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).
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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.
In April, Jensen says he began adding energy and energy-related stocks, in part because he saw them benefitting from a pick-up in merger activity. “It turns out that it’s been cheaper to buy (oil and natural gas) reserves on Wall Street than it has been to drill for them,” he says. “Maybe three to five years down the track some of our names will be scooped up.”
The sector, which now accounts for about 5% of the fund’s assets, looks good, too, Jensen says, because odds are that energy prices over the next three years will stay in a range that will enable oil and gas companies and their service suppliers to “make a very good living.”
Two of Jensen’s recent additions to the portfolio are Whiting Petroleum Corp. (WLL) and St. Mary Land & Exploration Co. (SM), which explore for and produce oil and gas. Both feature attractively valued stocks, sound finances, and conservative managers, Jensen says.
A pair of Canadian companies, Brascan Corp.`A` (BNN) and Timberwest Forest Corp., held the top two positions in the portfolio at the end of April, the latest month for which the fund disclosed its holdings.
Toronto-based Brascan, an asset management company focused on real estate and power generation facilities, features an “excellent” group of executives, Jensen says. Brascan also owns a controlling stake in Canadian miner Noranda Inc. (NRD), which is currently a takeover target.
Timberwest, a forest products company, looks good because its stock is inexpensive compared with its private market value, Jensen says.
Both stocks have been in the portfolio for several years and Brascan has been one of his best performers this year, Jensen says. The fund, he says, has also gotten strong contributions from retailer Kmart Holding Corp. (KMRT), and Commscope Inc. (CTV), a fiber-optic cable maker that was another of the fund’s top stocks at the end of April.
When it comes to selling, Jensen will trim or eliminate a position if a stock becomes too pricey, or if a company’s financial health appears to have taken a permanent turn for the worse.
Concerns about their multiples have led him to reduce his technology holdings in recent months, Jensen says. In the second quarter he sold CyberOptics Corp. (CYBE), which makes sensors and integrated systems for producing and ensuring the quality of electronic circuit boards and semiconductors. “It was just a valuation call,” he says.
However, once a stock enters the fund, it tends to stay there for a while. The annual turnover rate for Third Avenue Small-Cap Value is generally about 15% to 20%, according to Jensen, who prefers to sit on investments to let their value increase and to limit taxable gains for shareholders. The fund had a turnover rate of 22% last year, compared with its peers’ 73.5%.
“We tend to take a very long-term view of the world,” Jensen says of himself and the other money managers at Third Avenue Funds.
Contact Robert F. Keane with questions or comments at: