AIC finds soulmate in Third Avenue

(April 21, 2005) When AIC decided to launch its new Global Focused Corporate Class fund, they picked a New York-based sub-advisor few Canadians would recognize. But clearly the house of Michael Lee-Chin was more concerned with investment style than name recognition.

“Third Avenue’s bottom-up value style with concentrated portfolios and low portfolio turnover is very compatible with the two other mandates in the AIC Focused series,” says Rudy, Luukko, Investment Funds Editor, Morningstar Canada. “I would guess that up until now most advisors would never have heard of them.”

That could soon change. Third Avenue’s four funds have chalked up impressive returns, earning its three equity funds a four star rating from Morningstar in the U.S., while its real estate fund has earned a five star rating, Luukko points out.

Third Avenue’s philosophy is to invest for the longer term, making them a good match for AIC’s “buy, hold and prosper” approach. Portfolio manager Ian Lapey says a typical holding period ranges from two to five years, as he waits for the market to realize the value of his holding.

“While we consider ourselves value investors, we’re really growth investors,” said David Barse, CEO of Third Avenue, in an interview. “We buy good companies, so value is dynamic — it’s going to grow year over year.”

Barse sums up the firm’s investment philosophy in two words: Safe and cheap. To make the grade in terms of safety, a company must have a strong balance sheet, competent managers with interests aligned with ownership.

“Historically, we’ve stayed away from old economy U.S. manufacturing,” says Lapey, explaining these companies rarely meet their balance sheet criterion, with their massively leveraged positions and off-balance sheet liabilities, such as pensions.

Also important is that the company in question has a clearly understandable business. “If we can’t understand how they make money, we pass,” says Lapey. “We like businesses we understand with good disclosure.”

To meet the “cheap” aspect of their investment criteria, Lapey says a stock must be trading “at a significant discount to fair market value,” basing this valuation on the company’s assets and ignoring their projects earnings. In fact, he says the near term estimates for his target companies are usually pretty grim.

“We’re long term investors, so we’re not setting a target price when we enter a security and selling once it hits that target price,” says Barse.

These exits sometimes come as the market value of the shares rise, but more often it comes in the form of what Third Avenue calls “resource conversion,” when the company unloads its less profitable operations, making it an attractive takeover target.

In addition to its own funds, Third Avenue has sub-advised for other major firms, including Met Life, Aegon and Goldman Sachs. Barse says total assets under administration are about $14 billion US, making Third Avenue a relatively small fund manager by Wall Street standards.

While they have made investments north of the border for some of these funds, the AIC offering marks their first foray into the Canadian fund industry.

It is also their first global focused fund. The AIC mandate offers Third Avenue incredibly wide discretion, allowing for investments ranging from micro-cap to large cap, with the ability to invest virtually anywhere in the world.

“Global equity has been a tough sell lately, but Third Avenue’s ‘safe and cheap’ approach to stock picking probably has good marketing potential for AIC because of the prevailing conservative mood of investors,” says Luukko.

The fund is limited to maximum of 20 holdings, with no more than 52% of the portfolio located in North America. A given holding cannot exceed 10% of the portfolio value and there is a 25% sector weighting cap as well.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(04/21/05)

Steven Lamb