Third Avenue Value Fund

For many years I advocated Third Avenue Value Fund (TAVFX), because it had an excellent and very long track record, and had the experience to invest in both stocks and distressed debt.

This month I am withdrawing that advocacy. The reason is that TAVFX, with over $5 billion under management, now has over half its assets in just 5 stocks, all in east Asia. Still more alarming, over a third of assets are in just 4 stocks, all Hong Kong real estate investment trusts.

The fund manager’s explanation for this concentration is essentially “China is a growth story.” Ominous. China is a well-managed command economy that grew by exports — exports that will not grow for the foreseeable future. China may instead be the Mother of All Black Swans.

Those four Hong Kong REITs still have all the features that made TAVFX great: strong balance sheet, shares trading well below adjusted book value. They are incredibly good companies, selling incredibly cheap — hence the concentration. And this will probably do well. Probably. But it is too much risk concentration. There are easier ways to make a buck — mainly by going to smaller cap investments.