Third Avenue Value (TAVFX) is frequently described as a vulture fund, though that’s a bit of a mischaracterization. Manager Martin Whitman, who’s helmed the Third Avenue’s flagship fund for 19 years, devotes just a small percentage of the fund’s portfolio to distressed securities.

Whitman currently holds a small position, less than 1 percent of investable assets, in senior debt issued by the Canadian telecommunications equipment manufacturer Nortel (TSX: NT, OTC: NRTLQ). After struggling for almost a decade, two years of layoffs and other cost cutting measures failed to rescue the firm from bankruptcy. Facing an interest payment that would have cost it almost 5 percent of its dwindling cash reserves, Nortel filed for bankruptcy protection in January.

Whitman purchased the debt for just 17 percent of its anticipated settlement value; with some patience the trade should ultimately work out to a nice gain for the fund’s investors.

And Whitman has patience. With annual portfolio turnover clocking in at just 17 percent, it’s not unusual for the same securities to show up in the portfolio year after year.

More typical of the fund’s portfolio, though, are solid companies that, for whatever reason, are unloved by the markets. Whitman’s investment approach is one that would make Warren Buffett or Benjamin Graham proud. In his search for “safe and cheap” stocks, Whitman targets companies that possess certain qualities: strong balance sheets with limited leverage; capable management teams that usually own large blocks of the company; comprehensible business models; friendly regulatory environments; and shares that trade at a discount to Whitman’s estimated takeover value.

Of late, that’s led the fund to build a heavy stake in property developers in Hong Kong, a play that has panned out thus far. All of these holdings, including Cheung Kong Limited (HGK: 0001,
OTC: CHEUY) and Hang Lung Group (HGK: 0010, OTC: HNLGY), reported profitable first quarters, and the second quarter should bring more of the same. The Government of Hong Kong’s Land Registry reported that property transactions jumped 50 percent in May on a year-over-year basis, leading some to speculate that prices could rise by 20 percent or more over the next year.

That’s not to suggest that all of Whitman’s trades work out; in fact, the fund suffered a major blowup as recently as February.

Last year the fund began building a position in common stock issued by MBIA (NYSE: MBI) and debt securities issued by one of its subsidiaries. In February, the company announced that it was stripping assets out of the subsidiary and moving them into another corporate entity, leaving the fund holding worthless paper. Third Avenue has since filed suit, though there’s no way to gauge how much–if anything–it will ultimately recover.

Despite that cautionary tale, the fund makes an excellent long-term holding, particularly for younger investors. Although it’s not unusual for Third Avenue Value to underperform in the intermediate term–on a three-year annualized basis the fund has lost 8.2 percent, ranking it in the 64th percentile of the world stock category–long-term performance is where the fund shines. Given Whitman’s long view on investing, it can take years for his investment theses to work out, though the payoffs can be substantial. On a 10-year annualized basis the fund is ranked in the top 8 percent of its category. And since its inception, it’s returned better than 11.5 percent.

Those returns exhibit low correlation to both stock and bond markets as well as foreign and US indexes, making Third Avenue Value an excellent supplemental holding for a broader portfolio.

WHY TO BUY

Third Avenue Value (TAVFX)
. Excellent long-term performance
. Low correlation to major stock indexes
. Experienced management