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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD AVENUE REAL ESTATE VALUE FUND
PROSPECTUS
----------
SEPTEMBER 15, 1998
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CONTENTS
FUND EXPENSES 3
FINANCIAL HIGHLIGHTS 5
ABOUT THE FUNDS 8
Investment Objectives 8
Risk Factors Specific to Third
Avenue Real Estate Value Fund 10
INVESTMENT PHILOSOPHY
AND APPROACH 11
Value Discipline 11
Intensive Research 11
Diversification 11
Buy and Hold 11
Investment in Equity Securities 11
Investment in Debt Securities 12
Convertible Securities 13
Mortgage-Backed Securities 13
Asset-Backed Securities 14
Floating Rate, Inverse Floating
Rate and Index Obligations 14
Investment in High Yield Debt Securities 15
Zero-Coupon and Pay-in-Kind Securities 17
Loans and Other Direct Debt Instruments 17
Trade Claims 18
Portfolio Practices 18
Foreign Securities 18
Foreign Currency Transactions 19
Restricted and Illiquid Securities 20
Investment in Relatively New Issues 20
Temporary Defensive Investments 21
Borrowing 21
Investment in Other Investment Companies 21
Simultaneous Investments 21
Restrictions on Investments 22
Securities Lending 22
Portfolio Turnover 23
MANAGEMENT OF THE FUNDS 24
The Investment Adviser 24
Advisory Fees 25
Administrator 26
Distributor 26
Custodian and Transfer Agent 26
Portfolio Trading Practices 27
PERFORMANCE INFORMATION 28
Performance Illustrations 28
DIVIDENDS, CAPITAL GAIN
DISTRIBUTIONS AND TAXES 30
Distribution Options 31
Withholding 32
HOW TO PURCHASE SHARES 33
Business Hours 33
Determining Net Asset Value 33
Share Certificates 34
Through an Authorized Broker-
Dealer or Investment Adviser 34
New Accounts 35
Initial Investment 35
By Mail 35
By Wire 36
Additional Investments By Mail 36
Additional Investments Through
the Automatic Investment Plan 36
Individual Retirement Accounts 37
Other Retirement Plans 37
HOW TO REDEEM SHARES 38
By Mail 38
Telephone Redemption Service 38
Fees 39
Redemption Without Notice 39
Account Minimum 39
Payment of Redemption Proceeds 39
Wired Proceeds 39
Signature Guarantees/Other Documents 40
Systematic Withdrawal Plan 40
Early Redemption Fee 40
HOW TO EXCHANGE SHARES 42
Inter-Fund Exchange Privilege 42
Money Market Exchange Privilege 42
Early Redemption Fee 43
SHAREHOLDER SERVICES 44
Telephone Information 44
TRANSFER OF OWNERSHIP 45
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS 46
Standard & Poor's Ratings Group 46
Moody's Investor's Service, Inc. 48
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Third Avenue Trust (the "Trust") is an open-end, non-diversified, management
investment company organized as a Delaware business trust. The Trust currently
consists of four separate investment series; THIRD AVENUE VALUE FUND, THIRD
AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND (each a "Fund" and, collectively, the "Funds"). Each Fund
seeks to achieve its investment objective by adhering to a strict value
discipline when selecting securities, although each Fund has a distinct
investment approach.
THIRD AVENUE VALUE FUND seeks to achieve its objective of long-term capital
appreciation by investing in a portfolio of equity securities of well-financed
companies believed to be priced below their private market values and debt
securities providing strong, protective covenants and high effective yields.
THIRD AVENUE SMALL-CAP VALUE FUND seeks to achieve its objective of long-term
capital appreciation by investing at least 65% of its total assets in a
portfolio of equity securities of well-financed companies having market
capitalizations of below $1 billion at the time of investment and believed to be
priced below their private market values.
THIRD AVENUE HIGH YIELD FUND seeks to achieve its objective of maximizing total
return through a combination of income and capital appreciation by investing at
least 65% of its total assets in a portfolio of non-investment grade fixed
income or other debt securities of companies whose capital structures, in the
opinion of EQSF Advisers, Inc., the Fund's investment adviser, have a market
value priced below their private market values.
THIRD AVENUE REAL ESTATE VALUE FUND seeks to achieve its objective of long-term
capital appreciation by investing at least 65% of its total assets in a
portfolio of equity and debt securities of well-financed companies in the real
estate industry or related industries or that own significant real estate assets
at the time of investment.
Some of the securities in which the Funds may invest are regarded as
speculative. As with all mutual funds, there is no assurance the Funds will
achieve their objectives. The Funds are not intended to be a complete investment
program.
THIRD AVENUE HIGH YIELD FUND INTENDS TO INVEST AT LEAST 65% OF ITS TOTAL ASSETS
IN MEDIUM AND LOWER RATED AND COMPARABLE UNRATED FIXED INCOME AND OTHER DEBT
SECURITIES, COMMONLY REFERRED TO AS "JUNK BONDS." THESE SECURITIES ARE
CONSIDERED TO BE SPECULATIVE WITH REGARD TO THE PAYMENT OF INTEREST AND RETURN
OF PRINCIPAL AND INVOLVE GREATER VOLATILITY OF PRICE THAN HIGHER QUALITY FIXED
INCOME SECURITIES. INVESTORS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH
AN INVESTMENT IN JUNK BONDS BEFORE INVESTING IN THIRD AVENUE HIGH YIELD FUND.
SEE "INVESTMENT IN HIGH YIELD DEBT SECURITIES."
This Prospectus contains important information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference. A Statement of Additional Information ("SAI"),
dated September 15, 1998, about the Funds has been filed with the Securities and
Exchange Commission and is incorporated by reference into this Prospectus. You
can obtain the SAI without charge by writing or calling the Funds at 767 Third
Avenue, New York, NY 10017-2023, (800) 443-1021 or (212) 888-5222. The SAI,
material incorporated by reference into this Prospectus, and any other
information regarding the Funds are maintained electronically with the
Securities and Exchange Commission at its Internet Web sight
(http://www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Each Fund's objective is suitable for investors who are willing to hold their
shares through periods of market fluctuations and the accompanying changes in
prices of the Funds' portfolio securities and, in the case of THIRD AVENUE HIGH
YIELD FUND, for investors seeking current income. The Funds are not intended for
investors seeking short-term price appreciation or for "market timers."
Shares of each Fund are sold and redeemed at net asset value. See "How to
Purchase Shares" and "How to Redeem Shares."
No person is authorized by the Funds to give any information or make any
representation other than those contained herein or in other printed or written
material issued by the Funds, and no person is entitled to rely upon any other
information or representation.
THIRD AVENUE VALUE FUND IS CURRENTLY CLOSED TO NEW INVESTORS. SEE "HOW TO
PURCHASE SHARES."
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FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of the
Funds will incur.
<TABLE>
<CAPTION>
THIRD AVENUE THIRD AVENUE
THIRD AVENUE SMALL-CAP THIRD AVENUE REAL ESTATE
VALUE FUND VALUE FUND HIGH YIELD FUND VALUE FUND
---------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
SHAREHOLDER
TRANSACTION
EXPENSES:
Sales Load Imposed
on Purchases None None None None
Sales Load Imposed on
Reinvested Dividends None None None None
Deferred Sales Load None None None None
Redemption Fee Payable
to the Fund None None 1.00%* 1.00%*
ANNUAL FUND OPERATING
EXPENSES: (AS A PER-
CENTAGE OF NET ASSETS)
Management Fees .90% .90% .90% .90%
12b-1 Fees None None None None
Other Expenses .23% .75% 1.00% 1.00%
--- --- ---- ----
(after (after
reimburse- reimburse-
ments) ments)
Total Fund
Operating Expenses 1.13% 1.65% 1.90% 1.90%
==== ==== ==== ====
(after (after
reimburse- reimburse-
ments) ments)
</TABLE>
Example
The following example illustrates the expenses that a shareholder would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
THIRD AVENUE VALUE FUND $12 $36 $63 $138
THIRD AVENUE SMALL-CAP VALUE FUND $17 $52 $90 $197
THIRD AVENUE HIGH YIELD FUND $30 $60
THIRD AVENUE REAL ESTATE VALUE FUND $30 $60
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The purpose of this table is to assist investors in understanding the various
costs and expenses that investors will bear directly or indirectly. The expenses
of THIRD AVENUE VALUE FUND are based on actual expenses incurred for the fiscal
year ended October 31, 1997. The other expenses of THIRD AVENUE SMALL-CAP VALUE
FUND are estimated based on actual expenses incurred for the period April 1,
1997, commencement of operations, to October 31, 1997. THIRD AVENUE HIGH YIELD
FUND commenced operations on February 12, 1998. The other expenses of THIRD
AVENUE HIGH YIELD FUND are estimated based on actual expenses incurred for the
period February 12, 1998, commencement of operations, to August 31, 1998. THIRD
AVENUE REAL ESTATE VALUE FUND commenced operations on or about September 17,
1998. Because THIRD AVENUE REAL ESTATE VALUE FUND has no operating history,
"Other Expenses" is based on estimated amounts for the current fiscal year. From
time to time, the Adviser may voluntarily waive receipt of its fees and/or
assume certain expenses of the Funds which would have the effect of lowering the
expense ratio and increasing the yield to investors. The expenses noted above
for THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND,
without reimbursement, would be: "Other Expenses" 3.40% and 1.68%, respectively,
and "Total Fund Operating Expenses" 4.30% and 2.58%, respectively. In addition,
shareholders of each Fund pay a $9 charge for redemptions by wire. For a further
description of the various costs and expenses incurred in the Funds' operations,
as well as any reimbursements or waiver arrangements, see "Management of the
Funds."
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
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* There will be a 1% fee retained by THIRD AVENUE HIGH YIELD FUND and THIRD
AVENUE REAL ESTATE VALUE FUND which is imposed only on redemptions or
exchanges of shares held less than one year. For additional information,
see "How to Redeem Shares - Early Redemption Fee" and "How to Exchange
Shares - Early Redemption Fee."
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FINANCIAL HIGHLIGHTS
THIRD AVENUE TRUST
The following sets forth information for THIRD AVENUE VALUE FUND, THIRD AVENUE
SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD FUND regarding per share income
and capital changes from each of the Fund's commencement of operations to April
30, 1998, the end of the Funds' most recent semi-annual period. The Financial
Highlights for the fiscal years included herein have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose unqualified report on
the October 31, 1997 financial statements appears in the Funds' Annual Report to
Shareholders. The Financial Highlights for the period ended April 30, 1998 have
not been audited. This information should be read in conjunction with the
financial statements and accompanying notes appearing in the 1997 Annual Report
to Shareholders and the Funds' Semi-Annual Report for the period ended April 30,
1998, which are incorporated by reference into the SAI.
Because the Trust's new Fund, THIRD AVENUE REAL ESTATE VALUE FUND, commenced
investment operations on or about September 17, 1998, no financial highlights
are available.
THIRD AVENUE VALUE FUND: SELECTED DATA AND RATIOS
<TABLE>
<CAPTION>
(UNAUDITED)
SIX MONTHS
ENDED
APRIL 30, (YEARS ENDED OCTOBER 31,)
------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $31.94 $24.26 $21.53 $18.01 $17.92 $13.57 $12.80 $10.00
------ ------ ------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .29 .48 .53 .38 .29 .18 .19 .15
Net gain on securities (both
realized and unrealized) 2.58 7.92 2.76 3.53 .16 4.77 .64 4.65
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment Operations 2.87 8.40 3.29 3.91 .45 4.95 .83 4.80
------ ------ ------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from
net investment income (.41) (.57) (.41) (.25) (.22) (.24) (.02) (.15)
Distributions from
net realized gains (.16) (.15) (.15) (.14) (.14) (.36) (.04) (1.85)
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions (.57) (.72) (.56) (.39) (.36) (.60) (.06) (2.00)
------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End Of Period $34.24 $31.94 $24.26 $21.53 $18.01 $17.92 $13.57 $12.80
====== ====== ====== ====== ====== ====== ====== ======
TOTAL RETURN 9.15% 35.31% 15.55% 22.31% 2.56% 37.36% 6.50% 49.16%
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $2,001,489 $1,646,240 $566,847 $312,722 $187,192 $118,958 $31,387 $17,641
Ratio of Expenses to Average
Net Assets 1.08%1 1.13% 1.21% 1.25% 1.16% 1.42% 2.32% 2.50%
Ratio of Net Income to Average
Net Assets 1.83%1 2.10% 2.67% 2.24% 1.85% 1.45% 1.71% 1.71%
Portfolio Turnover Rate 4% 10% 14% 15% 5% 17% 31% 67%
- -------
1 Annualized
</TABLE>
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THIRD AVENUE SMALL-CAP VALUE FUND: SELECTED DATA AND RATIOS
(Unaudited)
Six Months Period from
Ended April 1, 1997*
April 30, 1998 to October 31,1997
-------------- ------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $12.37 $10.00
INCOME FROM
INVESTMENT OPERATIONS:
Net investment income .03 .05
Net gain on securities
(both realized
and unrealized) .80 2.32
------ -----
Total from investment
operations .83 2.37
------ -----
LESS DISTRIBUTIONS:
Dividends from net
investment income (.06)
------
Total Distributions (.06)
------
Net Asset Value, End Of Period $13.14 12.37
====== =====
TOTAL RETURN 6.79%1 23.70%1
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period
(in thousands) $165,916 $107,256
Ratio of Expenses to
Average Net Assets 1.30%2 1.65%2
Ratio of Net Income
to Average Net Assets 0.65%2 1.44%2
Portfolio Turnover Rate 2%1 7%1
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1 Not Annualized
2 Annualized
* Commencement of investment operations
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THIRD AVENUE HIGH YIELD FUND: SELECTED DATA AND RATIOS
(Period from February 12, 1998* to April 30,)
(Unaudited)
1998
----------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .06
Net gain on securities (both realized and unrealized) .36
------
Total from Investment Operations .42
------
Net Asset Value, End Of Period $10.42
======
TOTAL RETURN 4.20%1
RATIOS/SUPPLEMENTAL DATA:
Net Assets, End of Period (in thousands) $8,057
Ratio of Expenses to Average Net Assets
Before expense reimbursement 7.59%2
After expense reimbursement 1.90%2
Ratio of Net Income to Average Net Assets
Before expense reimbursement (0.37%)2
After expense reimbursement 5.32%2
Portfolio Turnover Rate 11%1
- ----------
1 Not Annualized
2 Annualized
* Commencement of investment operations
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ABOUT THE FUNDS
Third Avenue Trust (the "Trust") was organized as a business trust under the
laws of the state of Delaware pursuant to a Trust Instrument dated October 31,
1996. At the close of business on March 31, 1997, shareholders of Third Avenue
Value Fund, Inc. ("Third Avenue Maryland"), a Maryland corporation which was
incorporated on November 27, 1989 and began operations on October 9, 1990,
became shareholders of THIRD AVENUE VALUE FUND, a series of the Trust, pursuant
to a merger agreement which was approved by a majority of Third Avenue
Maryland's shareholders on December 13, 1996. Upon this merger, all assets,
privileges, powers, franchises, liabilities and obligations of Third Avenue
Maryland were assumed by the Trust. Except as noted herein, all information
about THIRD AVENUE VALUE FUND includes information about its predecessor, Third
Avenue Maryland. THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE HIGH YIELD
FUND, series of the Trust, commenced investment operations on April 1, 1997 and
February 12, 1998, respectively.
INVESTMENT OBJECTIVES
The investment objective of each of THIRD AVENUE VALUE FUND, THIRD AVENUE
SMALL-CAP VALUE FUND and THIRD AVENUE REAL ESTATE VALUE Fund is long-term
capital appreciation. The investment objective of THIRD AVENUE HIGH YIELD FUND
is to maximize total return through a combination of income and capital
appreciation. Each investment objective is a fundamental policy and may not be
changed without the affirmative vote of a majority of that Fund's outstanding
voting securities. In pursuit of the Funds' investment objectives, the research
efforts of the Funds' Adviser, EQSF Advisers, Inc., emphasize analysis of
documents, especially stockholder mailings and Securities and Exchange
Commission ("SEC") filings by issuers. The Adviser's intensive research process,
combined with the Adviser's investment philosophy, may mean that any or all
Funds may be constructed using a relatively limited number of securities.
THIRD AVENUE VALUE FUND seeks to achieve its objective by following a value
investing philosophy to acquire common stocks of well-financed companies at a
substantial discount to the Adviser's estimate of the issuing company's private
market value or takeover value. The Fund also seeks to acquire senior
securities, such as preferred stocks and debt instruments, that have strong
covenant protections and above-average current yields, yields to events, or
yields to maturity. See "Investment in Equity Securities" and "Investment in
Debt Securities."
THIRD AVENUE SMALL-CAP VALUE FUND seeks to achieve its objective by following a
value investing philosophy that seeks to acquire common stocks
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of well-financed companies at a substantial discount to the Adviser's estimate
of the issuing company's private market value or takeover value. The Fund
intends to invest at least 65% of its total assets in the equity securities of
companies whose aggregate shares outstanding have a market value of less than $1
billion at the time of investment. See "Investment in Equity Securities."
THIRD AVENUE HIGH YIELD FUND seeks to achieve its objective by following a value
investing philosophy that seeks to acquire senior securities such as debt
instruments and preferred securities, both straight and convertible, of
companies whose securities are rated primarily below investment grade. The Fund
intends to invest at least 65% of its total assets in a portfolio of
non-investment grade fixed income and other debt securities of companies whose
capital structures, in the opinion of the Adviser, have a market value priced
below their private market values. Securities emphasized will have above-average
yields in the case of straight senior issues, and in the case of convertible
issues, the possibility of capital appreciation should the underlying common
stock increase in value. See "Investment in High Yield Debt Securities" and
"Convertible Securities."
THIRD AVENUE REAL ESTATE VALUE FUND seeks to achieve its objective by following
a value investing philosophy that seeks to acquire equity and debt securities of
well-financed companies at a substantial discount to the Adviser's estimate of
the issuing company's private market value or liquidation value. Under normal
conditions, the Fund intends to invest at least 65% of its total assets in
equity and debt securities of companies in the real estate industry or related
industries or in companies which own significant real estate assets at the time
of investment.
A company is considered to be in the real estate industry or a related industry
or considered to own significant real estate assets, respectively, if (i) at
least 50% of its gross revenues or net profits at the time of investment are
derived from (a) construction, ownership, management, operation, financing,
refinancing, sales, leasing, development or rehabilitation of real estate; or
(b) extraction of timber or minerals from real estate; (ii) at least 50% of its
gross revenues or net profits at the time of investment are derived from
providing goods (e.g. building materials and/or supplies) or services (e.g.
consulting, legal or insurance) to the foregoing companies; or (iii) at least
50% of the fair market value of its assets at the time of investment, as
determined by the Adviser, is attributable to one or more of the following: (a)
real estate owned or leased by the company as lessor or as lessee; (b) timber
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or minerals on such real estate; or (c) the discounted value of the stream of
fees or revenues to be derived from the management or operation of real estate
or the rights to extract timber or minerals from real estate. Examples of such
companies include, but are not limited to:
o Real estate development companies (including commercial/industrial
developers and homebuilders);
o Real estate investment trusts (REITs) and master limited partnerships;
o Hotel and hotel management companies;
o Real estate brokerage companies and/or management companies;
o Financial institutions that make or service mortgage loans;
o Title insurance companies;
o Lumber, paper, forest product, timber, mining and oil companies;
o Companies with significant real estate holdings such as supermarkets,
restaurant chains and retail chains; and
o Manufacturers or distributors of construction materials and/or building
supplies.
RISK FACTORS SPECIFIC TO THIRD AVENUE REAL ESTATE VALUE FUND
Because the Fund generally invests at least 65% of its total assets in real
estate-oriented companies, it is likely to be subject to risks normally
associated with the direct ownership of real estate. These risks include
declines in the value of real estate, risks related to general and local
economic conditions, overbuilding and increased competition, increases in
property taxes and operating expenses, changes in zoning laws, casualty or
condemnation losses, variations in rental income, changes in neighborhood
values, the appeal of properties to tenants and increases in interest rates. The
value of securities of companies that service the real estate industry will also
be affected by these risks.
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INVESTMENT PHILOSOPHY AND APPROACH
VALUE DISCIPLINE
The Adviser adheres to a strict value discipline when selecting securities for
the Funds. Contrary to conventional wisdom, which says that you have to take
greater risks to reap greater rewards, the Adviser seeks to invest in a
portfolio of securities where the prices at the time of acquisition are low
enough so that the Adviser can conclude that both the risk is lowered and
appreciation potential is enhanced. For that reason, the Adviser may seek
investments in the securities of companies in industries that are temporarily
depressed.
INTENSIVE RESEARCH
The Adviser believes that value is created more by past corporate prosperity
than by bear markets. For this reason, the Adviser conducts intensive bottom-up
research to identify investment opportunities, and ignores general stock market
conditions and other macro factors.
DIVERSIFICATION
The Adviser believes that knowledge gained through intensive research lends more
toward reducing investment risk than does diversification. However, the Funds
will remain diversified in general, although probably less diversified than
other mutual funds of comparable size.
BUY AND HOLD
The Adviser follows a strategy of "buy and hold." This approach to achieving
growth over the long term means that the Funds should experience low turnover,
minimizing transaction costs and tax consequences.
INVESTMENT IN EQUITY SECURITIES
In selecting common stocks, the Adviser seeks issuing companies that exhibit the
following characteristics:
(1) A strong financial position, as measured not only by balance sheet
data but also by off-balance sheet assets, liabilities and
contingencies (as disclosed in footnotes to financial statements and
as determined through research of public information), where debt
service1 consumes a small part of such companies' cash flow.
(2) Responsible management and control groups, as gauged by managerial
competence as operators and investors as well as by an apparent
absence of intent to profit at the expense of stockholders.
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1 "Debt Service" means the current annual required payment of interest and
principal to creditors.
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(3) Availability of comprehensive and meaningful financial and related
information. A key disclosure is audited financial statements and
information which the Adviser believes are reliable benchmarks to aid
in understanding the business, its values and its dynamics.
(4) Availability of the security at a market price which the Adviser
believes is at a substantial discount to the Adviser's estimate of
what the issuer is worth as a private company or as a takeover or
merger and acquisition candidate.
In selecting preferred stocks, the Adviser will use its selection criteria for
either common stocks or debt securities, depending on the Adviser's
determination as to how the particular issue should be viewed, based, among
other things, upon the terms of the preferred stock and where it fits in the
issuer's capital structure.
Although the Adviser does not pay attention to market factors in making
investment decisions, the Funds are, of course, subject to the vagaries of the
markets. In particular, small-cap stocks have less market liquidity and tend to
have more price volatility than larger capitalization stocks.
INVESTMENT IN DEBT SECURITIES
Each of THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND intends its investment in debt securities to be, for the
most part, in securities which the Adviser believes will provide above-average
current yields, yields to events, or yields to maturity. In selecting debt
instruments for THIRD AVENUE VALUE FUND, the Adviser requires the following
characteristics:
1) Strong covenant protection, and
2) Yield to maturity at least 500 basis points above that of a comparable
credit.
In acquiring debt securities for THIRD AVENUE VALUE FUND, the Adviser generally
will look for covenants which protect holders of the debt issue from possible
adverse future events such as, for example, the addition of new debt senior to
the issue under consideration. Also, the Adviser will seek to analyze the
potential impacts of possible extraordinary events such as corporate
restructurings, refinancings, or acquisitions. The Adviser will also use its
best judgment as to the most favorable range of maturities. In general, THIRD
AVENUE VALUE FUND will acquire debt issues which have a senior position in an
issuer's capitalization and will avoid "mezzanine" issues such
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as non-convertible subordinated debentures. THIRD AVENUE HIGH YIELD FUND and
THIRD AVENUE REAL ESTATE VALUE FUND may invest in such "mezzanine" issues.
The market value of debt securities is affected by changes in prevailing
interest rates and the perceived credit quality of the issuer. When prevailing
interest rates fall or perceived credit quality is increased, the market values
of debt securities generally rise. Conversely, when interest rates rise or
perceived credit quality is lowered, the market values of debt securities
generally decline. The magnitude of these fluctuations will be greater when the
average maturity of the portfolio securities is longer.
CONVERTIBLE SECURITIES
THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND intend to
invest in convertible securities, which are bonds, debentures, notes, preferred
stocks or other securities that may be converted into or exchanged for a
prescribed amount of equity securities (generally common stock) of the same or a
different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both
fixed income and equity securities. Yields for convertible securities tend to be
lower than for non-convertible debt securities but higher than for common
stocks. Although to a lesser extent than with fixed income securities generally,
the market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market value of the underlying
security and therefore also will react to variations in the general market for
equity securities and the operations of the issuer. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
MORTGAGE-BACKED SECURITIES
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND intend to invest in mortgage-backed securities and derivative
mortgage-backed securities, including, with respect to THIRD AVENUE HIGH YIELD
FUND, "principal only" and "interest only" components. Mortgage-backed
securities are securities that directly or indirectly represent a participation
in, or are secured by and payable from, mortgage loans on real property. Those
Funds intend to invest in
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these securities only when they believe, after analysis, that there is unlikely
to ever be permanent impairment of capital as measured by whether there will be
a money default by either the issuer or the guarantor of these securities. These
securities do, nonetheless, entail considerable market risk, i.e., fluctuations
in quoted prices for the instruments, interest rate risk, prepayment risk and
inflation risk.
THIRD AVENUE VALUE FUND will not invest in non-investment grade subordinated
classes of residential mortgage-backed securities and does not intend to invest
in commercial mortgage-backed securities. THIRD AVENUE HIGH YIELD FUND and THIRD
AVENUE REAL ESTATE VALUE FUND may invest in commercial mortgage-backed
securities if these securities are available at a sufficient yield spread over
risk-free investments. Prepayments of principal generally may be made at any
time without penalty on residential mortgages and these prepayments are passed
through to holders of one or more of the classes of mortgage-backed securities.
Prepayment rates may change rapidly and greatly, thereby also affecting yield to
maturity, reinvestment risk and market value of the mortgage-backed securities.
As a result, the high credit quality of many of these securities may provide
little or no protection against loss in market value, and there have been
periods during which many mortgage-backed securities have experienced
substantial losses in market value. The Adviser believes that, under certain
circumstances, many of these securities may trade at prices below their inherent
value on a risk-adjusted basis and believes that selective purchases by a Fund
may provide high yield and total return in comparison to risk levels.
ASSET-BACKED SECURITIES
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD
FUND may also invest in asset-backed securities that, through the use of trusts
and special purpose vehicles, are securitized with various types of assets, such
as automobile receivables, credit card receivables and home-equity loans in
pass-through structures similar to the mortgage-related securities described
above. In general, the collateral supporting asset-backed securities is of
shorter maturity than the collateral supporting mortgage loans and is less
likely to experience substantial prepayments. However, asset-backed securities
are not backed by any governmental agency.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in debt
securities with interest payments or maturity values that are not fixed, but
float in conjunction with (or inversely to) an underlying
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index or price. These securities may be backed by U.S. Government or corporate
issuers, or by collateral such as mortgages. The indices and prices upon which
such securities can be based include interest rates, currency rates and
commodities prices. However, neither Fund will invest in any instrument whose
value is computed based on a multiple of the change in price or value of an
asset or an index of or relating to assets in which that Fund cannot or will not
invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. The reset mechanism may be formula based, or reflect the passing
through of floating interest payments on an underlying collateral pool. Inverse
floating rate securities are similar to floating rate securities except that
their coupon payments vary inversely with an underlying index by use of a
formula. Inverse floating rate securities tend to exhibit greater price
volatility than other floating rate securities.
Neither Fund intends to invest more than 5% of its total assets in inverse
floating rate securities. Floating rate obligations generally exhibit a low
price volatility for a given stated maturity or average life because their
coupons adjust with changes in interest rates. Interest rate risk and price
volatility on inverse floating rate obligations can be high, especially if
leverage is used in the formula. Index securities pay a fixed rate of interest,
but have a maturity value that varies by formula, so that when the obligation
matures a gain or loss may be realized. The risk of index obligations depends on
the volatility of the underlying index, the coupon payment and the maturity of
the obligation.
INVESTMENT IN HIGH YIELD DEBT SECURITIES
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND intend to invest in high yield debt securities, including
those rated below Baa by Moody's Investors Service, Inc. ("Moody's") and below
BBB by Standard & Poor's Ratings Group ("Standard & Poor's") and unrated debt
securities, commonly referred to as "junk bonds". THIRD AVENUE HIGH YIELD FUND
intends to invest at least 65% of its total assets, under normal market
conditions, in non-investment grade high yield fixed income and other debt
securities, including straight debt instruments, convertible debt, preferred
securities and unrated securities. THIRD AVENUE VALUE FUND and THIRD AVENUE REAL
ESTATE VALUE FUND do not intend to invest more than 35% of their total assets in
such securities. See also "Investment in Debt Securities" and "Restricted and
Illiquid Securities." Such securities are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
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the terms of the obligation, and may in fact be in default. The ratings of
Moody's and Standard & Poor's represent their opinions as to the credit quality
of the securities which they undertake to rate (see Appendix A for a description
of those ratings). It should be emphasized, however, that ratings are relative
and subjective and, although ratings may be useful in evaluating the safety of
interest and principal payments, they do not evaluate the market price risk of
these securities. In seeking to achieve its investment objective, each such Fund
depends on the Adviser's credit analysis to identify investment opportunities.
For the Funds, credit analysis is not a process of merely measuring the
probability of whether a money default will occur, but also measuring how the
creditor would fare in a reorganization or liquidation in the event of a money
default.
Before investing in any high yield debt instruments, the Adviser will evaluate
the issuer's ability to pay interest and principal, as well as the seniority
position of such debt in the issuer's capital structure vis-a-vis any other
outstanding debt or potential debts. There appears to be a direct cause and
effect relationship between the weak financial conditions of issuers of high
yield bonds and the market valuation and prices of their credit instruments, as
well as a direct relationship between the weak financial conditions of such
issuers and the prospects that principal or interest may not be paid.
The market price and yield of bonds rated below Baa by Moody's and below BBB by
Standard & Poor's are more volatile than those of higher rated bonds due to such
factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer and general market liquidity and the risk of an issuer's inability
to meet principal and interest payments. In addition, the secondary market for
these bonds is generally less liquid than that for higher rated bonds.
Lower rated or unrated debt obligations also present reinvestment risks based on
payment expectations. If an issuer calls the obligation for redemption, the Fund
may have to replace the security with a lower yielding security, resulting in a
decreased return for investors.
The market values of these higher yielding debt securities tend to be more
sensitive to economic conditions and individual corporate developments than
those of higher rated securities. Companies that issue such bonds often are
highly leveraged and may not have available to them more traditional methods of
financing. Under adverse economic conditions, there is a risk that highly
leveraged issuers may be unable to service their debt obligations or to repay
their obligations upon maturity. Under deteriorating economic conditions or
rising interest rates, the capacity of issuers of lower-
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rated securities to pay interest and repay principal is more likely to weaken
significantly than that of issuers of higher-rated securities. Investors should
carefully consider the relative risks of investing in high yield securities and
understand that such securities are generally not meant for short term
investing.
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may also purchase or retain debt obligations of issuers not
currently paying interest or in default (i.e. with a rating from Moody's or
Standard & Poor's of C or C1, respectively, or lower). In addition, those Funds
may purchase securities of companies that have filed for protection under
Chapter 11 of the United States Bankruptcy Code. Defaulted securities will be
purchased or retained if, in the opinion of the Adviser, they may present an
opportunity for subsequent price recovery, the issuer may resume payments, or
other advantageous developments appear likely.
ZERO-COUPON AND PAY-IN-KIND SECURITIES
THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in zero
coupon and pay-in-kind ("PIK") securities. Zero coupon securities are debt
securities that pay no cash income but are sold at substantial discounts from
their value at maturity. PIK securities pay all or a portion of their interest
in the form of additional debt or equity securities. Because such securities do
not pay current cash income, the price of these securities can be volatile when
interest rates fluctuate. While these securities do not pay current cash income,
federal income tax law requires the holders of zero coupon and PIK securities to
include in income each year the portion of the original issue discount (or
deemed discount) and other non-cash income on such securities accrued during
that year. In order to continue to qualify for treatment as a "regulated
investment company" under the Internal Revenue Code and avoid a certain excise
tax, each Fund may be required to distribute a portion of such discount and
income and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS
THIRD AVENUE VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND may invest in loans and other direct debt instruments owed by
a borrower to another party. They represent amounts owed to lenders or lending
syndicates (loans and loan participations) or to
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other parties. Direct debt instruments may involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal protection to a
Fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the SEC.
TRADE CLAIMS
Both THIRD AVENUE VALUE FUND and THIRD AVENUE HIGH YIELD FUND may invest in
trade claims. Trade claims are interests in amounts owed to suppliers of goods
or services and are purchased from creditors of companies in financial
difficulty. For purchasers such as a Fund, trade claims offer the potential for
profits since they are often purchased at a significant discount from face value
and, consequently, may generate capital appreciation in the event that the
market value of the claim increases as the debtor's financial position improves
or the claim is paid.
An investment in trade claims is speculative and carries a high degree of risk.
Trade claims are illiquid instruments which generally do not pay interest and
there can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. The markets in trade claims are not regulated by
federal securities laws or the SEC. Because trade claims are unsecured, holders
of trade claims may have a lower priority in terms of payment than certain other
creditors in a bankruptcy proceeding.
PORTFOLIO PRACTICES
FOREIGN SECURITIES
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH
YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND may invest in foreign
securities. Each Fund's foreign securities investments will have characteristics
similar to those of domestic securities selected for the Fund. Each Fund intends
to limit its investments in foreign securities to companies issuing U.S.
dollar-denominated American Depository Receipts or which, in the judgment of the
Adviser, otherwise provide financial information which provides the Adviser with
substantively similar financial information as SEC disclosure requirements. By
limiting their investments in this manner, the Funds seek to avoid investing in
securities where there is no compliance with SEC requirements to provide public
financial information, or such information is unreliable as a basis for
analysis.
Foreign securities markets generally are not as developed or efficient as those
in the United States. Securities of some foreign issuers are less liquid
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and more volatile than securities of comparable U.S. issuers. The Funds will be
subject to additional risks which include: possible adverse political
andeconomic developments, seizure or nationalization of foreign deposits and
adoption of governmental restrictions that may adversely affect the payment of
principal and interest on the foreign securities or currency blockage that would
restrict such payments from being brought back to the United States. Because
foreign securities often are purchased with and payable in foreign currencies,
the value of these assets as measured in U.S. dollars may be affected favorably
or unfavorably by changes in currency rates and exchange control regulations.
FOREIGN CURRENCY TRANSACTIONS
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH
YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND may, from time to time,
engage in foreign currency transactions in order to hedge the value of their
respective portfolio holdings denominated in foreign currencies against
fluctuations in foreign currency prices versus the U.S. dollar. These
transactions include forward currency contracts, exchange listed and OTC options
on currencies, currency swaps and other swaps incorporating currency hedges.
The notional amount of a currency hedged by a Fund will be closely related to
the aggregate market value (at the time of making such sale) of the securities
held and reasonably expected to be held in its portfolio denominated or quoted
in or currently convertible into that particular currency or a closely related
currency. If a Fund enters into a hedging transaction in which such Fund is
obligated to make further payments, its custodian will segregate cash or readily
marketable securities having a value at all times at least equal to such Fund's
total commitments.
The cost to a Fund of engaging in currency hedging transactions varies with
factors such as (depending upon the nature of the hedging transaction) the
currency involved, the length of the contract period, interest rates in foreign
countries for prime credits relative to U.S. interest rates for U.S. Treasury
obligations, the market conditions then prevailing and fluctuations in the value
of such currency in relation to the U.S. dollar. Transactions in currency
hedging contracts usually are conducted on a principal basis, in which case no
fees or commissions are involved. The use of currency hedging contracts does not
eliminate fluctuations in the prices in local currency of the securities being
hedged. The ability of a Fund to realize its objective in entering into currency
hedging transactions is depen-
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dent on the performance of its counterparties on such contracts, which may in
turn depend on the absence of currency exchange interruptions or blockage by the
governments involved, and any failure on their part could result in losses to a
Fund. The requirements for qualification as a regulated investment company under
the Internal Revenue Code of 1986, as amended (the "Code"), may cause a Fund to
restrict the degree to which it engages in currency hedging transactions.
RESTRICTED AND ILLIQUID SECURITIES
None of THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE
HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND will purchase or
otherwise acquire any security if, as a result, more than 15% of its net assets
(taken at current market value) would be invested in securities that are
illiquid. Generally speaking, an illiquid security is any asset or investment
which a Fund cannot sell in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the asset or investment,
including securities that cannot be sold publicly due to legal or contractual
restrictions.
Over the past several years, strong institutional markets have developed for
various types of restricted securities, including repurchase agreements,
commercial paper, and some corporate bonds and notes. Securities freely salable
among qualified institutional investors under special rules adopted by the SEC
or otherwise determined to be liquid, including "principal only" and "interest
only" components of mortgage-backed securities, may be treated as liquid if they
satisfy liquidity standards established by the Board of Trustees. The continued
liquidity of such securities is not as well assured as that of publicly traded
securities, and accordingly the Board of Trustees will monitor their liquidity.
The Board will review pertinent factors such as trading activity, reliability of
price information and trading patterns of comparable securities in determining
whether to treat any such security as liquid for purposes of the foregoing 15%
test. To the extent the Board treats such securities as liquid, temporary
impairments to trading patterns of such securities may adversely affect the
Fund's liquidity.
INVESTMENT IN RELATIVELY NEW ISSUES
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE REAL
ESTATE VALUE FUND intend to invest occasionally in the common stock of selected
new issuers; THIRD AVENUE HIGH YIELD FUND intends to invest occasionally in the
debt securities of selected new issuers. Investments in relatively new issuers,
i.e., those having continuous operat-
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ing histories of less than three years, may carry special risks and may be more
speculative because such companies are relatively unseasoned. Such companies may
also lack sufficient resources, may be unable to generate internally the funds
necessary for growth and may find external financing to be unavailable on
favorable terms or even totally unavailable. Those companies will often be
involved in the development or marketing of a new product with no established
market, which could lead to significant losses.
TEMPORARY DEFENSIVE INVESTMENTS
When, in the judgment of the Adviser, a temporary defensive posture is
appropriate, a Fund may hold all or a portion of its assets in short-term U.S.
Government obligations, cash or cash equivalents. The adoption of a temporary
defensive posture does not constitute a change in such Fund's investment
objective.
BORROWING
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH
YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND may also make use of bank
borrowing as a temporary measure for extraordinary or emergency purposes, such
as for liquidity necessitated by shareholder redemptions, and may use securities
as collateral for such borrowing. Such temporary borrowing may not exceed 5% of
the value of the applicable Fund's total assets at the time of borrowing.
INVESTMENT IN OTHER INVESTMENT COMPANIES
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may invest in securities of other investment companies,
to the extent permitted under the Investment Company Act of 1940, provided that
after any purchase the Fund does not own more than 3% of such investment
company's outstanding stock. THIRD AVENUE VALUE FUND may invest up to 10% of its
total assets in securities of other investment companies; up to 5% of its total
assets may be invested in any one investment company, provided that after its
purchase no more than 3% of such investment company's outstanding stock is owned
by the Fund. The Adviser will charge an advisory fee on the portion of a Fund's
assets that are invested in securities of other investment companies. Thus,
shareholders will be responsible for a "double fee" on such assets, since both
investment companies will be charging fees on such assets.
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SIMULTANEOUS INVESTMENTS
Investment decisions for a Fund are made independently from those of the other
accounts advised by the Adviser and its affiliates. If, however, such other
accounts wish to invest in, or dispose of, the same securities as one of the
Funds, available investments will be allocated equitably to each Fund and other
account. This procedure may adversely affect the size of the position obtained
for or disposed of by a Fund or the price paid or received by a Fund.
RESTRICTIONS ON INVESTMENTS
The Funds have adopted various investment restrictions, some of which are
fundamental policies that cannot be changed without shareholder approval and
others of which are operating investment restrictions that may be changed
without shareholder approval. Certain restrictions not described in this
Prospectus are set forth in full in the SAI. In the event any Fund changes an
operating investment restriction, the new restriction may not meet the
investment needs of every shareholder. Except as specifically described herein
or in the SAI, the Funds are not restricted in the amount of any type of
security they may acquire.
SECURITIES LENDING
THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE
REAL ESTATE VALUE FUND may lend their portfolio securities to qualified
institutions. By lending its portfolio securities, a Fund attempts to increase
its income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that may occur during the term of the loan
will be for the account of the Fund. A Fund may lend its portfolio securities so
long as the terms and the structure of such loans are not inconsistent with the
requirements of the Investment Company Act of 1940, which currently provide that
(a) the borrower pledge and maintain with the Fund collateral consisting of
cash, a letter of credit issued by a domestic U.S. bank, or securities issued or
guaranteed by the U.S. government having a value at all times not less than 100%
of the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the value of the loan
is "marked to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time and the loaned securities be subject to
recall within the normal and customary settlement time for securities
transactions and (d) the Fund receive reasonable interest on the loan (which may
include the
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Fund's investing any cash collateral in interest bearing short-term
investments), any distributions on the loaned securities and any increase in
their market value.
A Fund will not lend portfolio securities if, as a result, the aggregate of such
loans exceeds 33 1/3% of the value of its total assets (including such loans).
Loan arrangements made by a Fund will comply with all other applicable
regulatory requirements. All relevant facts and circumstances, including the
creditworthiness of the qualified institution, will be monitored by the Adviser,
and will be considered in making decisions with respect to lending of
securities, subject to review by the Fund's Board of Trustees.
A Fund may pay reasonable negotiated fees in connection with loaned securities,
so long as such fees are set forth in a written contract and approved by its
Board of Trustees. In addition, the Fund shall, through the ability to recall
securities prior to any required vote, retain voting rights over the loaned
securities.
On behalf of THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND and
THIRD AVENUE REAL ESTATE VALUE FUND, the Trust has entered into a master lending
arrangement with Bear, Stearns Securities Corp. in compliance with the foregoing
requirements.
PORTFOLIO TURNOVER
The Funds' investment policies and objectives, which emphasize long-term
holdings, would tend to keep the number of portfolio transactions relatively
low. THIRD AVENUE VALUE FUND'S portfolio turnover rate for the years ended
October 31, 1996 and 1997 was 14% and 10%, respectively. THIRD AVENUE SMALL-CAP
VALUE FUND'S portfolio turnover rate for the period ended October 31, 1997 was
7%.
It is currently estimated that, under normal market conditions, the annual
portfolio turnover rate for THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL
ESTATE VALUE FUND will not exceed 75%.
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MANAGEMENT OF THE FUNDS
THE INVESTMENT ADVISER
EQSF Advisers, Inc. (the "Adviser") manages each Fund's investments, provides
various administrative services and supervises the Funds' daily business
affairs, subject to the authority of the Trust's Board of Trustees. The Adviser,
a New York corporation organized in 1986, is controlled by Martin J. Whitman and
has its offices at 767 Third Avenue, New York, NY 10017-2023.
Mr. Whitman, the Chairman and Chief Executive Officer of the Trust and its
Adviser, is responsible for the day-to-day management of the portfolios of THIRD
AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD AVENUE REAL
ESTATE VALUE FUND. During the past five years, he has also served in various
executive capacities with M.J. Whitman, Inc., the Fund's distributor and regular
broker dealer, and several affiliated companies engaged in various investment
and financial businesses; he has served as a Distinguished Management Fellow at
the Yale School of Management; and has been a director of various public and
private companies, including Danielson Holding Corporation, an insurance holding
company, and Nabors Industries, Inc., an international oil drilling contractor.
Curtis Jensen has served as co-manager of THIRD AVENUE SMALL-CAP VALUE FUND
since inception. He has been employed by the Adviser since 1995 and also serves
as senior research analyst for THIRD AVENUE VALUE FUND. Prior to joining the
Adviser, Mr. Jensen was a graduate business student at the Yale School of
Management from 1993 to 1995 where he studied under Mr. Whitman. Prior to that,
Mr. Jensen was a director of and managed the operations of a specialty food
manufacturer.
Margaret Patel has served as the manager of THIRD AVENUE HIGH YIELD FUND since
inception. Prior to joining the Adviser, Ms. Patel was a portfolio manager of
several mutual funds which invested in high yield, convertible and government
securities at Northstar Investment Management Corp. from 1995 to 1997. Prior to
that, Ms. Patel was a portfolio manager of several mutual funds with investments
in high yield, convertibles, governments, and municipals at Boston Security
Counsellors, Inc., the investment advisor for the Advantage Funds, from 1988
until their acquisition by Northstar in 1995.
Michael Winer has served as the co-manager of THIRD AVENUE REAL ESTATE VALUE
FUND since inception. Since 1994, Mr. Winer has been a managing director of M.J.
Whitman Senior Debt Corp. and a senior real estate analyst for M.J. Whitman,
Inc. From 1991 to 1994, Mr. Winer held senior-
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level positions with two financial institutions where he directed the workout,
collection and liquidation of distressed real estate loan and asset portfolios.
From 1986 to 1991, Mr. Winer was the chief financial officer, director and
co-owner of a southern California real estate development firm specializing in
the development, construction and management of commercial properties. From 1980
to 1986, Mr. Winer served as controller and financial officer for two large
Southern California real estate development firms. From 1978 to 1980, Mr. Winer
was a CPA and senior auditor with Touche Ross & Co.
The portfolio managers and certain other persons related to the Adviser and the
Funds are subject to written policies and procedures designed to prevent abusive
personal securities trading and other activities.
ADVISORY FEES
Each of THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE
HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND has agreed to pay the
Adviser an annual rate of .90% of its average daily net assets. Each Fund pays
all costs of leased office space of or allocable to such Fund. The Adviser's fee
for the previous month is paid at the beginning of the next month based upon the
average daily net assets during the previous month.
Each Fund pays all of its expenses other than those assumed by the Adviser. Any
expense which cannot be allocated to a specific Fund will be allocated to each
of the Funds based on their relative net asset values on the date the expense is
incurred. From time to time, the Adviser may waive receipt of its fees and/or
assume certain expenses of a Fund, which would have the effect of lowering the
expense ratio of the Fund and increasing yield to investors. Under current
arrangements, whenever in any fiscal year, a Fund's normal operating expenses,
including the investment advisory fee, but excluding brokerage commissions and
interest and taxes, exceeds 1.9% of the first $100 million of average daily net
assets of the Fund, and 1.5% of assets in excess of $100 million, the Adviser is
obligated to reimburse the Fund in an amount equal to that excess. If a Fund's
operating expenses fall below the expense limitation, that Fund will begin
repaying the Adviser for the amount contributed on behalf of the Fund. This
repayment will continue for up to three years after the end of the fiscal year
in which an expense is reimbursed by the Adviser, subject to the expense
limitation, until the Adviser has been paid for the entire amount contributed or
such three year period expires. For the fiscal years ended October 31, 1996 and
1997, no
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reimbursement was required to be paid for THIRD AVENUE VALUE FUND. For the
period ended October 31, 1997, no reimbursement was required to be paid for
THIRD AVENUE SMALL-CAP VALUE FUND.
ADMINISTRATOR
First Data Investor Services Group, Inc. ("Investor Services Group"), a wholly
owned subsidiary of First Data Corporation, which has its principal business
address at 4400 Computer Drive, Westboro MA 01581, serves as administrator of
the Funds pursuant to an Administrative Services Agreement. The services that
Investor Services Group provides to the Funds include: coordinating and
monitoring of any third parties furnishing services to the Funds; providing the
necessary office space, equipment and personnel to perform administrative and
clerical functions for the Funds; preparing, filing and distributing proxy
materials, periodic reports to shareholders, registration statements and other
documents; and responding to shareholder inquiries.
DISTRIBUTOR
M.J. Whitman, Inc. (together with its predecessors "MJW"), a registered
broker-dealer and member of the National Association of Securities Dealers
("NASD"), is the Distributor of the Funds' shares. MJW, whose business address
is 767 Third Avenue, New York, NY 10017-2023, is a wholly-owned subsidiary of
M.J. Whitman Holding Corp. ("MJWHC"). Martin J. Whitman, David M. Barse, Michael
Carney and Ian M. Kirschner are executive officers of the Trust, MJW and MJWHC,
as well as stockholders of MJWHC.
CUSTODIAN AND TRANSFER AGENT
The custodian acts as the depository for the Funds, is responsible for
safekeeping its portfolio securities, collects all income and other payments
with respect to portfolio securities, disburses monies at the Funds' request and
maintains records in connection with its duties. North American Trust Company,
525 B Street San Diego, CA 92101-4492, serves as custodian for THIRD AVENUE
VALUE FUND and Custodial Trust Company, 101 Carnegie Center, Princeton, NJ
08540-6231, serves as custodian for THIRD AVENUE SMALL-CAP VALUE FUND, THIRD
AVENUE HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE FUND (each a
"Custodian" and, collectively, the "Custodians").
Investor Services Group serves as the Funds' Transfer Agent and also performs
certain accounting and pricing services for the Funds. Investor
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Services Group maintains shareholder records, answers shareholder inquiries
concerning their accounts, processes purchases and redemptions of the Funds'
shares, acts as dividend and distribution disbursing agent and performs other
shareholder services. All shareholder inquiries should be directed to Investor
Services Group. You may write to: First Data Investor Services Group, Inc., 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903 or you may
telephone toll free (800) 443-1021.
PORTFOLIO TRADING PRACTICES
The Adviser is responsible on a day-to-day basis for executing the Funds'
portfolio transactions, and seeks to obtain the most favorable price and best
available execution of orders. In principal trades, it normally deals with
market makers and will not deal with any affiliated broker. In agency trades, it
seeks to obtain reasonable commissions and may have the Funds pay a higher
commission than the broker might otherwise charge if the Funds determine that
the commission is reasonable in relation to, among other things, the value of
brokerage or research services provided by the broker to the Adviser. In agency
trades, the Adviser generally uses the services of its affiliated brokers, if in
the judgment of the Adviser, such affiliates are able to obtain a price and
execution at least as favorable as other qualified brokers. For a more detailed
description of the Funds' portfolio trading practices, see "Portfolio Trading
Practices" in the SAI.
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PERFORMANCE INFORMATION
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE VALUE FUND
AND THE STANDARD & POOR'S 500 INDEX (S&P 500)
Average Annual Total Return
1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year
35.31% 25.00% 24.12% 18.34% 21.92% 19.20% 23.07%
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED PIECE]
TAVF S & P
10/31/90 10000.00 10000.00
10/31/91 14916.00 13350.00
10/31/92 15884.48 14679.66
10/31/93 21818.91 16872.80
10/31/94 22377.48 17525.78
10/31/95 27369.89 22159.59
10/31/96 31625.91 27498.71
10/31/97 42793.02 36328.55
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COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE SMALL-CAP VALUE FUND AND THE RUSSELL 2000 INDEX
Total Return Since Inception
Seven Months -- 23.70%
[THE FOLLOWING TABLE REPRESENTS A CHART IN THE PRINTED PIECE]
TASCVF Russell 2000
4/1/97* 10000.00 10000.00
10/31/97 12370.00 12811.00
- ----------
* Period beginning April 1, 1997 (THIRD AVENUE SMALL-CAP VALUE FUND'S
commencement of operations)
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DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS
AND TAXES
Each of THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND and THIRD
AVENUE REAL ESTATE VALUE FUND expects to declare and pay distributions annually,
generally in December. THIRD AVENUE HIGH YIELD FUND expects to declare and pay
distributions quarterly. The Funds will notify shareholders of the tax status of
dividends and capital gain distributions.
Each Fund intends to qualify annually for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code, and thus not be subject
to Federal income tax on the portion of its net investment income and net
realized capital gains that it distributes to shareholders. Each Fund intends to
continue its qualification as a regulated investment company in future years,
unless it determines that such tax treatment would not be advantageous to the
Fund and its shareholders. Each Fund intends to distribute substantially all of
its net investment income and net realized capital gain.
For the year ended October 31, 1997, THIRD AVENUE VALUE FUND distributed net
investment income of approximately $13,987,128 and net realized capital gains on
investments of approximately $3,539,465. A distribution of $0.572 per share,
consisting of $0.411 of income, $0.049 of short-term capital gain and $0.112 of
long-term capital gain was distributed to shareholders of record on December 30,
1997.
For the period ended October 31, 1997, THIRD AVENUE SMALL-CAP VALUE FUND did not
distribute net investment income or net realized capital gains. A distribution
of $0.062 per share, consisting solely of income, was distributed to
shareholders of record on December 30, 1997.
Distributions from net investment income and short-term capital gains are
taxable as ordinary income. A portion of these distributions may qualify for the
corporate dividends-received deduction available to corporate shareholders.
Distributions of net long-term capital gain realized by the Funds from the
purchase and sale of securities held by them for more than one year or, with
respect to shares sold prior to January 1, 1998, eighteen months, as the case
may be, will be taxable to shareholders as a long-term capital gain (even if the
shareholder has held the shares for less than one year) at the rate applicable
to those respective holding periods. The Taxpayer Relief Act of 1997 generally
reduced the maximum federal tax rate for noncorporate taxpayers on long-term
capital gains generated from assets held for more than eighteen months from 28%
to 20%. The holding period was subsequently reduced to twelve months effective
January 1, 1998. Capital gains from
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assets held for more than twelve months but not more than eighteen months were
taxed at a maximum 28% rate through December 31, 1997. After the close of each
calendar year, the shareholders of each Fund will receive information regarding
the amount and the tax character of that Fund's distributions. If a shareholder
who has received a capital gain distribution suffers a loss on the sale of his
shares not more than six months after purchase, the loss will be treated as a
long-term capital loss to the extent of the capital gain distribution received.
Shareholders receiving distributions in the form of additional shares will be
treated for federal income tax purposes in the same manner as if they had
received cash distributions equal in value to the shares received, and will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the applicable Fund on the date of distribution.
Shareholders will generally recognize taxable gain or loss on a redemption of
shares in an amount equal to the difference between the redemption proceeds and
the shareholder's basis in the shares redeemed. This gain or loss will generally
be capital, assuming that the shareholder held the shares as a capital asset,
and will be long-term capital gain or loss if the shares were held for longer
than one year. A loss recognized on the disposition of shares of a Fund will be
disallowed if identical (or substantially identical) shares are acquired in a
61-day period beginning 30 days before and ending 30 days after the date of
disposition.
Depending on the residence of the shareholder for tax purposes, distributions
also may be subject to state and local taxes or withholding taxes. Shareholders
should consult their tax advisers as to the tax consequences to them of
ownership of shares of the Funds.
If a shareholder purchases shares shortly before the record date of a dividend
or capital gain distribution, such distribution will be taxable even though it
may represent in whole or in part a return of the purchase price, and the value
of the shares drops by the approximate amount of the distribution.
DISTRIBUTION OPTIONS
Shareholders should specify on their account application how they wish to
receive distributions. If no election is made on the account application, all
distributions will automatically be reinvested. Each Fund offers four options:
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(1) all income dividends and capital gain distributions paid in cash;
(2) income dividends paid in cash with capital gain distributions
reinvested;
(3) income dividends reinvested with capital gain distributions paid in
cash; or
(4) both distributions automatically reinvested in additional shares of
that Fund.
Any distribution payments returned by the post office as undeliverable will be
reinvested in additional shares of the applicable Fund at the net asset value
next determined.
WITHHOLDING
The Funds may be required to withhold Federal income tax at the rate of 31%
(backup withholding) from dividend, capital gain and redemption payments to
shareholders (a) who fail to furnish the Funds with and to certify the payee's
correct taxpayer identification number or social security number, (b) when the
Internal Revenue Service notifies the Funds that the payee has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect or (c) when the payee fails to certify that he is not
subject to backup withholding. Investors should be sure to provide this
information when they complete the application. Certain foreign accounts may be
subject to U.S. withholding tax on ordinary distributions. Investors should be
sure to provide their place of residence as well as citizenship status when
completing the application.
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HOW TO PURCHASE SHARES
The price paid for shares is the net asset value next determined following
receipt of the purchase order in proper form by the applicable Fund or its
authorized service agent or sub-agent. See "Determining Net Asset Value" below.
All purchase orders should be directed to the Funds' transfer agent, First Data
Investor Services Group, Inc., 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903.
The Funds reserve the right to reject any purchase order.
THIRD AVENUE VALUE FUND is closed to new investors effective July 16, 1998,
except for eligible investors described below. From and after July 15, 1998, (i)
shareholders of THIRD AVENUE VALUE FUND as of the close of business on July 15,
1998, (ii) discretionary investment advisers that invest through existing
omnibus accounts at a financial intermediary, (iii) clients of a financial
intermediary which has an asset allocation program of which THIRD AVENUE VALUE
FUND is an investment option on July 15, 1998, and (iv) qualified defined
contribution retirement plans (e.g., 401(k) plans and profit sharing plans),
403(b) plans and 457 plans that invest through existing omnibus accounts at a
financial intermediary, may continue to make additional purchases and to
reinvest dividends and capital gain distributions in existing accounts. Once an
account is closed, additional investments will not be accepted.
Except as otherwise noted, these restrictions apply to investments made directly
with THIRD AVENUE VALUE FUND and investments made through financial
intermediaries. Investors may be required to demonstrate eligibility to purchase
shares of the Fund before an investment is accepted. THIRD AVENUE VALUE FUND may
resume sales of shares to new investors at some future date, but it has no
present intention to do so.
BUSINESS HOURS
The Funds are open for business each day the New York Stock Exchange ("NYSE") is
open. The NYSE and the Funds will be closed on the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
DETERMINING NET ASSET VALUE
Net asset value per share is calculated as of the close of regular trading on
the NYSE, normally 4:00 p.m., Eastern time, each day the NYSE is open for
trading. Net asset value of each Fund is determined by dividing the value of all
portfolio securities, cash, and other assets, including accrued
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interest and dividends, owned by the Fund, less all liabilities, including
accrued expenses of the Fund, by the total number of shares of each Fund
outstanding.
Short-term securities with original or remaining maturities in excess of 60 days
are valued at the mean of their quoted bid and asked prices. Short-term
securities with 60 days or less to maturity are amortized to maturity based on
their cost to a Fund if acquired within 60 days of maturity or, if already held
by the Fund on the day, based on the value determined on the day. This amortized
cost method will be used unless the Board of Trustees determines that such
method does not represent fair value.
Securities traded on any securities exchange or other market trading system
which reports actual transaction prices on a contemporaneous basis are valued at
the last quoted sales price or, in the absence of closing sales prices on that
day, securities will be valued at the mean between the closing bid and asked
price. Other readily marketable securities are valued at the mean between the
closing bid and asked prices. A Fund may utilize the services of one or more
pricing services to assist it in valuing the Fund's securities. Illiquid
securities and other securities and assets for which market quotations are not
readily available are valued at "fair value", as determined in good faith by or
under the direction of the Board of Trustees of the Fund holding such
securities.
SHARE CERTIFICATES
Share certificates representing shares of a Fund will be delivered to
shareholders only upon written request.
THROUGH AN AUTHORIZED BROKER-DEALER OR INVESTMENT ADVISER
Shares of the Funds may also be purchased through an investor's broker-dealer or
investment adviser. The broker-dealer must be a member in good standing with the
NASD and have entered into a selling agreement with the Funds' distributor, MJW.
Investment advisers must be registered under federal securities laws.
Transactions in Fund shares made through an investor's broker-dealer or
investment adviser may be subject to charges imposed by the dealer or investment
adviser, who may also impose higher initial or additional amounts for investment
than those established by the Funds. In those situations, the investor's
broker-dealer or investment adviser is responsible for forwarding payment or
arranging for payment promptly. The Funds reserve the right to cancel any
purchase order for which payment has not been received by the third business day
following receipt of
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the purchase order. Telephone purchase orders will only be accepted from
financial institutions which have been approved previously by the Funds or the
Adviser.
NEW ACCOUNTS
An account application must be completed and signed for each new account opened,
regardless of the method chosen for making the initial investment.
INITIAL INVESTMENT
The minimum initial investment for each Fund is $1,000. Payment may be made by
check or money order payable to "THIRD AVENUE VALUE FUND," "THIRD AVENUE
SMALL-CAP VALUE FUND", "THIRD AVENUE HIGH YIELD FUND" or "THIRD AVENUE REAL
ESTATE VALUE FUND."
BY MAIL
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND or
THIRD AVENUE REAL ESTATE VALUE FUND
c/o First Data Investor Services Group, Inc. 3200
Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903.
Checks will be accepted if drawn in U.S. currency on a domestic bank. Checks
drawn against a non-U.S. bank may be subject to collection delays and will be
accepted only upon actual receipt of the funds by the transfer agent, Investor
Services Group. The Funds will not accept a check endorsed over by a
third-party. A charge (minimum of $20) will be imposed if any check used for the
purchase of Fund shares is returned unpaid. Investors who purchase Fund shares
by check or money order may not receive redemption proceeds until there is a
reasonable belief that the check has cleared, which may take up to fifteen
calendar days after payment has been received.
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BY WIRE
Prior to sending wire instructions, notify Investor Services Group at (800)
443-1021, Option 2 to insure proper credit to the shareholder's account. Direct
shareholder's bank to wire funds as follows:
UMB Bank KC NA
Kansas City, MO
ABA #: 10-10-00695
For Investor Services Group #: 98-7037-071-9
For further credit to: THIRD AVENUE VALUE FUND, THIRD AVENUE
SMALL-CAP VALUE FUND, THIRD AVENUE HIGH YIELD FUND or THIRD
AVENUE REAL ESTATE VALUE FUND (Shareholder's name, exact
account title and account number)
Heavy wire traffic over the Federal Reserve System may delay the arrival of
purchase orders made by wire.
ADDITIONAL INVESTMENTS BY MAIL
Subsequent investments should be accompanied by the "payment stub" attached to
the shareholder's account statement and may be made in minimum amounts of $1,000
and mailed to:
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND or
THIRD AVENUE REAL ESTATE VALUE FUND
c/o First Data Investor Services Group, Inc.
P.O. Box 412797
Kansas City, MO 64141-2797
At the sole discretion of the Adviser, the initial and any additional investment
minimums may be waived in new accounts opened by existing shareholders for
additional family members and by officers, trustees or employees of the Funds,
MJW, the Adviser or any affiliate of the Adviser (including their spouses and
children under age 21).
ADDITIONAL INVESTMENTS THROUGH THE AUTOMATIC INVESTMENT PLAN
This Plan provides shareholders with a convenient method by which they may
automatically make subsequent monthly purchases. A predetermined amount,
selected by the shareholder, will be deducted from the shareholder's checking
account. Subsequent investments under this Plan are subject
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to a monthly minimum of $200. The Automatic Investment Plan option may be
elected on the application.
INDIVIDUAL RETIREMENT ACCOUNTS
The Funds' Individual Retirement Account ("IRA") application and additional
forms required may be obtained by contacting Investor Services Group at (800)
443-1021, Option 1. For IRA's, the initial minimum is $500 and the minimum
subsequent contribution is $200. The account will be maintained by the
custodian, Semper Trust Company, which currently charges an annual maintenance
fee of $12. Fees are subject to change by Semper Trust Company.
OTHER RETIREMENT PLANS
Investors who are self-employed may purchase shares of the Funds through
tax-deductible contributions to retirement plans for self-employed persons,
known as Keogh or H.R. 10 plans. However, the Funds do not currently act as a
sponsor or administrator for such plans. Fund shares may also be purchased for
other types of qualified pension or profit sharing plans which are
employer-sponsored, including deferred compensation or salary reduction plans
known as "401(k) Plans", which give participants the right to defer portions of
their compensation for investment on a tax-deferred basis until distributions
are made from the plan.
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HOW TO REDEEM SHARES
Shareholders may redeem shares on any business day during which the NYSE is
open. All redemption requests should be directed to Investor Services Group.
Fund shares will be redeemed at the net asset value next calculated after such
request is received by Investor Services Group in proper form. Redemption
requests that contain a restriction as to the time, date or share price at which
the redemption is to be effective will not be honored.
BY MAIL
Send a written request, together with any share certificates that have been
issued, to:
First Data Investor Services Group, Inc.
3200 Horizon Drive
P.O. Box 61503 King of
Prussia, PA 19406-0903
Written redemption requests, stock powers and any share certificates issued must
be submitted and signed exactly as the account is registered. Such requests
generally require a signature guarantee and additional documents. See "Signature
Guarantees/Other Documents."
TELEPHONE REDEMPTION SERVICE
Shareholders who wish to redeem shares by telephone may elect this service on
the application. Such shareholders may thereafter redeem unissued shares valued
at not less than $1,000 on any business day by calling Investor Services Group
at (800) 443-1021, Option 2, prior to 4:00 p.m. Eastern time.
The Funds and Investor Services Group will not be liable for following telephone
instructions reasonably believed to be genuine. In this regard, Investor
Services Group will require personal identification information before accepting
a telephone redemption order. If the transfer agent fails to use reasonable
procedures, the Funds or Investor Services Group might be liable for losses due
to fraudulent instructions.
Shareholders who did not previously elect the Telephone Redemption Service on
their application, or who wish to change any information previously provided,
including the address of record or the bank to which redemption proceeds are to
be wired, must submit a signature guaranteed letter of instructions. See
"Signature Guarantees/Other Documents."
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FEES
There is no charge for redemption of shares tendered directly to Investor
Services Group, except as described below under "Early Redemption Fee." Investor
Services Group currently charges a wire fee of $9 for payment of redemption
proceeds by federal funds. Investor Services Group will automatically deduct the
wire fee from the redemption proceeds. Broker-dealers handling redemption
transactions generally will charge a service fee.
REDEMPTION WITHOUT NOTICE
The Funds have the right, at any time and without prior notice to a shareholder,
to redeem shares held in any account registered in the name of such shareholder
at current net asset value, if and to the extent that such redemption is
necessary to reimburse the Funds for any loss sustained by reason of the failure
of such shareholder to make full payment for shares of the Funds previously
purchased or subscribed for by such shareholder.
ACCOUNT MINIMUM
A shareholder selling a partial amount of shares must leave at least $500 worth
of shares to keep the account open, or in the case of an IRA account, at least
$200. The Funds may also, upon 30 days prior written notice to a shareholder,
redeem shares in any account, other than an IRA account, containing shares
currently having an aggregate net asset value, not attributed to market
fluctuations, of less than $500.
PAYMENT OF REDEMPTION PROCEEDS
A Fund will usually make payment for redemptions of Fund shares within one
business day, but not later than seven calendar days after receipt of such
redemption requests. However, redemption of recently purchased Fund shares that
have been paid for by check may be delayed until the Fund has a reasonable
belief that the check has cleared, which may take up to fifteen calendar days
after payment for the purchase. Investors who anticipate that they may wish to
redeem their shares before fifteen calendar days are advised to pay for their
shares by federal funds wire.
WIRED PROCEEDS
In the case of redemption proceeds that are wired to a shareholder's bank,
payment will be transmitted only on days that commercial banks are open for
business and only to the bank and account previously authorized on the
application or shareholder's signature guaranteed letter of instruction. Neither
the Funds nor Investor Services Group will be responsible for any
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delays in wired redemption proceeds due to heavy wire traffic over the Federal
Reserve System.
SIGNATURE GUARANTEES/OTHER DOCUMENTS
Signatures on any (1) request for redemption, payable to the registered
shareholder involving $5,000 or more, (2) redemption proceeds payable to and/or
mailed to other than the registered shareholder, or (3) requests to transfer
shares, must be guaranteed by an "eligible guarantor institution" as such term
is defined in Rule 17Ad-15 under the Securities Exchange Act of 1934, which
includes certain banks, brokers, dealers, credit unions, securities exchanges
and associations, clearing agencies and savings associations. A notary public is
not an acceptable guarantor. ADDITIONAL DOCUMENTS MAY BE REQUIRED WHEN SHARES
ARE REGISTERED IN THE NAME OF A CORPORATION, PARTNERSHIP, ASSOCIATION, AGENT,
FIDUCIARY, TRUST, ESTATE OR OTHER ORGANIZATION. Additional tax documents may
also be required in the case of redemptions from IRA accounts. For further
information, call Investor Services Group toll free at (800) 443-1021, Option 2.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders owning or purchasing shares of the Funds having a current value of
at least $10,000 may participate in a Systematic Withdrawal Plan, which provides
for automatic redemption of at least $100 monthly, quarterly, semi-annually, or
annually. Shareholders may establish a Systematic Withdrawal Plan by sending a
letter to Investor Services Group. Notice of all changes concerning the
Systematic Withdrawal Plan must be received by Investor Services Group at least
two weeks prior to the next scheduled payment. Further information regarding the
Systematic Withdrawal Plan and its requirements can be obtained by contacting
Investor Services Group at (800) 443-1021, Option 2.
EARLY REDEMPTION FEE
With respect to THIRD AVENUE HIGH YIELD FUND and THIRD AVENUE REAL ESTATE VALUE
FUND, upon the redemption or exchange of shares held less than one year, a fee
of 1% of the current net asset value of the shares will be assessed and retained
by the Fund for the benefit of the remaining shareholders. This fee is intended
to encourage long-term investment in these Funds, to avoid transaction and other
expenses caused by early redemptions, and to facilitate portfolio management.
The fee is not a deferred sales charge, is not a commission paid to the Adviser,
and does not benefit the Adviser in any way. The Funds reserve the right to
modify the terms of or
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terminate this fee at any time. The fee applies to redemptions from the Funds
and exchanges to other Third Avenue funds, but not to dividend or capital gains
distributions which have been automatically reinvested in the Fund. The fee is
applied to the shares being redeemed or exchanged in the order in which they
were purchased. For the foregoing purposes and without regard to the shares
actually redeemed, shares will be treated as redeemed as follows: first,
reinvestment shares; second, purchased shares held one year or more; and third,
purchased shares held for less than one year. No fee will be payable by
shareholders who are omnibus or similar account customers of certain
Fund-approved broker-dealers and other institutions.
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HOW TO EXCHANGE SHARES
INTER-FUND EXCHANGE PRIVILEGE
Shareholders may, in writing or by telephone, exchange shares of one Fund of the
Trust for shares of another Fund at net asset value without the payment of any
fee or charge, except as noted below under "Early Redemption Fee." An exchange
is considered a sale of shares and may result in capital gain or loss for
federal income tax purposes. Shareholders who wish to use this exchange
privilege may elect the service on the account application.
If Investor Services Group receives exchange instructions in writing or by
telephone at (800) 443-1021, in good order by the valuation time on any business
day, the exchange will be effected that day. For an exchange request to be in
good order, it must include the shareholder's name as it appears on the account,
the account number, the amount to be exchanged, the names of the Funds from
which and to which the exchange is to be made and a signature guarantee as may
be required.
MONEY MARKET EXCHANGE PRIVILEGE
Shareholders may redeem any or all shares of the Funds and automatically invest
the proceeds through the Third Avenue Money Market Fund account, in the Cash
Account Trust Money Market Portfolio, an unaffiliated, separately managed, money
market mutual fund. The exchange privilege with the money market portfolio does
not constitute an offering or recommendation of the shares of the money market
portfolio by the Funds or the Distributor. The Adviser is compensated for
administrative services it performs with respect to the money market portfolio.
Shareholders who wish to use this exchange privilege may elect the service on
the account application. The Funds' shareholders should not order shares of the
Money Market Fund without first receiving the current prospectus for the Money
Market Fund. By giving exchange instructions, a shareholder will be deemed to
have represented that he has received the current prospectus for the Money
Market Fund. Exchanges of Fund shares are subject to the other requirements of
the Money Market Fund into which the exchange is made.
The Funds reserve the right to reject any exchange request or otherwise modify,
restrict or terminate the exchange privilege at any time upon at least 60 days
prior written notice.
Shareholders should be aware that an exchange is treated for federal income tax
purposes as a sale and a purchase of shares, which may result in realization of
a gain or loss.
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EARLY REDEMPTION FEE
See "How to Redeem Shares - Early Redemption Fee" for an explanation of a fee
that might be applicable upon the exchange of shares of THIRD AVENUE HIGH YIELD
FUND or THIRD AVENUE REAL ESTATE VALUE FUND held for less than one year.
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SHAREHOLDER SERVICES
Each Fund provides you with helpful services and information about your account.
o A statement after every transaction.
o An annual account statement reflecting all transactions for the year.
o Tax information mailed by January 31 of each year, a copy of which will
also be filed with the Internal Revenue Service.
o The financial statements of the Fund with a summary of portfolio
composition and performance, mailed at least twice a year.
o The Funds intend to continue to mail to shareholders quarterly reports
containing the Portfolio Managers' letters and a summary of portfolio
changes, composition and performance.
o 24 hour automated voice response service.
The Funds pay for shareholder services but not for special services such as
requests for historical transcripts of accounts. The Funds' transfer agent,
Investor Services Group, currently charges $10 per year for duplication of
historical account activity records, with a maximum fee of $100.
TELEPHONE INFORMATION
Your Account: Questions about your account, purchases, redemptions and
distributions can be answered by Investor Services Group
Monday through Friday, 9:00 AM to 7:00 PM (Eastern time).
Call toll free (800) 443-1021, Option 2 or (610) 239-4600.
The Funds: Questions about the Funds can be answered by the Funds'
telephone representatives Monday through Friday 9:00 AM to
5:00 PM (Eastern time). Call toll free (800) 443-1021 or
(212) 888-5222.
To Redeem Shares: To redeem shares by telephone, call Investor Services Group
prior to 4:00 PM on the day you wish to redeem, toll free
(800) 443-1021, Option 2, or (610) 239-4600.
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TRANSFER OF OWNERSHIP
A shareholder may transfer Fund shares or change the name or form in which the
shares are registered by writing to Investor Services Group. The letter of
instruction must clearly identify the account number, name(s) and number of
shares to be transferred, and provide a certified tax identification number by
way of a completed new account application or W-9 form, and include the
signature(s) of all registered owners, and any share certificates issued. The
signature(s) on the transfer instructions or any stock power must be guaranteed
as described under "Signature Guarantees/Other Documents."
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APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS
STANDARD & POOR'S RATINGS GROUP
The ratings are based on current information furnished by the issuer or obtained
by Standard & Poor's from other sources it considers reliable. Standard & Poor's
does not perform any audit in connection with any rating and may, on occasion,
rely on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such information
or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation.
II. Nature and provisions of the obligation.
III. Protection afforded by, and relative position of the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC", and "C" is regarded,
on balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" indicates the lowest degree of speculation and "C" the
highest degree of speculation. While such debt will
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likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
The "BB" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "BBB" rating.
B - Debt rated "B" has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is
also used for debt subordinated to senior debt that is assigned an actual
or implied "BB" or "BB-" rating.
CCC - Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial or economic conditions, it is
not likely to have the capacity to pay interest and repay principal. The
"CCC" rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied "B" or "B-" rating.
CC - The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C - The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been
filed, but debt service payments are continued.
C1 - The rating "C1" is reserved for income bonds on which no interest is
being paid.
D - Debt rated "D" is in payment default. The "D" rating category is used
when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during
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such grace period. The "D" rating also will be used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
categories.
MOODY'S INVESTORS SERVICE, INC.
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, fluctuation
of protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risk appear somewhat greater than
the Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa - Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are rated Ba are judged to have speculative elements:
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
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B - Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca - Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Moody's applies numerical
modifiers: 1, 2 and 3 in each generic rating classification from Aa through
B in its corporate bond rating system. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category, the
modifier 2 indicates a mid-range ranking, and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
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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
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
DISTRIBUTOR
M.J. Whitman, Inc.
767 Third Avenue
New York, NY 10017-2023
TRANSFER AGENT
First Data Investor Services Group, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
CUSTODIANS
THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND
North American Trust Company THIRD AVENUE HIGH YIELD FUND
525 B Street THIRD AVENUE REAL ESTATE VALUE FUND
San Diego, CA 92101-4492 Custodial Trust Company
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
www.thirdavenuefunds.com
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