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.
Hughes: And it's an opportunistic play.
Jensen: It is opportunistic. When we started, for example, our investments in Japan, we had no hedge on the yen. The yen, at that point, two or three years ago, was north of 120. We thought the odds were stacked in our favor that the yen, while it could get weaker of course, that the odds were that it could strengthen from there. And so we had no hedges until just this late last year when the yen went under 90. We thought that the odds had turned, and it was time to consider hedging at that point.
Similarly, with the euro, we had no hedge for a while in the euro. Ran up to north of 1.50, I think, late last year. And as it started pulling back--and as we started seeing events unfold in Europe--we decided it was time to implement hedges there as well.
Hughes: And even with this pullback, and a better pipeline, and more inventory to look at, Third Avenue's mantra of "safe and cheap," I imagine, continues to ring in your ears. Can you talk about how you think about the downside, even when there are good valuations?
Jensen: Sure, and you said the magic word: "downside." When we think about implementing a new name, we always consider the downside first, as opposed to how much money we might make on the upside. A couple of the names that might be an interesting example.
One is, late last year, we started a position in a company called HCC Insurance. It's a specialty P&C company with lines of business including medial stop-loss, offshore marine oil and gas businesses, D&O, and E&O, a surety business. The company's been a very good underwriter for many, many years. It's been an opportunistic approach to entering new markets, and we think the reserving has been good.
So we've been buying the stock when it's been at a discount to book value. We think the book value is solid. There is a two percent dividend at the company right now, and probably trading at eight or nine times earnings. So we think there's downside protection in the form of a strong balance sheet and quite a reasonable valuation.
Another name could be a company like Bristow Group, the largest provider of aviation services to the offshore oil and gas industry, including helicopters, as well as fixed wing aircraft. The company today is probably trading at about 10 or 12 times earnings. It's trading at a significant discount to liquidation value of the fleet. So we think investors have protection in the asset value there. The balance sheet is quite reasonable, and the nature of the business is such that there is some stability in the business in the form of long-term contracts with their customers.
So, again, the focus is on protecting our downside first. And then, thinking about what potentially good surprises might happen down the road.
Hughes: Right. Well, thank you, Curtis, for your time, and we'll talk again soon.
Jensen: Thanks for having me.