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By Bridget B. Hughes, CFA | 06-01-2010 04:58 PM

Jensen: Inventory More Interesting in Small Caps

Third Avenue Small Cap Value manager Curtis Jensen on opportunities in the recent pullback, hedging currency exposure, and downside protection.

Bridget Hughes: Hi, this is Bridget Hughes with Morningstar. I'm here in New York at Third Avenue Management talking with Curtis Jensen, who runs the Third Avenue Small Cap Value Fund.

Curtis, I've read your recent shareholder letter, and you said that you were wary and cautious of the rapid and relentless appreciation of small caps. Since we've had this recent pullback of the last couple of weeks, how are you feeling now?

Curtis Jensen: Well, the pullback has definitely helped us in terms of getting much closer to implementing some new ideas in the portfolio. In fact, in this current quarter, you're going to see a few new names popping up, a couple of names in the technology sector for example. And we're very close on implementing. Yesterday, for example, last couple of days, we've been very close in implementing some new names.

So our inventory is much more interesting than it's been even in the last few weeks. And we continue to identify new ideas. Whether it's industrials, whether it's technology, financials, and we're even peeking again back at the energy sector.

Hughes: Now, you're one of the few small-cap funds that has as big a non-U.S. stake as you do, with about 30% in foreign stocks. I read also that you have hedged out your currency exposure to the euro and to the yen. I'm just wondering what the rationale is behind that?

Jensen: So the fund's exposure today is primarily in the Canadian dollar, the euro, and the yen, as you point out. We want to protect ourselves against a catastrophic outcome in those currencies, as a way of protecting the portfolio overall. So we think of buying put options as one way to protect the portfolio, a form of cheap insurance in the portfolio. And, of course, it does represent a cost, and so we're wary of that.

And we try to implement puts when we see there's an opportunity to buy it cheaply. And, again, it's a way of trying to protect against a catastrophic outcome.

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