Barron’s reported over the weekend that Third Avenue Management, the firm founded by deep value investing pioneer Marty Whitman, is undergoing yet another management shakeup. The once-venerated value-shop’s assets under management are down 85% since reaching a peak of over $26 billion in 2006.
CRASH, while maybe unfair, is the only word that comes to mind.
Third Avenue is a firm that Young Research was heavily involved with in the early 2000s. We advised the funds in our flagship strategy report and to our exclusive investment advisory client. We moved on from Third Avenue and all open-end stock mutual funds with a single exception years ago.
Tide on its Way Out for Mutual Fund Industry
The tide has been on its way out for actively managed stock mutual funds for over a decade. Confiscatory front-end sales loads, 12b-1 marketing trailers, high expense ratios, closet-indexing, and the proliferation of ETFs have all contributed to a hollowing out of the mutual fund industry.
For individual investors and small-businesses, the future is in old-line conservative investment counsel firms that concentrate on individual securities selection. Think boutique investment manager instead of mutual fund supermarket.
Why we Left the Third Avenue Funds
In the case of Third Avenue, fees that became uncompetitive and assets that grew too large for fund managers to stay true to their investment mandates—at least as we saw it—were some of the reasons we moved on.
Why did Third Avenue maintain high expense ratios and allow fund assets to become so large? Affiliated Managers, a publicly traded firm that purchased a 60% stake in Third Avenue in 2002, may have been a driving force behind some of these decisions. Affiliated obviously took a stake in Third Avenue to maximize its profits. Cutting fees and closing funds to new investors isn’t the best way to boost the quarterly earnings that the Wall Street analysts following Affiliated’s shares are so interested in.
We would advise you to think long and hard before putting your money with a publicly traded investment manager. The interests of the firm and your interests are not always aligned.
Our decision to leave Third Avenue turned out to be a timely one. Since we left, the performance of the Third Avenue family of mutual funds have been lackluster—to be kind. The poor performance is partly a problem of deep-value investing being out of favor, but portfolio management also played a role.
Marty Whitman is a pioneer in the craft of vulture and deep value investing. His strategies informed a generation of today’s value investors. It is unfortunate to read about the turmoil of his firm in Barron’s. I don’t doubt that deep value investing will again have its day in the sun, but as for open-end equity funds at Third Avenue and other firms…I’m afraid the sun is setting.
Jeremy Jones, CFA
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