The Fortress That Marty Built

A terrific 2004 underscores Third Avenue's outstanding long-term record.

By Steven Goldberg, Contributing Columnist

From Kiplinger's Personal Finance magazine, January 11, 2005

It may have been a so-so year for the stock market, but 2004 was a bang-up year for Marty Whitman. All four of his Third Avenue funds posted double-digit gains, ranging from 16% to 22% through mid November. To what does the 80-year-old Whitman ascribe these stellar results? "I can spell it out for you in one word,"he says in an unmistakable New York accent, "l-u-c-k."

In a profession filled with massive egos and excuse makers, Whitman stands apart for self-deprecation and brutal honesty. "No one can predict what will happen short term," he says. "We're doing the right things now, but we were also doing the right things in 1999" -- when performance was nothing to brag about.

But Whitman is justifiably proud of his funds' longer-term records, and investors have taken notice. Third Avenue's assets stand at $10 billion, up by one-third over the past year. The family's flagship fund, Third Avenue Value (TAVFX; 800-443-1021), which invests in companies of all sizes, returned an annualized 12% over the past five years to November 1, 11 percentage points per year better than the average gain of diversified U.S. stock funds. It is the only fund that Whitman personally runs.

As for the other Third Avenue funds, International Value (TAVIX) has returned an annualized 22% since its launch nearly three years ago. It has been in the top 30% each year among funds that invest in small foreign companies. Real Estate Value (TAREX) earned an annualized 22% over the past five years, putting it in the top 20% of real estate funds. And Small-Cap Value (TASCX) gained 16% annualized over the past five years, putting it in the top 40% of funds that invest in small, undervalued companies.

When buying stocks, Whitman's mantra is "safe and cheap." Whitman was an expert in bankruptcy investing before entering the fund business, and he favors companies that have the strength to pay off their debts. "First and foremost, we look for stocks with fortresslike balance sheets," says Curtis Jensen, 42, manager of Small-Cap Value and Whitman's heir apparent. The funds are filled with shares of banks, insurers, energy companies, real estate developers and other asset-rich firms whose values are easily quantified.

Whitman and crew won't buy a stock unless it trades at a steep discount to the worth of the company's underlying assets. They tend to hold a stock for long periods--sometimes five years or more -- unless it becomes grossly overpriced. "Unless there are strong and compelling reasons, we don't sell," Whitman says.

Cross-pollination

Third Avenue's 15 managers and analysts work closely together. As a result, many of the stocks that are held in one fund often appear in one or more of the others. (For example, 30% of Third Avenue Value's stocks are also in Small-Cap Value.)

Jensen says finding good stocks is much harder now than it was a year ago. A sign that the pickings for Third Avenue's type of stocks are getting slim: Cash positions have built to double-digit levels in all four funds. International Value, with 36% in cash, has the highest position. Given Third Avenue's cautious approach, it's no surprise that the funds tend to lag in sharply rising markets and star in mediocre markets. The funds will also lag when growth-style investing comes back into favor, which may be soon.

Meanwhile, Whitman has no plans to step down. "Retire?" he asks, expressing horror at the thought. "If I could be a tennis pro, I'd retire." Until then, he'll continue to hit the courts a couple of times a week and walk three miles a day to his office -- on Manhattan's Third Avenue, naturally.

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