Whitman on the Opportunities Today

Russ Kinnel: Hi, I am Russ Kinnel, Director of Fund Research for Morningstar. I am joined today by Marty Whitman, Manager of Third Avenue Value Fund.

Marty, I know the question you are probably hearing the most is your strategy is known as cheap but safe, but last year you lost a fair amount of money. What happened to that strategy?

Marty Whitman: Well, I mean the strategy never works consistently, I mean that's baloney put forth by academics. All we ever strived to do is outperform benchmarks; most of the time on average and over the long term we have. We can't do anything about near term rationality.

I would say poor performance in 2008 among value funds is really divided into two parts, in one there are those funds who have suffered tremendous amount of permanent impairments in their portfolio companies, serious people invested in Lehman Brothers and Bear Stearns and Washington Mutual and things like that.

Third Avenue Value Fund was somewhat better, suffered almost no permanent impairments and we don't try to outperform consistently. I have a theory, I don't know if it is going to be proved right, but if we are doing the value analysis properly, it is going to be pretty hard to have two bad years in a row. We'll see.

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Russ: So, where are you finding the most attractive opportunities today?

Marty: Biggest investments are in Hong Kong blue chips all of whom have tremendous presences in mainland China, distress, credits, performing loans that we think stay performing loans, energy. We just do three things and common stock investing is one. We don't buy common stocks unless a company has a super strong financial position. We buy-in in huge discounts from readily ascertainable net asset value and we try to pick companies where the growth over the next five years or so will be at least 10% per annum compound.

Russ: That's interesting, we have been hearing at the conference a number of managers talking about taking a look at corporate bonds for the first time, looking more at the capital structure. You have always done that, you have always looked at buying stocks, you don't care, so maybe if you can explain a little bit about for instance you said you have been buying some loans, obviously you have to do a lot of work in a recession in this environment to feel confident about an investment like that?

Marty: Yes. In credit investing, you are basically driven by contract rights and documents rather than source stuff like economic outlooks and stuff. In my lifetime I have never seen pricing like I do now in credits. You have performing loans which say announces 95% probability remain performing loans and we are buying my deals to maturity better than 30% or had been assume we are wrong and have to participate in reorganization. You are probably not going to lose any money, probably make some money, those kind of opportunities I had never seen before.

Russ: I just like to close by one of the things I have heard in reaction to the bear market was some people said, well if active managers are going to lose money, we don't need them. I will just invest in index funds, what do you think about that?

Marty: Baloney.

[laughter]

Marty: I mean look at our long term record, what we do on average and what we do most of the time. If you think you ought not to invest in active managements like us because we don't beat the market all the time, God bless you. If I had my life to live over again, there is no way I would manage money for funds where investors can be deemed everyday.

[laughter]

Marty: If that's where they are coming from, fine.

Russ: Well, thanks a lot.

Marty: Thank you for having me Russ.

Russ: I am Russ Kinnel, Director of Fund Research for Morningstar.

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