NEW YORK (
) -- Third Avenue, which is well known for its value fund,
Third Avenue Value
, wants to move into a timely area -- distressed debt.
The firm believes that its expertise in spotting undervalued assets is a natural fit for finding undervalued debt, and that the ongoing credit crisis will provide plenty of investment opportunities.
The firm brought in Jeffrey Gary to lead the fund, which is named
Third Avenue Focused Credit
. He was former head of Blackrock's high- yield and distressed investment team.
The prospectus says the fund "seeks total return from a combination of capital appreciation and interest income, by focusing capital in our highest-conviction ideas across the credit spectrum."
According to the prospectus, inefficient credit markets are providing opportunities for Third Avenue's experienced management, who have past experience in this segment of the market.
Focused Credit will follow the same asset allocation strategy as other Third Avenue funds by concentrating assets in their best ideas. Marty Whitman's Third Avenue Value recently held more than 50% of assets in the top six holdings.
Third Avenue funds are not constrained by style, sector or asset class. In July, I compared
iShares Hong Kong
Third Avenue Value
because Marty Whitman's heavy bets on Hong Kong real estate led to a substantial overlap between these two funds.
Focused Credit will hold 50 to 60 securities, but based on the other funds, investors should expect a high concentration in the manager's best ideas.
Few mutual fund companies allow their managers the type of latitude given at Third Avenue, where managers are more akin to hedge fund managers who have the freedom to go where they believe the best opportunities lie.
While the fund is called Focused Credit, it may also hold equity it receives in exchange for debt, along with the bank loans, convertible bonds and high-yield debt that one typically associates with a credit fund.
Due to the latitude offered to the manager and the great team of investment analysts who stand behind all Third Avenue funds, I believe this is a great opportunity for investors who want exposure to the ongoing credit crisis.
Individual investors would need to be extremely well-capitalized and have experience valuing debt securities to carry this out on their own. Even passively investing in this market segment usually requires a high net worth. These types of funds are offered through separate accounts, private equity, or hedge funds. Third Avenue, for instance, already offers a distressed credit hedge fund for institutional investors.
Focused Credit won't be cheap. It will cost 1.71% for retail shares and 1.27% for institutional shares, although during the first year these fees will be reduced to 1.4% and 0.95%, respectively. Good returns will justify those expenses. Since the fund just launched last week, it'll be some time before we see how it performs.
Still, this should prove to be a profitable area of the market for years to come. Banks still have many bad loans on their books, and the unwinding of housing and credit bubbles will mean plenty of distressed credit securities. Third Avenue has distinguished itself as a value investing firm, and one has a hard time finding a better value than distressed securities.
An area of the market that was difficult for retail investors to access is now available via TFCVX. The fund may not be for everyone, since periodic crises could cause big declines in value.
Conservative investors should only consider a very small slice of their portfolio for such an investment, while younger and more aggressive investors, who will not feel compelled to sell during a panic, might consider a larger position as part of a diversified portfolio.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion does own any of the funds mentioned in the article.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.