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July 15, 2004 at 08:00 PM
Quick Take: The Third Avenue Small-Cap Value Fund (TASCX) typically keeps about 5% to 8% of its assets in cash, but lately greenbacks have accounted for more than 25% of its holdings, says portfolio manager Curtis Jensen.
That’s because it’s been difficult to find attractive stocks, he says. “Certainly, our universe of prospective investments is narrower today than it was a year ago,” says Jensen.
When he is buying, Jensen looks for financially strong small companies with talented managers whose stocks trade for less than what he thinks the business is actually worth.
The mountain of cash the fund has been sitting on has restrained its performance this year, Jensen concedes. Nonetheless, the $796 million fund stayed ahead of its peers this year through June. It returned 9.8% during that period, while the average small-cap value fund gained 7.5%.
For the three-year period through last month, the fund rose 10.5%, annualized, versus a 10.9% gain for its peers.
Jensen, the co-chief investment officer of Third Avenue Management, the investment advisor for Third Avenue Funds, has been Third Avenue Small-Cap Value’s sole manager since 2001. He joined Martin Whitman as co-manager in 1997, when the fund was started. Whitman runs Third Avenue’s flagship Third Avenue Value Fund (TAVFX).
The Full Interview:
Curtis Jensen uses two words to describe the kind of stocks he buys for the Third Avenue Small-Cap Value Fund: “safe” and “cheap.”
For safety, Jensen says he looks first and foremost for companies with “super strong” finances as evidenced by an absence of liabilities and “fortress-like” balance sheets.
Next, he wants shareholder-friendly management teams with successful track records.
Potential investments must also have businesses that are comprehensible, says Jensen, who points out that he spends a lot of time going over publicly available information on companies. “If we don’t understand how they make money, we’re not going to buy the stock,” he says.
Once those hurdles are cleared, Jensen hunts for shares trading at a discount to his estimate of a company’s intrinsic value or its worth to a buyer.
The fund normally holds 60 to 80 small companies, that is, those with market caps in the range of the Russell 2000 index or Standard & Poor’s SmallCap 600 index.
