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Third Avenue Funds
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP
VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD QUARTER REPORT
(Unaudited)
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July 31, 1998
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At July 31, 1998, the unaudited net asset value attributable to the 56,209,736
common shares outstanding of Third Avenue Value Fund ("TAVF", "Third Avenue" or
the "Fund") was $30.90 per share. This compares with unaudited net asset values
of $34.24 per share at April 30, 1998 and $31.12 per share at July 31, 1997 as
adjusted for subsequent distributions. At September 8, 1998, the unaudited net
asset value was $28.52 per share.
QUARTERLY ACTIVITY
During the third quarter of fiscal 1998, the Fund established new positions in
seven issues, two of which, Golden State Bancorp, Inc. Class A Litigation
Warrants and BankAtlantic Bancorp, Inc. Class A Common Stock, were received as
either distributions on existing holdings or in connection with an acquisition.
Four of the new acquisitions were the common stocks of strongly capitalized
small-cap, high tech issuers and one acquisition was the common stock of a land
development company. TAVF also increased its holdings of twenty-one securities.
Six were the common stocks of exceptionally well-financed manufacturers of
semiconductor equipment, four were the common stocks of Japanese issuers, four
were the common stocks of other small-cap, high tech issuers, three were the
common stocks of U.S. financial institutions, and two were the common stocks of
a real estate land company and an oil service company, respectively. The Fund
also received a PIK (pay-in-kind) dividend on its holdings of CGA Preferred and
increased the amount of put options held as a hedge against weakening of the
Japanese Yen. Three positions were eliminated during the quarter: National Media
Corp. by sale in the open market, Ryan Beck & Co., Inc. which was acquired in an
exchange of stock transaction by BankAtlantic Bancorp and White River Corp.
which was acquired for cash.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
523,900 shares ADE Corp. Common Stock
("ADE Common")
297,600 shares Avatar Holdings, Inc. Common Stock
("Avatar Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED (CONTINUED)
123,237 shares BankAtlantic Bancorp, Inc. Class A
Common Stock ("BankAtlantic Common")
572,000 shares C.P. Clare Corp. Common Stock
("C.P. Clare Common")
149,227 warrants Golden State Bancorp, Inc. Litigation
Warrants ("Golden State Warrants")
757,500 shares Hologic, Inc. Common Stock
("Hologic Common")
299,000 shares Hypercom Corp. Common Stock
("Hypercom Common")
INCREASES IN EXISTING POSITIONS
$50,000,000 notional amount Japanese Yen Put Options
("Japanese Yen Put Options")
342,500 shares Alexander & Baldwin, Inc. Common Stock
("Alexander & Baldwin Common")
472,000 shares American Physicians Service Group, Inc.
Common Stock ("American Physicians
Common")
1,024,900 shares AVX Corp. Common Stock
("AVX Common")
7,649 shares CGA Group, Ltd. Series A Preferred Stock
("CGA Preferred")
473,000 shares Electro Scientific Industries, Inc. Common
Stock ("Electro Scientific Common")
393,400 shares Electroglas, Inc. Common Stock
("Electroglas Common")
50,000 shares Financial Security Assurance Holdings Ltd.
Common Stock ("FSA Common")
487,000 shares Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
336,600 shares Leucadia National Corp. Common Stock
("Leucadia Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
100,000 shares Liberty Financial Companies, Inc. Common
Stock ("Liberty Financial Common")
850,000 shares Nabors Industries, Inc. Common Stock
("Nabors Common")
142,700 shares Protocol Systems, Inc. Common Stock
("Protocol Common")
1,288,100 shares Silicon Valley Group, Inc. Common Stock
("Silicon Valley Common")
672,300 shares SpeedFam International, Inc. Common
Stock ("SpeedFam Common")
46,000,000 shares The Long-Term Credit Bank of Japan, Ltd.
Common Stock ("LTCB Common")
902,000 shares The Nissan Fire & Marine Insurance Co.,
Ltd. Common Stock ("Nissan Common")
15,000 shares The Yasuda Fire & Marine Insurance Co.,
Ltd. Common Stock ("Yasuda Common")
1,021,000 shares Toyoda Automatic Loom Works, Ltd.
Common Stock ("Toyoda Common")
24,400 shares Veeco Instruments, Inc. Common Stock
("Veeco Common")
148,700 shares 3Com Corp. Common Stock
("3Com Common")
POSITIONS ELIMINATED
27,600 shares National Media Corp. Common Stock
("National Media Common")
161,941 shares Ryan, Beck & Co., Inc. Common Stock
("Ryan Beck Common")
21,400 shares White River Corp. Common Stock
("White River Common")
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The Fund's performance during the quarter was poor, probably the worst, or close
to the worst, I've experienced as a money manager since I first started managing
mutual funds in 1984. I remain confident, nonetheless, that TAVF's cash was
redeployed during the quarter, with the exception of LTCB Common, into safe and
cheap equities at prices similar to those that existed during the bear markets
of 1974, or 1982. If I'm close to right about this, the appreciation potential
for the shares of Third Avenue ought to be huge no matter what happens in the
general market.
For many years, funds I have managed have been rather successful following the
approach of buying into businesses with strong finances and unquestioned staying
power at the time the industries served by those companies were severely
depressed, and where the equities of those companies appeared to be selling at a
fraction of the value that would be attributed to those issues, were the
businesses private companies or takeover candidates. Examples include the
acquisitions of securities (either common stocks or troubled senior debt) of oil
service companies in the mid-to-late 1980's; depository institutions and real
estate companies in the early 1990's; broker/dealers and title insurers in 1993;
and Kmart in 1995.
In each of these instances, near term outlooks were poor. However, for each
security acquired, the quality of the resources in the business seemed to be
extremely high (or in lieu thereof, debt instruments acquired contained strong
covenants and/or strong seniority); and the quantity of resources in the company
appeared to be quite large relative to the prices the funds paid for the
security. Quality of resources and quantity of resources are intimately related
to long-term earnings prospects. I believed that these resource pictures would
eventually be translated into earning power one way or the other; i.e., reported
profits would increase dramatically and/or the businesses would be merged, taken
over or refinanced.
Historically, this has proven to be a pretty good investment strategy for buy
and hold fundamentalists. I think that it may be even more promising today than
it has been historically because there exist two areas where the quality of
resources appear to be very high; common stock prices seem to be inordinately
low compared with the net resources employed in the businesses; and where the
long-term earnings outlook seems to vary between very good and spectacular.
These two areas are semiconductor equipment manufacturers and certain very well
capitalized Japanese issuers, with some emphasis on non-life insurers.
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SEMICONDUCTOR EQUIPMENT COMPANIES COMMON STOCKS
Securities of semiconductor equipment, and related, companies acquired during
the past quarter were ADE Common, AVX Common, C.P. Clare Common, Electro
Scientific Common, Electroglas Common, Silicon Valley Common, SpeedFam Common
and a small number of shares of Veeco Common.
Normally, a first stage venture capitalist financing a promising start-up before
that company went public would pay some kind of premium over both the cost to
start the company incurred by the founder(s) and the stated Net Asset Value
("NAV") of the start-up. As a rule of thumb, that premium price over NAV might
be anywhere from 50% to 400%, even though that price would be only a mere
fraction of the price at which the company would expect to sell common stock at
a subsequent date in an Initial Public Offering. The Fund is acquiring its
positions in semiconductor equipment companies at much more attractive prices
relative to NAV than are usually available to first stage venture capitalists.
In addition, the Fund seems to have certain advantages over venture capitalists.
The companies in which TAVF is investing are already public; all are extremely
well financed; all, prior to the current industry depression, had exhibited
substantial earning power relative to the current market prices for the common
stocks; and insofar as mistakes are made about individual companies, TAVF, in
the future, ought to have better opportunities to sell its positions in the open
market than would be available to a venture capitalist.
A statistical review of these common stocks is contained in the table
immediately below. Briefly, the table shows for each company its cash and
equivalent holdings as a percentage of total book liabilities as of the date of
the most recently published balance sheet; and recent market prices as related
to NAV and peak earnings for the most prosperous recent year. For those
companies that succeed, the next peak earnings ought to be a lot higher than the
last peak. All of the companies account very conservatively. In each case
Research, Development and Engineering expenditures are expensed and none have
any material amounts of intangible assets on their balance sheets. In each case,
except for Veeco Common, prices paid, based on statistics, ought to be the envy
of first stage venture capitalists. Each company seemed to be very well
financed. Market prices relative to NAVs ranged from a premium of 61% to a
discount of 46%. Price earnings ratios based on past peak earnings ranged from a
high of 10.1 times to a low of 4.7 times:
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<TABLE>
<CAPTION>
CASH/ PREMIUM
PRICE TOTAL BOOK TANGIBLE (DISCOUNT) PRICE/
(8/31/98 LIABILITIES NAV/ TO PEAK PEAK
COMPANY CLOSE) (%) SHARE NAV ANNUAL EPS EPS
- -------- ------- ----------- -------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
ADE Corp. 11 5/8 253% $10.16 14.4% $1.48 7.9 times
AVX Corp. 14 7/8 66% $9.23 61.1% $1.58 9.4
C.P. Clare Corp. 6.69 124% $9.93 (32.6%) $0.95 7.0
Electroglas, Inc. 10 3/4 552% $9.26 16.2% $2.05 5.2
Electro-Scientific
Industries, Inc. 19 1/4 227% $16.02 20.2% $1.90 10.1
Silicon Valley Group,
Inc. 9 5/8 95% $17.94 (46.4%) $2.07 4.7
SpeedFam
International, Inc. 12 3/8 345% $17.92 (30.9%) $1.67 7.4
Veeco Instruments
Inc. 22 5/8 24% $6.46 250.4% $1.36 16.6
</TABLE>
In analyzing companies and securities from a buy-and-hold fundamentalist point
of view, it is always the case that the attractiveness, or unattractiveness, of
any investment can be boiled down to one, two, three, four or five factors (at
most) that will eventually determine the outcome of the investment. Other
factors that might be considered are just "noise", factors that really don't
have anything to do with the attractiveness or unattractiveness of the
investment. "Noise" in connection with semiconductor equipment common stocks for
buy-and-hold fundamentalists are the outlook for reported earnings for 1998 and
1999 and forecasts about when the current industry depression will end.
There seem to be four factors crucial to understanding semiconductor equipment
company common stocks:
1) The industry seems bound to experience explosive growth over the next 3
to 7 years. Semiconductors are becoming ubiquitous; it's just not
computers anymore, it's everything; - smart cards, automobiles,
telephones, the factory floor; household appliances, internet shopping.
Compounding the growth in basic demand are technological innovations of
all sorts which will require that Fabs (semiconductor manufacturing
facilities) reequip.
2) The industry will remain highly cyclical with recurrent booms and
busts. TAVF does not want to be in the common stocks of companies in this
industry unless the companies are very well financed.
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3) The industry is excruciatingly competitive and very management skills
intensive. Not every company in which the Fund has invested will prosper.
It is impossible for us in mid-1998 to identify the future winners and the
future losers. In semiconductor equipment, diversification is essential.
After all, the industry is very venture capital like. And in venture
capital, the "strike out" ratios tend to be quite high. However, if any
sizeable number of the fourteen companies in which TAVF has invested
succeed, the semiconductor portfolio ought to perform quite well overall.
4) It seems probable that there will be consolidations and mergers on a
relatively large scale within the industry.
Because semiconductor equipment is a relatively small industry and because TAVF
is making relatively large investments, the Fund is among the largest
shareholders of several issuers. Third Avenue owns over 10% of the outstanding
common stock of three companies; Electro-Scientific, FSI International and
Silicon Valley. TAVF owns over 5% of the outstanding common stocks of an
additional three companies; C.P. Clare, Electroglas and SpeedFam.
WELL-CAPITALIZED JAPANESE COMPANIES
During the quarter, the Fund acquired additional shares of Nissan Common, Toyoda
Common and Yasuda Common. The Fund has been acquiring the common stocks of
Japanese issuers, which are strongly capitalized, and whose assets consist
mostly of performing loans and marketable common stocks. Assuming these issuers
did their accounting the same way U.S. mutual funds or closed-end companies
accounted, Third Avenue has been acquiring these common stocks at discounts from
net asset value of anywhere from 35% to 75%. In addition, each company has
rather profitable operating businesses, something that no U.S. investment
company can have. No U.S. mutual fund is available at a discount. The typical
discount for U.S. closed-ends is 10%-15%.
Japanese financial institutions are generally capital short. The non-life
companies whose common stocks are owned by Third Avenue are all capital rich.
Reform of Japanese financial institutions is proceeding rapidly, all driven from
the bottom up by the private sector, not the government. Virtually every major
U.S. and European financial institution has entered the Japanese market since
"Big Bang" deregulation took hold within the past year. Many of these
institutions are involved in various joint ventures with non-life insurers.
Within five years, it seems likely that the non-life industry will undergo
dramatic changes. We suspect that a few of the non-lifes,
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whose common stocks the Fund owns, are takeover candidates. The various new
entrants into the huge Japanese financial market seem to be concluding that it
is a lot more attractive to buy via joint ventures and takeovers than it is by
being a new entrant into the market. Meanwhile, if the Japanese government
decides, as I think it has to decide, to allow interest rates to rise, at least
for certain types of loans, the reported earnings of non-life companies ought to
increase significantly as net investment income rises.
LONG-TERM CREDIT BANK OF JAPAN
The acquisition of 50 million shares of LTCB Common, now selling around 30 cents
U.S. per share, may well prove to be the worst mistake I have made since I
started managing fund portfolios. If LTCB Common is wiped out, a distinct
possibility, the Fund will suffer a loss of approximately $1 per TAVF share
based on the Fund's original cost basis for LTCB Common. It seems as if almost
every time I stray from Third Avenue's doctrine of safe and cheap, the Fund gets
burned. LTCB Common was ultra-cheap - unquestionably the cheapest major bank
stock in the civilized world - but LTCB Common is not safe because it may be
insolvent, at least for bank regulatory purposes.
The Fund acquired its position in LTCB Common not so much for statistical
reasons, but, more importantly, because I was high on management. It turns out
though that my appraisal of management could not have been more wrong. What a
colossal mistake! LTCB management seems to be inept in terms of protecting the
interests of the bank and its common stockholders.
LTCB Common appeared to be an ultra cheap bank stock with a huge upside
potential prior to LTCB's August 21 press release: - LTCB at March 31, 1998, had
an NAV of about $1.95 per share based on U.S. accounting standards. LTCB, the
34th largest bank in the world, was well capitalized for Bank For International
Settlement ("BIS") purposes at that date. While the Fund could not undertake a
due diligence investigation into LTCB's bad loans, and the adequacy of reserves,
the best indications were that LTCB had no more a bad loan problem than Japanese
banks in general. This was attested to by management statements, opinions of the
company's independent auditors, the due diligence investigation undertaken by
Swiss Bank in late 1997 in connection with its three joint venture agreements
with LTCB, and a Bank of Japan (the Japanese Federal Reserve Bank) audit in
mid-1998.
I thought, and still think, that LTCB management had been making the right
strategic moves - shrinking the amount of spread lending during the past three
and one
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half years, and building up fee income through three very important 50-50 joint
ventures with Swiss Bank into Money Management, Investment Banking and Personal
Banking. However, Swiss Bank pulled out of the Personal Banking joint venture on
August 12.
On August 21, LTCB announced that it proposed to forgive $3.6 billion of senior
loans to three non-bank "affiliates" without any consideration whatsoever. The
"affiliates" are non-controlled borrowers in which LTCB has minor common stock
positions. It is outside my experience that senior loans are forgiven without
consideration. Rather, senior lenders participate in the reorganization of
companies which would be feasible subsequent to a reorganization. LTCB has
opined that these companies will become feasible after reorganization but that
LTCB, as a senior lender, will receive none of the reorganized debtors'
securities whether new debt instruments, preferred stocks or common stocks. Most
U.S. banks would never have survived the problems of the late 1980's-early
1990's if they forgave wholly corporate loans on their books rather than
participating in reorganizations. If the $3.6 billion of debt forgiveness stays
in place, the holders of LTCB Common Stock are bound to suffer massive dilution,
and may even be wiped out.
On September 1, the Fund brought suit in the U.S. Federal District Court seeking
to enjoin LTCB from making a gift to the common shareholders of the debtor
companies, which gift would be worth the present value of $3.6 billion of loans,
say anywhere from 25% to 100% of the principal amount. Hopefully, the lawsuit
will serve as a wedge so that LTCB management, and government authorities, can
be educated as to the need for banks to work out senior loans rather than to
make gifts to debtors, or to sell loans at fire sale prices. Our various
communications with LTCB management have not evoked any response.
For Japan, the debt forgiveness mentality has an importance that transcends the
immediate LTCB problem. If the Japanese do not develop a system in which bad
loans can be worked out, it is a foregone conclusion that Japan will never solve
its huge bad loan problems. The U.S. has just such a system for working out
non-performing loans and restructuring troubled companies. It is called Chapter
11. In the troubled times for U.S. banks, non-performing corporate loans were
worked out at present values which probably ranged anywhere from 75% of claim to
100% of claim. Given the Japanese mindset, it will be a stroke of luck if the
Japanese bad loans are sold for as much as 10% to 15% of claim. Except for LTCB!
Here management is making proposals that assure that $3.6 billion of senior
claims are worth nothing.
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Third Avenue's prospects for bringing LTCB management and government authorities
to their senses may not be very good. But I have to try. I'd rather be shot for
a lion than hanged for a lamb. The lawsuit is being brought at no expense to the
Fund. The management company is bearing all expenses.
Obviously I do not think that the Japanese authorities know what they are doing,
and, as far as I can tell, the American authorities advising the Japanese about
working out bad loans are equally at sea. I reached this conclusion after I was
a participant from July 17-19 in a conference, partially about Japan, sponsored
by Harvard Law School and the Japan Institute of International Affairs. The
other participants in the conference were important people from Japan, the US,
BIS and the International Monetary Fund.
A prime mover for the Fund's investment in LTCB was the great success TAVF
enjoyed buying the common stocks of well capitalized U.S. banks at prices below
NAV in the early 1990's. In going into LTCB, though, I failed to realize how
different Japan is from the U.S. in terms of reorganizing troubled companies and
working out bad loans. I feel strongly that the key to the successful resolution
of the U.S. banking crisis was that the government set up ground rules in which
the private sector could operate, swiftly and profitably-very profitably. No one
seems to be following that script in Japan. The Japanese, and LTCB, would be far
better off if the private sector were attracted to the reorganization and
workout processes on a basis where it would be attractive for the private sector
to pay more, much more, for bad loans than 10% to 15% per total amount of claim.
To improve realizations for Japanese banks, and to encourage productive lending
into the Japanese economy, it appears as if certain fundamental changes have to
be made:
1) Japan needs modern reorganization statutes; adopting the best from,
say, U.S. Chapter 11 and Canadian CCAA.
2) The income tax code should be amended so that companies having
tremendous amounts of surplus capital (Tokio Marine, for example) can
redeploy that capital to more constuctive, more profitable, uses without
an income tax penalty.
3) Certain credit enhancements, even if only partial rather than full
guarantees, should be put in place.
4) Interest rates, at least in certain sectors of the Japanese economy,
have to be raised in order to attract new lending.
I saw little at the Harvard Conference that made me think that the bad loan
crisis would start to get resolved anytime in the future. What is needed is
thinking and
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actions "outside of the box". In political and economic terms, what is needed is
Franklin Delano Roosevelt and John Maynard Keynes. What the Japanese seem to be
getting is Herbert Hoover and Milton Friedman.
The poor macro outlook in Japan has a lot to do with LTCB. On the other hand, it
does not seem to have much to do for buy-and-hold fundamentalists involved with
non-life insurers or truly international companies such as Toyoda.
OTHER ACQUISITIONS DURING THE QUARTER
The other small-cap-high tech issues acquired, American Physicians Common,
Hologic Common, Hypercom Common and Protocol Common all have statistical
profiles not terribly different from those of the semiconductor equipment
commons acquired. Glenayre Common is a cheap issue but its financial position is
less than it used to be as $82 million cash was spent on an acquisition late in
1997. Earning power, though, should be huge. 3Com is well financed and is an
important Internet player.
Leucadia Common is a semi arbitrage with a reasonably determinant workout within
a reasonably determinant period of time, say one year. This superbly managed
company seems likely to liquidate. The workout should be somewhere in the 40's;
TAVF is acquiring Leucadia Common in the low 30's. The Fund added modestly to
its holdings of FSA Common during the quarter. I woke up to the fact that if
Glass-Steagall is repealed, financial guaranty insurers such as FSA seem to be
prime candidates for acquisition by commercial banks. Liberty Financial Common
seemed to be selling at a discount from its adjusted book value based on
takeover prices for money management firms. Both FSA and Liberty Financial seem
to be very well managed companies.
Nabors Industries has been a spectacular growth story since the company emerged
from Chapter 11 in 1988. In great part, that growth was attributable to
judicious acquisitions of other oil service companies and oil service assets.
Corporate values in the industry are now so depressed again, that new
opportunities may open up for Nabors, a well-financed company. Meanwhile, as the
leading land driller on the North American Continent, Nabors, whose common sells
around $12, seems to have the potential to earn over $3.00 per share on its
existing business base when, as and if demand for rigs becomes buoyant again.
However, there are no signs that the industry will emerge from its current
depression anytime soon.
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CLOSING THE FUND TO NEW INVESTORS
Part of the motivation for closing the Fund to new investors is a desire to use
up TAVF's surplus cash by acquiring those securities which I think are so
attractive now. Last year, and early this year, the Fund's cash and cash
equivalent positions reached 40% of assets. At July 31, that position was down
to 21%. Unlike other mutual funds which strive to maximize near-term performance
and are always fully invested, or even borrow money, TAVF is unlikely to let its
cash position go below 10%; sort of an emergency reserve. If TAVF's surplus cash
is spent, and there appear to be attractive investment opportunities, Third
Avenue will then solicit new investors. If it never happens, the Fund will not
open for new investors.
I will write you again when the Annual Report for the year to end October 31,
1998 is published.
Sincerely yours,
/s/ Martin J. Whitman
- ---------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
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<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES - 3.94%
23,827,709 Ford Credit Auto Owner Trust
Series 1997-B A2, Subordinated Bond,
5.95% due 1/15/00 $ 23,868,216
17,805,309 Honda Auto Receivables Grantor Trust
Series 1997-A A, Subordinated Bond,
5.85% due 2/15/03 17,815,280
9,871,708 Residential Funding Mortgage Securities
Co., Inc. Series 1996-S9 A12,
7.25% due 4/25/26 9,938,935
12,500,000 Standard Credit Card Master Trust
Series 1993-3 A, Subordinated Bond,
5.50% due 2/7/00 12,507,125
2,559,486 The Money Store Home Equity Trust
Series 1992-A A, 6.95% due 1/15/07 2,563,530
1,860,983 The Money Store Home Equity Trust
Series 1995-B A3, 6.65% due 1/15/16 1,865,300
-------------
TOTAL ASSET BACKED SECURITIES
(Cost $68,461,629) 68,558,386 3.94%
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BANK AND OTHER DEBT - 1.03%
Oil Services 1,511,910 Cimarron Petroleum Corp. (c) (d) 1,531,135 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) * 3,900,000
8,571,364 Montgomery Ward Series C 9.24%,
3/15/03 (c) * 2,571,409
10,000,000 Montgomery Ward Series F 9.81%,
3/15/03 (c) * 3,000,000
26,576,795 Montgomery Ward Trade Claims (c) 6,909,966
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16,399,097 0.94%
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TOTAL BANK AND OTHER DEBT
(Cost $22,676,684) 17,930,232
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</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 0.43%
Bermuda Based 6,428,575 CGA Special Account Trust (b) (c) $ 6,428,575 0.37%
Financial -------------
Institutions
Membership
Sports & 1,128,123 Thousand Trails, Inc.,
Recreation Clubs Pay-In-Kind Notes 12%, 7/15/03 1,026,592 0.06%
-------------
TOTAL CORPORATE BONDS
(Cost $7,461,481) 7,455,167
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U.S. GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) - 16.73%
Planned
Amortization 368,600 Fannie Mae
Classes Series X-188A E, 5.40% due 7/25/03 368,600
18,638,144 Fannie Mae
Series 1993-78 D, 5.95% due 5/25/05 18,619,692
4,080,687 Fannie Mae
Series 1993-131 C, 5.75% due 6/25/06 4,069,628
14,325,190 Fannie Mae
Series 1998-20 A, 6.00% due 9/18/07 14,334,788
24,280,236 Fannie Mae
Series 1998-24 PA, 6.00% due 12/18/08 24,290,677
45,256,841 Fannie Mae
Series 1998-16 PA, 6.00% due 4/18/09 45,274,039
4,031,796 Fannie Mae
Series 1994-41 PD, 5.75% due 4/25/15 4,019,862
6,454,860 Fannie Mae
Series G-92-65 E, 6.50% due 12/25/16 6,469,125
5,594,303 Freddie Mac
Series 1586 E, 5.50% due 9/15/03 5,581,771
5,000,000 Freddie Mac
Series 1580 N, 5.85% due 7/15/04 4,999,400
19,188,578 Freddie Mac
Series 1601 PE, 5.75% due 1/15/06 19,158,836
33,654,062 Freddie Mac
Series 1679 A, 5.25% due 9/15/06 33,348,147
15,219,347 Freddie Mac
Series 2031 PA, 5.75% due 2/15/07 15,184,495
</TABLE>
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14
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) (CONTINUED)
Planned
Amortization 36,856,593 Freddie Mac
Classes (continued) Series 2046 PA, 6.50% due 7/15/08 $ 37,024,291
23,700,000 Freddie Mac
Series 1985 PB, 6.25% due 8/17/12 23,716,590
20,000,000 Freddie Mac
Series 1978 PA, 6.30% due 8/15/16 20,105,800
10,000,000 Freddie Mac
Series 1610 PE, 6.00% due 4/15/17 10,006,300
3,992,042 Freddie Mac
Series 2007 CA, 7.50% due 9/15/23 4,013,200
-------------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $290,754,288) 290,585,241 16.73%
-------------
SHARES
- ----------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 74.28%
Annuities &
Mutual Fund 163,300 John Nuveen & Co., Inc. Class A 6,093,131
Management &
Sales 508,000 Liberty Financial Companies, Inc. 17,272,000
450,000 SunAmerica, Inc. 27,646,875
-------------
51,012,006 2.94%
-------------
Apparel
Manufacturers 150,000 Kleinerts, Inc. (a) (c) 2,700,000 0.15%
-------------
Banking-Japan 261,000 The Chuo Trust & Banking Co., Ltd. 884,006
50,000,000 The Long-Term Credit Bank of Japan, Ltd. 17,662,265
1,000,000 The Sakura Bank, Ltd. 2,313,410
-------------
20,859,681 1.20%
-------------
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) 2,620,684
85,917 LaSalle Re Holdings, Ltd. 3,007,095
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
-------------
9,914,248 0.57%
-------------
</TABLE>
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15
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Building Products 44,000 Central Sprinkler Corp. (a) $ 308,000
& Related
125,000 Cummins Engine Co., Inc. 6,960,938
145,000 H.B. Fuller Co. 8,156,250
125,400 Tecumseh Products Co. Class A (b) 6,583,500
417,300 Tecumseh Products Co. Class B (b) 23,055,825
-------------
45,064,513 2.59%
-------------
Business 43,200 Capital Southwest Corp. 4,255,200 0.24%
Development -------------
Companies
Computers, 800,000 3Com Corp. (a) 19,800,000
Networks
& Software 365,000 Electronics for Imaging, Inc. (a) 5,794,375
391,200 NCR Corp. (a) 13,251,900
100,000 Novell, Inc. (a) 1,137,500
-------------
39,983,775 2.30%
-------------
Depository
Institutions 53,000 Astoria Financial Corp. 2,656,625
123,237 BankAtlantic Bancorp, Inc. Class A 1,263,180
147,034 Bankers Trust New York Corp. 16,476,998
218,500 Carver Bancorp, Inc. (b) 2,635,656
62,500 First Colorado Bancorp, Inc. 1,660,156
149,227 Golden State Bancorp., Inc. (a) 4,113,069
53,480 Golden State Bancorp., Inc. Warrants,
8/21/00 (a) 1,089,655
149,227 Golden State Bancorp, Inc.
Litigation Warrants (a) 708,828
60,000 Letchworth Independent Bancshares Corp. 1,012,500
155,952 Marshall & Ilsley Corp. 8,762,553
69,566 Peoples Heritage Financial Group, Inc. 1,573,931
-------------
41,953,151 2.42%
-------------
Electronic
Components 1,500,000 AVX Corp. 22,500,000 1.30%
-------------
</TABLE>
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16
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Financial
Insurance 200,000 Ambac Financial Group, Inc. $ 11,650,000
488,200 Enhance Financial Services Group, Inc. 15,317,275
800,000 Financial Security Assurance
Holdings, Ltd. 41,650,000
344,673 MBIA Inc. 23,222,343
-------------
91,839,618 5.29%
-------------
Financial
Services 13,104 Associates First Capital Corp. 1,018,017 0.06%
-------------
Food 328,000 J & J Snack Foods Corp. (a) 6,314,000
Manufacturers 95,000 Premark International, Inc. 2,945,000
& Purveyors 172,200 Sbarro, Inc. 4,229,663
109,100 Weis Markets, Inc. 3,743,494
-------------
17,232,157 0.99%
-------------
Holding Companies 50,000 Aristotle Corp. (a) 343,750 0.02%
-------------
Industrial -
Japan 2,100,000 Toyoda Automatic Loom Works, Ltd. 34,908,943 2.01%
-------------
Insurance 189,978 ACMAT Corp. Class A (a) (b) 2,992,154
Holding
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 4,822,014
50,000 Fund American Enterprises 7,550,000
Holdings, Inc.
497,600 Leucadia National Corp. 16,545,200
409,700 Risk Capital Holdings, Inc. (a) 10,191,287
5,490 Sen-Tech International Holdings,
Inc. (a) (c) 2,745,000
-------------
44,845,655 2.58%
-------------
Life Insurance 434,536 ReliaStar Financial Corp. 21,563,849 1.24%
-------------
Manufactured
Housing 89,000 Liberty Homes, Inc. Class A 1,123,625
40,000 Liberty Homes, Inc. Class B 540,000
16,875 Palm Harbor Homes, Inc. (a) 459,844
-------------
2,123,469 0.12%
-------------
Media 276,600 ValueVision International, Inc.
Class A (a) 1,063,167 0.06%
-------------
</TABLE>
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17
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Medical Supplies 81,400 Acuson Corp. (a) $ 1,343,100
& Services
342,300 Datascope Corp. (a) 7,787,325
757,500 Hologic, Inc. (a) 12,546,094
348,500 Physio-Control International Corp. (a) 9,322,375
643,800 Protocol Systems, Inc. (a) (b) 5,955,150
90,750 St. Jude Medical, Inc. (a) 2,767,875
-------------
39,721,919 2.29%
-------------
Membership 237,267 Thousand Trails, Inc. (a) 1,067,701 0.06%
Sports & -------------
Recreation Clubs
Mortgage
Insurance 152,800 CMAC Investment Corp. 8,432,650 0.49%
-------------
Motor Vehicles & 50,000 Ford Motor Co. 2,846,875 0.16%
Cars' Bodies -------------
Natural 1,000,000 Alexander & Baldwin, Inc. 24,718,700
Resources &
Real Estate 297,600 Avatar Holdings, Inc. (a) 8,053,801
31,000 Consolidated-Tomoka Land Co. 515,375
412,800 Forest City Enterprises, Inc. Class A 11,919,600
7,500 Forest City Enterprises, Inc. Class B 222,422
880,336 Koger Equity, Inc. 16,396,258
846 Public Storage, Inc. 22,419
163,200 St. Joe Corp. 4,049,400
3,045,508 Tejon Ranch Co. (b) (c) 55,177,753
-------------
121,075,728 6.97%
-------------
Non-Life 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 38,020,618
Insurance-
Japan 4,602,000 The Chiyoda Fire & Marine Insurance
Co., Ltd. 16,702,600
5,316,000 The Nissan Fire & Marine Insurance
Co., Ltd. 17,526,617
3,246,000 The Sumitomo Marine & Fire Insurance
Co., Ltd. (a) 18,705,874
850,000 The Tokio Marine & Fire Insurance Co.,
Ltd., Sponsored ADR 42,818,750
</TABLE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Non-Life 3,000,000 The Yasuda Fire & Marine Insurance
Insurance- Co., Ltd. $ 14,233,706
Japan -------------
(continued)
148,008,165 8.52%
-------------
Oil Services 1,700,000 Nabors Industries, Inc. (a) 29,006,250 1.67%
-------------
Security 223,600 Jefferies Group, Inc. 9,838,400
Brokers,
Dealers & 446,666 Legg Mason, Inc. 27,274,543
Flotation
Companies 1,181,250 Raymond James Financial, Inc. 30,269,531
-------------
67,382,474 3.88%
-------------
Semiconductor 523,900 ADE Corp. (a) 6,679,725
Equipment
Manufacturers 25,000 AG Associates, Inc. (a) 68,750
400,000 Applied Materials, Inc. (a) 13,400,000
1,266,400 Electro Scientific Industries, Inc.(a)(b) 30,710,200
1,582,500 Electroglas, Inc. (a) (b) 19,088,906
2,820,900 FSI International, Inc. (a) (b) 23,096,119
369,200 KLA-Tencor Corp. (a) 11,029,850
300,000 Photronics, Inc. (a) 5,437,500
3,648,500 Silicon Valley Group, Inc. (a) (b) 50,850,969
1,448,500 SpeedFam International, Inc. (a) 24,443,437
663,200 Veeco Instruments, Inc. (a) (b) 17,574,800
262,500 Zygo Corp. (a) 2,493,750
-------------
204,874,006 11.80%
-------------
Small-Cap
Technology 108,750 AFC Cable Systems, Inc. (a) 3,466,406
1,009,000 American Physicians Service Group,
Inc. (a) (b) 6,936,875
127,000 Analogic Corp. 5,175,250
455,400 Boston Communications Group, Inc. (a) 3,643,200
572,000 C.P. Clare Corp. (a) 5,362,500
168,500 Evans & Sutherland Computer Corp. (a) 4,180,906
81,500 FDP Corp. 988,188
1,811,200 Glenayre Technologies, Inc. (a) 14,829,200
</TABLE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Small-Cap 299,000 Hypercom Corp. (a) $ 2,616,250
Technology
(continued) 140,600 H & Q Life Sciences Investors 1,757,500
154,800 Integrated Systems, Inc. (a) 2,592,900
300,000 Interphase Corp. (a) (b) 1,800,000
293,000 Mountbatten, Inc. (a) (b) 4,156,938
412,200 Planar Systems, Inc. (a) 4,946,400
53,600 Sparton Corp. (a) 435,500
612,000 Texas Micro, Inc. (a) 2,142,000
306,900 Vertex Communications Corp. (a) (b) 6,751,800
-------------
71,781,813 4.13%
-------------
Title Insurance 3,666,150 First American Financial Corp. (b) 97,152,975
975,700 Stewart Information Services Corp. (b) 45,735,937
-------------
142,888,912 8.23%
-------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $1,011,702,968) 1,290,267,692
-------------
- ----------------------------------------------------------------------------------------------
PREFERRED STOCK - 0.67%
Bermuda Based 230,162 CGA Group, Ltd., Series A (b) (c) 5,754,051
Financial
Institutions 171,429 CGA Group, Ltd., Series B (b) (c) 4,285,725
-------------
10,039,776 0.58%
-------------
Depository
Institutions 20,000 Golden State Bancorp Convertible,
Non-Cumulative, 8.75%, Series A 1,570,000 0.09%
-------------
Insurance
Companies 4,775 Ecclesiastical Insurance, 8.625% 10,859 0.00%
-------------
TOTAL PREFERRED STOCK
(Cost $10,549,572) 11,620,635
-------------
</TABLE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
INVESTMENT
AMOUNT ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 1.94%
Bermuda Based $2,215,000 ESG Partners, LP (c) $ 2,573,794 0.15%
Financial -----------
Institutions
Closed-End Bond 652,100 American Government Income
Funds Fund, Inc. 3,790,331 0.22%
------------
Financial
Insurance $15,000,000 American Capital Access Holdings,
LLC (c) 15,000,000 0.86%
------------
Foreign $50,000,000 Japanese Yen November 1998
Option Put Options (c) (e) 3,952,500
Contracts $100,000,000 Japanese Yen April 1999
Put Options (c) (f) 3,876,250
$50,000,000 Japanese Yen June 1999
Put Options (c) (g) 1,325,000
------------
9,153,750 0.53%
------------
Insurance $1,858,756 Head Insurance Investors LP (c) 1,858,756
Holding 100 HIPI Holdings, Inc. (c) 1,267,448
Companies ------------
3,126,204 0.18%
------------
TOTAL OTHER INVESTMENTS
(Cost $26,863,532) 33,644,079
------------
PRINCIPAL
AMOUNT ($)
- ----------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 1.15%
U.S. Government 5,000,000 Federal Home Loan Bank
Agency 5.61%, 3/2/99 4,996,385 0.29%
Obligations ------------
U.S. Treasury
Bills 1,960,000 U.S. Treasury Bill 4.94%, 2/4/99 (h) 1,909,336
13,000,000 U.S. Treasury Bill 5.04% 8/20/98 12,966,861
------------
14,876,197 0.86%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $19,873,214) 19,872,582
------------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT($)ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL INVESTMENT PORTFOLIO - 100.17%
(Cost $1,458,343,368) $1,739,934,014
--------------
LIABILITIES NET OF CASH
and Other Assets - (0.17%) (3,054,439)
--------------
NET ASSETS - 100.00%
(Applicable to 56,209,736
shares outstanding) $1,736,879,575
==============
NET ASSET VALUE PER SHARE $30.90
======
</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 November 10, 1998
to sell 6.7 billion Japanese Yen at a strike price of 134.20.
(f) 100 million U.S. Dollar notional amount may be exercised on April 7, 1999 to
sell 14.4 billion Japanese Yen at a strike price of 143.80.
(g) 50 million U.S. Dollar notional amount may be exercised on June 8, 1999 to
sell 7.5 billion Japanese Yen at a strike price of 150.45.
(h) Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
- --------------------------------------------------------------------------------
22
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[LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At July 31, 1998, the end of our third fiscal quarter, the unaudited net asset
value attributable to the 13,118,818 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value") was $11.64, compared with the Fund's
unaudited net asset value at April 30, 1998 of $13.14. As of September 8, 1998,
the unaudited net asset value attributable to the 13,003,004 common shares
outstanding was $10.27.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in the common
stocks of three companies, added to 14 of its 37 existing positions, and
eliminated its position in one company. At July 31, 1998, Small-Cap Value held
positions in 40 companies, the top 10 positions of which accounted for
approximately 39% of the Fund's net assets. Approximately 14% of the Fund's
assets were in cash.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
10,000 Acuson Corp. Common
Stock ("Acuson Common")
25,000 Evans & Sutherland Computer Corp.
Common Stock ("E&S Common")
80,000 Hologic, Inc. Common Stock
("Hologic Common")
INCREASES IN EXISTING POSITIONS
15,500 Alico, Inc. Common Stock
("Alico Common")
25,700 Avatar Holdings, Inc. Common Stock
("Avatar Common")
31,000 Cabot Industrial Trust Common
Stock ("Cabot Common")
164,500 C.P. Clare Corp. Common
Stock ("C.P. Clare Common")
57,400 Deltic Timber Corp. Common
Stock ("Deltic Common")
- --------------------------------------------------------------------------------
23
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NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
30,200 Electroglas, Inc. Common Stock
("Electroglas Common")
20,000 FBL Financial Group, Inc. Class A Common
Stock ("FBL Common")
50,000 Koger Equity, Inc. Common Stock
("Koger Common")
16,700 Silicon Valley Group, Inc. Common Stock
("SVG Common")
35,600 Sparton Corp. Common Stock
("Sparton Common")
30,100 SpecTran Corp. Common Stock
("SpecTran Common")
184,900 SpeedFam International, Inc. Common
Stock ("SpeedFam Common")
99,000 The Nissan Fire & Marine Insurance Co.,
Ltd. Ordinary Shares ("Nissan Common")
391,000 The TimberWest Timber Trust
("TimberWest Units")
POSITIONS ELIMINATED
55,800 National Media Corp. Common Stock
("National Media Common")
E&S Common and Acuson Common represent positions in two companies that we have
known for years. Jim Oyler and his team at Evans & Sutherland seem to have done
a tremendous job during the past three years of building value in E&S'
simulation and graphics businesses, yet the stock currently sells at levels
below our original purchase prices. With little extra capital, management has
grown revenues and earnings steadily. The company recently completed some
important acquisitions and received a large equity investment from Intel
Corporation. Acuson, a leading maker of ultrasound equipment, continues to
benefit from the introduction of new products. While Acuson's balance sheet has
weakened over time, the recent acquisition of ATL Ultrasound, an Acuson
competitor, highlights the significant spread that still exists between Acuson's
BUSINESS value and its STOCK MARKET value. Hologic, another addition to our
small stable of medical equipment companies, is a leading supplier of diagnostic
test systems for osteoporosis.
- --------------------------------------------------------------------------------
24
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[LOGO]
Despite a significant unrealized loss in our position in Japanese P&C insurer
Nissan Fire & Marine, we continue to believe that the company remains "safe and
cheap." We value Nissan much the way we might value a closed-end investment
fund. Our best estimate of Nissan's Net Asset Value ("NAV"), adjusted for
unrealized gains in its investment portfolio as of March 31, 1998, equals (Y)
285 billion, or (Y) 1,091 per share, versus a current share price of
approximately (Y) 423, reflecting a whopping 60% discount from NAV. Even
adjusting for the roughly 12% decline in the Japanese equity markets since March
31, 1998, it's reasonable to assume that Nissan's common stock sells at a huge
discount relative to NAV. One would be hard pressed today to find a publicly
traded closed-end fund selling at such a discount. More importantly, the
company's operations look safe as judged by the company's surplus of capital and
conservative underwriting leverage. The specific catalyst or, more likely,
catalysts that might help to surface some of this value remain largely hidden
from view. We continue to believe, however, that the deregulation now occurring
in the world's second largest insurance market may well supply at least some of
the necessary ingredients.
I look forward to writing you again when we publish our Annual Report dated
October 31, 1998.
Sincerely,
/s/Curtis R. Jensen
- ---------------------------
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
- --------------------------------------------------------------------------------
25
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 85.51%
Construction-Japan 431,900 Sawako Corp., Sponsored ADR $ 4,103,050 2.69%
-----------
Financial Insurance 40,300 Financial Security Assurance
Holdings Ltd. 2,098,118
113,324 MBIA Inc. 7,635,204
-----------
9,733,322 6.37%
-----------
Life Insurance 149,800 FBL Financial Group, Inc.
Class A (b) 3,735,637 2.45%
-----------
Manufactured Housing 184,300 Skyline Corp. 5,932,156 3.88%
-----------
Media 408,700 ValueVision International,
Inc. Class A (a) 1,570,920 1.03%
-----------
Medical Supplies 10,000 Acuson Corp. (a) 165,000
& Services 80,000 Hologic, Inc (a) 1,325,000
275,000 Protocol Systems, Inc. (a) 2,543,750
-----------
4,033,750 2.64%
-----------
Natural Resources & 187,500 Alexander & Baldwin,
Real Estate Inc. (b) 4,634,756
218,900 Alico, Inc. 4,323,275
225,000 Avatar Holdings, Inc. (a) (b) 6,089,062
122,400 Cabot Industrial Trust 2,317,950
206,800 Deltic Timber Corp. 4,808,100
160,000 Koger Equity, Inc. 2,980,000
200,000 Tejon Ranch Co. (c) 3,623,550
1,104,700 The TimberWest Timber Trust 6,596,481
-----------
35,373,174 23.16%
-----------
Non-Life 2,425,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 7,995,118 5.24%
-----------
Retail 406,100 HomeBase, Inc. (a) (b) 3,147,275
250,000 Value City Department
Stores, Inc. (a) 4,500,000
-----------
7,647,275 5.01%
-----------
</TABLE>
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26
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Semiconductor 118,700 Electroglas, Inc. (a) (b) $ 1,431,819
Equipment 412,700 FSI International, Inc.
Manufacturers (a) (b) 3,378,981
164,200 Silicon Valley Group,
Inc. (a) 2,288,538
283,100 SpeedFam International,
Inc. (a) (b) 4,777,313
------------
11,876,651 7.78%
------------
Technology 275,000 ACT Networks, Inc. (a) 1,933,580
25,000 Bel Fuse, Inc. Class A (a) 453,125
25,000 Bel Fuse, Inc. Class B (a) 418,750
117,400 Boston Communications Group,
Inc. (a) (b) 939,200
326,900 Centigram Communications
Corp. (a) (b) 3,555,038
440,000 C.P. Clare Corp. (a) 4,125,000
25,000 Evans & Sutherland Computer
Corp. (a) 620,312
257,300 Glenayre Technologies,
Inc. (a) 2,106,644
161,500 PictureTel Corp. (a) 1,312,188
348,300 Planar Systems, Inc. (a) 4,179,600
101,500 Rofin-Sinar Technologies,
Inc. (a) (b) 1,509,813
244,800 Shiva Corp. (a) 1,453,500
89,000 Sparton Corp. (a) 723,125
490,600 SpecTran Corp. (a) (b) 2,529,632
197,300 Summa Four, Inc. (a) 3,267,781
316,400 Xircom, Inc. (a) 6,585,075
------------
35,712,363 23.39%
------------
Title Insurance 108,000 First American Financial
Corp. 2,862,000 1.87%
------------
TOTAL COMMON STOCKS
(Cost $136,646,178) 130,575,416
------------
</TABLE>
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27
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER INVESTMENTS - 0.47%
Foreign Option 7,000,000 Canadian Dollar July 1999
Contracts Put Options (c) (d) $ 119,875 .08%
10,000,000 Japanese Yen February 1999
Put Options (c) (e) 602,000 .39%
------------
TOTAL OTHER INVESTMENTS
(Cost $197,900) 721,875
------------
- ---------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 16.05%
Repurchase 24,512,660 Bear Stearns 5.53%,
Agreements dated July 31, 1998 (f) 24,512,660 16.05%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $24,512,660) 24,512,660
------------
TOTAL INVESTMENT PORTFOLIO - 102.03%
(Cost $161,356,738) 155,809,951
------------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (2.03%) (3,100,205)
------------
NET ASSETS - 100.00%
(Applicable to 13,118,818
shares outstanding) $152,709,746
============
NET ASSET VALUE PER SHARE $11.64
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities whole or in part on loan: At July 31, 1998 the value of
securities on loan was $13,051,812 (equating to 8.55% of net assets).
(c) Restricted/fair valued securities.
(d) 7 million U.S. Dollar notional amount may be exercised on July 2,1999 to
sell 10.6 million Canadian Dollars at a strike price of 1.52.
(e) 10 million U.S. Dollar notional amount may be exercised on February 2, 1999
to sell 1.4 billion Japanese Yen at a strike price of 136.50.
(f) Repurchase agreement collateralized by:
Nomura Asset Securities Corp., par value $24,405,000, 6.59%, matures
2/15/10: market value $24,915,553.
ADR: American Depository Receipt.
- --------------------------------------------------------------------------------
28
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<PAGE>
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[LOGO]
Third Avenue High Yield Fund
Dear Fellow Shareholders:
July 31, 1998 marks the completion of the first full quarter for the Third
Avenue High Yield Fund (the "Fund") since its inception on February 12, 1998.
The Fund's initial offering price of $10.00 per share rose to $10.42 on April
30, 1998, and ended at an unaudited net asset value of $9.82 at July 31, 1998,
attributable to 1,068,713 common shares outstanding. On June 30, 1998, the Fund
paid a dividend to shareholders of record on June 29, 1998 of $0.124 per share
on 1,021,276 shares, paid on July 7, 1998. At September 8, 1998 the unaudited
net asset value was $9.07.
QUARTERLY ACTIVITY
During the quarter, the Fund established new positions in securities of seven
companies, made additions to six of its existing positions, and eliminated one
position. At the end of July, the Fund had positions in 30 companies. The Fund
experienced two asset conversions in its holdings during the quarter.
PRINCIPAL AMOUNT ($)
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
STRAIGHT BONDS
$500,000 Chattem, Inc. 8.875% due 4/01/08
$500,000 Del Webb Corp. 9.375% due 5/01/09
CONVERTIBLE BONDS
$300,000 Lomak Petroleum, Inc. 6.00% due 2/01/07
$500,000 P-Com, Inc. 4.25% due 11/01/02
CONVERTIBLE PREFERRED SHARES
6,000 Budget Group Capital 6.25% due 6/15/28
2,000 Texas Utilities 9.25% due 8/16/01
5,000 WinStar Communications, Inc. 7.00% due
3/15/10
INCREASES IN EXISTING POSITIONS
$100,000 Alpharma, Inc. 5.75% due 4/01/05
- --------------------------------------------------------------------------------
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[LOGO]
PRINCIPAL AMOUNT ($)
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
$300,000 Columbia/HCA Medical Care, Int'l 6.75%
due 10/01/06
$300,000 Credence Systems Corp. 5.25% due 9/15/02
$100,000 Cymer, Inc. 3.25% due 8/06/04
$150,000 Lam Research Corp. 5.00% due 9/01/02
$105,000 PhyMatrix Corp. 6.75% due 6/15/03
POSITIONS ELIMINATED
$400,000 U.S. Office Products Co. 5.50% due 5/15/03
NEW PURCHASES
The issues newly purchased in the Fund during the quarter are securities of
companies whose businesses primarily are domestically based, with little
exposure to the economic slowdowns affecting virtually all countries in the
emerging markets. An expanded discussion of our reasoning is found in the
"Market Overview" section. The companies discussed below are well managed and
have strong positions in their industries.
Budget Group Capital ("Budget") has two main businesses-car rentals and consumer
truck rentals, and is the third largest car rental company and the second
largest consumer truck rental company in the world, with 80% of its revenues
located in the U.S. Historically, the car rental segment has been very
economically sensitive with aggressive price competition because of ownership of
rental companies by auto manufacturers, who used the rental market as a way to
increase car sales. However, independent rental companies such as Budget have
concentrated on pricing and profitability, which should result in less volatile
markets.
Chattem, Inc. is a manufacturer and marketer of branded consumer personal care
products, with strong brand names and leading market niches. Products include
such brands as Ban deodorant, Gold Bond powders, Flexall topical analgesic,
Pamprin internal analgesic, Phisoderm cleanser, and Sunsource dietary
supplements. It has grown both from internal product line extensions as well as
from acquisitions, such as its most recent purchase of Ban from Bristol Meyers.
- --------------------------------------------------------------------------------
30
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<PAGE>
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[LOGO]
Del Webb Corp. ("Del Webb") is the largest builder of master-planned communities
for active adults over 55 years old, and the sixth largest builder of
single-family homes in the U.S. The company operates in Arizona, California,
Texas and Florida, and has recently begun the construction of unrestricted age
communities. It has extensive and strategically valuable land holdings in Nevada
and Florida and should benefit from such demographic trends as the increasing
age of baby boomers, and high population growth in the Sunbelt areas where Del
Webb concentrates its construction activities.
Lomak Petroleum, Inc. is an independent oil and gas producer whose properties
are located primarily onshore in Texas, Oklahoma and Appalachia. Natural gas is
approximately 3/4 of total reserves, and the company also owns and operates gas
gathering and processing facilities near its gas properties. The company has
consistently grown through successful internal exploration and discovery of long
lived assets, as well as from many small strategic acquisitions, most recently
Domain Energy, whose operations are primarily offshore Texas and Louisiana.
P-Com, Inc. is a leading producer of millimeter-wave radios used as short-haul
devices that provide an alternative to laying cable to buildings, and are used
at cell sites or towers. Its network access products are used by cellular and
personal communications services, corporate communications, and local exchange
telecommunications carriers. At the present time, about 2/3 of its revenue is
from cellular companies connecting to its cell sites. The company's long-term
growth should benefit from telecommunications deregulation worldwide, growth of
wireless telecommunications, and rapid growth in the voice, data and Internet
markets.
Texas Utilities is Texas' largest electric utility, providing service in the
north central, eastern and western parts of Texas, and as owner of Eastern
Energy, it offers electric energy in Victoria, Australia. Its 1997 acquisition
of ENSEARCH provides natural gas distribution facilities. It is also expanding
into the UK with its most recent purchase of Energy Group, the UK's largest
electric utility. Through this diverse asset base, the company plans to expand
its businesses as deregulation of the industry unfolds.
WinStar Communications, Inc. ("WinStar") is a competitive local exchange carrier
providing voice and data telecommunications services to businesses in 21 major
U.S. metropolitan areas. It also owns the largest amount of 38 GHz spectrum in
the country, reaching a total population of 185 million. The company is building
a nationwide network using fiber quality digital capacity in their radio
spectrum to provide services at a lower cost than fiber installation. WinStar is
one of many new
- --------------------------------------------------------------------------------
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<PAGE>
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[LOGO]
companies which have grown rapidly as a result of the Telecommunications Act of
1996, designed to deregulate the industry and foster new competition with the
incumbent local and long distance service providers.
ASSET CONVERSIONS
During the quarter, two of the Fund's 30 holdings were beneficiaries of asset
conversions. We are pleased that our research-oriented approach to finding
undervalued securities in the high yield, below investment grade fixed income
market has been affirmed by these two transactions.
U.S. Office Products Co. carried out an extensive restructuring program in order
to maximize the value of its considerable hidden assets, spinning off several of
its subsidiaries in IPOs. As part of the restructuring, the 5.5% convertible
bonds due May 15, 2003, which the Fund owned, were subject to a cash tender at a
price substantially above our cost and the then-prevailing market price. This
holding was liquidated and proceeds invested in issues which we feel reflect our
approach to finding underpriced securities.
Our second asset conversion involved DSC Communications Corp., which received a
purchase offer in June from Alcatel Alsthom, one of France's largest companies.
The transaction was completed in early September. This takeover offer caused the
bonds we hold to rise sharply in price, reflecting both the improved prospects
of the combined companies, as well as the prospective rating improvement for the
bonds-from B1/BB+ ratings by Moody's/S&P currently, to reflect Alcatel's A1/A+
bond rating. We continue to hold this position.
MARKET RISK VERSUs INVESTMENT RISK
Because of our fundamental credit concerns, we continue to avoid any investment
in the emerging market sector of the high yield market, where lack of U.S.
quality financial disclosure, unfavorable regulations of creditors' rights, and
inefficient, commodity based economies provide insurmountable obstacles to our
finding securities that would satisfy our investment philosophy and avoid
investment risk.
Market risk-that is, short-term price fluctuation-has been with us in abundance
during the May to July quarter for many high yield and convertible issues.
Watching short-term price volatility in our holdings is not my idea of a
pleasant experience. However, it does create buying opportunities for the
long-term investor such as the funds of the Third Avenue Trust.
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32
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[LOGO]
Because our value-oriented research often leads us to invest in out-of-favor
sectors, we regard temporary downward price pressure on our holdings as
providing an opportunity to augment many current positions at very reasonable
valuations. In addition, we are optimistic about finding new long-term
investment opportunities, which are created as near-term market worries pull
down price levels for many attractive issues.
I look forward to discussing the portfolio with you again when the Annual
Report for the year ending October 31, 1998 is published.
Sincerely,
/s/ Margaret D. Patel
- -------------------------------
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
- --------------------------------------------------------------------------------
33
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 54.27%
Capital Equipment - 450,000 Lam Research Corp.
Semiconductors 5.00%, due 9/1/02 (a) $ 367,875 3.50%
-------------
Computers - Memory 300,000 HMT Technology Corp.
Devices 5.75%, due 1/15/04 222,375 2.12%
-------------
Diversified 300,000 MascoTech, Inc.
Manufacturing 4.50%, due 12/15/03 277,500 2.64%
-------------
Electric Utility Services 400,0000 Itron, Inc. 6.75%,
due 3/31/04 317,000 3.02%
-------------
Electronic 325,000 Amtel SA 3.25%, due 6/1/02 265,688
Components - 325,000 Cypress Semiconductor Corp.
Semiconductors 6.00%, due 10/1/02 (a) 286,000
-------------
551,688 5.26%
-------------
Instrumentation - 600,000 Credence Systems Corp.
Electronic Testing 5.25%, due 9/15/02 445,500 4.24%
-------------
Lasers - 450,000 Cymer, Inc. 3.50%, due 8/6/04 343,687 3.27%
Systems/Components -------------
Medical - Generic Drugs 475,000 Alpharma, Inc. 5.75%,
due 4/1/05 508,250 4.84%
-------------
Medical - Hospitals 625,000 Columbia/HCA Medical Care,
Int'l. 6.75%, due 10/1/06 575,000 5.48%
-------------
Medical Management 505,000 PhyMatrix Corp. 6.75%,
Services due 6/15/03 356,656 3.40%
-------------
Networking 425,000 Adaptec, Inc. 4.75%,
due 2/1/04 324,594 3.09%
-------------
Oil/Gas Exploration 300,000 Lomak Petroleum, Inc.
6.00% Due 2/1/07 262,875
300,000 Pogo Producing Co.
5.50%, due 6/15/06 263,250
-------------
526,125 5.01%
-------------
Oil Field Services 300,000 Key Energy Group, Inc.
5.00%, due 9/15/04 221,250 2.11%
-------------
</TABLE>
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34
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<PAGE>
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS (CONTINUED)
Telecommunication 300,000 DSC Communications Corp.
Equipment 7.00%, due 8/1/04 $ 310,500 2.96%
-------------
Telecommunications - 500,000 P-Com, Inc 4.250% Due 11/1/02 350,000 3.33%
Wireless -------------
TOTAL CONVERTIBLE BONDS
(Cost $6,141,490) 5,698,000
-------------
<CAPTION>
SHARES
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK - 18.72%
Auto Parts Original 7,000 BREED Technologies, Inc.
6.50%, due 11/15/27 294,875 2.81%
-------------
Diversified 5,000 Coltec Capital Trust 5.25%,
Manufacturing due 4/15/28 222,500 2.12%
-------------
Electric Utility Services 2,000 Texas Utilities 9.250%
Due 8/16/01 101,750 0.97%
-------------
Insurance 5,000 Conseco Finance Trust IV
7.00%, due 2/16/01 243,125 2.31%
-------------
Medical - 9,000 Sun Financing I 7.00%,
Long Term/Subacute due 5/1/28 220,500 2.10%
-------------
Rental Auto Equipment 6,000 Budget Group Capital
6.250% 6/15/28 329,250 3.14%
-------------
Telecommunications - 5,000 WinStar Communications, Inc.
Wireless 7.00% Due 3/15/10 236,250 2.25%
-------------
Telephone Services 6,000 NEXTLINK Communications, Inc.
6.50%, due 3/31/10 317,250 3.02%
-------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $2,057,372) 1,965,500
-------------
<CAPTION>
PRINCIPAL
AMOUNT ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 23.96%
Health Toiletries 500,000 Chattem, Inc. 8.875%
Due 4/1/08 501,250 4.77%
-------------
Internet Software 500,000 PSINet, Inc. 10.00%,
due 2/15/05 (a) 527,500 5.02%
-------------
</TABLE>
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35
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[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
Real Estate-Commercial 500,000 BF Saul REIT 9.75%,
due 4/1/08 $ 490,000 4.67%
------------
Real Estate-Residential 500,000 Del Webb Corp. 9.375%
due /1/09 (a) 501,250 4.77%
------------
Telephone Services 500,000 Level 3 Communications, Inc.
9.125%, due 5/1/08 496,250 4.73%
------------
TOTAL CORPORATE BONDS 2,516,250
(Cost $2,486,823) ------------
- ---------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 3.81%
Repurchase 400,467 Bear Stearns 5.53%,
Agreements dated 7/31/98 (b) 400,467 3.81%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $400,467) 400,467
------------
TOTAL INVESTMENT PORTFOLIO - 100.76%
(Cost $11,086,152) 10,580,217
------------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (0.76%) (79,960)
------------
NET ASSETS - 100.00%
(Applicable to 1,068,713
shares outstanding) $10,500,257
===========
NET ASSET VALUE PER SHARE $9.82
=====
</TABLE>
Notes:
(a) Securities whole or in part on loan: At July 31, 1998 the value of
securities on loan was $1,305,842 (equating to 12.30% of net assets).
(b) Repurchase agreement collateralized by:
Nomura Asset Securities Corp., par value $400,000, 6.59%,
matures 2/15/10: market value $408,368.
- --------------------------------------------------------------------------------
36
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<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
David M. Barse
President, Chief Operating Officer
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
First Data Investor Services Group, 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
PricewaterhouseCoopers 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 THIRD AVENUE HIGH YIELD FUND
225 Broadway Custodial Trust Company
San Diego, CA 92101-4492 101 Carnegie Center
Princeton, NJ 08540-6231
[LOGO]
767 THIRD AVENUE
NEW YORK, NY 10017-2023
Phone (212) 888-5222
Toll Free (800) 443-1021
Fax (212) 888-6757
www.thirdavenuefunds.com
