Third Avenue Value Fund Letter

I just read through the third quarter shareholder letter from Marty Whitman at the Third Avenue Value Fund. Some tidbits from the letter:

1) The fund was hit with $500 million in redemptions in the quarter, and had to sell "non-core" positions. Cash in the fund is now at $719 million or 8.5% of assets.

2) During the quarter Whitman bought $1.5 million of the fund, bringing the total that he controls through his wife and others to 1.5 million shares. At the August 11 net asset value of $49.56, his stake is worth approximately $75 million, so he certainly has skin in the game. One of his senior analysts bought $200,000 of the fund also.

3) New position in Sycamore (SCMR) of 10 million shares. Increased position in ABK and MBI.

4) Eliminated the fund's position in White Mountains Insurance (WTM). He explained in the letter - "None of the securities sales during the quarter were made for investment reasons; they were all made for portfolio reasons, so that the Fund could maintain an adequate cash cushion."

He defended his position in MBIA Insurance:

"it is theoretically possible that claims experienced over the next few years could be so bad that there would be little or no value for the common stocks of monoline insurers and mortgage insurers. To date, there is no credible evidence that this might be the case. A wipe-out of the equity seems remote."

Third Quarter Letter

Whitman Throws Down the Gauntlet

The latest shareholder letter from The Third Avenue Fund has Marty Whitman firing back at William Ackman, a hedge fund manager I have written about previously, over MBIA:

"...invested in MBIA Surplus Notes at a yield to call of slightly over 14% per annum. The MBIA Surplus Notes appear to carry very small, or non-existent, credit risk, and thus are considered by management to be a near-cash investment (albeit the MBIA Surplus Notes, unlike cash equivalents, are subject to market price fluctuations)."

"On February 11th, TAVF acquired from MBIA, 10,610,425 shares of MBIA Common at $12.15 per share. This brought the Fund’s holding to 23,148,845 shares of MBIA Common, or about 10% of the issue outstanding.MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business."

And then Whitman gets the knives out:

"Ackman does not seem to understand the Property and Casualty (“P&C”) Insurance business and its sources of profitability. Ackman believes that the Bond Insurer Model does not work because the insureds are able to buy an AAA credit rating so cheaply. The facts are that Bond Insurance is one of the more profitable P&C businesses."

"(Ackman) argues that prices, as determined by marks to market, or mark to model, always deserve 100% weight. This is arrant nonsense. Market prices do deserve dominant weight in an analysis where the portfolio consists wholly of common stocks and non-performing loans held in trading accounts. Market prices deserve little or no weight, when the portfolio consists of performing loans, and in force policies, to be held to maturity."

"(Ackman) pays little attention to the rules of seniority and priority of payment in evaluating, or understanding, senior tranches of debt. The argument that if an entity is in trouble, every liability on the balance sheet of that entity is also in trouble is strictly “amateur hour”. Frequently, senior issues sail through troubles unscathed."

Here is my post on MBIA from February 2008.