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By Bridget B. Hughes, CFA | 01-10-2012 11:00 AM

Europe Crisis No Reason to Avoid Region Altogether

Third Avenue International Value's Matt Fine says the macro problems in Europe are creating rare opportunities to take advantage of certain stocks, particularly in the automotive and insurance sectors.

Bridget Hughes: Hi. I am Bridget Hughes. I am one of the analysts here at Morningstar, and I am here this morning with Matt Fine, who was recently named as a comanager on Third Avenue International Value. Matt, thanks so much for coming and joining us.

Matthew Fine: Thanks for having me.

Hughes: So, you've got a promotion and have been added as a comanager on International Value. So, maybe you can just give us a really quick summary of your experience at Third Avenue and then talk a little bit about the relationship with Amit Wadhwaney, who has been the lead manager on the fund since its inception, how that will change, if at all?

Fine: Sure. First of all, thank you for having me. Second of all, I think the most important thing I would mention is that we believe that our shareholders in the fund, in Third Avenue International Value, need a clearly articulated succession plan, and that's really what this is all about. We would like people to know that if for some reason, God forbid, Amit wasn't able to come to work, they would know who will steward the fund.

Secondly, I've been with the firm since January of 2000, so I am now in my 12-year anniversary this month, as we speak, and I think this is, to some extent, a recognition of my contribution to the fund over that time. I've been working specifically with Amit for approximately nine years, and increasingly the fund has reflected my influence on the process, on security selection, and on the management of the portfolio.

Hughes: I thought it was interesting you told me earlier that the relationship with Amit started closely because of the Argentine crisis.

Fine: That's true.

Hughes: And you never went back.

Fine: That's true. It was an auspicious start. I was working as a generalist for the entire research department for, what was then, about 15 or 16 people. Argentina, of course, imploded, and the peso peg was broken. Argentina remains the largest sovereign default in history to this day and provided us with some very interesting fodder for the portfolio. Some of our great portfolio returns came out of that period, and as you said, I never looked back.

Hughes: So, as an opportunist obviously, as you mentioned, there was lots of activity after that crisis. People are talking about Europe today and have been for a couple of years. You have seen the portfolio sort of migrate toward some of those European companies but maybe not still the obvious ones as is typical of this portfolio. Can you talk a little bit about where in Europe you're seeing those opportunities?

Fine: Absolutely. You're exactly correct. So if you looked at our portfolio five or six years ago, you would have seen a much larger representation in Asia, whether it'd be Singapore, or Hong Kong, to some extent, in Australia and New Zealand. And with an economic boom during half a decade in that part of the world, you've seen us being largely priced out of a number of securities where we have historically been active. It's much tougher for us to find opportunities.

On the flip side, though Europe has gotten a tremendous amount of press of late, what you've really been seeing is a much slower deterioration over a number of years, such as a deteriorating credit quality and an inability to generate growth at the macroeconomic level. I'm talking about a number of eurozone countries, in fact that would describe most, have been creating a tremendous amount of opportunity for us, where at present, including the United Kingdom, Europe-wide, we would be at about 40% of the portfolio. So, there really has been a significant migration.

One of those companies is Daimler, one of our newest investments that we wrote about in our quarterly letter, which is a bit unusual for us and at the same time illustrative of the severity of the pricing dislocations that are taking place because of the European crisis. This is a class of company that we don't normally get the opportunity to buy. Daimler, by most measures, is rated one of the top five brands in the world. It has an absolutely rock-solid balance sheet with about EUR 11 per share in cash and a wildly profitable business that's actually having its record year as we speak. But currently, we're looking at a valuation based on its record year, which we need to seriously discount in our analysis, but based on this record year, it's at about 2 to 3 times earnings before interest, taxes, depreciation, and amortization. So, it's below book value and is the type of opportunity in that quality of company that we don't typically get.

Now as a final point, Daimler is a very global business. Less than half of its business is in Continental Europe. It is listed in Continental Europe; it's headquartered in Continental Europe. But I think we are living in a world today where people are reluctant to take the time to understand the actual underlying business factors and actual underlying business exposures and are happier to shoot first and ask questions later.

Hughes: Just real quickly, when you talk about discounting this record year, what exactly do you mean by that? How do you do that?

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