Matthew Fine started in an entry-level position at Third Avenue Management in 2000 and worked is way up to portfolio manager of their flagship Third Avenue Value fund, overseeing its $900 million since 2017. Last year, while the S&P 500 plunged 18.1%, the fund returned 17.5%, ranking in the first percentile of its category, and has annualized total returns of 37.5% and 7.9% over 3 and 5 years, respectively. In an interview with Barron’s, Fine discusses the strategy that has made Third Avenue a success.
The firm deliberately seeks out companies that are being challenged by difficult circumstances, such as an industry issue or a company problem that is fixable. If investor sentiment has turned excessively negative, Third Avenue jumps in to buy securities at an undervalued price, Fine explains. The flagship fund holds about 30 positions at any one time, with the largest 10 comprising roughly 50% of the portfolio—a highly concentrated portfolio, which Fine takes a “benchmark-agnostic” approach to, meaning he doesn’t build the portfolio around the benchmark. Currently, the fund’s biggest holding is Tidewater, which operates vessels for oil and gas platforms. They grabbed Tidewater just as it was emerging out of bankruptcy, a typical play for Third Avenue because those companies have usually straightened out their balance sheets but their stock is still a bargain. Third Avenue bought Tidewater stock for about $25 per share, and “today it is about $45 per share,” Fine told Barron’s. The fund also bought Warrior Met Coal as it came out of bankruptcy, and though it has remained very cheap, the company has been distributing all of its extra cash flow through special dividends. Because it came out of bankruptcy with a massive net-operating-loss that it carried forward, it isn’t paying taxes on that cash flow which Fine believes will eventually be distributed back to shareholders. Though natural resource production has fallen out of favor, one of Third Avenue’s biggest investment is Capstone Copper, which is vital to renewable energies and may soon encounter a shortage due to increased demand.
When he bought Bank of Ireland stock in 2019, the interest-rate environment at the time “created about the worst banking environment from a rate perspective that has ever existed,” Fine says. The stock was about 40% of book value, offering a mere 5% return on equity at the time they purchased it, though they were getting a double-digits earnings yield. Third Avenue wagered that the conditions could only improve—which it did in the last 2 years, when the Irish banking industry consolidated 5 banks into 3, making Bank of Ireland one of the two largest in the country. It’s now valued at about 90% of its stated book value, with a return on equity of 10% for last year which Fine predicts will hit 15% by 2025.
Fine worked for years with Third Avenue founder Marty Whitman, who passed away in 2018, and who he quoted as saying “The next time someone walks into this room with a perfect investment will be the first time.” In other words, every investment has a flaw, “and if you don’t know what was wrong with an investment, you didn’t fully understand it,” Fine told Barron’s.
