Mr. Wadhwaney: Third Avenue Management is focused exclusively on value investing. Third Avenue's investments are not just solely in the United States, but rather they span the globe. Our strategies are offered to private investors and institutional clients. You can speak of us as having value equity strategies, small-cap value, real estate value, international value and most recently to complement all of these we added a credit strategy.
All of these are available through mutual funds, separately managed accounts and alternative investment vehicles. We have a limited partnership dedicated to real estate that focuses on unique smaller-capitalization real estate opportunities around the world. Then there is another one, which is devoted to special situations, which focuses on one-off special situations - event-driven investments, bankruptcies, recapitalizations, spinoffs, restructurings and more complicated stuff. My focus is primarily non-U.S. investing. I manage the Third Avenue's International Value Fund (TAVIX) as well as an alternative vehicle called the Third Avenue Global Value Fund, LP. The alternative vehicle tends to be invested in somewhat smaller-capitalization companies. Think of it as a more adventurous, enterprising version of the mutual fund, which does an awful lot more in emerging markets.
In aggregate, Third Avenue management manages roughly about $16 billion across the different strategies and vehicles. The philosophy of the firm is long-term value investing. That's really what we do; that's what we believe in. We invest our own money alongside our clients, and we certainly eat our own cooking here.
TWST: Would you tell us about 2009 and how your investments fared in these markets.
Mr. Wadhwaney: The wheels started to come off the global economy - really the first signs were late 2007 and 2008, when you started to see problems in the residential mortgage-backed securities market in the United States. There obviously were ripples in the United Kingdom and then as 2008 progressed, it started to spread across not just the U.S. but also across Continental Europe. Once banking systems start to gum up businesses and by implication stocks come under strain, everything gets tripped up and falls, or just gums up and stops going forward. Banks are terrified of lending, whereas companies that actually had plans to borrow or to refinance find themselves without alternatives. You have a very serious disruption in economic activity.
Everything starts to slow down and it feels like everything is about to come to a halt. We'd experienced something very similar to this in 1998 in Asia, when the banking system just ceased functioning for a brief period of time. This time the locus of the problem was not just Asia - one continent, one area - but rather it was worldwide. In that sort of a world, a number of different things start to happen. Companies, which really were otherwise reasonably capitalized in the world of functional capital markets, suddenly become a whole lot less, shall we say, viable. Companies that have looming debt or companies that require continued high-credit ratings and continued access to capital markets, such as investment banks like Bear Stearns or Lehman Brothers, suddenly find themselves with a threat of a downgrade, and their ability to access capital markets diminished.
We historically focus on businesses that are very well capitalized - businesses that really do not need a great deal of access to capital markets to move forward in their day-to-day business activities. There are a number of companies which we avoided. The Bears and Lehmans automatically would not fall within the realm of our accepted or attractive business models. We would not, in general, own such companies. As a result of that, we certainly sidestep blowups like that. But that said, blowups aside, most stocks went down during the time period.
Now, everything else being equal, if so many well-capitalized companies start to get cheaper and cheaper, obviously these are the kinds of things that start to provide us potential opportunities. Starting in May 2007 and really accelerating during 2008, our portfolios started to find more and more opportunities in the world of financial companies. Really what they were, in great part, were insurance and reinsurance companies. Those were a big part of our purchases during 2008 and early 2009.
Resource companies started to get quite interesting because one of the things that's a byproduct of a slowing economy is demand for all sorts of raw materials - be it natural gas, be it oil, be it base metals - obviously tumbles, and with them the prices of these products tumbled, which in turn result in prices of companies that are engaged in the production of these falling apart. That was another class of opportunities that presented themselves during this time period.
There was also tremendous risk aversion towards the emerging markets. If I am not mistaken, I think the last time we spoke we talked about a company called Netia, which is a fairly successful Polish telecom company. The only two problems associated with the company that are visible from the outside world is, one, it is a Polish company and of course the Polish stock market and the Polish currency was under pressure; two: its single largest shareholder was an Icelandic entity that came under financial pressure. Their holding in the shares of Netia had to be sold at what was effectively a very large margin call. Netia's stock price tumbled and Third Avenue became by default the largest shareholder of Netia.
Tickers included in this excerpt: FRDPF, NET, RSL, TLSN
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