Graham, that most people or institutions
trying to outperform, or even just equal, a market consistently are best
described as short term speculators, not investors).
2) The securities to be analyzed are best analyzed by reference to a very
limited number of computer programmable variables. Such securities seem limited
to the following:
a) credit instruments without credit risk, e.g., U.S. Treasuries.
b) derivative securities including options and convertibles.
c) risk arbitrage securities, i.e., workout securities where the
amount of workout value is relatively determinant and where the
timing of the workout is also relatively determinant;--something
that tends to be the case after, say, the public announcement of a
merger.
The funny thing about Graham & Dodd is that lots of people talk about Graham &
Dodd, but very few people seem to have actually read the earlier editions of
Security Analysis or The Intelligent Investor.
In terms of equity investments, Graham & Dodd have given outside passive
investors a series of terrific caveats by which to live if the investor really
does not know very much about the company with which the investor is involved,
or the specific securities issued by that company. The Graham & Dodd caveats
provide a margin of safety.
I believe though that, today, unlike the Graham & Dodd period, public
disclosures have gotten so good that it is now possible for an outsider who is
not a very, very short term trader to know much about many companies just from
the public record. Most of the improvements in public disclosures seem to have
occurred subsequent to the publication of the pre-1988 editions of Security
Analysis. There has been a disclosure revolution in this country which I trace
to the Securities Acts Amendments of 1964. Now an outsider, who is a buy and
hold investor trained in funda-
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mental analysis, can know an awful lot about an awful lot of companies just by
relying on the public record. For example, look at the overall success in
earning excess returns for those involved in hostile takeovers from the 1970's
onward. In hostiles, all you have is the public record. Using inside information
to acquire securities in a hostile is almost always a "show stopper".
However, after 1964, there seems to have been little or no scholarship to
advance fundamentalism beyond Graham & Dodd. All academics seemed to have
focused on EMH and EPT. My fellow speaker, Seth Klarman, wrote a book on
fundamental analysis, MARGIN OF SAFETY, and I wrote a book on fundamental
analysis, THE AGGRESSIVE CONSERVATIVE INVESTOR. Almost nobody bothered to read
either book.
Graham & Dodd were less good in their approach to credit analysis than they were
in their approach to equity analysis. Graham & Dodd's credit analysis
essentially involved gauging the prospects of whether or not a money default
might occur for any debt issue in a corporate capitalization. The analysis was
basically quantitative with an emphasis on overall coverage. My fundamental
credit analysis, on the other hand, involves the assumption that a money default
will occur and then gauging how the security will work out either in an
out-of-court restructuring or a Chapter 11. For this type of approach, analysis
of debt covenants become crucial, and coverage is measured at various levels of
seniority and not on an overall basis (unless you are looking at the most junior
issue in a company's debt capitalization).
It seems to me that the most successful people in the financial community -
control buyers such as Warren Buffett, Carl Icahn, Ron Perelman and Richard
Rainwater - approach securities analysis quite differently from Graham & Dodd or
EMH theorists. In investing passively, I try to emulate these control buyers.
These successful people analyze what a business is worth and what its dynamics
might be; all done from the bottom-up. They then stop. The focus in Graham &
Dodd and EMH is different. The Graham & Dodd and EMH goals are to predict where
a security will sell in a market populated by outside, passive minority
investors. Compared with the best investors, Graham and Dodd seem to carry a lot
of excess analytical baggage. This excess baggage is mostly irrelevant to
determining an underlying business value. Among these extraneous factors that
are irrelevant to valuing a business' fundamentals are the following:
1) Dividend policy;
2) Macro market factors;
3) General level of interest rates; and
4) Technical factors such as supply and demand for marketable securities.
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Graham & Dodd, along with EMH, undertake virtually all their analysis of
companies whose common stocks are publicly traded (other than investment
companies whose assets consist of marketable securities) based on a strict going
concern assumption. It is assumed that the company being analyzed will continue
to operate in the same industry it always has been in, financed the way the
business has always been financed, managed as it has traditionally been managed,
controlled as it has been controlled and owned as it has been owned. I am
convinced that the strict going concern assumption is unrealistic. Few, if any,
companies are going to go as long as 5 years without being engaged in mergers
and acquisitions, massive refinancings and restructurings, massive asset
redeployments, changes in control, and liquidations, in whole or in part. Until
the early 1990's, the strict going concern assumption seems to have been
accurate for the electric utility industry but in few other places. The strict
going concern assumption is no longer accurate even for electric utilities.
A logical concomitant of the strict going concern assumption is that the past
earnings record, or in the case of EMH, the past cash flow record, is the best
indicator of what future results will be for the company. Thus, there is a
belief in the primacy of earnings, or cash flow, as determinants of corporate
value. This emphasis on flows, whether cash or earnings, denigrates in
importance two other areas where corporate values are created:
a) conversion of assets to other uses and other ownership coupled with
refinancings.
b) having access to capital markets, either debt or equity, on super
attractive bases.
In our fundamental analysis of equities, we do not place much emphasis on
predicting the future. Rather we try to buy what is safe and cheap. The
companies in whose equities we invest are supposed to have four characteristics:
1) Exceptionally strong financial position as measured by an absence of
liabilities either on balance sheet or off balance sheet; the presence of high
quality assets such as surplus cash; and/or the presence of operations that
generate unencumbered cash flows available to service the capitalization, e.g.,
money management firms.
2) Reasonable managements from the outside stockholders' point of view
(This is the toughest area for us in most analyses).
3) An understandable business, which in each case means complete public
filings, especially with the SEC, and reliable audits useful to us as objective
benchmarks which we treat as tools of analysis. We use financial statements, not
because they are Truth, but rather because they are Objective Benchmarks.
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4) We try to pay no more than 50 cents for each $1 we think the common
stock would be worth were the company a private business or a take-over
candidate.
There are trade-offs involved in following our approach. In almost all cases
when we acquire a security, the near term earnings outlook is terrible.
Managements of the companies whose common stocks are in our portfolios tend to
be non-promotional and highly conservative, willing in up periods to sacrifice
returns on equity and returns on assets for safety. The markets for many
securities we own are relatively illiquid.
There are two important respects in which I would like to distinguish Graham &
Dodd from EMH:
EMH is information unconscious. EMH theory is that in order to outperform a
market, an investor has to have superior information. Graham & Dodd, in
contrast, are right on the money in their premise that the route to investment
success is to use the available information in a superior manner. As
technician-chartists, EMH people seem to have no conception of what corporate
information is and how it is used. Some of them even seem to think that Algebra
is more important than Financial Accounting. In the preface to a leading EMH
text, Principles of Corporate Finance by Brealy and Myers, there appears this
statement, "There are no ironclad prerequisites for reading this book except
algebra and the English language. An elementary knowledge of accounting,
statistics and microeconomics is helpful, however."
EMH is price unconscious. Market price in EMH represents a universal equilibrium
establishing business values for all purposes. Graham & Dodd, on the other hand
point out that market prices can be too high or too low; or to paraphrase Ben
Graham, Mr. Market is an extremely emotional fellow, subject to frequent fits of
irrationality. The EMH view seems summarized by the statement of William F.
Sharpe, a Nobel Laureate, in the Third Edition of his book, Investments, "Every
security's price equals its investment value at all times." If Bill Sharpe
really believes that, I own a bridge to Brooklyn which I would like to sell to
him.
I will write you again when the semi-annual report is published.
Sincerely yours,
/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 January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal % of
Amount($) Issues Value Net Assets
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Securities - 2.23%
5,000,000 Arcadia Automobile Receivables Trust
Series 1997-C A3, Subordinated Bond,
6.25% due 11/15/01 $ 5,046,450
13,402,456 Honda Auto Receivables Grantor Trust
Series 1997-A A, Subordinated Bond,
5.85% due 2/15/03 13,419,879
1,446,149 Olympic Automobile Receivables Trust
Series 1995-E CTFS, Subordinated Bond,
5.95% due 6/15/02 1,446,067
12,500,000 Standard Credit Card Master Trust
Series 1993-3 A, Subordinated Bond,
5.50% due 2/7/00 12,483,000
3,103,736 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 3,171,180
4,097,165 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 4,158,318
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TOTAL ASSET BACKED SECURITIES
(Cost $39,519,170) 39,724,894 2.23%
-----------
- --------------------------------------------------------------------------------------------
Bank and Other Debt - 0.87%
Oil 1,645,313 Cimarron Petroleum Corp.(c)(d) 1,664,539 0.09%
-----------
Retail 295,370 Lechmere, Inc. Trade Claim(c) 17,722
13,000,000 Montgomery Ward Series I 8.37%,
7/15/02(c)* 4,030,000
8,571,364 Montgomery Ward Series C 9.24%,
3/15/03(c)* 2,657,123
10,000,000 Montgomery Ward Series F 9.81%,
3/15/03(c)* 3,100,000
14,852,918 Montgomery Ward Trade Claim(c) 4,010,288
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13,815,133 0.78%
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TOTAL BANK AND OTHER DEBT
(Cost $19,691,237) 15,479,672
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</TABLE>
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Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal % of
Amount($) Issues Value Net Assets
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate Bonds - 0.41%
Foreign Issuers - 6,428,575 CGA Special Account Trust(b)(c) $ 6,428,575 0.36%
Bermuda -----------
Membership Sports & 1,064,267 Thousand Trails, Inc.,
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 968,482 0.05%
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TOTAL CORPORATE BONDS
(Cost $7,461,481) 7,397,057
-----------
- ----------------------------------------------------------------------------------------------
Government Agency Bonds (Collateralized Mortgage Obligations) - 9.32%
Planned Amortization 3,863,757 Fannie Mae
Classes Series X-188A E, 5.40% due 7/25/03 3,849,615
23,500,000 Fannie Mae
Series 1993-78 D, 5.95% due 5/25/05 23,517,860
5,000,000 Fannie Mae
Series 1993-131 C, 5.75% due 6/25/06 4,992,550
10,000,000 Fannie Mae
Series 1993-174 D, 6.00% due 7/25/06 9,998,500
16,875,000 Fannie Mae
Series 1993-191 PE, 5.80% due 9/25/06 16,858,631
6,581,974 Fannie Mae
Series 1994-41 PD, 5.75% due 4/25/15 6,563,808
5,000,000 Freddie Mac
Series 1580 N, 5.85% due 7/15/04 5,007,300
41,932,593 Freddie Mac
Series 1679 A, 5.25% due 9/15/06 41,653,742
6,000,000 Freddie Mac
Series 1998 PN, 6.25% due 7/15/14 6,047,580
20,000,000 Freddie Mac
Series 1978 PA, 6.30% due 8/15/16 20,178,200
12,000,000 Freddie Mac
Series 1547 PE, 6.00% due 3/15/17 12,042,840
10,000,000 Freddie Mac
Series 1610 PE, 6.00% due 4/15/17 10,035,800
4,900,722 Freddie Mac
Series 2007 CA, 7.50% due 9/15/23 4,983,887
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TOTAL GOVERNMENT AGENCY BONDS
(Cost $165,267,284) 165,730,313 9.32%
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</TABLE>
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Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants - 55.10%
Annuities & 163,300 John Nuveen & Co., Inc. Class A $ 5,368,487
Mutual Fund 408,000 Liberty Financial Companies, Inc. 13,795,500
Management & Sales 450,000 SunAmerica, Inc. 18,084,375
-----------
37,248,362 2.09%
-----------
Apparel Manufacturers 150,000 Kleinerts, Inc.(a)(c) 2,700,000 0.15%
-----------
Banking-Japan 261,000 The Chuo Trust & Banking Co., Ltd. 751,301
887,000 The Long-Term Credit
Bank of Japan, Ltd. 1,993,650
1,000,000 The Sakura Bank, Ltd. 3,746,055
-----------
6,491,006 0.36%
-----------
Bermuda Based 838,710 CGA Group, Ltd.(a)(b)(c) 4,193,550
Financial Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd.(a)(c) 2,887,194
85,917 LaSalle Re Holdings, Ltd. 2,910,438
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
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10,084,101 0.57%
-----------
Building Products 44,000 Central Sprinkler Corp.(a) 836,000
& Related 125,000 Cummins Engine Co., Inc. 6,687,500
145,000 H.B. Fuller Co. 7,612,500
124,400 Tecumseh Products Co. Class A(b) 5,940,100
417,300 Tecumseh Products Co. Class B(b) 20,447,700
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41,523,800 2.33%
-----------
Business Development 43,200 Capital Southwest Corp. 3,888,000 0.22%
Companies -----------
</TABLE>
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Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Computers, Networks 451,300 3Com Corp.(a) $ 14,921,106
& Software 365,000 Electronics for Imaging, Inc.(a) 6,113,750
391,200 NCR Corp.(a) 11,760,450
100,000 Novell, Inc.(a) 706,250
-----------
33,501,556 1.88%
-----------
Depository Institutions 53,000 Astoria Financial Corp. 2,722,875
147,034 Bankers Trust New York Corp. 15,337,484
218,500 Carver Bancorp, Inc.(b) 3,113,625
62,500 First Colorado Bancorp, Inc. 1,546,875
149,227 Golden State Bancorp., Inc.(a) 4,933,818
53,480 Golden State Bancorp., Inc. Warrants,
8/21/00(a) 1,176,560
20,000 Letchworth Independent
Bancshares Corp. 1,025,000
155,952 Marshall & Ilsley Corp. 8,674,830
34,783 Peoples Heritage Financial Group, Inc. 1,495,669
-----------
40,026,736 2.25%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 9,512,500
223,900 CapMAC Holdings Inc. 6,884,925
244,100 Enhance Financial Services Group, Inc. 13,578,062
750,000 Financial Security Assurance
Holdings Ltd. 35,859,375
240,000 MBIA Inc. 15,540,000
-----------
81,374,862 4.58%
-----------
Food Manufacturers 328,000 J & J Snack Foods Corp.(a) 4,674,000
& Purveyors 95,000 Premark International, Inc. 2,654,063
172,200 Sbarro, Inc. 5,047,613
109,100 Weis Markets, Inc. 3,811,681
-----------
16,187,357 0.91%
-----------
</TABLE>
14
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Holding Companies 50,000 Aristotle Corp.(a) $ 243,750
21,400 White River Corp. (a) 1,701,300
-----------
1,945,050 0.11%
-----------
Insurance Holding 189,978 ACMAT Corp. Class A (a)(b) 3,288,994
Companies 803,669 Danielson Holding Corp.(a)(b)(c) 6,328,893
50,000 Fund American Enterprises
Holdings, Inc. 6,575,000
161,000 Leucadia National Corp. 5,584,688
409,700 Risk Capital Holdings, Inc.(a) 9,115,825
5,490 Sen-Tech International
Holdings, Inc.(a)(c) 2,098,827
-----------
32,992,227 1.86%
-----------
Life Insurance 434,536 ReliaStar Financial Corp. 18,033,244 1.01%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 801,000
40,000 Liberty Homes, Inc. Class B 380,000
13,500 Palm Harbor Homes, Inc.(a) 435,375
-----------
1,616,375 0.09%
-----------
Medical Supplies 81,400 Acuson Corp.(a) 1,373,625
& Services 342,300 Datascope Corp.(a) 7,830,112
348,500 Physio-Control International Corp.(a) 6,142,313
498,100 Protocol Systems, Inc.(a) 4,296,113
90,750 St. Jude Medical, Inc.(a) 2,949,375
-----------
22,591,538 1.27%
-----------
Membership Sports 237,267 Thousand Trails, Inc.(a) 978,726 0.06%
& Recreation Clubs -----------
Mortgage Insurance 152,800 CMAC Investment Corp. 9,530,900 0.54%
-----------
Motor Vehicles & 50,000 Ford Motor Co. 2,550,000 0.14%
Cars' Bodies -----------
Non-Life 4,594,000 Mitsui Marine & Fire
Insurance-Japan Insurance Co., Ltd. 25,940,871
</TABLE>
15
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Non-Life 4,302,000 The Chiyoda Fire & Marine
Insurance-Japan Insurance Co., Ltd. $ 15,945,891
(continued) 4,379,000 The Nissan Fire & Marine
Insurance Co., Ltd. 16,265,836
3,246,000 The Sumitomo Marine & Fire
Insurance Co., Ltd. (a) 20,914,675
850,000 The Tokio Marine & Fire
Insurance Co., Ltd., Sponsored ADR 47,175,000
2,000,000 The Yasuda Fire & Marine
Insurance Co., Ltd. 11,214,506
----------
137,456,779 7.73%
----------
Real Estate 500,000 Alexander & Baldwin, Inc. 14,062,500
31,000 Consolidated-Tomoka Land Co. 552,188
206,400 Forest City Enterprises, Inc. Class A 11,055,300
3,750 Forest City Enterprises, Inc. Class B 201,562
880,336 Koger Equity, Inc. 20,027,644
846 Public Storage, Inc. 27,812
163,200 St. Joe Corp. 5,793,600
3,045,508 Tejon Ranch Co. (b) (c) 58,856,574
-----------
110,577,180 6.22%
-----------
Security Brokers, 223,600 Jefferies Group, Inc. 8,608,600
Dealers & 446,666 Legg Mason, Inc. 22,082,050
Flotation 787,500 Raymond James Financial, Inc. 27,267,188
Companies 161,941 Ryan, Beck & Co., Inc. 1,336,013
-----------
59,293,851 3.33%
-----------
Semiconductor 25,000 AG Associates, Inc. (a) 100,000
Equipment 400,000 Applied Materials, Inc. (a) 13,125,000
Manufacturers 793,400 Electro Scientific
Industries, Inc. (a) (b) 24,595,400
1,189,100 Electroglas, Inc. (a) (b) 17,241,950
2,483,900 FSI International, Inc. (a) (b) 29,651,556
369,200 KLA-Tencor Corp. (a) 13,845,000
300,000 Photronics, Inc. (a) 6,900,000
</TABLE>
16
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Warrants (continued)
Semiconductor 1,154,600 Silicon Valley Group, Inc. (a) $ 25,834,175
Equipment 326,700 SpeedFam International, Inc. (a) 7,779,544
Manufacturers 638,800 Veeco Instruments, Inc. (a) 14,373,000
(continued) 262,500 Zygo Corp. (a) 3,937,500
-----------
157,383,125 8.85%
-----------
Small-Cap 108,750 AFC Cable Systems, Inc. (a) 3,099,375
Technology 459,000 American Physicians Service
Group, Inc. (a) 3,155,625
127,000 Analogic Corp. 4,572,000
455,400 Boston Communications Group, Inc. (a) 3,073,950
168,500 Evans & Sutherland Computer Corp. (a) 4,802,250
81,500 FDP Corp. 835,375
1,324,200 Glenayre Technologies, Inc. (a) 17,462,888
140,600 H & Q Life Sciences Investors 1,871,738
154,800 Integrated Systems, Inc. (a) 2,186,550
300,000 Interphase Corp. (a) (b) 1,875,000
293,000 Mountbatten, Inc. (a) (b) 3,442,750
412,200 Planar Systems, Inc. (a) 5,178,263
53,600 Sparton Corp. (a) 482,400
612,000 Texas Micro, Inc. (a) 2,409,750
306,900 Vertex Communications Corp. (a) (b) 7,557,413
-----------
62,005,327 3.49%
-----------
Title 1,222,050 First American Financial Corp. (b) 60,796,987
Insurance 975,700 Stewart Information Services Corp. (b) 29,149,037
-----------
89,946,024 5.06%
-----------
TOTAL COMMON STOCKS AND
WARRANTS (Cost $647,073,968) 979,926,126
-----------
</TABLE>
17
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Preferred Stock - 0.63%
Bermuda Based 215,118 CGA Group, Ltd., Series A (b) (c) $ 5,377,952
Financial
Institutions 171,429 CGA Group, Ltd., Series B (b)(c) 4,285,725
-----------
9,663,677 0.54%
-----------
Depository 20,000 Golden State Bancorp Convertible,
Institutions Non-Cumulative, 8.75%, Series A 1,590,000 0.09%
-----------
Insurance 4,775 Ecclesiastical Insurance, 8.625% 9,915 0.00%
Companies -----------
TOTAL PREFERRED STOCK
(Cost $10,173,472) 11,263,592
-----------
<CAPTION>
Shares or
Investment
Amount
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Other Investments - 1.50%
Bermuda Based $2,215,000 ESG Partners, LP (c) 2,838,477 0.16%
Financial -----------
Institutions
Closed-End 652,100 American Government
Bond Funds Income Fund, Inc. 3,505,037 0.20%
-----------
Financial $15,000,000 American Capital Access
Insurance Holdings, LLC (c) 15,000,000 0.84%
-----------
Foreign Option $50,000,000 Japanese Yen May 1998
Contracts Put Options (c) (e) 1,321,250
$50,000,000 Japanese Yen November 1998
Put Options (c) (f) 798,750
-----------
2,120,000 0.12%
-----------
Insurance Holding $3,126,204 Head Insurance Investors LP (c) 3,126,204 0.18%
Companies -----------
TOTAL OTHER INVESTMENTS
(Cost $24,798,532) 26,589,718
-----------
</TABLE>
18
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Principal % of
Amount ($) Issues Value Net Assets
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills - 30.12%
1,914,000 U.S. Treasury Bill 5.19%, 2/5/98(g) $ 1,912,896
44,000,000 U.S. Treasury Bill 4.96%, 2/12/98 43,933,316
10,000,000 U.S. Treasury Bill 5.03%, 2/19/98 9,974,875
40,000,000 U.S. Treasury Bill 5.15%, 2/26/98 39,857,083
66,000,000 U.S. Treasury Bill 5.16%, 3/5/98 65,697,280
63,000,000 U.S. Treasury Bill 5.13%, 3/12/98 62,649,877
14,000,000 U.S. Treasury Bill 5.00%, 3/19/98 13,910,556
30,000,000 U.S. Treasury Bill 4.92%, 3/26/98 29,782,700
52,915,000 U.S. Treasury Bill 5.64%, 4/2/98 52,494,855
60,000,000 U.S. Treasury Bill 5.06%, 4/9/98 59,464,200
20,000,000 U.S. Treasury Bill 5.11%, 4/16/98 19,801,800
28,000,000 U.S. Treasury Bill 5.15%, 4/23/98 27,694,520
15,000,000 U.S. Treasury Bill 4.99%, 5/7/98 14,806,050
79,000,000 U.S. Treasury Bill 5.15%, 5/14/98 77,907,430
16,000,000 U.S. Treasury Bill 5.09%, 5/28/98 15,746,080
--------------
TOTAL U.S. TREASURY BILLS 535,633,518 30.12%
--------------
(Cost $535,424,785)
TOTAL INVESTMENT PORTFOLIO - 100.18% 1,781,744,890
--------------
(Cost $1,449,409,929)
LIABILITIES NET OF CASH
AND OTHER ASSETS - (0.18%) (3,290,109)
--------------
NET ASSETS - 100.00% $1,778,454,781
==============
(Applicable to 56,456,356
shares outstanding)
NET ASSET VALUE PER SHARE $31.50
======
</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 valued securities.
(d) Interest accrued at a current rate of prime + 2%.
(e) 50 million U.S. Dollar notional amount may be exercised on May 27, 1998 to
sell 6.3 billion Japanese Yen at a strike price of 126.
(f) 50 million U.S. Dollar notional amount may be exercised on November 10, 1998
to sell 6.7 billion Japanese Yen at a strike price of 134.2.
(g) Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
19
<PAGE>
[LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At January 31, 1998, the end of our first fiscal quarter, the unaudited net
asset value attributable to the 10,433,928 common shares outstanding of Third
Avenue Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $11.85,
compared with the Fund's audited net asset value at October 31, 1997 of $12.37.
As of February 23, 1998, the unaudited net asset value attributable to the
11,336,240 common shares outstanding was $12.40.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in the common
stocks of 10 companies, and added to 19 of its 26 existing positions. At January
31, 1998, Small-Cap Value held positions in 36 companies, and was close to 80%
invested, compared with 26 holdings and the 60% invested level at the end of
last quarter. The Fund's top 10 positions accounted for approximately 40% of the
Fund's net assets, or 50% of the invested portion of the Fund. None of our
positions were reduced or sold during the quarter.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
15,000 Cabot Industrial Trust
Common Stock ("Cabot Common")
195,500 C.P. Clare Corp. Common
Stock ("C.P. Clare Common")
31,000 Deltic Timber Corp. Common
Stock ("Deltic Common")
333,600 HomeBase, Inc. Common Stock
("HomeBase Common")
100,000 Koger Equity, Inc. Common Stock
("Koger Common")
137,700 National Media Corp. Common
Stock ("National Media Common")
275,000 Protocol Systems, Inc. Common
Stock ("Protocol Common")
20
<PAGE>
[LOGO]
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
101,500 Rofin-Sinar Technologies Inc.
Common Stock ("Rofin Common")
431,900 Sawako Corp. Sponsored ADR's
("Sawako ADR's")
13,700 SpeedFam International, Inc.
Common Stock ("SpeedFam
Common")
INCREASES IN EXISTING POSITIONS
500 ACT Networks, Inc. Common Stock
("ACT Common")
163,100 Alexander & Baldwin, Inc.
Common Stock ("Alex Common")
54,700 Alico, Inc. Common Stock
("Alico Common")
60,400 Boston Communications Group, Inc.
Common Stock ("Boston
Communications Common")
25,000 Centigram Communications Corp.
Common Stock ("Centigram
Common")
61,500 Electroglas, Inc. Common Stock
("Electroglas Common")
55,750 FSI International, Inc. Common
Stock ("FSI Common")
140,800 Glenayre Technologies, Inc.
Common Stock ("Glenayre
Common")
35,500 Planar Systems, Inc. Common
Stock ("Planar Common")
111,800 Shiva Corp. Common Stock
("Shiva Common")
21
<PAGE>
[LOGO]
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
79,000 Silicon Valley Group, Inc. Common
Stock ("SVG Common")
24,200 Skyline Corp. Common Stock
("Skyline Common")
30,000 Sparton Corp. Common Stock
("Sparton Common")
217,300 SpecTran Corp. Common Stock
("SpecTran Common")
7,400 Summa Four, Inc. Common Stock
("Summa Common")
183,000 The Nissan Fire & Marine Insurance Co.,
Ltd. Common Stock ("Nissan Common")
43,000 Value City Department Stores, Inc.
Common Stock ("Value City
Common")
127,700 ValueVision International, Inc. Class A
("ValueVision Common")
36,200 Xircom, Inc.
("Xircom Common")
Small-Cap Value took advantage of the declining stock prices that seemed to
characterize much of the last two months of 1997, focusing its efforts and
resources on "averaging down" in existing positions, while also identifying
several new opportunities.
Cabot Common, Deltic Common and Koger Common all represent investments in real
estate securities whose prices, we believe, offer significant discounts to the
companies' underlying asset values. Cabot, a well-financed real-estate
investment trust, owns, through a partnership, approximately 144 light
industrial properties. Deltic owns 341,000 acres of timberland in Arkansas and
Louisiana; operates sawmills and a fiberboard plant and engages in real estate
development in Arkansas. Koger, like Cabot, is a real estate investment trust,
and owns and operates approximately 225 office buildings located throughout the
southeastern and southwestern United States. All of these companies appear to be
well financed.
Small-Cap Value added a second Japanese security to the portfolio with the
purchase of Sawako ADR's. Sawako is a profitable and growing residential
building contractor, headquartered in the city of Nagoya, Japan's third largest
metropolitan area and located between Japan's two largest metropolitan areas,
Tokyo and Osaka.
22
<PAGE>
[LOGO]
The company develops low-cost, moderate- to high-quality rental property and
targets landowners in the property rental business. While the general Japanese
construction market appears to be fairly depressed, Sawako operates with little
direct competition and is very conservatively financed. At the time of purchase,
the shares traded around book value with a modest price-earnings multiple.
Interestingly, Sawako's president owns a large percentage of the company's
stock.
National Media, a producer of infomercials, has agreed to merge with
ValueVision, a company currently owned by Small-Cap Value. As of this date, the
merger has not been completed. If the deal is completed, the two companies will
form a marketing organization with $500 million in revenues, improved prospects
for profitability and a strong balance sheet. A search is underway for a new CEO
to guide the new company. Buying shares of National Media -- at the prices paid
- -- represented a modest arbitrage opportunity vis-a-vis purchasing more shares
of ValueVision.
Small-Cap Value also purchased shares of HomeBase, which operates 85 home
improvement warehouses in the western United States. HomeBase, despite a
reasonably strong balance sheet, has struggled against better managed
competitors like Home Depot, Lowe's and Eagle. By almost any comparison, for
example, sales productivity, asset utilization or expense structure, HomeBase
has plenty of room for improvement. The company has recently accelerated its
store remodeling program and the growth prospects of the home improvement
industry -- the titans notwithstanding -- seem reasonable. Shares were purchased
at a significant discount to stated book value, equal to about 25% of revenues,
and probably well below those values an acquirer might pay.
Protocol Systems manufactures and markets patient monitoring devices that
include both portable patient monitors and a central monitoring station. At the
time of purchase, the shares traded at a modest premium to book value and at
less than 1x sales. It's likely that the company's profitability will be
hamstrung over the coming quarters, however, as management adds to its direct
sales capabilities. Nevertheless, the company appears to have more than adequate
financial strength to execute its growth plans.
OUR CASE FOR INVESTMENT IN THE SEMICONDUCTOR EQUIPMENT INDUSTRY
With more than $150 million currently invested in the semiconductor equipment
industry, Third Avenue Funds have a very significant stake in the fortunes of
companies that supply tools to semiconductor manufacturers around the world. We
continue to like the investment characteristics of the industry, and added
meaningfully to our positions during the quarter just ended. From a shareholder
standpoint, Third Avenue's investment in the industry serves as a good example
of its investment discipline.
23
<PAGE>
[LOGO]
Our investment thesis rests on at least three important legs. Broadly speaking,
these legs include (i) extraordinary balance sheet quality; (ii) healthy
long-term industry growth; and (iii) growing industry consolidation. At a
minimum, these characteristics make the case for investment in the semiconductor
equipment industry quite compelling.
STRONG BALANCE SHEETS MEAN STAYING POWER
A critical piece of Third Avenue's investment philosophy revolves around buying
companies with strong balance sheets, as measured by a presence of high quality
assets and a lack of encumbrances, either on or off the balance sheet. The
semiconductor equipment companies in which we have invested are no exception.
Encouraged by an extraordinarily strong business cycle during the 1993-95 time
period, many semiconductor equipment companies were able to attract large
amounts of equity capital on attractive bases (i.e., at relatively high stock
prices). Largely as a result of these capital infusions, equipment suppliers
today show cash-rich, low-debt balance sheets. These high quality financials
endow the equipment suppliers with a number of important characteristics,
including: (i) extraordinary staying power, critical because of the cyclical
nature of the industry; (ii) tremendous financial flexibility, enabling a
company to make acquisitions, repurchase stock or assist a customer with
financing; and (iii) high levels of credibility with customers, who operate
billion dollar factories and depend on worldwide, around-the-clock service and
support.
Equipment supplier balance sheets, when compared with those of other industries,
are probably even better than they appear. Since the equipment suppliers tend to
operate in a very R&D-intensive environment -- as opposed to capital-intensive
ones like airlines, retailing, and steel -- and as R&D gets expensed immediately
for financial accounting purposes unlike capital investments, it is reasonable
to conclude that the reported earnings and book values of the equipment
suppliers are, in a sense, probably artificially depressed and are, therefore,
more conservative than those found in many other more capital-intensive
industries.
HEALTHY, ALBEIT CYCLICAL, GROWTH
Most of the industries and businesses in which Third Avenue invests have lousy
short-term outlooks. It is, however, this type of temporary weakness that
enables us to get our kind of pricing. Third Avenue cares little about owning
"cosmetically correct" or popular stocks and believes that buying what's
popular, when it's popular, is a sure-fire recipe for disaster. So it goes in
the current semiconductor equipment industry down-
24
<PAGE>
[LOGO]
turn. The economic and political crises in Asia, combined with diverging
currency valuations have introduced new disruptions for the equipment suppliers,
and have contributed to temporarily worsening business conditions in many
segments of the equipment industry.
These short-term challenges notwithstanding, it's apparent that over the next
three to five years, overall industry growth should resume a favorable level of
growth. In the coming years, the equipment suppliers will:
o benefit from technological changes occurring on the customer side.
Demand by customers for new tool sets derives virtually out of
necessity, being driven not only by competition but by greater chip
complexity, including smaller feature sizes; increasing densities; the
introduction of new materials; and the transition to larger wafers;
along with the need for improved manufacturing process data. One
lesson history has taught the semiconductor manufacturers: those who
do not invest today will not have a business tomorrow;
o find new applications for their tools. Some of our companies, for
example, are finding demand among manufacturers in other industries
like data storage and flat panel displays;
o benefit from healthy end markets less reliant on the personal computer
(PC) market. For example, demand for semiconductors is growing quickly
in markets beyond the various PC markets, and the percentage content
of semiconductors in every day life -- in everything from automobiles
and cell phones to smart cards -- will continue to increase.
CONSOLIDATION MAY ACCELERATE
Industry consolidation, while by no means a prerequisite for an investment by
Third Avenue, does tend to draw our attention. And an industry slowdown, like
the one gripping the semiconductor equipment industry, would certainly appear to
make for some timely consolidation opportunities. In fact, since late 1996, the
equipment industry has experienced an unprecedented period of consolidation
encompassing dozens of mergers and acquisitions. While a wide variety of reasons
might explain the M&A activity, at least two related themes can help explain
consolidation as it exists today.
Too many marginal suppliers. Today, literally hundreds of publicly- and
privately-owned equipment and materials suppliers try to sell into a
semiconductor industry populated by a limited number of very large companies.
Many of the suppliers sell substitute process solutions and/or competing sets of
tools. At the same time, it seems the Intel's, IBM's and Motorola's of the world
are relying on fewer, stronger
25
<PAGE>
[LOGO]
suppliers, not more. Therefore, there are probably too many suppliers "on the
margin" and many of these suppliers -- for reasons of size, technology or
finances -- will cease to exist in the years ahead. In other words, the universe
of competitors has begun to shrink, and with limited new entry to the industry,
it is likely to continue to do so.
Critical mass required. As the absolute number of competitors shrinks, the
remaining players will need to continue to expand the size and scope of their
operations. Not only must suppliers have the capacity to produce enough product
to fill customer orders on a timely basis, but in a world where a down
production line means millions of dollars, they are expected to provide timely
support for customer operations scattered around the globe. At the same time, on
the order of six to twelve equipment suppliers have eclipsed or are rapidly
approaching the billion dollar revenue mark, pulling away from most of the rest
of the industry. In view of this environment, the remaining players trying to
develop new products and customers may well favor "buying over building."
Consolidation has surfaced more and more even in Third Avenue's portfolio. Six
of the companies owned by Third Avenue embarked on significant M&A activity
during the past year alone. Applied Materials acquired Opal and Orbot. Electro
Scientific Industries acquired AISI, Chipstar and Dynamotion. KLA Instruments
merged with Tencor Instruments. Electroglas acquired Knights Technology and has
announced plans to acquire Techne Systems. Photronics continued to purchase
various captive mask making assets. And Veeco Instruments, which derives most of
its business from the equally cyclical data storage industry, acquired Wyko
Corporation and the Media and Magnetics division of Materials Research
Corporation.
In summary, for as long as a downturn continues, I would expect consolidation to
accelerate. Smaller companies, lacking the critical mass necessary to support
customer demands on the one hand, and threatened by huge competitors on the
other, will be forced out of business or into the arms of larger acquirers.
Acquirers will add to or fill out their product portfolios and will leverage
their worldwide existing sales and support organizations. Many clever companies
will recognize the current industry downturn as an opportunity to buy assets
cheaply.
Third Avenue shareholders could benefit as our companies find acquisitions and
build their businesses, become takeover candidates, or dispose of under
performing assets and direct the proceeds into higher and better uses.
26
<PAGE>
[LOGO]
WHAT'S WRONG?
At Third Avenue we probably spend more time worrying about what's wrong with our
investments, than how much money we might make. Despite its many attractive
investment characteristics the semiconductor equipment industry has a lot wrong
with it. It appears to be just as horribly cyclical as it has ever been, with
the current downturn likely to last anywhere from a couple of quarters to a
couple of years. The temporary over capacity and financial distress that
characterize Asia today underscore the cyclicality issue quite emphatically.
Competition with the domestic companies owned by the Fund, particularly from the
Japanese, has probably intensified during the last year as the Japanese Yen has
weakened against the dollar, making Japanese tools look more price competitive.
The transition to 300 millimeter wafers from 200 millimeters, alluded to above,
holds much promise for a new round of capital spending. Yet, it's quite likely
that in that transition, the equipment suppliers will bear more of the
development cost than in past transitions where Intel and IBM largely bore the
cost. The potential transfer of costs to the equipment suppliers from the
manufacturers portends lower future profitability for the companies in our
portfolio.
Even the productivity-enhancing qualities of the tools themselves have probably
had the unintended affect of contributing to the current spate of over capacity
and, ironically, weaker industry conditions.
I look forward to writing you again when we publish our semi-annual report dated
April 30, 1998.
Sincerely,
/s/ Curtis R. Jensen
---------------------
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
27
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio of Investments
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks - 77.31 %
Construction-Japan 431,900 Sawako Corp., Sponsored ADR $ 3,563,175 2.88%
-----------
Financial Insurance 242,400 CapMAC Holdings Inc. 7,453,800
40,300 Financial Security Assurance
Holdings Ltd. 1,926,844
-----------
9,380,644 7.58%
-----------
Life Insurance 64,900 FBL Financial Group, Inc. Class A 2,551,381 2.06%
-----------
Manufactured Housing 184,300 Skyline Corp. 5,114,325 4.14%
-----------
Media 137,700 National Media Corp. (a) 421,706
642,700 ValueVision International, Inc. Class A (a) 2,410,125
-----------
2,831,831 2.29%
-----------
Medical Supplies 275,000 Protocol Systems, Inc. (a) 2,371,875 1.92%
& Services -----------
Non-Life 2,315,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 8,599,089 6.95%
-----------
Real Estate 187,500 Alexander & Baldwin, Inc. 5,273,438
192,300 Alico, Inc. 4,230,600
15,000 Cabot Industrial Trust 337,500
31,000 Deltic Timber Corp. 887,375
100,000 Koger Equity, Inc. 2,275,000
200,000 Tejon Ranch Co. (b) 3,865,140
-----------
16,869,053 13.64%
-----------
Retail 333,600 HomeBase, Inc. (a) 2,251,800
250,000 Value City Department Stores, Inc. (a) 2,296,875
-----------
4,548,675 3.68%
-----------
Semiconductor 88,500 Electroglas, Inc. (a) 1,283,250
Equipment 300,000 FSI International, Inc. (a) 3,581,250
Manufacturers 105,000 Silicon Valley Group, Inc. (a) 2,349,375
13,700 SpeedFam International, Inc. (a) 326,231
-----------
7,540,106 6.10%
-----------
</TABLE>
28
<PAGE>
[LOGO]
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio of Investments (continued)
at January 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
% of
Shares Issues Value Net Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks (continued)
Technology 275,000 ACT Networks, Inc. (a) $ 2,578,125
50,000 Bel Fuse Inc. (a) 1,096,875
110,400 Boston Communications Group, Inc. (a) 745,200
225,000 Centigram Communications Corp. (a) 2,700,000
195,500 C.P. Clare Corp. (a) 2,688,125
257,300 Glenayre Technologies, Inc. (a) 3,393,144
161,500 PictureTel Corp. (a) 1,120,406
348,300 Planar Systems, Inc. (a) 4,375,519
101,500 Rofin-Sinar Technologies Inc. (a) 1,281,437
244,800 Shiva Corp. (a) 2,310,300
38,400 Sparton Corp. (a) 345,600
306,100 SpecTran Corp. (a) 2,735,769
197,300 Summa Four, Inc. (a) 1,738,706
316,400 Xircom, Inc. (a) 3,341,975
-----------
30,451,181 24.62%
-----------
Title Insurance 36,000 First American Financial Corp. 1,791,000 1.45%
-----------
TOTAL COMMON STOCKS
(Cost $96,345,106) 95,612,335
-----------
<CAPTION>
Principal
Amount ($)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills - 20.99%
26,000,000 U.S. Treasury Bill 4.84%, 2/12/98 25,961,549
------------
TOTAL U.S. TREASURY BILLS 25,961,549 20.99%
------------
(Cost $25,961,549)
TOTAL INVESTMENT PORTFOLIO - 98.30% 121,573,884
------------
(Cost $122,306,655)
CASH AND OTHER ASSETS
LESS LIABILITIES - 1.70% 2,102,000
------------
NET ASSETS - 100.00% $123,675,884
============
(Applicable to 10,433,928
shares outstanding)
NET ASSET VALUE PER SHARE $11.85
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Restricted/fair valued securities.
ADR: American Depository Receipt.
29
<PAGE>
BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Barbara Whitman
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 (toll-free)
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 92101-4492 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
