UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-08039
Third Avenue Trust
(Exact name of registrant as specified in charter)
622 Third Avenue, 32nd Floor, New York, NY | 10017 | |
(Address of principal executive offices) | (Zip code) | |
W. James Hall III, General Counsel, 622 Third Avenue, New York, NY 10017 |
(Name and address of agent for service) |
Registrant’s telephone number, including area code: 800-443-1021
Date of fiscal year end: October 31, 2016
Date of reporting period: October 31, 2016
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Trust’s annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), is as follows:
Third Avenue Value Fund
Third Avenue Small-Cap Value Fund
Third Avenue Real Estate Value Fund
Third Avenue International Value Fund
ANNUAL REPORT
OCTOBER 31, 2016
THIRD AVENUE FUNDS
Privacy Policy
Third Avenue Funds (the “Funds”) respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain personal information about you. This is the information we collect from you on applications or other forms and from the transactions you make with us, our affiliates, or third parties. We do not disclose any information about you or any of our former customers to anyone, except to our affiliates (which may include the Funds’ affiliated money management entities) and service providers, or as otherwise permitted by law. To protect your personal information, we permit access only by authorized employees. Be assured that we maintain physical, electronic and procedural safeguards that comply with federal standards to guard your personal information.
Proxy Voting Policies and Procedures
The Funds have delegated the voting of proxies relating to their voting securities to the Funds’ investment adviser pursuant to the adviser’s proxy voting guidelines. A description of these proxy voting guidelines and procedures, as well as information relating to how a Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available by August 31 each year (i) without charge, upon request, by calling (800) 443-1021, (ii) at the website of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov, and (iii) on the Funds’ website www.thirdave.com.
Schedule of Portfolio Holdings—Form N-Q
The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Form N-Q is available on the SEC’s website at http://www.sec.gov, and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Third Avenue Trust
Third Avenue Value Fund
Portfolio Management Discussion
October 31, 2016 (Unaudited)
At October 31, 2016, the audited net asset values attributable to each of the 282,001 common shares outstanding of the Third Avenue Value Fund Investor Class and 22,299,198 common shares outstanding of the Third Avenue Value Fund Institutional Class were $51.12 and $51.22 per share, respectively. This compares with audited net asset values at October 31, 2015 of $50.33 and $50.30 per share, respectively, adjusted for a subsequent distribution to shareholders.
Average Annual Returns for the periods | ||||||||||||||||||||
ended October 31, 2016 | ||||||||||||||||||||
One Year ended | Three | Five | Ten | Since | ||||||||||||||||
10/31/16 | Year | Year | Year | Inception | ||||||||||||||||
Third Avenue Value Fund Investor Class† | 1.74 | % | 1.35 | % | 7.38 | % | N/A | 4.83 | % | |||||||||||
Third Avenue Value Fund Institutional Class^ | 2.00 | % | 1.60 | % | 7.65 | % | 1.96 | % | 10.78 | % | ||||||||||
MSCI World Index‡ | 1.79 | % | 4.40 | % | 9.65 | % | 4.48 | % | 8.38 | % | ||||||||||
S&P 500 Index‡ | 4.51 | % | 8.84 | % | 13.57 | % | 6.70 | % | 12.24 | % |
† | Investor Class commenced investment operations on December 31, 2009. |
^ | Institutional Class commenced investment operations on November 1, 1990. |
‡ | The date used to calculate the Since Inception performance for the index is the inception date of the Investor Class. |
For the fiscal year ended October 31, 2016, the Third Avenue Value Fund (the “Fund”) generated positive 1.74% and 2.00% returns for the Investor and Institutional share classes, respectively. The Fund’s benchmark, the MSCI World Index, returned 1.79% over the same period.
The top performers in the Fund during the fiscal year were Comerica Inc. and Apache Corp. A top ten holding, Comerica remains a high conviction name in the Fund. Comerica has a strong financial position which has enabled it to focus on cost control measures while targeting geographic growth and significant capital returns through dividends and stock buybacks.
The top two detractors in the Fund during the fiscal year were Brookdale Senior Living, Inc. and Canfor Corp. Brookdale is the largest operator of senior housing assets in the United States, with approximately 549 centers and 48,000 units. We continue to be positive about the longer-term outlook for Brookdale, given pricing growth and real estate monetization efforts, despite our disappointment in recent performance.
The Fund added eight new common stock investments during the year including Amgen, Inc., Harman International Industries, Inc., Johnson Controls International PLC, Lennar Corp., LivaNova PLC and Ralph Lauren Corp. common stock. Amgen is one of the most recent additions. Amgen is one of the world’s leading biotechnology companies. It is well-financed and has a diversified portfolio of existing products, strong cash flow generation and a promising pipeline. We were able to add the security to the Fund at a discount to our estimated NAV during a period of volatility in the fiscal third quarter.
The Fund exited 11 securities during the year, including General Motors Co., NVIDIA Corp., and Symantec Corp. common stock, each of which were sold for valuation reasons allowing us to redeploy the proceeds into other investments.
We look at downside protection, the ability to compound growth over the long-term and upside to our fair value net asset value estimates as determinants of portfolio inclusion and position size. We remain positive about the outlook of our concentrated portfolio of 37 securities.
THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND’S PERFORMANCE AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS, A GUARANTEE OF FUTURE RESULTS NOR INVESTMENT ADVICE. VIEWS EXPRESSED ARE THOSE OF THE INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO’S HOLDINGS, THE FUND’S PERFORMANCE, AND THE INVESTMENT TEAM’S VIEWS ARE AS OF OCTOBER 31, 2016, AND ARE SUBJECT TO CHANGE.
The Fund’s performance may be influenced by a foreign country’s political, social and economic situation. Other risks include currency fluctuations, less liquidity, lack of efficient trading markets, and different auditing and legal standards. These risks may result in more volatility for the Fund. These and other risks are described more fully in the Fund’s prospectus.
Third Avenue Value Fund is offered by prospectus only. The prospectus contains more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. Foreside Fund Services, LLC, Distributor.
1 |
Third Avenue Trust
Third Avenue Value Fund
Portfolio Management Discussion (continued)
October 31, 2016 (Unaudited)
If you should have any questions, or for updated information (including performance data current to the most recent month-end) or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Current performance may be lower or higher than performance quoted.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of 23 of the world’s most developed markets. The S&P 500 Index is a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The MSCI World Index and the S&P 500 Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of all distributions.
2 |
Third Avenue Trust
Third Avenue Value Fund - Investor Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE VALUE FUND – INVESTOR CLASS (TVFVX), THE MSCI WORLD INDEX AND THE STANDARD & POOR’S 500 INDEX (S&P 500 INDEX) FROM INCEPTION OF THE FUND (12/31/09) THROUGH OCTOBER 31, 2016
Average Annual Total Return
1 Year | 3 Years | 5 Years | Since Inception (12/31/09) |
1.74% | 1.35% | 7.38% | 4.83% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
3 |
Third Avenue Trust
Third Avenue Value Fund - Institutional Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE VALUE FUND – INSTITUTIONAL CLASS (TAVFX), THE MSCI WORLD INDEX AND THE STANDARD & POOR’S 500 INDEX (S&P 500 INDEX) FOR THE TEN YEARS ENDED OCTOBER 31, 2016
Average Annual Total Return | |||
1 Year | 3 Years | 5 Years | 10 Years |
2.00% | 1.60% | 7.65% | 1.96% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
4 |
Third Avenue Trust
Third Avenue Value Fund
Industry Diversification
(Unaudited)
The summary of the Fund’s investments as of October 31, 2016 is as follow:
5 |
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments
at October 31, 2016
Principal Amount($) | Security† | Value (Note 1) | ||||||
Corporate Bonds & Notes - 1.51% | ||||||||
Consumer Products - 1.51% | ||||||||
24,204,152 | Home Products International, Inc., 2nd Lien, Convertible, 6.000% Payment-in-kind Interest, due 3/20/17 (a)(b)(c)(d) | $ | 17,402,785 | |||||
Total Corporate Bonds & Notes (Cost $24,204,152) | 17,402,785 | |||||||
Shares | ||||||||
Common Stocks - 93.74% | ||||||||
Agricultural Equipment - 2.05% | ||||||||
464,413 | AGCO Corp. | 23,722,216 | ||||||
Asset Management - 10.65% | ||||||||
1,771,413 | Bank of New York Mellon Corp. (The) | 76,649,041 | ||||||
1,329,056 | Brookfield Asset Management, Inc., Class A (Canada) | 46,543,541 | ||||||
123,192,582 | ||||||||
Auto Parts - 0.23% | ||||||||
59,603 | Adient PLC (Ireland) (e) | 2,712,528 | ||||||
Automotive - 1.75% | ||||||||
441,593 | Toyota Industries Corp. (Japan) | 20,275,296 | ||||||
Banks - 12.04% | ||||||||
1,336,149 | Comerica, Inc. | 69,600,001 | ||||||
1,275,198 | KeyCorp | 18,005,796 | ||||||
540,500 | PNC Financial Services Group, Inc. (The) | 51,671,800 | ||||||
139,277,597 | ||||||||
Consumer Products - 6.83% | ||||||||
360,773 | Harman International Industries, Inc. | 28,757,216 | ||||||
526,368 | Home Products International, Inc. (a)(c)(d)(e) | — | ||||||
6,398,304 | Kingfisher PLC (United Kingdom) | 28,295,417 | ||||||
710,930 | Masco Corp. | 21,953,518 | ||||||
79,006,151 | ||||||||
Diversified Holding Companies - 10.30% | ||||||||
3,711,500 | CK Hutchison Holdings, Ltd. (Hong Kong) | 45,917,882 | ||||||
938,961 | Investor AB, Class B (Sweden) | 33,380,798 | ||||||
311,688 | Pargesa Holding S.A. (Switzerland) | 20,930,390 | ||||||
3,052,000 | Wheelock & Co., Ltd. (Hong Kong) | 18,849,830 | ||||||
119,078,900 | ||||||||
Electronic Components - 1.51% | ||||||||
265,007 | Anixter International, Inc. (e) | 17,424,210 | ||||||
Forest Products & Paper - 5.66% | ||||||||
2,186,910 | Weyerhaeuser Co., REIT | 65,454,216 | ||||||
Industrial Machinery & Equipment - 2.08% | ||||||||
596,029 | Johnson Controls International PLC (Ireland) | 24,031,889 | ||||||
Insurance & Reinsurance - 7.11% | ||||||||
72,073 | Alleghany Corp. (e) | 37,204,803 | ||||||
54,227 | White Mountains Insurance Group, Ltd. (Bermuda) | 44,993,227 | ||||||
82,198,030 | ||||||||
Manufactured Housing - 3.54% | ||||||||
443,073 | Cavco Industries, Inc. (e) | 40,939,945 |
Value | ||||||||
Shares | Security† | (Note 1) | ||||||
Materials - 2.28% | ||||||||
2,380,400 | Canfor Corp. (Canada) (e) | $ | 26,407,479 | |||||
Media & Entertainment - 3.57% | ||||||||
729,200 | CBS Corp., Class B, Non-Voting Shares | 41,287,304 | ||||||
Medical Devices - 1.52% | ||||||||
310,200 | LivaNova PLC (United Kingdom) (e) | 17,582,136 | ||||||
Oil & Gas Production & Services - 7.34% | ||||||||
257,700 | Apache Corp. | 15,327,996 | ||||||
691,106 | Devon Energy Corp. | 26,186,007 | ||||||
903,950 | Total S.A. (France) | 43,384,043 | ||||||
84,898,046 | ||||||||
Pharmaceuticals - 2.60% | ||||||||
139,400 | Amgen, Inc. | 19,677,704 | ||||||
61,638 | Shire PLC, ADR (Jersey) | 10,394,632 | ||||||
30,072,336 | ||||||||
Retailers - 2.08% | ||||||||
245,465 | Ralph Lauren Corp. | 24,080,117 | ||||||
Senior Housing - 1.83% | ||||||||
1,466,533 | Brookdale Senior Living, Inc. (e) | 21,162,071 | ||||||
Telecommunications - 2.41% | ||||||||
10,123,456 | Vodafone Group PLC (United Kingdom) | 27,855,334 | ||||||
U.S. Homebuilder - 2.06% | ||||||||
571,000 | Lennar Corp., Class A | 23,804,990 | ||||||
U.S. Real Estate Operating Companies - 2.35% | ||||||||
1,217,794 | Tejon Ranch Co. (d)(e) | 27,205,518 | ||||||
Utilities - 1.95% | ||||||||
1,504,807 | Covanta Holding Corp. | 22,572,105 | ||||||
Total Common Stocks (Cost $972,919,902) | 1,084,240,996 | |||||||
Investment | ||||||||
Amount($) | ||||||||
Limited Partnerships - 0.00%(f) | ||||||||
Insurance & Reinsurance - 0.00%(f) | ||||||||
1,805,000 | Insurance Partners II Equity Fund, L.P. (a)(e) | 12,217 | ||||||
Total Limited Partnerships (Cost $0) | 12,217 | |||||||
Principal | ||||||||
Amount($) | ||||||||
Short-Term Investments - 2.16% | ||||||||
U.S. Government Obligations - 2.16% | ||||||||
25,000,000 | U.S. Treasury Bill, 0.150%, due 12/1/16 (g) | 24,996,875 | ||||||
Total Short-Term Investments (Cost $24,996,875) | 24,996,875 | |||||||
Total Investment Portfolio - 97.41% (Cost $1,022,120,929) | 1,126,652,873 | |||||||
Other Assets less Liabilities - 2.59% | 30,010,728 | |||||||
NET ASSETS - 100.00% | $ | 1,156,663,601 |
The accompanying notes are an integral part of the financial statements.
6 |
Third Avenue Trust
Third Avenue Value Fund
Portfolio of Investments (continued)
at October 31, 2016
Notes:
(a) | Fair-valued security. |
(b) | Payment-in-kind (“PIK”) security. Income may be paid as additional securities. |
(c) | Security subject to restrictions on resale. |
Shares/ | Market | |||||||||||||
Principal | Acquisiton | Value | ||||||||||||
Amount($) | Issuer | Date | Cost | Per Unit | ||||||||||
526,368 | Home Products International, Inc. | 5/30/07 | $ | 54,667,471 | $ | 0.00 | ||||||||
$ | 24,204,152 | Home Products International, Inc., 2nd Lien, Convertible, 6.000% Payment-in-kind Interest, due 3/20/17 | 3/16/07 - 10/1/16 | 24,204,152 | 71.90 |
At October 31, 2016, these restricted securities had a total market value of $17,402,785 or 1.51% of net assets. | |
(d) | Affiliated issuers - as defined in the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). |
(e) | Non-income producing security. |
(f) | Amount represents less than 0.01% of net assets. |
(g) | Annualized yield at date of purchase. |
† | U.S. issuer unless otherwise noted. |
ADR: American Depositary Receipt.
REIT: Real Estate Investment Trust.
Country Concentration
% of | ||||
Net Assets | ||||
United States* | 61.82 | % | ||
United Kingdom | 6.38 | |||
Canada | 6.31 | |||
Hong Kong | 5.60 | |||
Bermuda | 3.89 | |||
France | 3.75 | |||
Sweden | 2.89 | |||
Ireland | 2.31 | |||
Switzerland | 1.81 | |||
Japan | 1.75 | |||
Jersey | 0.90 | |||
Total | 97.41 | % |
* Includes cash equivalents, classified as Short-Term Investments on the Portfolio of Investments.
The accompanying notes are an integral part of the financial statements.
7 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio Management Discussion
October 31, 2016 (Unaudited)
At October 31, 2016, the audited net asset values attributable to each of the 247,785 common shares outstanding of the Third Avenue Small-Cap Value Fund Investor Class and 13,929,311 common shares outstanding of the Third Avenue Small-Cap Value Fund Institutional Class were $20.77 and $20.97 per share, respectively. This compares with audited net asset values at October 31, 2015 of $19.52 and $19.66 per share, respectively, adjusted for a subsequent distribution to shareholders.
Average Annual Returns for the periods | |||||||||||||||||||||
ended October 31, 2016 | |||||||||||||||||||||
One Year Ended 10/31/16 | Three Year | Five Year | Ten Year | Since Inception | |||||||||||||||||
Third Avenue Small-Cap Value Fund Investor Class† | 6.71 | % | 3.95 | % | 10.02 | % | N/A | 9.07 | % | ||||||||||||
Third Avenue Small-Cap Value Fund Institutional Class^ | 6.95 | % | 4.18 | % | 10.26 | % | 4.60 | % | 8.41 | % | |||||||||||
Russell 2000 Index‡ | 4.11 | % | 4.12 | % | 11.51 | % | 5.96 | % | 11.39 | % | |||||||||||
Russell 2000 Value Index‡ | 8.81 | % | 4.47 | % | 11.63 | % | 4.91 | % | 10.78 | % | |||||||||||
S&P Small Cap 600 Index‡ | 6.35 | % | 6.13 | % | 13.56 | % | 7.69 | % | 13.43 | % |
† | Investor Class commenced investment operations on December 31, 2009. |
^ | Institutional Class commenced investment operations on April 1, 1997. |
‡ | The date used to calculate the Since Inception performance for the index is the inception date of the Investor Class. |
The Third Avenue Small-Cap Value Fund (the “Fund”) generated positive absolute returns of 6.71% and 6.95% for the Investor and Institutional share classes over the last fiscal year, respectively. The Fund’s benchmark, the Russell 2000 Value Index, returned 8.81% over the same period.
The top performers in the Fund during the fiscal year were ICF International, Inc., Tetra Tech, Inc., and Alamo Group Inc. Alamo Group’s principal activity is to manufacture, distribute and service equipment for right-of-way maintenance and agriculture. Bucking the trend seen in other companies exposed to agricultural end markets, Alamo’s industrial mowing equipment business was resilient and the company reported organic growth and expanded margins, driving profits higher than last year. Alamo also reported a record backlog further reflecting the recovery in the budgets of its municipal customers and the less cyclical, more maintenance nature of much of its product line.
Positions that detracted from performance over the fiscal year were Alico, Inc., G-III Apparel Group, Ltd. (“G-III”), and Legg Mason, Inc. G-III, a designer, manufacturer, and marketer of men’s and women’s apparel, is a recent addition to the Fund. It is one of the larger companies in the apparel industry with more than $2 billion in annual sales. We remain positive about its increasingly strong opportunities for growth.
The Fund added 11 new investments during the year. In addition to G-III, the Fund purchased common shares of NetScout Systems, Inc., SP Plus Corp., Cambrex Corp., Interface, Inc., Kennedy-Wilson Holdings, Inc., and Seaboard Corp. NetScout is a well-financed provider of 24x7 network monitoring solutions to carriers and enterprises. Its offerings provide high-quality performance analytics that help its customers resolve technology issues that could negatively impact service quality and/or result in outages/downtime and compromised security. Last year, the company acquired certain communications assets from Danaher which doubled its addressable market by broadening its product offerings, providing an entrée into the cyber security space and increased its distribution. Near-term macro concerns over a slowdown in carrier spending provided us an opportunity to acquire shares at a substantial discount to our estimate of NAV.
The Fund sold out of nine names during the year. Dispositions included Broadridge Financial Solutions, Inc., City National Corp. and Noble Energy, Inc.
We remain excited about the potential for our portfolio, especially about the outlook for our top holdings.
THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND’S PERFORMANCE AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS, A GUARANTEE OF FUTURE RESULTS NOR INVESTMENT ADVICE. VIEWS EXPRESSED ARE THOSE OF THE INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO’S HOLDINGS, THE FUND’S PERFORMANCE, AND THE INVESTMENT TEAM’S VIEWS ARE AS OF OCTOBER 31, 2016, AND ARE SUBJECT TO CHANGE.
Small-cap companies carry additional risks because their share prices may be more volatile, and their securities may be less liquid than larger, more established companies. Such investments may increase the risk of greater price fluctuations. These and other risks are described more fully in the Fund’s prospectus.
8 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio Management Discussion (continued)
October 31, 2016 (Unaudited)
Third Avenue Small-Cap Value Fund is offered by prospectus only. The prospectus contains more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. Foreside Fund Services, LLC, Distributor.
If you should have any questions, or for updated information (including performance data current to the most recent month-end) or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Current performance may be lower or higher than performance quoted.
The Russell 2000 Index measures the performance of small companies. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The S&P Small Cap 600 Index is a small cap index that covers approximately 3% of the U.S. equities market and consists of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. The Russell 2000 Index, the Russell 2000 Value Index, and the S&P Small Cap 600 Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of all distributions.
9 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund - Investor Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE SMALL-CAP VALUE FUND – INVESTOR CLASS (TVSVX), THE RUSSELL 2000 INDEX, THE RUSSELL 2000 VALUE INDEX AND THE S&P SMALL CAP 600 INDEX FROM INCEPTION OF THE FUND (12/31/09) THROUGH OCTOBER 31, 2016
Average Annual Total Return | ||||||
1 Year | 3 Years | 5 Years | Since Inception (12/31/09) | |||
6.71% | 3.95% | 10.02% | 9.07% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
10 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund - Institutional Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE SMALL-CAP VALUE FUND – INSTITUTIONAL CLASS (TASCX), THE RUSSELL 2000 INDEX, THE RUSSELL 2000 VALUE INDEX AND THE S&P SMALL CAP 600 INDEX FOR THE TEN YEARS ENDED OCTOBER 31, 2016
Average Annual Total Return | |||
1 Year | 3 Years | 5 Years | 10 Years |
6.95% | 4.18% | 10.26% | 4.60% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
11 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Industry Diversification
(Unaudited)
The summary of the Fund’s investments as of October 31, 2016 is as follow:
12 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio of Investments
at October 31, 2016
Shares | Security† | Value (Note 1) | ||||||
Common Stocks - 95.74% | ||||||||
Asset Management - 1.01% | ||||||||
104,132 | Legg Mason, Inc. | $ | 2,990,671 | |||||
Auto Parts and Services - 6.88% | ||||||||
99,300 | Dorman Products, Inc. (a) | 6,379,032 | ||||||
153,347 | Standard Motor Products, Inc. | 7,498,668 | ||||||
92,964 | Visteon Corp. | 6,564,188 | ||||||
20,441,888 | ||||||||
Bank & Thrifts - 14.03% | ||||||||
176,482 | Commerce Bancshares, Inc. | 8,792,333 | ||||||
82,000 | Cullen/Frost Bankers, Inc. | 6,231,180 | ||||||
101,963 | Prosperity Bancshares, Inc. | 5,655,888 | ||||||
221,678 | Southside Bancshares, Inc. | 7,231,136 | ||||||
141,491 | UMB Financial Corp. | 8,779,517 | ||||||
508,775 | Valley National Bancorp | 5,016,521 | ||||||
41,706,575 | ||||||||
Business Services - 4.14% | ||||||||
105,000 | Korn/Ferry International | 2,140,950 | ||||||
167,370 | SP Plus Corp. (a) | 4,217,724 | ||||||
143,433 | Viad Corp. | 5,952,469 | ||||||
12,311,143 | ||||||||
Computers-Integrated Systems - 1.97% | ||||||||
213,944 | NetScout Systems, Inc. (a) | 5,872,763 | ||||||
Conglomerates - 1.07% | ||||||||
937 | Seaboard Corp. (a) | 3,171,745 | ||||||
Consulting and Information Technology Services - 8.02% | ||||||||
152,892 | FTI Consulting, Inc. (a) | 5,956,672 | ||||||
207,366 | Genpact, Ltd. (Bermuda) (a) | 4,767,344 | ||||||
168,022 | ICF International, Inc. (a) | 7,796,221 | ||||||
264,606 | Syntel, Inc. | 5,318,581 | ||||||
23,838,818 | ||||||||
Consumer Products and Services - 5.60% | ||||||||
533,064 | 1-800-Flowers.com, Inc., Class A (a) | 5,090,761 | ||||||
60,282 | CST Brands, Inc. | 2,894,742 | ||||||
142,601 | G-III Apparel Group, Ltd. (a) | 3,724,738 | ||||||
80,458 | VCA, Inc. (a) | 4,944,949 | ||||||
16,655,190 | ||||||||
Diversified Holding Companies - 1.10% | ||||||||
521,707 | JZ Capital Partners, Ltd. (Guernsey) | 3,275,875 | ||||||
Electronic Components - 4.80% | ||||||||
58,456 | Anixter International, Inc. (a) | 3,843,482 | ||||||
110,211 | Ingram Micro, Inc., Class A | 4,099,849 | ||||||
219,650 | Insight Enterprises, Inc. (a) | 6,323,724 | ||||||
14,267,055 | ||||||||
Energy Exploration & Production - 1.14% | ||||||||
100,453 | Carrizo Oil & Gas, Inc. (a) | 3,398,325 | ||||||
Forest Products & Paper - 1.32% | ||||||||
350,505 | Interfor Corp. (Canada) (a) | 3,922,374 | ||||||
Healthcare - 2.19% | ||||||||
75,400 | Patterson Cos., Inc. | 3,220,334 | ||||||
23,007 | Teleflex, Inc. | 3,292,992 | ||||||
6,513,326 |
Shares | Security† | Value (Note 1) | ||||||
Home Building - 3.14% | ||||||||
402,750 | WCI Communities, Inc. (a) | $ | 9,323,662 | |||||
Industrial Capital Equipment Manufacturers - 1.40% | ||||||||
104,200 | Barnes Group, Inc. | 4,151,328 | ||||||
Industrial Equipment - 2.57% | ||||||||
95,906 | Alamo Group, Inc. | 6,226,218 | ||||||
26,267 | CIRCOR International, Inc. | 1,412,639 | ||||||
7,638,857 | ||||||||
Industrial Services - 17.94% | ||||||||
102,857 | ABM Industries, Inc. | 4,019,651 | ||||||
161,375 | Comfort Systems USA, Inc. | 4,655,669 | ||||||
171,518 | Cubic Corp. | 7,323,819 | ||||||
126,707 | EMCOR Group, Inc. | 7,660,705 | ||||||
202,020 | Interface, Inc. | 3,202,017 | ||||||
111,246 | Multi-Color Corp. | 7,222,646 | ||||||
115,900 | MYR Group, Inc. (a) | 3,458,456 | ||||||
149,244 | Tetra Tech, Inc. | 5,738,432 | ||||||
32,510 | UniFirst Corp. | 3,982,475 | ||||||
151,019 | World Fuel Services Corp. | 6,078,515 | ||||||
53,342,385 | ||||||||
Insurance & Reinsurance - 0.82% | ||||||||
4,743 | Alleghany Corp. (a) | 2,448,384 | ||||||
Metals Manufacturing - 1.29% | ||||||||
52,778 | Kaiser Aluminum Corp. | 3,825,877 | ||||||
Pharmaceutical Intermediate - 1.13% | ||||||||
83,585 | Cambrex Corp. (a) | 3,368,476 | ||||||
Restaurants - 0.92% | ||||||||
104,127 | Fiesta Restaurant Group, Inc. (a) | 2,748,953 | ||||||
Retailers - 0.88% | ||||||||
125,300 | DSW, Inc., Class A | 2,602,481 | ||||||
Securities Trading/Processing Services - 1.56% | ||||||||
48,300 | DST Systems, Inc. | 4,644,528 | ||||||
Software and Services - 2.70% | ||||||||
203,687 | Allscripts Healthcare Solutions, Inc. (a) | 2,446,281 | ||||||
67,198 | CSG Systems International, Inc. | 2,555,540 | ||||||
112,355 | Progress Software Corp. (a) | 3,023,473 | ||||||
8,025,294 | ||||||||
Specialty Pharmaceuticals - 1.00% | ||||||||
49,933 | ANI Pharmaceuticals, Inc. (a) | 2,981,000 | ||||||
Transportation - 1.35% | ||||||||
68,154 | Kirby Corp. (a) | 4,017,678 | ||||||
U.S. Real Estate Investment Trusts - 0.44% | ||||||||
37,519 | Tanger Factory Outlet Centers, Inc. | 1,305,661 | ||||||
U.S. Real Estate Operating Companies - 5.33% | ||||||||
129,227 | Alico, Inc. | 3,379,286 | ||||||
296,367 | Brookdale Senior Living, Inc. (a) | 4,276,576 | ||||||
189,053 | Kennedy-Wilson Holdings, Inc. | 3,894,492 |
The accompanying notes are an integral part of the financial statements.
13 |
Third Avenue Trust
Third Avenue Small-Cap Value Fund
Portfolio of Investments (continued)
at October 31, 2016
Shares | Security† | Value (Note 1) | ||||||
Common Stocks (continued) | ||||||||
U.S. Real Estate Operating Companies (continued) | ||||||||
26,939 | Vail Resorts, Inc. | $ | 4,295,154 | |||||
15,845,508 | ||||||||
Total Common Stocks (Cost $226,163,129) | 284,635,820 | |||||||
Total Investment Portfolio - 95.74% (Cost $226,163,129) | 284,635,820 | |||||||
Other Assets less Liabilities - 4.26% | 12,675,201 | |||||||
NET ASSETS - 100.00% | $ | 297,311,021 |
Notes:
(a) | Non-income producing security. |
† | U.S. issuer unless otherwise noted. |
Country Concentration | ||||
% of Net Assets | ||||
United States | 91.71 | % | ||
Bermuda | 1.61 | |||
Canada | 1.32 | |||
Guernsey | 1.10 | |||
Total | 95.74 | % |
The accompanying notes are an integral part of the financial statements.
14 |
Third Avenue Trust
Third Avenue Real Estate Value Fund
Portfolio Management Discussion
October 31, 2016 (Unaudited)
At October 31, 2016, the audited net asset values attributable to each of the 8,251,884 common shares outstanding of the Third Avenue Real Estate Value Fund Investor Class and 53,720,436 common shares outstanding of the Third Avenue Real Estate Value Fund Institutional Class were $29.51 and $29.73 per share, respectively. This compares with audited net asset values at October 31, 2015 of $29.61 and $29.75 per share, respectively, adjusted for a subsequent distribution to shareholders.
Average Annual Returns for the periods ended October 31, 2016 | |||||||||||||||||||||
One Year ended 10/31/16 | Three Year | Five Year | Ten Year | Since Inception | |||||||||||||||||
Third Avenue Real Estate Value Fund Investor Class† | (0.21 | %) | 3.80 | % | 10.83 | % | N/A | 9.13 | % | ||||||||||||
Third Avenue Real Estate Value Fund Institutional Class^ | 0.05 | % | 4.06 | % | 11.11 | % | 3.16 | % | 10.59 | % | |||||||||||
FTSE EPRA/NAREIT Developed Index‡ | 3.38 | % | 5.51 | % | 9.22 | % | 2.98 | % | 9.41 | % |
† | Investor Class commenced investment operations on December 31, 2009. |
^ | Institutional Class commenced investment operations on September 17, 1998. |
‡ | The date used to calculate the Since Inception performance for the index is the inception date of the Investor Class. |
The Third Avenue Real Estate Value Fund (the “Fund”) generated returns -0.21% and +0.05% over the last fiscal year ended October 31, 2016, for the Investor and Institutional share classes, respectively. The Fund’s benchmark, the FTSE EPRA/NAREIT Developed Index, returned 3.38% over the same time frame.
The largest contributors during the fiscal year were First Industrial Realty Trust, Inc., Rayonier Inc. and Wheelock & Co. Ltd. Rayonier is a real estate investment trust based in the United States that owns high-quality timberland assets, most of which are located in the Southeast. Rayonier is part of the Fund’s substantial interests in the U.S. residential markets where fundamentals continue to improve particularly in single-family construction.
The largest detractors to performance during the year were Hammerson PLC, Land Securities Group PLC and Hang Lung Group, Ltd. In the face of declining prices, the Fund used the period of volatility to increase its positions in Land Securities and Hammerson. Both businesses are based in the UK where there has most recently been uncertainty around “Brexit”, but Land Securities and Hammerson are very well-capitalized and will withstand the period of volatility, if not take advantage of it.
The Fund made investments in eight securities during the fiscal year and disposed of 12 equities. In addition to the purchase of Land Securities previously described, the Fund also made a substantial investment in Lennar Corp. Lennar is a well-capitalized and well-managed U.S. homebuilder that focuses on some of the most desirable markets on the West Coast, in Texas, and throughout the Southeast. The Fund has owned Lennar Common twice before, holding it as recently as 2013, but exited the position along with its other homebuilding investments as Fund Management believed the price of those securities had outpaced the underlying fundamental value. During the first fiscal quarter, Lennar’s stock price fell back below a reasonable estimate of NAV, allowing the Fund to re-establish a position with a more adequate margin of safety.
The Fund’s invested capital remains concentrated in the pockets of the real estate universe that offer tremendous value, including the U.S. residential markets, property companies involved with long-term wealth creation, and certain special situations.
THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND’S PERFORMANCE AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS, A GUARANTEE OF FUTURE RESULTS NOR INVESTMENT ADVICE. VIEWS EXPRESSED ARE THOSE OF THE INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO’S HOLDINGS, THE FUND’S PERFORMANCE, AND THE INVESTMENT TEAM’S VIEWS ARE AS OF OCTOBER 31, 2016, AND ARE SUBJECT TO CHANGE.
Real estate investments may be subject to special risks, including risks related to general and local economic conditions, and changes in real estate values that may have negative effects on issuers related to the real estate industry. The Fund’s investments in small and medium capitalization stocks may experience more volatility than larger capitalization stocks. These and other risks are described more fully in the Fund’s prospectus.
Third Avenue Real Estate Value Fund is offered by prospectus only. The prospectus contains more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. Foreside Fund Services, LLC, Distributor.
15 |
Third Avenue Trust
Third Avenue Real Estate Value Fund
Portfolio Management Discussion (continued)
October 31, 2016 (Unaudited)
If you should have any questions, or for updated information (including performance data current to the most recent month-end) or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Current performance may be lower or higher than performance quoted.
The FTSE EPRA/NAREIT Developed Index is designed to reflect the stock performance of companies engaged in specific aspects of the North American, European and Asian Real Estate markets. The FTSE EPRA/NAREIT Developed Index is not a security that can be purchased or sold, and its total returns are reflective of unmanaged portfolios. The returns include reinvestment of all distributions.
16 |
Third Avenue Trust
Third Avenue Real Estate Value Fund - Investor Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE REAL ESTATE FUND – INVESTOR CLASS (TVRVX) AND THE FTSE EPRA/NAREIT DEVELOPED INDEX FROM INCEPTION OF THE FUND (12/31/09) THROUGH OCTOBER 31, 2016
Average Annual Total Return | |||
1 Year | 3 Years | 5 Years | Since Inception (12/31/09) |
(0.21%) | 3.80% | 10.83% | 9.13% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
17 |
Third Avenue Trust
Third Avenue Real Estate Value Fund - Institutional Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE REAL ESTATE VALUE FUND – INSTITUTIONAL CLASS (TAREX) AND THE FTSE EPRA/NAREIT DEVELOPED INDEX FOR THE TEN YEARS ENDED OCTOBER 31, 2016
Average Annual Total Return | |||
1 Year | 3 Years | 5 Years | 10 Years |
0.05% | 4.06% | 11.11% | 3.16% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
18 |
Third Avenue Trust
Third Avenue Real Estate Value Fund
Industry Diversification
(Unaudited)
The summary of the Fund’s investments as of October 31, 2016 is as follow:
19 |
Third Avenue Trust
Third Avenue Real Estate Value Fund
Portfolio of Investments
at October 31, 2016
Principal Amount | Security† | Value (Note 1) | ||||||||
Term Loans - 0.19% | ||||||||||
Non-U.S. Real Estate Operating Companies - 0.19% | ||||||||||
Concrete Investment I, Term Loan (Luxembourg): | ||||||||||
27,935 | EUR | Tranche A2, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (a)(b)(c) | $ | 30,666 | ||||||
19,762 | EUR | Tranche A3, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (a)(b)(c) | 21,694 | |||||||
Concrete Investment II, Term Loan (Luxembourg): | ||||||||||
35,613 | EUR | Tranche A2, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (a)(b)(c) | 39,094 | |||||||
4,941 | EUR | Tranche A3, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (a)(b)(c) | 5,423 | |||||||
IVG Immobilien AG, Term Loan (Germany): | ||||||||||
1,251,238 | EUR | Tranche A1, 9.500% Cash or Payment-in-kind Interest, due 9/1/17 (a)(b)(c) | 1,373,553 | |||||||
1,846,977 | EUR | Tranche A2, 9.500% Cash or Payment-in-kind Interest, due 9/1/17 (a)(b)(c) | 2,027,529 | |||||||
Total Term Loans (Cost $4,207,299) | 3,497,959 | |||||||||
Shares | ||||||||||
Common Stocks & Warrants - 88.10% | ||||||||||
Banks - 6.28% | ||||||||||
2,452,249 | PNC Financial Services Group, Inc., Warrants, expire 12/31/18 (d) | 69,472,214 | ||||||||
1,433,200 | Zions Bancorporation | 46,163,372 | ||||||||
115,635,586 | ||||||||||
Consulting/Management - 1.24% | ||||||||||
633,300 | FNF Group | 22,741,803 | ||||||||
Forest Products & Paper - 9.99% | ||||||||||
3,290,300 | Rayonier, Inc., REIT | 88,245,846 | ||||||||
3,195,610 | Weyerhaeuser Co., REIT | 95,644,607 | ||||||||
183,890,453 | ||||||||||
Lodging & Hotels - 1.34% | ||||||||||
4,484,125 | Millennium & Copthorne Hotels PLC (United Kingdom) | 24,643,779 | ||||||||
Non-U.S. Real Estate Consulting/Management - 0.87% | ||||||||||
1,885,212 | Savills PLC (United Kingdom) | 16,014,115 | ||||||||
Non-U.S. Real Estate Investment Trusts - 10.33% | ||||||||||
5,441,044 | Hammerson PLC (United Kingdom) | 36,695,862 | ||||||||
8,000,348 | Land Securities Group PLC (United Kingdom) | 97,826,751 | ||||||||
10,387,243 | Segro PLC (United Kingdom) | 55,585,780 | ||||||||
190,108,393 | ||||||||||
Non-U.S. Real Estate Operating Companies - 35.07% | ||||||||||
2,128,089 | Brookfield Asset Management, Inc., Class A (Canada) | 74,525,677 |
Shares | Security† | Value (Note 1) | ||||||||
Non-U.S. Real Estate Operating Companies (continued) | ||||||||||
13,433,000 | Cheung Kong Property Holdings, Ltd. (Hong Kong) | $ | 99,506,270 | |||||||
8,992,350 | City Developments, Ltd. (Singapore) | 54,875,149 | ||||||||
48,319,100 | Global Logistic Properties, Ltd. (Singapore) | 61,647,010 | ||||||||
12,668,434 | Henderson Land Development Co., Ltd. (Hong Kong) | 75,057,803 | ||||||||
7,357,967 | Hysan Development Co., Ltd. (Hong Kong) | 33,964,737 | ||||||||
9,494,070 | Inmobiliaria Colonial SA (Spain) | 67,045,779 | ||||||||
2,478,000 | Sun Hung Kai Properties, Ltd. (Hong Kong) | 36,999,619 | ||||||||
11,410,034 | Westfield Corp., REIT (Australia) | 77,248,477 | ||||||||
10,453,500 | Wheelock & Co., Ltd. (Hong Kong) | 64,563,139 | ||||||||
645,433,660 | ||||||||||
Retail-Building Products - 2.30% | ||||||||||
535,230 | Lowe’s Cos., Inc. | 35,673,079 | ||||||||
3,653,991 | Tenon, Ltd. (New Zealand) (e) | 6,636,922 | ||||||||
42,310,001 | ||||||||||
U.S. Homebuilder - 3.97% | ||||||||||
1,753,093 | Lennar Corp., Class A | 73,086,447 | ||||||||
U.S. Real Estate Investment Trusts - 12.23% | ||||||||||
1,708,231 | First Industrial Realty Trust, Inc. | 45,114,381 | ||||||||
4,233,217 | Forest City Realty Trust, Inc., Class A | 91,395,155 | ||||||||
256,562 | Macerich Co. (The) | 18,159,458 | ||||||||
979,769 | Parkway, Inc. (d) | 17,655,439 | ||||||||
569,094 | Vornado Realty Trust | 52,800,541 | ||||||||
225,124,974 | ||||||||||
U.S. Real Estate Operating Companies - 4.48% | ||||||||||
1,006,100 | Kennedy-Wilson Holdings, Inc. | 20,725,660 | ||||||||
941,627 | Tejon Ranch Co. (d) | 21,035,947 | ||||||||
4,206,286 | Trinity Place Holdings, Inc. (d)(e)(f) | 40,632,712 | ||||||||
82,394,319 | ||||||||||
Total Common Stocks & Warrants (Cost $1,216,328,719) | 1,621,383,530 | |||||||||
Preferred Stocks - 1.96% | ||||||||||
Non-U.S. Real Estate Operating Companies - 1.96% | ||||||||||
294,770 | Concrete Investment II SCA (Luxembourg) (d) | 36,079,757 | ||||||||
Total Preferred Stocks (Cost $41,943,570) | 36,079,757 | |||||||||
Units | ||||||||||
Private Equities - 5.10% | ||||||||||
U.S. Real Estate Operating Companies - 5.10% | ||||||||||
28,847,217 | FivePoint Holdings, LLC, Class A Units (d)(e) | 93,753,455 | ||||||||
Total Private Equities (Cost $75,516,192) | 93,753,455 |
The accompanying notes are an integral part of the financial statements.
20 |
Third Avenue Trust
Third Avenue Real Estate Value Fund
Portfolio of Investments (continued)
at October 31, 2016
Notional Amount($) | Security† | Value (Note 1) | ||||||||
Purchased Options - 0.01% | ||||||||||
Foreign Currency Call Options - 0.01% | ||||||||||
380,000,000 | U.S. Currency, strike 8.1400 HKD, expire 8/1/17 (d) | $ | 209,532 | |||||||
Total Purchased Options (Cost $1,282,500) | 209,532 | |||||||||
Total Investment Portfolio - 95.36% (Cost $1,339,278,280) | 1,754,924,233 | |||||||||
Other Assets less Liabilities - 4.64% (g) | 85,464,743 | |||||||||
NET ASSETS - 100.00% | $ | 1,840,388,976 |
Notes:
(a) | Fair-valued security. |
(b) | Payment-in-kind (“PIK”) security. Income may be paid as additional securities or cash at the discretion of the issuer. |
(c) | Variable rate security. The rate disclosed is in effect as of October 31, 2016. |
(d) | Non-income producing security. |
(e) | Affiliated issuers - as defined in the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). |
(f) | Security subject to restrictions on resale. |
Market | ||||||||
Acquisiton | Value | |||||||
Shares | Issuer | Date | Cost | Per Unit | ||||
4,206,286 | Trinity Place Holdings, Inc. | 10/2/13 - 11/30/15 | $18,498,824 | $9.66 | ||||
At October 31, 2016, the restricted security had a total market value of $40,632,712 or 2.21% of net assets. |
(g) | Includes restricted cash pledged to and received from counterparties as collateral management for forward foreign currency contracts and options. |
† | U.S. issuer unless otherwise noted. |
EUR: | Euro. |
HKD: | Hong Kong Dollar. |
REIT: | Real Estate Investment Trust. |
Country Concentration | ||||
% of | ||||
Net Assets | ||||
United States | 45.22 | % | ||
Hong Kong | 16.86 | |||
United Kingdom | 12.54 | |||
Singapore | 6.33 | |||
Australia | 4.20 | |||
Canada | 4.05 | |||
Spain | 3.64 | |||
Luxembourg | 1.97 | |||
New Zealand | 0.36 | |||
Germany | 0.19 | |||
Total | 95.36 | % |
Schedule of Forward Foreign Currency Contracts
Settlement | Settlement | Value at | Unrealized | ||||||||||
Contracts to Sell Counterparty | Date | Value | 10/31/16 | Depreciation | |||||||||
48,633,000 EUR | Goldman Sachs & Co. | 11/29/16 | $ | 53,143,448 | $ | 53,448,946 | $ | (305,498) | |||||
48,633,000 EUR | Morgan Stanley & Co. LLC | 11/29/16 | 53,143,424 | 53,448,946 | (305,522) | ||||||||
$ | (611,020) |
The accompanying notes are an integral part of the financial statements.
21 |
Third Avenue Trust
Third Avenue International Value Fund
Portfolio Management Discussion
October 31, 2016 (Unaudited)
At October 31, 2016, the audited net asset values attributable to each of the 286,394 common shares outstanding of the Third Avenue International Value Fund Investor Class and 7,962,485 common shares outstanding of the Third Avenue International Value Fund Institutional Class were $15.59 and $15.59 per share, respectively. This compares with audited net asset values at October 31, 2015 of $15.09 and $15.06 per share, respectively, adjusted for a subsequent distribution to shareholders.
Average Annual Returns for the periods | |||||||||||||||||||||
ended October 31, 2016 | |||||||||||||||||||||
One Year ended | Three | Five | Ten | Since | |||||||||||||||||
10/31/16 | Year | Year | Year | Inception | |||||||||||||||||
Third Avenue International Value Fund Investor Class† | 3.44 | % | (5.11 | %) | 2.66 | % | N/A | 1.96 | % | ||||||||||||
Third Avenue International Value Fund Institutional Class^ | 3.66 | % | (4.89 | %) | 2.90 | % | 0.61 | % | 6.93 | % | |||||||||||
MSCI All Country World ex US Index‡ | 0.72 | % | (1.04 | %) | 4.11 | % | 2.07 | % | 3.44 | % |
† | Investor Class commenced investment operations on December 31, 2009. |
^ | Institutional Class commenced investment operations on December 31, 2001. |
‡ | The date used to calculate the Since Inception performance for the index is the inception date of the Investor Class. |
For the fiscal year period ending October 31, 2016, the Third Avenue International Value Fund (the “Fund”) returned 3.44% and 3.66% for the Investor and Institutional share classes, respectively. The Fund outperformed its benchmark, the MSCI All Country World ex US Index, which returned 0.72% over the same period.
The three largest contributors in the Fund during the fiscal year were Cosan Ltd., Arcos Dorados Holdings, Inc. and Prosegur Cia de Seguridad S.A. Each of these companies have a majority of their operations located in Latin America. Cosan is a Brazilian industrial conglomerate with a variety of exceptional and resilient businesses that the Fund purchased in the latter half of 2015. Cosan operates one of Brazil’s largest fuel distribution businesses in partnership with Shell. The company is also the largest producer of sugar and ethanol in Brazil and, through a separate publicly-listed entity, controls one of the largest natural gas distribution businesses in Brazil. The company is controlled and operated by a team of extremely competent and experienced executives who built the company from a very small scale over decades.
Detractors to performance during the fiscal year include Rubicon, Ltd., Petroleum Geo-Services ASA (PGS) and Vard Holdings, Ltd. PGS is a Norwegian offshore seismic company. The offshore seismic industry is a niche within the oil service industry. PGS has a balance sheet that is far superior to that of its peers offering a relative competitive strength. While performance detracted during the fiscal year, we maintain our positive long-term view of the company.
Over the year, the Fund added three investments and sold five investments. Two of the more recent dispositions were in German companies. During recent quarters, Leoni AG underwent a management reshuffle and subsequently suffered a series of operational missteps. We voiced our discontent with the nature of the management changes immediately after they were implemented and viewed the operating missteps as a lack of adequate controls, causing us to lose what remained of our confidence in management. We sold our entire position. Separately, we sold our entire position in Telefonica Deutschland Holding AG, which we continue to view as an attractive proposition, though less attractive than other opportunities available to the Fund.
The Fund strategy employs a high conviction investment approach, with a strong commitment to finding unique sources of value. As a result, the Portfolio is highly concentrated and heavily populated by names that are not found in broad based indices, as evidenced by its high active share relative to the MSCI All Country World ex US Index. The current portfolio offers very attractive valuations relative to the index, as well as exposure to numerous event-driven/special situation investments with low correlation to the market.
THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND’S PERFORMANCE AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS, A GUARANTEE OF FUTURE RESULTS NOR INVESTMENT ADVICE. VIEWS EXPRESSED ARE THOSE OF THE INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO’S HOLDINGS, THE FUND’S PERFORMANCE, AND THE INVESTMENT TEAM’S VIEWS ARE AS OF OCTOBER 31, 2016, AND ARE SUBJECT TO CHANGE.
The Fund’s performance may be influenced by a foreign country’s political, social and economic situation. Other risks include currency fluctuations, less liquidity, lack of efficient trading markets, and different auditing and legal standards. These risks may result in more volatility for the Fund. These and other risks are described more fully in the Fund’s prospectus.
Third Avenue International Value Fund is offered by prospectus only. The prospectus contains more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Past performance is no guarantee of future
22 |
Third Avenue Trust
Third Avenue International Value Fund
Portfolio Management Discussion (continued)
October 31, 2016 (Unaudited)
results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. The Fund’s returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. Foreside Fund Services, LLC, Distributor.
If you should have any questions, or for updated information (including performance data current to the most recent month-end) or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Current performance may be lower or higher than performance quoted.
The MSCI All Country World ex US Index is an unmanaged index of common stocks and includes securities representative of the market structure of over 50 developed and emerging market countries (other than the United States) in North America, Europe, Latin America and the Asian Pacific Region. This index is not a security that can be purchased or sold, and its total returns are reflective of unmanaged portfolios. The returns include reinvestment of all distributions.
23 |
Third Avenue Trust
Third Avenue International Value Fund - Investor Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE INTERNATIONAL VALUE FUND – INVESTOR CLASS (TVIVX) AND THE MSCI ALL COUNTRY WORLD EX US INDEX FROM INCEPTION OF THE FUND (12/31/09) THROUGH OCTOBER 31, 2016
Average Annual Total Return
1 Year | 3 Years | 5 Years | Since Inception (12/31/09) |
3.44% | (5.11%) | 2.66% | 1.96% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
24 |
Third Avenue Trust
Third Avenue International Value Fund - Institutional Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE INTERNATIONAL VALUE FUND – INSTITUTIONAL CLASS (TAVIX) AND THE MSCI ALL COUNTRY WORLD EX US INDEX FOR THE TEN YEARS ENDED OCTOBER 31, 2016
Average Annual Total Return
1 Year | 3 Years | 5 Years | 10 Years |
3.66% | (4.89%) | 2.90% | 0.61% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
25 |
Third Avenue Trust
Third Avenue International Value Fund
Industry Diversification
(Unaudited)
The summary of the Fund’s investments as of October 31, 2016 is as follow:
26 |
Third Avenue Trust
Third Avenue International Value Fund
Portfolio of Investments
at October 31, 2016
Principal Amount($) | Security† | Value (Note 1) | ||||||
Corporate Bonds & Notes - 3.90% | ||||||||
Oil & Gas Production & Services - 3.90% | ||||||||
5,800,000 | Petroleum Geo-Services ASA, 7.375% due 12/15/18 (Norway) (a) | $ | 5,017,000 | |||||
Total Corporate Bonds & Notes (Cost $5,382,019) | 5,017,000 | |||||||
Shares | ||||||||
Common Stocks - 88.08% | ||||||||
Agricultural Equipment - 3.17% | ||||||||
524,200 | CNH Industrial N.V. (Netherlands) | 4,078,276 | ||||||
Automotive - 2.54% | ||||||||
45,922 | Daimler AG (Germany) | 3,272,185 | ||||||
Building & Construction Products/Services - 6.04% | ||||||||
4,277,651 | Tenon, Ltd. (New Zealand) (b) | 7,769,705 | ||||||
Capital Goods - 2.13% | ||||||||
48,132 | Nexans S.A. (France) (c) | 2,735,908 | ||||||
Corporate Services - 3.02% | ||||||||
535,024 | Prosegur Cia de Seguridad S.A. (Spain) | 3,888,094 | ||||||
Diversified Holding Companies - 8.58% | ||||||||
272,184 | CK Hutchison Holdings, Ltd. (Hong Kong) | 3,367,402 | ||||||
511,000 | Cosan Ltd., Class A (Bermuda) | 4,547,900 | ||||||
167,333 | Leucadia National Corp. | 3,124,107 | ||||||
11,039,409 | ||||||||
Engineering & Construction - 5.16% | ||||||||
666,443 | Amec Foster Wheeler PLC (United Kingdom) | 3,647,943 | ||||||
27,120 | Cie d’Entreprises CFE (Belgium) | 2,987,532 | ||||||
6,635,475 | ||||||||
Financials - 1.53% | ||||||||
331,441 | BinckBank N.V. (Netherlands) | 1,966,925 | ||||||
Food & Beverage - 1.86% | ||||||||
623,275 | C&C Group PLC (Ireland) | 2,394,712 | ||||||
Forest Products & Paper - 11.09% | ||||||||
365,600 | Interfor Corp. (Canada) (c) | 4,091,296 | ||||||
47,077,150 | Rubicon, Ltd. (New Zealand) (b)(c) | 7,742,897 | ||||||
81,043 | Weyerhaeuser Co., REIT | 2,425,617 | ||||||
14,259,810 | ||||||||
Media - 3.69% | ||||||||
234,862 | Vivendi S.A. (France) | 4,749,062 | ||||||
Metals & Mining - 11.00% | ||||||||
659,635 | Antofagasta PLC (United Kingdom) | 4,384,164 | ||||||
10,528,312 | Capstone Mining Corp. (Canada) (c) | 6,357,961 | ||||||
868,500 | Lundin Mining Corp. (Canada) (c) | 3,399,407 | ||||||
14,141,532 | ||||||||
Oil & Gas Production & Services - 4.43% | ||||||||
1,428,760 | Petroleum Geo-Services ASA (Norway) (c) | 3,844,104 | ||||||
13,899,800 | Vard Holdings, Ltd. (Singapore) (c) | 1,858,302 | ||||||
5,702,406 | ||||||||
Real Estate - 12.30% | ||||||||
1,094,650 | Atrium European Real Estate, Ltd. (Jersey) | 4,685,263 |
Shares | Security† | Value (Note 1) | ||||||
Real Estate (continued) | ||||||||
495,184 | Cheung Kong Property Holdings, Ltd. (Hong Kong) | $ | 3,668,124 | |||||
3,184,000 | Global Logistic Properties, Ltd. (Singapore) | 4,062,246 | ||||||
325,600 | Henderson Land Development Co., Ltd. (Hong Kong) | 1,929,112 | ||||||
269,578 | Millennium & Copthorne Hotels PLC (United Kingdom) | 1,481,542 | ||||||
15,826,287 | ||||||||
Retail & Restaurants - 5.56% | ||||||||
1,163,100 | Arcos Dorados Holdings, Inc., Class A (British Virgin Islands) (c) | 7,153,065 | ||||||
Transportation Infrastructure - 5.98% | ||||||||
300,051 | easyJet PLC (United Kingdom) | 3,441,263 | ||||||
4,412,345 | Santos Brasil Participacoes S.A. (Brazil) | 4,243,703 | ||||||
7,684,966 | ||||||||
Total Common Stocks (Cost $150,334,354) | 113,297,817 | |||||||
Total Investment Portfolio - 91.98% (Cost $155,716,373) | 118,314,817 | |||||||
Other Assets less Liabilities - 8.02% | 10,311,242 | |||||||
NET ASSETS - 100.00% | $ | 128,626,059 |
Notes:
(a) | Security is exempt from registration pursuant to Rule 144A under the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. |
(b) | Affiliated issuers - as defined in the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). |
(c) | Non-income producing security. |
† | U.S. issuer unless otherwise noted. |
REIT: Real Estate Investment Trust.
Country Concentration
% of Net Assets | ||||
New Zealand | 12.06 | % | ||
Canada | 10.77 | |||
United Kingdom | 10.07 | |||
Hong Kong | 6.97 | |||
Norway | 6.89 | |||
France | 5.82 | |||
British Virgin Islands | 5.56 | |||
Netherlands | 4.70 | |||
Singapore | 4.60 | |||
United States | 4.32 | |||
Jersey | 3.64 | |||
Bermuda | 3.54 | |||
Brazil | 3.30 | |||
Spain | 3.02 | |||
Germany | 2.54 | |||
Belgium | 2.32 | |||
Ireland | 1.86 | |||
Total | 91.98 | % |
The accompanying notes are an integral part of the financial statements.
27 |
Third Avenue Trust
Statement of Assets and Liabilities
As of October 31, 2016
Small-Cap | Real Estate | International | |||||||||||||||
Value Fund | Value Fund | Value Fund | Value Fund | ||||||||||||||
Assets: | |||||||||||||||||
Investments at value (Notes 1 and 5): | |||||||||||||||||
Unaffiliated issuers† | $ | 1,082,044,570 | $ | 284,635,820 | $ | 1,613,691,612 | $ | 102,802,215 | |||||||||
Affiliated issuers‡ | 44,608,303 | — | 141,023,089 | 15,512,602 | |||||||||||||
Total investments# | 1,126,652,873 | 284,635,820 | 1,754,714,701 | 118,314,817 | |||||||||||||
Cash | 54,972,339 | 12,583,729 | 71,871,385 | 8,360,875 | |||||||||||||
Dividends and interest receivable | 3,140,541 | 366,320 | 1,612,572 | 2,198,605 | |||||||||||||
Receivable for securities sold | 3,516,685 | 2,386,851 | 57,864,306 | 129,652 | |||||||||||||
Restricted cash pledged to counterparties for collateral management | — | — | 650,000 | — | |||||||||||||
Receivables for fund shares sold | 23,591 | 7,133 | 545,193 | 2,220 | |||||||||||||
Receivable from broker | 430,000 | — | — | — | |||||||||||||
Foreign currency at value^ | — | — | 286 | 4,193 | |||||||||||||
Purchased foreign currency options* | — | — | 209,532 | — | |||||||||||||
Other assets | 84,753 | 25,426 | 136,535 | 19,034 | |||||||||||||
Total assets | 1,188,820,782 | 300,005,279 | 1,887,604,510 | 129,029,396 | |||||||||||||
Liabilities: | |||||||||||||||||
Payable for securities purchased | 29,312,635 | 2,175,857 | 40,783,017 | — | |||||||||||||
Payable for fund shares redeemed | 1,047,437 | 127,450 | 3,004,993 | 136,342 | |||||||||||||
Restricted cash received from counterparty for collateral management | — | — | 342,000 | — | |||||||||||||
Payable to Adviser (Note 3) | 900,810 | 212,671 | 1,431,776 | 110,397 | |||||||||||||
Unrealized depreciation on forward foreign currency contracts | — | — | 611,020 | — | |||||||||||||
Payable for shareholder servicing fees (Note 3) | 110,445 | 25,873 | 200,187 | 10,705 | |||||||||||||
Distribution fees payable (Note 6) | 9,360 | 8,260 | 52,565 | 3,802 | |||||||||||||
Payables to trustees and officers | 24,685 | 5,115 | 44,943 | 2,707 | |||||||||||||
Accrued expenses | 308,869 | 139,032 | 315,033 | 132,134 | |||||||||||||
Payable to broker | — | — | 430,000 | — | |||||||||||||
Taxes payable | 442,940 | — | — | 7,250 | |||||||||||||
Total liabilities | 32,157,181 | 2,694,258 | 47,215,534 | 403,337 | |||||||||||||
Net assets | $ | 1,156,663,601 | $ | 297,311,021 | $ | 1,840,388,976 | $ | 128,626,059 | |||||||||
Summary of net assets: | |||||||||||||||||
Capital stock, $0.001 par value, | $ | 951,587,402 | $ | 214,109,669 | $ | 1,406,647,060 | $ | 176,025,701 | |||||||||
Accumulated undistributed net investment income/(distributions in excess of net investment income) | 22,343,547 | (127,569 | ) | 7,843,367 | (2,119,875 | ) | |||||||||||
Accumulated net realized gain/(loss) on investments and foreign currency transactions | 78,256,332 | 24,913,352 | 10,977,096 | (7,576,765 | ) | ||||||||||||
Net unrealized appreciation/(depreciation) on investments and translation of foreign currency denominated assets and liabilities | 104,476,320 | 58,415,569 | 414,921,453 | (37,703,002 | ) | ||||||||||||
Net assets applicable to capital shares outstanding | $ | 1,156,663,601 | $ | 297,311,021 | $ | 1,840,388,976 | $ | 128,626,059 | |||||||||
Investor Class | |||||||||||||||||
Net assets | $ | 14,414,635 | $ | 5,145,421 | $ | 243,501,918 | $ | 4,465,343 | |||||||||
Outstanding shares of beneficial interest, unlimited number of shares authorized | 282,001 | 247,785 | 8,251,884 | 286,394 | |||||||||||||
Net asset value, offering and redemption price per share± | $ | 51.12 | $ | 20.77 | $ | 29.51 | $ | 15.59 | |||||||||
Institutional Class | |||||||||||||||||
Net assets | $ | 1,142,248,966 | $ | 292,165,600 | $ | 1,596,887,058 | $ | 124,160,716 | |||||||||
Outstanding shares of beneficial interest, unlimited number of shares authorized | 22,299,198 | 13,929,311 | 53,720,436 | 7,962,485 | |||||||||||||
Net asset value, offering and redemption price per share± | $ | 51.22 | $ | 20.97 | $ | 29.73 | $ | 15.59 | |||||||||
† | Cost of unaffiliated issuers | $ | 926,726,930 | $ | 226,163,129 | $ | 1,237,527,061 | $ | 134,577,675 | ||||||||
‡ | Cost of affiliated issuers | $ | 95,393,999 | $ | — | $ | 100,468,719 | $ | 21,138,698 | ||||||||
# | Total cost | $ | 1,022,120,929 | $ | 226,163,129 | $ | 1,337,995,780 | $ | 155,716,373 | ||||||||
^ | Cost of foreign currency | $ | — | $ | — | $ | 286 | $ | 4,191 | ||||||||
* | Cost of purchased foreign currency options | $ | — | $ | — | $ | 1,282,500 | $ | — | ||||||||
± | Redemption price is gross of redemption fees (Note 7) |
The accompanying notes are an integral part of the financial statements.
28 |
Third Avenue Trust
Statement of Operations
For the Year Ended October 31, 2016
Small-Cap | Real Estate | International | |||||||||||||||
Value Fund | Value Fund | Value Fund | Value Fund | ||||||||||||||
Investment Income: | |||||||||||||||||
Dividends - unaffiliated issuers* | $ | 27,820,841 | $ | 5,680,483 | $ | 38,261,493 | $ | 2,540,738 | |||||||||
Dividends - affiliated issuers** (Note 5) | — | — | 314,389 | 324,310 | |||||||||||||
Interest - unaffiliated issuers | 320,684 | — | 13,319 | 623,224 | |||||||||||||
Interest - payment-in-kind unaffiliated issuers (Note 1) | — | — | 316,753 | — | |||||||||||||
Interest - payment-in-kind affiliated issuers (Notes 1 and 5) | 1,389,417 | — | — | — | |||||||||||||
Other income | 102,435 | — | 72,315 | — | |||||||||||||
Total investment income | 29,633,377 | 5,680,483 | 38,978,269 | 3,488,272 | |||||||||||||
Expenses: | |||||||||||||||||
Investment advisory fees (Note 3) | 11,592,864 | 2,847,626 | 20,816,643 | 1,715,991 | |||||||||||||
Shareholder servicing fees (Note 3) | 1,309,999 | 338,999 | 2,600,001 | 162,999 | |||||||||||||
Auditing and tax fees | 153,231 | 82,732 | 102,486 | 82,389 | |||||||||||||
Transfer agent fees | 536,002 | 228,420 | 357,002 | 184,002 | |||||||||||||
Reports to shareholders | 163,999 | 40,501 | 343,000 | 21,999 | |||||||||||||
Accounting fees | 135,098 | 55,359 | 224,801 | 69,307 | |||||||||||||
Administration fees (Note 3) | 70,846 | 17,402 | 127,213 | 7,551 | |||||||||||||
Custodian fees | 64,208 | 9,729 | 290,812 | 36,671 | |||||||||||||
Trustees’ and officers’ fees and expenses | 250,379 | 59,323 | 488,396 | 26,299 | |||||||||||||
Insurance | 207,288 | 50,671 | 388,266 | 23,391 | |||||||||||||
Legal fees | 110,999 | 25,999 | 221,999 | 10,401 | |||||||||||||
Distribution fees (Note 6) | 44,865 | 15,282 | 789,506 | 11,341 | |||||||||||||
Registration and filing fees | 44,265 | 35,861 | 89,688 | 37,465 | |||||||||||||
Miscellaneous | 143,000 | 24,500 | 177,208 | 85,234 | |||||||||||||
Total expenses | 14,827,043 | 3,832,404 | 27,017,021 | 2,475,040 | |||||||||||||
Less: Expenses waived (Note 3) | — | (171,158 | ) | — | (538,118 | ) | |||||||||||
Expenses reduced by custodian fee expense offset arrangement (Note 3) | (35,208 | ) | (7,330 | ) | (41,814 | ) | (3,671 | ) | |||||||||
Net expenses | 14,791,835 | 3,653,916 | 26,975,207 | 1,933,251 | |||||||||||||
Net investment income | 14,841,542 | 2,026,567 | 12,003,062 | 1,555,021 | |||||||||||||
Realized and unrealized gain/(loss) on investments, written options, and foreign currency transactions: | |||||||||||||||||
Net realized gain/(loss) on investments - unaffiliated issuers | 48,428,014 | 27,350,846 | 33,393,933 | (8,467,404 | ) | ||||||||||||
Net realized gain on investments - affiliated issuers | 6,901 | — | 14,634 | 2,251,468 | |||||||||||||
Net realized gain on written equity options | 92,481 | — | — | — | |||||||||||||
Net realized gain/(loss) on foreign currency transactions | (118,174 | ) | 142 | 5,963,883 | (102,974 | ) | |||||||||||
Net change in unrealized appreciation/(depreciation) on investments | (64,049,183 | ) | (13,772,358 | ) | (133,664,849 | ) | 4,080,231 | ||||||||||
Net change in unrealized appreciation on written equity options | 666 | — | — | — | |||||||||||||
Net change in unrealized appreciation/(depreciation) on translation of other assets and liabilities denominated in foreign currency | (13,350 | ) | (5,168 | ) | (4,591,822 | ) | 26,723 | ||||||||||
Net change in unrealized appreciation on deferred taxes | — | — | — | 5,862 | |||||||||||||
Net gain/(loss) on investments and foreign currency transactions | (15,652,645 | ) | 13,573,462 | (98,884,221 | ) | (2,206,094 | ) | ||||||||||
Net increase/(decrease) in net assets resulting from operations | $ | (811,103 | ) | $ | 15,600,029 | $ | (86,881,159 | ) | $ | (651,073 | ) | ||||||
* | Net of foreign withholding taxes of | $ | 977,717 | $ | — | $ | 1,828,578 | $ | 190,566 | ||||||||
** | Net of foreign withholding taxes of | $ | — | $ | — | $ | 55,480 | $ | 57,231 |
The accompanying notes are an integral part of the financial statements.
29 |
Third Avenue Trust
Statement of Changes in Net Assets
Value Fund | Small-Cap Value Fund | |||||||||||||||||||
For the Year | For the Year | For the Year | For the Year | |||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||
October 31, 2016 | October 31, 2015 | October 31, 2016 | October 31, 2015 | |||||||||||||||||
Operations: | ||||||||||||||||||||
Net investment income/(loss) | $ | 14,841,542 | $ | 14,497,298 | $ | 2,026,567 | $ | (776,245 | ) | |||||||||||
Net realized gain | 48,409,222 | 115,378,820 | 27,350,988 | 50,575,553 | ||||||||||||||||
Net change in unrealized appreciation/(depreciation) | (64,061,867 | ) | (193,686,655 | ) | (13,777,526 | ) | (52,752,310 | ) | ||||||||||||
Net increase/(decrease) in net assets resulting from operations | (811,103 | ) | (63,810,537 | ) | 15,600,029 | (2,953,002 | ) | |||||||||||||
Dividends and Distributions to Shareholders from: | ||||||||||||||||||||
Net investment income: | ||||||||||||||||||||
Investor Class | (309,798 | ) | (1,186,004 | ) | — | — | ||||||||||||||
Institutional Class | (22,539,852 | ) | (78,815,872 | ) | — | — | ||||||||||||||
Net realized gains: | ||||||||||||||||||||
Investor Class | (1,659,569 | ) | (603,699 | ) | (1,115,615 | ) | (2,033,716 | ) | ||||||||||||
Institutional Class | (96,040,894 | ) | (37,196,364 | ) | (46,384,578 | ) | (98,965,533 | ) | ||||||||||||
Decrease in net assets from dividends and distributions | (120,550,113 | ) | (117,801,939 | ) | (47,500,193 | ) | (100,999,249 | ) | ||||||||||||
Capital Share Transactions: | ||||||||||||||||||||
Proceeds from sale of shares | 17,208,028 | 38,010,116 | 6,657,754 | 13,806,220 | ||||||||||||||||
Net asset value of shares issued in reinvestment of dividends and distributions | 116,333,170 | 109,844,922 | 46,419,821 | 97,559,755 | ||||||||||||||||
Redemption fees | 8,925 | 8,120 | 1,725 | 1,757 | ||||||||||||||||
Cost of shares redeemed | (541,257,635 | ) | (446,008,324 | ) | (121,688,598 | ) | (129,545,870 | ) | ||||||||||||
Net decrease in net assets resulting from capital share transactions | (407,707,512 | ) | (298,145,166 | ) | (68,609,298 | ) | (18,178,138 | ) | ||||||||||||
Net decrease in net assets | (529,068,728 | ) | (479,757,642 | ) | (100,509,462 | ) | (122,130,389 | ) | ||||||||||||
Net assets at beginning of period | 1,685,732,329 | 2,165,489,971 | 397,820,483 | 519,950,872 | ||||||||||||||||
Net assets at end of period* | $ | 1,156,663,601 | $ | 1,685,732,329 | $ | 297,311,021 | $ | 397,820,483 | ||||||||||||
* Including accumulated undistributed net investment income/(distributions in excess of net investment income) of | $ | 22,343,547 | $ | 24,844,336 | $ | (127,569 | ) | $ | (3,626,380 | ) |
The accompanying notes are an integral part of the financial statements.
30 |
Third Avenue Trust
Statement of Changes in Net Assets
Real Estate Value Fund | International Value Fund | |||||||||||||||||||
For the Year | For the Year | For the Year | For the Year | |||||||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||||||
October 31, 2016 | October 31, 2015 | October 31, 2016 | October 31, 2015 | |||||||||||||||||
Operations: | ||||||||||||||||||||
Net investment income | $ | 12,003,062 | $ | 3,441,088 | $ | 1,555,021 | $ | 2,100,564 | ||||||||||||
Net realized gain/(loss) | 39,372,450 | 170,690,075 | (6,318,910 | ) | 14,735,072 | |||||||||||||||
Net change in unrealized appreciation/(depreciation) | (138,256,671 | ) | (136,963,908 | ) | 4,112,816 | (33,208,724 | ) | |||||||||||||
Net increase/(decrease) in net assets resulting from operations | (86,881,159 | ) | 37,167,255 | (651,073 | ) | (16,373,088 | ) | |||||||||||||
Dividends and Distributions to Shareholders from: | ||||||||||||||||||||
Net investment income: | ||||||||||||||||||||
Investor Class | (1,877,632 | ) | (5,176,771 | ) | — | (704,920 | ) | |||||||||||||
Institutional Class | (19,925,485 | ) | (44,946,068 | ) | (331,431 | ) | (21,445,285 | ) | ||||||||||||
Net realized gains: | ||||||||||||||||||||
Investor Class | (19,638,175 | ) | (7,373,691 | ) | (76,680 | ) | — | |||||||||||||
Institutional Class | (132,429,662 | ) | (55,424,653 | ) | (2,282,943 | ) | — | |||||||||||||
Decrease in net assets from dividends and distributions | (173,870,954 | ) | (112,921,183 | ) | (2,691,054 | ) | (22,150,205 | ) | ||||||||||||
Capital Share Transactions: | ||||||||||||||||||||
Proceeds from sale of shares | 304,661,847 | 1,052,314,450 | 4,242,388 | 10,309,129 | ||||||||||||||||
Net asset value of shares issued in reinvestment of dividends and distributions | 164,892,407 | 106,285,274 | 2,618,813 | 21,124,596 | ||||||||||||||||
Redemption fees | 105,529 | 83,278 | 4,198 | 9,521 | ||||||||||||||||
Cost of shares redeemed | (1,833,310,328 | ) | (852,820,440 | ) | (76,397,119 | ) | (143,183,983 | ) | ||||||||||||
Net increase/(decrease) in net assets resulting from capital share transactions | (1,363,650,545 | ) | 305,862,562 | (69,531,720 | ) | (111,740,737 | ) | |||||||||||||
Net increase/(decrease) in net assets | (1,624,402,658 | ) | 230,108,634 | (72,873,847 | ) | (150,264,030 | ) | |||||||||||||
Net assets at beginning of period | 3,464,791,634 | 3,234,683,000 | 201,499,906 | 351,763,936 | ||||||||||||||||
Net assets at end of period* | $ | 1,840,388,976 | $ | 3,464,791,634 | $ | 128,626,059 | $ | 201,499,906 | ||||||||||||
* Including accumulated undistributed net investment income/(distributions in excess of net investment income) of | $ | 7,843,367 | $ | 2,348,429 | $ | (2,119,875 | ) | $ | (3,143,658 | ) |
The accompanying notes are an integral part of the financial statements.
31 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Value Fund | |||||||||||||||||||||||||
Years Ended October 31, | |||||||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||
Investor Class: | |||||||||||||||||||||||||
Net asset value, beginning of period | $ | 54.22 | $ | 59.54 | $ | 57.73 | $ | 48.47 | $ | 44.00 | |||||||||||||||
Income/(loss) from investment operations: | |||||||||||||||||||||||||
Net investment income@ | 0.41 | ‡ | 0.29 | 1.39 | ± | 0.61 | ** | 0.27 | |||||||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized) | 0.38 | 1 | (2.46 | )1 | 2.22 | 1 | 9.89 | 1 | 4.99 | 2 | |||||||||||||||
Total from investment operations | 0.79 | (2.17 | ) | 3.61 | 10.50 | 5.26 | |||||||||||||||||||
Less dividends and distributions to shareholders: | |||||||||||||||||||||||||
Dividends from net investment income | (0.61 | ) | (2.09 | ) | (1.80 | ) | (1.24 | ) | (0.79 | ) | |||||||||||||||
Distributions from net realized gain | (3.28 | ) | (1.06 | ) | — | — | — | ||||||||||||||||||
Total dividends and distributions | (3.89 | ) | (3.15 | ) | (1.80 | ) | (1.24 | ) | (0.79 | ) | |||||||||||||||
Net asset value, end of period | $ | 51.12 | $ | 54.22 | $ | 59.54 | $ | 57.73 | $ | 48.47 | |||||||||||||||
Total return3 | 1.74 | % | (3.90 | %) | 6.45 | % | 22.07 | % | 12.36 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 14,415 | $ | 28,963 | $ | 33,936 | $ | 36,811 | $ | 25,796 | |||||||||||||||
Ratio of expenses to average net assets | |||||||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.40 | % | 1.34 | % | 1.33 | % | 1.35 | % | 1.36 | % | |||||||||||||||
After fee waivers/expense offset arrangement/recovery4 | 1.39 | % | 1.34 | % | 1.32 | % | 1.35 | %† | 1.40 | %† | |||||||||||||||
Ratio of net investment income to average net assets | 0.83 | %‡ | 0.52 | % | 2.36 | %± | 1.15 | %** | 0.61 | % | |||||||||||||||
Portfolio turnover rate | 17 | % | 24 | % | 31 | % | 21 | % | 16 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Includes redemption fees of $0.01 per share. |
3 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
4 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.40%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects a special dividend received during the period which amounted to $0.19 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.43%. |
± | Investment income per share reflects special dividends received during the period which amounted to $0.41 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 1.67%. |
** | Investment income per share reflects a special dividend received during the period which amounted to $0.44 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.33%. |
† | The Adviser recovered a portion of its previously waived fees. |
The accompanying notes are an integral part of the financial statements.
32 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Institutional Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 54.35 | $ | 59.69 | $ | 57.86 | $ | 48.53 | $ | 44.08 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income@ | 0.57 | ‡ | 0.43 | 1.53 | ± | 0.77 | ** | 0.37 | ||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | 0.35 | (2.46 | ) | 2.23 | 9.87 | 4.98 | ||||||||||||||
Total from investment operations | 0.92 | (2.03 | ) | 3.76 | 10.64 | 5.35 | ||||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | (0.77 | ) | (2.25 | ) | (1.93 | ) | (1.31 | ) | (0.90 | ) | ||||||||||
Distributions from net realized gain | (3.28 | ) | (1.06 | ) | — | — | — | |||||||||||||
Total dividends and distributions | (4.05 | ) | (3.31 | ) | (1.93 | ) | (1.31 | ) | (0.90 | ) | ||||||||||
Net asset value, end of period | $ | 51.22 | $ | 54.35 | $ | 59.69 | $ | 57.86 | $ | 48.53 | ||||||||||
Total return2 | 2.00 | % | (3.64 | %) | 6.70 | % | 22.40 | % | 12.61 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 1,142,249 | $ | 1,656,769 | $ | 2,131,554 | $ | 2,594,637 | $ | 2,601,961 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.15 | % | 1.09 | % | 1.08 | % | 1.10 | % | 1.11 | % | ||||||||||
After fee waivers/expense offset arrangement/recovery3 | 1.14 | % | 1.09 | % | 1.07 | % | 1.10 | %† | 1.15 | %† | ||||||||||
Ratio of net investment income to average net assets | 1.16 | %‡ | 0.76 | % | 2.61 | %± | 1.45 | %** | 0.83 | % | ||||||||||
Portfolio turnover rate | 17 | % | 24 | % | 31 | % | 21 | % | 16 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.15%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects a special dividend received during the period which amounted to $0.19 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.76%. |
± | Investment income per share reflects special dividends received during the period which amounted to $0.41 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 1.92%. |
** | Investment income per share reflects a special dividend received during the period which amounted to $0.44 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.63%. |
† | The Adviser recovered a portion of its previously waived fees. |
The accompanying notes are an integral part of the financial statements.
33 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Small-Cap Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Investor Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 22.28 | $ | 28.18 | $ | 28.10 | $ | 22.13 | $ | 20.25 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income/(loss)@ | 0.08 | ‡ | (0.10 | ) | (0.11 | ) | 0.06 | ** | (0.04 | ) | ||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | 1.17 | (0.19 | ) | 1.96 | 6.57 | 2.01 | ||||||||||||||
Total from investment operations | 1.25 | (0.29 | ) | 1.85 | 6.63 | 1.97 | ||||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | — | — | — | (0.16 | ) | (0.02 | ) | |||||||||||||
Distributions from net realized gain | (2.76 | ) | (5.61 | ) | (1.77 | ) | (0.50 | ) | (0.07 | ) | ||||||||||
Total dividends and distributions | (2.76 | ) | (5.61 | ) | (1.77 | ) | (0.66 | ) | (0.09 | ) | ||||||||||
Net asset value, end of period | $ | 20.77 | $ | 22.28 | $ | 28.18 | $ | 28.10 | $ | 22.13 | ||||||||||
Total return2 | 6.71 | % | (1.49 | %) | 6.85 | % | 30.74 | % | 9.77 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 5,145 | $ | 9,379 | $ | 9,898 | $ | 11,995 | $ | 8,216 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.45 | % | 1.39 | % | 1.35 | % | 1.37 | % | 1.38 | % | ||||||||||
After fee waivers/expense offset arrangement/recovery3 | 1.40 | %# | 1.39 | % | 1.35 | % | 1.37 | % | 1.38 | %† | ||||||||||
Ratio of net investment income/(loss) to average net assets | 0.39 | %‡ | (0.42 | %) | (0.41 | %) | 0.25 | %** | (0.18 | %) | ||||||||||
Portfolio turnover rate | 20 | % | 29 | % | 40 | % | 39 | % | 33 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.40%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects special dividends received during the period which amounted to $0.11 per share. Excluding the special dividends, the ratio of net investment income/(loss) to average net assets would have been (0.17%). |
** | Investment income per share reflects special dividends received during the period which amounted to $0.11 per share. Excluding the special dividends, the ratio of net investment income/(loss) to average net assets would have been (0.18%). |
† | The Adviser recovered a portion of its previously waived fees. |
# | The Adviser waived a portion of its fees. |
The accompanying notes are an integral part of the financial statements.
34 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Small-Cap Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Institutional Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 22.42 | $ | 28.27 | $ | 28.16 | $ | 22.18 | $ | 20.30 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income/(loss)@ | 0.13 | ‡ | (0.04 | ) | (0.05 | ) | 0.15 | ** | 0.01 | |||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | 1.18 | (0.20 | ) | 1.97 | 6.54 | 2.01 | ||||||||||||||
Total from investment operations | 1.31 | (0.24 | ) | 1.92 | 6.69 | 2.02 | ||||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | — | — | (0.04 | ) | (0.21 | ) | (0.07 | ) | ||||||||||||
Distributions from net realized gain | (2.76 | ) | (5.61 | ) | (1.77 | ) | (0.50 | ) | (0.07 | ) | ||||||||||
Total dividends and distributions | (2.76 | ) | (5.61 | ) | (1.81 | ) | (0.71 | ) | (0.14 | ) | ||||||||||
Net asset value, end of period | $ | 20.97 | $ | 22.42 | $ | 28.27 | $ | 28.16 | $ | 22.18 | ||||||||||
Total return2 | 6.95 | % | (1.27 | %) | 7.09 | % | 31.05 | % | 9.99 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 292,166 | $ | 388,441 | $ | 510,053 | $ | 667,712 | $ | 641,684 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.21 | % | 1.14 | % | 1.10 | % | 1.12 | % | 1.13 | % | ||||||||||
After fee waivers/expense offset arrangement/recovery3 | 1.15 | %# | 1.14 | % | 1.10 | % | 1.12 | % | 1.13 | %† | ||||||||||
Ratio of net investment income/(loss) to average net assets | 0.65 | %‡ | (0.16 | %) | (0.17 | %) | 0.62 | %** | 0.07 | % | ||||||||||
Portfolio turnover rate | 20 | % | 29 | % | 40 | % | 39 | % | 33 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.15%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects special dividends received during the period which amounted to $0.11 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 0.09%. |
** | Investment income per share reflects special dividends received during the period which amounted to $0.11 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 0.19%. |
† | The Adviser recovered a portion of its previously waived fees. |
# | The Adviser waived a portion of its fees. |
The accompanying notes are an integral part of the financial statements.
35 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Real Estate Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Investor Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 31.14 | $ | 31.84 | $ | 29.40 | $ | 26.53 | $ | 21.40 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income/(loss)@ | 0.08 | ‡ | (0.04 | ) | 0.50 | ± | 0.10 | 0.16 | ||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | (0.18 | ) | 0.41 | 2.60 | 4.99 | 4.97 | ||||||||||||||
Total from investment operations | (0.10 | ) | 0.37 | 3.10 | 5.09 | 5.13 | ||||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | (0.13 | ) | (0.44 | ) | (0.26 | ) | (0.84 | ) | — | |||||||||||
Distributions from net realized gain | (1.40 | ) | (0.63 | ) | (0.40 | ) | (1.38 | ) | — | |||||||||||
Total dividends and distributions | (1.53 | ) | (1.07 | ) | (0.66 | ) | (2.22 | ) | — | |||||||||||
Net asset value, end of period | $ | 29.51 | $ | 31.14 | $ | 31.84 | $ | 29.40 | $ | 26.53 | ||||||||||
Total return2 | (0.21 | %) | 1.12 | % | 10.84 | % | 20.61 | % | 23.97 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 243,502 | $ | 438,506 | $ | 367,834 | $ | 145,169 | $ | 60,684 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.38 | % | 1.35 | % | 1.34 | % | 1.34 | % | 1.34 | % | ||||||||||
After fee waivers/expense offset arrangement/recovery3 | 1.38 | % | 1.35 | % | 1.33 | % | 1.33 | % | 1.34 | % | ||||||||||
Ratio of net investment income/(loss) to average net assets | 0.28 | %‡ | (0.11 | %) | 1.63 | %± | 0.36 | % | 0.68 | % | ||||||||||
Portfolio turnover rate | 20 | % | 17 | % | 14 | % | 13 | % | 4 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.40%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects a special dividend received during the period which amounted to $0.09 per share. Excluding the special dividend, the ratio of net investment income/(loss) to average net assets would have been (0.04%). |
± | Investment income per share reflects a special dividend received during the period which amounted to $0.06 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 1.43%. |
The accompanying notes are an integral part of the financial statements.
36 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue Real Estate Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Institutional Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 31.36 | $ | 32.05 | $ | 29.56 | $ | 26.66 | $ | 21.45 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income@ | 0.16 | ‡ | 0.04 | 0.56 | ± | 0.18 | 0.22 | |||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | (0.18 | ) | 0.41 | 2.63 | 4.99 | 4.99 | ||||||||||||||
Total from investment operations | (0.02 | ) | 0.45 | 3.19 | 5.17 | 5.21 | ||||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | (0.21 | ) | (0.51 | ) | (0.30 | ) | (0.89 | ) | — | |||||||||||
Distributions from net realized gain | (1.40 | ) | (0.63 | ) | (0.40 | ) | (1.38 | ) | — | |||||||||||
Total dividends and distributions | (1.61 | ) | (1.14 | ) | (0.70 | ) | (2.27 | ) | — | |||||||||||
Net asset value, end of period | $ | 29.73 | $ | 31.36 | $ | 32.05 | $ | 29.56 | $ | 26.66 | ||||||||||
Total return2 | 0.05 | % | 1.37 | % | 11.11 | % | 20.87 | % | 24.29 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 1,596,887 | $ | 3,026,286 | $ | 2,866,849 | $ | 2,010,557 | $ | 1,689,612 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers/expense offset arrangement/recovery | 1.13 | % | 1.10 | % | 1.09 | % | 1.09 | % | 1.09 | % | ||||||||||
After fee waivers/expense offset arrangement/recovery3 | 1.13 | % | 1.10 | % | 1.08 | % | 1.08 | % | 1.09 | % | ||||||||||
Ratio of net investment income to average net assets | 0.56 | %‡ | 0.13 | % | 1.82 | %± | 0.65 | % | 0.96 | % | ||||||||||
Portfolio turnover rate | 20 | % | 17 | % | 14 | % | 13 | % | 4 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers, expense offset arrangement and/or recovery of previously waived fees. Past performance is no guarantee of future results. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.15%. |
@ | Calculated based on the average number of shares outstanding during the period. |
‡ | Investment income per share reflects a special dividend received during the period which amounted to $0.09 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.24%. |
± | Investment income per share reflects a special dividend received during the period which amounted to $0.06 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 1.62%. |
The accompanying notes are an integral part of the financial statements.
37 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue International Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Investor Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 15.29 | $ | 17.58 | $ | 19.96 | $ | 16.14 | $ | 15.29 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income@ | 0.13 | 0.08 | 0.39 | ± | 0.25 | ** | 0.08 | |||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | 0.37 | (1.26 | ) | (2.55 | ) | 3.68 | 0.99 | |||||||||||||
Total from investment operations | 0.50 | (1.18 | ) | (2.16 | ) | 3.93 | 1.07 | |||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | — | (1.11 | ) | (0.22 | ) | (0.11 | ) | (0.22 | ) | |||||||||||
Distributions from net realized gain | (0.20 | ) | — | — | — | — | ||||||||||||||
Total dividends and distributions | (0.20 | ) | (1.11 | ) | (0.22 | ) | (0.11 | ) | (0.22 | ) | ||||||||||
Net asset value, end of period | $ | 15.59 | $ | 15.29 | $ | 17.58 | $ | 19.96 | $ | 16.14 | ||||||||||
Total return2 | 3.44 | % | (7.24 | %) | (10.96 | %) | 24.49 | % | 7.20 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 4,465 | $ | 5,977 | $ | 12,266 | $ | 35,013 | $ | 18,533 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers and expense offset arrangement | 2.04 | % | 1.86 | % | 1.71 | % | 1.69 | % | 1.69 | % | ||||||||||
After fee waivers and expense offset arrangement3, # | 1.65 | % | 1.65 | % | 1.65 | % | 1.65 | % | 1.65 | % | ||||||||||
Ratio of net investment income to average net assets | 0.90 | % | 0.50 | % | 1.99 | %± | 1.37 | %** | 0.53 | % | ||||||||||
Portfolio turnover rate | 15 | % | 25 | % | 22 | % | 11 | % | 20 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers and/or expense offset arrangement. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense offset arrangement, the total return would have been lower. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.65%. |
@ | Calculated based on the average number of shares outstanding during the period. |
± | Investment income per share reflects special dividends received during the period which amounted to $0.12 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 1.39%. |
** | Investment income per share reflects a special dividend received during the period which amounted to $0.15 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.53%. |
# | The Adviser waived a portion of its fees. |
The accompanying notes are an integral part of the financial statements.
38 |
Third Avenue Trust
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Third Avenue International Value Fund | ||||||||||||||||||||
Years Ended October 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
Institutional Class: | ||||||||||||||||||||
Net asset value, beginning of period | $ | 15.29 | $ | 17.63 | $ | 20.00 | $ | 16.16 | $ | 15.33 | ||||||||||
Income/(loss) from investment operations: | ||||||||||||||||||||
Net investment income@ | 0.16 | 0.13 | 0.43 | ± | 0.25 | ** | 0.12 | |||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | 0.37 | (1.27 | ) | (2.54 | ) | 3.74 | 0.97 | |||||||||||||
Total from investment operations | 0.53 | (1.14 | ) | (2.11 | ) | 3.99 | 1.09 | |||||||||||||
Less dividends and distributions to shareholders: | ||||||||||||||||||||
Dividends from net investment income | (0.03 | ) | (1.20 | ) | (0.26 | ) | (0.15 | ) | (0.26 | ) | ||||||||||
Distributions from net realized gain | (0.20 | ) | — | — | — | — | ||||||||||||||
Total dividends and distributions | (0.23 | ) | (1.20 | ) | (0.26 | ) | (0.15 | ) | (0.26 | ) | ||||||||||
Net asset value, end of period | $ | 15.59 | $ | 15.29 | $ | 17.63 | $ | 20.00 | $ | 16.16 | ||||||||||
Total return2 | 3.66 | % | (6.97 | %) | (10.79 | %) | 24.89 | % | 7.39 | % | ||||||||||
Ratios/Supplemental Data: | ||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 124,161 | $ | 195,523 | $ | 339,498 | $ | 1,223,107 | $ | 1,176,256 | ||||||||||
Ratio of expenses to average net assets | ||||||||||||||||||||
Before fee waivers and expense offset arrangement | 1.79 | % | 1.61 | % | 1.46 | % | 1.44 | % | 1.44 | % | ||||||||||
After fee waivers and expense offset arrangement3, # | 1.40 | % | 1.40 | % | 1.40 | % | 1.40 | % | 1.40 | % | ||||||||||
Ratio of net investment income to average net assets | 1.14 | % | 0.82 | % | 2.19 | %± | 1.40 | %** | 0.80 | % | ||||||||||
Portfolio turnover rate | 15 | % | 25 | % | 22 | % | 11 | % | 20 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers and/or expense offset arrangement. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense offset arrangement, the total return would have been lower. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 1.40%. |
@ | Calculated based on the average number of shares outstanding during the period. |
± | Investment income per share reflects special dividends received during the period which amounted to $0.12 per share. Excluding the special dividends, the ratio of net investment income to average net assets would have been 1.59%. |
** | Investment income per share reflects a special dividend received during the period which amounted to $0.15 per share. Excluding the special dividend, the ratio of net investment income to average net assets would have been 0.56%. |
# | The Adviser waived a portion of its fees. |
The accompanying notes are an integral part of the financial statements.
39 |
Third Avenue Trust
Notes to Financial Statements
October 31, 2016
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
Third Avenue Trust (the “Trust”) is an open-end, management investment company organized as a Delaware business trust pursuant to a Trust Instrument dated October 31, 1996. The Trust currently consists of the following non-diversified (within the meaning of Section 5(b)(2) of the Investment Company Act), separate investment series: Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund, and Third Avenue International Value Fund (each a “Fund” and, collectively, the “Funds”). The Trust also contains the Third Avenue Focused Credit Fund, a separate non-diversified investment series of the Trust, whose financial statements are presented separately. Third Avenue Management LLC (the “Adviser”) provides investment advisory services to each of the Funds in the Trust. The Funds seek to achieve their investment objectives by adhering to a strict value discipline when selecting securities and other instruments. Each Fund has a distinct investment approach.
Third Avenue Value Fund seeks to achieve its long-term capital appreciation objective mainly by acquiring common stocks of well-financed companies (meaning companies with high quality assets and conservative levels of liabilities) at a discount to what the Adviser believes is their intrinsic value. The Fund may invest in companies of any market capitalization. The Fund may also acquire senior securities, such as convertible securities, preferred stocks and debt instruments (including high-yield and distressed securities that may be in default and may have any or no credit rating), that the Adviser believes are undervalued. The Fund invests in both domestic and foreign securities.
Third Avenue Small-Cap Value Fund seeks to achieve its long-term capital appreciation objective mainly by acquiring equity securities, including common stocks and convertible securities, of well-financed (meaning companies with high quality assets and conservative levels of liabilities) small companies at a discount to what the Adviser believes is their intrinsic value. Under normal circumstances, the Fund expects to invest at least 80% of its net assets (plus the amount of any borrowing for investment purposes) in securities of companies that are considered small. The Fund considers a “small company” to be one whose market capitalization is within the range of capitalizations during the most recent 12-month period (as measured each calendar quarter end) of companies in the Russell 2000 Index, the S&P Small Cap 600 Index or the Dow Jones Wilshire U.S. Small-Cap Index at the time of investment (based on month-end data). The Fund may also acquire senior securities, such as preferred stocks and debt instruments (including high-yield and distressed securities that may be in default and may have any or no credit rating), that the Adviser believes are undervalued. The Fund invests in both domestic and foreign securities.
Third Avenue Real Estate Value Fund seeks to achieve its long-term capital appreciation objective primarily by investing in equity securities, including common stocks and convertible securities, of well-financed (meaning companies with high quality assets and conservative levels of liabilities) real estate and real estate-related companies, or in companies which own significant real estate assets or derive a significant portion of gross revenues or net profits from real estate-related companies at the time of investment (“real estate companies”). The Fund seeks to acquire these securities at a discount to what the Adviser believes is their intrinsic value. Under normal circumstances, at least 80% of the Fund’s net assets (plus the amount of any borrowing for investment purposes) will be invested in securities of real estate and real estate-related companies. The Fund may invest in companies of any market capitalization. The Fund may also acquire senior securities, such as preferred stocks and debt instruments (including high-yield, distressed and mortgage-backed securities that may be in default and may have any or no credit rating) of real estate companies or loans secured by real estate or real estate-related companies that the Adviser believes have above-average yield potential. The Fund invests in both domestic and foreign securities.
Third Avenue International Value Fund seeks to achieve its long-term capital appreciation objective primarily by acquiring equity securities, including common stocks and convertible securities, of well-financed companies (meaning companies with high quality assets and conservative levels of liabilities) located outside of the United States. While the Fund may invest in companies located anywhere in the world, it currently expects that most of its assets will be invested in the more developed countries and, under normal circumstances, at least 80% of its net assets (plus the amount of any borrowing for investment purposes) will be invested in securities of issuers located outside of the United States at the time of investment. The Fund may also acquire senior securities, such as preferred stocks and debt instruments (including high-yield and distressed securities that may be in default and may have any or no credit rating), that the Adviser believes are undervalued.
Because of the Funds’ disciplined and deliberate investing approach, there may be times when a Fund will have a significant cash position. A substantial cash position can adversely impact Fund performance in certain market conditions, and may make it more difficult for a Fund to achieve its investment objective.
Accounting policies:
The policies described below are followed consistently by the Funds in the preparation of their financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Trust is an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 946-Investment Companies, which is part of U.S. GAAP.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the
40 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
reported amounts and disclosures. Actual results could differ from those estimates.
Security valuation:
Generally, the Funds’ investments are valued at market value. Securities traded on a principal stock exchange, including The NASDAQ Stock Market, Inc. (“NASDAQ”), are valued at the last quoted sales price, the NASDAQ official closing price, or, in the absence of closing sales prices on that day, securities are valued at the mean between the closing bid and asked price. In accordance with procedures approved by the Trust’s Board of Trustees (the “Board”), the Funds have retained a third party provider that, under certain circumstances, applies a statistical model to provide fair value pricing for foreign equity securities with principal markets that are no longer open when a Fund calculates its net asset value (“NAV”), and certain events have occurred after the principal markets have closed but prior to the time as of which the Funds compute their NAVs. Debt instruments with maturities greater than 60 days, including floating rate loan securities, are valued on the basis of prices obtained from a pricing service approved by the Board or otherwise pursuant to policies and procedures approved by the Board. Investments in derivative instruments are valued independently by service providers or by broker quotes based on pricing models. Short-term cash investments are valued at cost, plus accrued interest, which approximates market value. Short-term debt securities with 60 days or less to maturity may be valued at amortized cost.
The Adviser has established a Valuation Committee (the “Committee”) which is responsible for overseeing the pricing and valuation of all securities held in the Funds. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value determinations (and oversight of third parties used in the valuation process determinations), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
Securities for which market quotations are not readily available are valued at “fair value”, as determined in good faith by the Committee as authorized by the Board, under procedures established by the Board. At October 31, 2016, such securities had a total fair value of $17,415,002 or 1.51% of net assets of Third Avenue Value Fund, and $3,497,959 or 0.19% of net assets of Third Avenue Real Estate Value Fund. There were no fair valued securities for Third Avenue Small-Cap Value Fund and Third Avenue International Value Fund at October 31, 2016. Among the factors that may be considered by the Committee in determining fair value are: prior trades in the security in question, trades in similar securities of the same or other issuers, the type of security, trading in marketable securities of the same issuer, the financial condition of the issuer, comparable multiples of similar issuers, the operating results of the issuer and liquidation value of the issuer. See Fair Value Measurements below for additional detail on fair value measurements for financial reporting purposes. The fair values determined in accordance with these procedures may differ significantly from the amounts which would be realized upon disposition of the securities.
Fair value measurements:
In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the Funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. Fair value is defined as the price that a Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment under current market conditions. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
• Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access at the measurement date;
• Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active;
• Level 3 – Significant unobservable inputs (including the Funds’ own assumptions in determining the fair value of investments)
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input both individually and in aggregate that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Funds. The Funds consider observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
The Funds use valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
41 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
The following are certain inputs and techniques that the Funds generally use to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with U.S. GAAP.
Equity Securities (Common Stocks, Preferred Stocks, and Warrants)—Equity securities traded in inactive markets and certain foreign equity securities are valued using inputs which include broker-dealer quotes, recently executed transactions adjusted for changes in the benchmark index, or evaluated price quotes received from independent pricing services or brokers that take into account the integrity of the market sector and issuer, the individual characteristics of the security, and information received from broker-dealers and other market sources pertaining to the issuer or security. To the extent that these inputs are observable, the values of equity securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
U.S. Government Obligations—U.S. Government obligations are valued by independent pricing services based on pricing models that evaluate the mean between the most recently quoted bid and ask price. The models also take into consideration data received from active market makers and broker-dealers, yield curves, and the spread over comparable U.S. Government issues. The spreads change daily in response to market conditions and are generally obtained from the new issue market and broker-dealer sources. To the extent that these inputs are observable, the values of U.S. Government obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Corporate Bonds & Notes—Corporate bonds and notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services or brokers using various inputs and techniques, which include broker-dealer quotations, live trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services or brokers based primarily on broker-dealer quotations from relevant market makers and recently executed transactions in securities of the issuer or comparable issuers. The broker-dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed bonds and sector specific trends. To the extent that these inputs are observable, the values of corporate bonds and notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Forward Foreign Currency Contracts—Forward foreign currency contracts are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, actual trading information and foreign currency exchange rates gathered from leading market makers and foreign currency exchange trading centers throughout the world. To the extent that these inputs are observable, the values of forward foreign currency contracts are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Term Loans—Term loans are valued by independent pricing services based on the average of evaluated quoted prices received from multiple dealers or valued relative to other benchmark securities when broker-dealer quotes are unavailable. Inputs may include quoted prices for similar investments in active markets, interest rates, coupon rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which is then discounted to calculate fair values. To the extent that these inputs are observable, the values of term loans are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Options (Written and Purchased)—Options are valued by independent pricing services or by brokers based on pricing models that take into account, among other factors, foreign exchange rate, time until expiration, and volatility of the underlying foreign currency security. To the extent that these inputs are observable, the values of options are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
42 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
The following is a Summary by Level of Inputs used to value the Funds’ investments as of October 31, 2016:
Third Avenue Value Fund | Third Avenue Small-Cap Value Fund | Third Avenue Real Estate Value Fund | Third Avenue International Value Fund | |||||||||||||
Level 1: Quoted Prices† | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Common Stocks & Warrants: | ||||||||||||||||
Consumer Products | $ | 79,006,151 | $ | — | $ | — | $ | — | ||||||||
Diversified Holding Companies | 119,078,900 | — | — | 11,039,409 | ||||||||||||
Retail-Building Products | — | — | 35,673,079 | — | ||||||||||||
Other** | 886,155,945 | 281,359,945 | 1,579,073,529 | 94,488,703 | ||||||||||||
Total for Level 1 Securities | 1,084,240,996 | 281,359,945 | 1,614,746,608 | 105,528,112 | ||||||||||||
Level 2: Other Significant Observable Inputs† | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Building & Construction Products/Services | — | — | — | 7,769,705 | ||||||||||||
Diversified Holding Companies | — | 3,275,875 | — | — | ||||||||||||
Retail-Building Products | — | — | 6,636,922 | — | ||||||||||||
Corporate Bonds & Notes | — | — | — | 5,017,000 | ||||||||||||
Purchased Options: | ||||||||||||||||
Foreign Currency Call Options | — | — | 209,532 | — | ||||||||||||
Short-Term Investments: | ||||||||||||||||
U.S. Government Obligations | 24,996,875 | — | — | — | ||||||||||||
Total for Level 2 Securities | 24,996,875 | 3,275,875 | 6,846,454 | 12,786,705 | ||||||||||||
Level 3: Significant Unobservable Inputs | ||||||||||||||||
Investments in Securities: | ||||||||||||||||
Common Stocks: | ||||||||||||||||
Consumer Products | — | * | — | — | — | |||||||||||
Limited Partnerships: | ||||||||||||||||
Insurance & Reinsurance | 12,217 | — | — | — | ||||||||||||
Preferred Stocks: | ||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | — | 36,079,757 | — | ||||||||||||
Corporate Bonds & Notes | 17,402,785 | — | — | — | ||||||||||||
Term Loans | — | — | 3,497,959 | — | ||||||||||||
Private Equities: | ||||||||||||||||
U.S. Real Estate Operating Companies | — | — | 93,753,455 | — | ||||||||||||
Total for Level 3 Securities | 17,415,002 | — | 133,331,171 | — | ||||||||||||
Total Value of Investments | $ | 1,126,652,873 | $ | 284,635,820 | $ | 1,754,924,233 | $ | 118,314,817 | ||||||||
Investments in Other Financial Instruments: | ||||||||||||||||
Level 2: Other Significant Observable Inputs | ||||||||||||||||
Forward Foreign Currency Contracts - Liabilities | $ | — | $ | — | $ | (611,020 | ) | $ | — | |||||||
Total Value or Appreciation/(Depreciation) of Other Financial Instruments | $ | — | $ | — | $ | (611,020 | ) | $ | — |
† | The value of securities that were transferred from Level 2 to Level 1 for Third Avenue International Value Fund was $12,691,710. The transfer was due to the availability of quoted prices in active markets at period end. |
* | Investments fair valued at zero. |
** | Please refer to the Portfolios of Investments for industry specifics of the portfolio holdings. |
Transfers from Level 1 to Level 2, or from Level 2 to Level 1, are recorded utilizing values as of the beginning of the period.
43 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
Third Avenue Value Fund | ||||||||||||||||
Common Stocks | Corporate Bonds & Notes | Limited Partnerships | Total | |||||||||||||
Balance as of 10/31/15 (fair value) | ||||||||||||||||
Consumer Products | $ | — | * | $ | 15,069,133 | $ | — | $ | 15,069,133 | |||||||
Financial Insurance | 389,302 | — | — | 389,302 | ||||||||||||
Insurance & Reinsurance | — | — | 34,315 | 34,315 | ||||||||||||
Payment-in-kind | ||||||||||||||||
Consumer Products | — | 1,389,417 | — | 1,389,417 | ||||||||||||
Sales | ||||||||||||||||
Financial Insurance | (595,147 | ) | — | — | (595,147 | ) | ||||||||||
Net change in unrealized gain/(loss) | ||||||||||||||||
Consumer Products | — | 944,235 | — | 944,235 | ||||||||||||
Financial Insurance | 37,323,211 | — | — | 37,323,211 | ||||||||||||
Insurance & Reinsurance | — | — | (22,098 | ) | (22,098 | ) | ||||||||||
Net realized gain/(loss) | ||||||||||||||||
Financial Insurance | (37,117,366 | ) | — | — | (37,117,366 | ) | ||||||||||
Balance as of 10/31/16 (fair value) | ||||||||||||||||
Consumer Products | — | * | 17,402,785 | — | 17,402,785 | |||||||||||
Financial Insurance | — | — | — | — | ||||||||||||
Insurance & Reinsurance | — | — | 12,217 | 12,217 | ||||||||||||
Total | $ | — | $ | 17,402,785 | $ | 12,217 | $ | 17,415,002 | ||||||||
Net change in unrealized gain/(loss) related to securities still held as of October 31, 2016: | $ | — | * | $ | 944,235 | $ | (22,098 | ) | $ | 922,137 |
* | Investments fair valued at zero. |
Third Avenue Real Estate Value Fund | ||||||||||||||||||||
Common Stocks | Preferred Stocks | Private Equities | Term Loans | Total | ||||||||||||||||
Balance as of 10/31/15 (fair value) | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | $ | — | $ | 38,086,911 | $ | — | $ | 3,213,452 | $ | 41,300,363 | ||||||||||
U.S. Real Estate Operating Companies | 19,909,988 | — | 109,980,014 | — | 129,890,002 | |||||||||||||||
Payment-in-kind | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | — | — | 316,753 | 316,753 | |||||||||||||||
Sales | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | — | — | (25,591 | ) | (25,591 | ) | |||||||||||||
Net change in unrealized gain/(loss) | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | (2,007,154 | ) | — | (247 | ) | (2,007,401 | ) | ||||||||||||
U.S. Real Estate Operating Companies | — | — | (16,226,559 | ) | — | (16,226,559 | ) | |||||||||||||
Net realized gain/(loss) | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | — | — | (6,408 | ) | (6,408 | ) | |||||||||||||
Transfer out of Level 3^ | ||||||||||||||||||||
U.S. Real Estate Operating Companies | (19,909,988 | ) | — | — | — | (19,909,988 | ) | |||||||||||||
Balance as of 10/31/16 (fair value) | ||||||||||||||||||||
Non-U.S. Real Estate Operating Companies | — | 36,079,757 | — | 3,497,959 | 39,577,716 | |||||||||||||||
U.S. Real Estate Operating Companies | — | — | 93,753,455 | — | 93,753,455 | |||||||||||||||
Total | $ | — | $ | 36,079,757 | $ | 93,753,455 | $ | 3,497,959 | $ | 133,331,171 | ||||||||||
Net change in unrealized gain/(loss) related to securities still held as of October 31, 2016: | $ | — | $ | (2,007,154 | ) | $ | (16,226,559 | ) | $ | (247 | ) | $ | (18,233,960 | ) |
^ | Transfers in/(out of) Level 3 are recorded utilizing values as of the beginning of the period. The transfers are due to increase/decrease in trading activities at period end. |
44 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Quantitative Information about Level 3 Fair Value Measurements
(amounts in thousands)
Third Avenue Value Fund | Fair Value at 10/31/16 | Valuation Technique(s) | Unobservable Inputs(s) | Range (Weighted Average) | ||||||
Corporate Bonds | $17,403 | Book Value | Restructuring value | $71.90 | ||||||
Other (a) | 12 | |||||||||
$17,415 | ||||||||||
Third Avenue Real Estate Value Fund | Fair Value at 10/31/16 | Valuation Technique(s) | Unobservable Inputs(s) | Range (Weighted Average) | ||||||
Private Equities | $93,753 | Broker Quote | # | $3.25 | ||||||
Preferred Stocks | 36,080 | Broker Quote | # | $122.40 | ||||||
Term Loans | 3,498 | Book Value | Restructuring value | $109.77-$109.78 | ||||||
$133,331 |
# | Valuation techniques and significant unobservable inputs used by third-party pricing vendors or brokers, such as those described in Note 1, were not provided to the Adviser. The appropriateness of fair values for these securities is based on results of back testing, broker due diligence, unchanged price review and consideration of macro or security specific events. |
(a) | Includes securities less than 0.50% of net assets within each respective Fund. |
The significant unobservable inputs used in the fair value measurement of the Funds’ investments are listed above. Generally, a change in the assumptions used in any input in isolation may be accompanied by a change in another input. Significant changes in any of the unobservable inputs may significantly impact the fair value measurement. The impact is based on the relationship between each unobservable input and the fair value measurement. Significant increases (decreases) in enterprise multiples may increase (decrease) the fair value measurement. Significant increases (decreases) in the discount for marketability may decrease (increase) the fair value measurement.
Security transactions and investment income:
Security transactions for financial statement purposes are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date or, for certain foreign dividends, as soon as the Funds become aware of the dividends. Interest income is determined on the basis of coupon interest accrued using the effective interest method which adjusts for amortization of premiums and accretion of discounts. Dividend income on the Statement of Operations are shown net of any foreign taxes withheld on income from foreign securities. Payments received from certain investments held by the Funds may be comprised of dividends, capital gains and return of capital. The Funds originally estimate the expected classification of such payments. These amounts may subsequently be reclassified upon receipt of information from the issuer. Realized gains and losses from securities transactions are recorded on an identified cost basis.
Foreign currency translation and foreign investments:
The books and records of the Funds are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:
• | Investments and assets and liabilities denominated in foreign currencies: At the prevailing rates of exchange on the valuation date. | |
• | Investment transactions and investment income: At the prevailing rates of exchange on the date of such transactions. |
The net assets of the Funds are presented at market values using the foreign exchange rates at the close of the period. The Funds do not generally isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the investments held.
Similarly, the Funds do not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of investments sold during the period. Accordingly, realized and unrealized foreign currency gains/(losses) are included in the reported net realized gain/(loss) and unrealized appreciation/(depreciation) on investments transactions and balances.
Net realized gains/(losses) on foreign currency transactions represent net foreign exchange gains/(losses) from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Funds’ books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains/(losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation/(depreciation) on the Statement of Assets and Liabilities. The change in net unrealized currency gains/(losses) for the period is reflected on the Statement of Operations.
Pursuant to U.S. federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are generally treated as ordinary income.
45 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Payment-in-kind securities:
The Funds may invest in PIKs. PIKs give the issuer the option at each interest payment date of making interest payments in either cash or additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds. The daily market quotations of the original bonds may include the accrued interest (referred to as a “dirty” price) and require a pro-rata adjustment from the unrealized appreciation or depreciation on investments to interest receivable on the Statement of Assets and Liabilities.
For the year ended October 31, 2016, the total in-kind payments with respect to PIK securities that were received by the Third Avenue Value Fund in the amounts of $1,389,417 or 4.69% of total investment income are shown as a separate line item on the Statement of Operations.
Term loans:
The Funds typically invest in loans which are structured and administered by a third party entity (the “Agent”) that acts on behalf of a group of lenders that make or hold interests in the loan. These securities generally pay interest at rates which are periodically pre-determined by reference to a base lending rate plus a premium. These base lending rates are generally either the lending rate offered by one or more major European banks, such as the London Interbank Offered Rate (“LIBOR”) or the prime rate offered by one or more major United States banks, or the certificate of deposit rate.
These securities are ordinarily contractually obligated to receive approval from the Agent bank and/or borrower prior to disposition. Remaining maturities of term loans may be less than the stated maturities shown as a result of contractual or optional payments by the borrower. Such prepayments cannot be predicted with certainty. The interest rate disclosed reflects the rate in effect on October 31, 2016.
Forward foreign currency contracts:
The Funds may be exposed to foreign currency risks associated with portfolio investments and therefore may use forward foreign currency contracts to hedge or manage these exposures. The Funds also may buy forward foreign currency contracts to gain exposure to currencies. Forward foreign currency contracts are valued at the forward rate and are marked-to-market daily. The change in market value is included in unrealized appreciation/(depreciation) on investments and foreign currency translations. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Funds’ portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts.
During the year ended October 31, 2016, Third Avenue Real Estate Value Fund used forward foreign currency contracts for hedging foreign currency risks.
Option contracts:
The Funds may purchase and sell (“write”) put and call options on various instruments including investments, indices, and foreign currency to manage and hedge exchange rate risks within their portfolios and also to gain long or short exposure to the underlying instruments.
An option contract gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying item at a fixed exercise price on a certain date or during a specified period. The cost of the underlying instruments acquired through the exercise of a call option is increased by the premiums paid. The proceeds from the underlying instruments sold through the exercise of a purchased put option are decreased by the premiums paid. Investments in over-the-counter option contracts require the Funds to fair value or mark-to market the options on a daily basis, which reflects the change in the market value of the contracts at the close of each day’s trading. The cost of purchased options that expire unexercised are treated by the Funds, on expiration date, as realized losses on investments or foreign currency transactions.
When the Funds write an option, an amount equal to the premium received by the Funds is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Funds, on the expiration date, as realized gains on written options or foreign currency. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Funds have a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Funds. In purchasing and writing options, the Funds bear the market risk of an unfavorable change in the price of the underlying security or the risk that the Funds may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Funds purchasing a security or currency at a price different from the current market value. The Funds may execute transactions in both listed and over-the-counter options. Listed options involve minimal counterparty risk since listed options are guaranteed against default by the exchange on which they trade. When purchasing over-the-counter options, the Funds bear the risk of economic loss from counterparty default, equal to the market value
46 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
of the option.
During the year ended October 31, 2016, Third Avenue Value Fund used purchased options on equity to gain long exposure to the underlying instruments. Third Avenue Real Estate Value Fund used purchased options on foreign currency for hedging purposes and/or to protect against losses in foreign currencies.
During the year ended October 31, 2016, Third Avenue Value Fund used written call options on equities to enhance the yield of the Fund. Third Avenue Real Estate Value Fund used written call options on foreign currency for hedging purposes. As of October 31, 2016, the Third Avenue Value Fund no longer held any written options on equities and the Third Avenue Real Estate Value Fund no longer held any written options on foreign currency.
Summary of derivatives information:
The following tables present the value of derivatives held as of October 31, 2016, by their primary underlying risk exposure and respective location on the Statements of Assets and Liabilities:
Third Avenue Real Estate Value Fund
Derivative Contract | Statement of Assets and Liabilities Location | Options | Forward Foreign Currency Contracts | |||||||
Assets: | ||||||||||
Foreign currency contracts | Purchased foreign currency options | $ | 209,532 | $ | — | |||||
Liabilities: | ||||||||||
Foreign currency contracts | Unrealized depreciation on forward foreign currency contracts | $ | — | $ | (611,020 | ) |
The following tables present the effect of derivatives on the Statement of Operations during the year ended October 31, 2016, by primary risk exposure:
Third Avenue Value Fund
Amount of Realized Gain/(Loss) on Derivatives Recognized in Income | |||||
Derivative Contract | Purchased Options | Written Options | Total | ||
Equity contracts | $(42,940)(a) | $92,481(b) | $49,541 |
Amount of Change in Unrealized Appreciation/(Depreciation) on Derivatives Recognized in Income | |||||
Derivative Contract | Written Options | ||||
Equity contracts | $666(c) |
Third Avenue Real Estate Value Fund
Amount of Realized Gain/(Loss) on Derivatives Recognized in Income | ||||||||
Derivative Contract | Purchased Options | Written Options | Forward Foreign Currency Contracts | Total | ||||
Foreign currency contracts | $(131,156)(d) | $648,855(d) | $3,809,185(d) | $4,326,884 |
Amount of Change in Unrealized Appreciation/(Depreciation) on Derivatives Recognized in Income | ||||||||
Derivative Contract | Purchased Options | Written Options | Forward Foreign Currency Contracts | Total | ||||
Foreign currency contracts | $(1,838,233)(e) | $(233,285)(e) | $(2,424,520)(e) | $(4,496,038) |
(a) | Included in “Net realized gain/(loss) on investments - unaffiliated issuers”. |
(b) | Included in “Net realized gain on written equity options”. |
(c) | Included in “Net change in unrealized appreciation on written equity options”. |
(d) | Included in “Net realized gain/(loss) on foreign currency transactions”. |
(e) | Included in “Net change in unrealized appreciation/(depreciation) on translation of other assets and liabilities denominated in foreign currency”. |
47 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Derivatives volume:
The tables below disclose the volume of the Funds’ forward foreign currency contracts and options activities during the year ended October 31, 2016 (amounts denominated in U.S. Dollars unless otherwise noted, except number of contracts). Please refer to the tables in the Summary of derivatives information for derivative-related gains and losses associated with volume activity (measured at each month-end).
Third Avenue Value Fund | Third Avenue Real Estate Value Fund | |||||||
OTC Equity Options: | ||||||||
Average Ending Value Written | 30,387 | — | ||||||
Foreign Currency Options: | ||||||||
Average Notional Balance Purchased | — | 20,769,231 | AUD | |||||
Average Notional Balance Purchased | — | 380,000,000 | ||||||
Average Notional Balance Written | — | 20,769,231 | AUD | |||||
Forward Foreign Currency Contracts: | ||||||||
Average Settlement Value Purchased | — | 956,668 | ||||||
Average Settlement Value Sold | — | 142,967,569 | ||||||
AUD: Australian Dollar |
Floating rate obligations:
The Funds may invest in debt securities with interest payments or maturity values that are not fixed, but float in conjunction with an underlying index or price. These securities may be backed by corporate issuers. The indices and prices upon which such securities can be based include interest rates and currency rates. Floating rate securities pay interest according to a coupon which is reset periodically.
Dividends and distributions to shareholders:
The amount of dividends and distributions paid to shareholders from net investment income and net realized capital gains on disposition of securities, respectively is determined in accordance with U.S. federal income tax law and regulations which may differ from U.S. GAAP. Such dividends and distributions are recorded on the ex-dividend date. The majority of dividends and capital gains distributions from a Fund may be automatically reinvested into additional shares of that Fund, based upon the discretion of the Fund’s shareholders.
Income tax information:
The Funds have complied and intend to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, and each Fund intends to distribute all of its taxable net investment income and net realized capital gains, if any, to its shareholders. Therefore, no provision for U.S. federal income taxes is included on the accompanying financial statements.
Income, including capital gains, from investments in foreign securities received by the Funds may be subject to income, withholding or other taxes imposed by foreign countries.
Management has analyzed the tax positions taken on the Funds’ U.S. federal income tax returns for all open tax years (generally the current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Funds’ financial statements. This conclusion may be subject to future review and adjustment at a later date based upon factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. The Funds are subject to possible examination by the relevant taxing authorities for tax years for which the applicable statutes of limitations have not expired.
Expense allocation:
Expenses attributable to a specific Fund are charged to that Fund. Expenses attributable to the Trust are generally allocated using the ratio of each series’ average net assets relative to the total average net assets of the Trust. Certain expenses are shared with Third Avenue Variable Series Trust, an affiliated fund group. Such costs are allocated using the ratio of the series’ average net assets relative to the total average net assets of each series of the Trust and Third Avenue Variable Series Trust.
Share class accounting:
Investment income, common expenses and realized/unrealized gains/(losses) on investments are allocated to the two classes of shares of each Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that share class.
48 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Trustees’ and officers’ fees:
The Trust does not pay any fees to its officers for their services as such, except for the Chief Compliance Officer and the Associate Director of Compliance, to whom the Trust paid $345,420, including $46,399 from Third Avenue Focused Credit Fund, for the year ended October 31, 2016. The Trust does pay, together with Third Avenue Variable Series Trust, Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) of the Trust (“independent Trustee”) a fee of $5,000 for each meeting of the Board that each independent Trustee attends, in addition to reimbursing all independent Trustees for travel and incidental expenses incurred by them in connection with their attendance at meetings. If a special meeting is required, Trustees will each receive $2,500. The Trust, together with Third Avenue Variable Series Trust, also pays each independent Trustee an annual retainer of $65,000 (the lead independent Trustee receives an additional retainer of $12,000). The Trustees on the Audit Committee each receive $2,000 for each audit committee meeting and the audit committee chairman receives an annual retainer of $6,000. Effective March 2016, one of the Trustees now acts in an Advisory Trustee capacity. The Advisory Trustee receives an annual retainer of $32,500 and a fee at $2,500 for each Board meeting the Trustee attends.
2. INVESTMENTS
Purchases and sales/conversions:
The aggregate cost of purchases and aggregate proceeds from sales and conversions of investments, excluding short-term investments, from unaffiliated and affiliated issuers (as defined in the Investment Company Act of 1940 as ownership of 5% or more of the outstanding voting securities of these issuers) for the year ended October 31, 2016 were as follows:
Purchases | Sales | |||||||
Third Avenue Value Fund | ||||||||
Affiliated | $ | 1,389,417 | $ | 82,245 | ||||
Unaffiliated | 211,339,653 | 689,840,360 | ||||||
Third Avenue Small-Cap Value Fund | ||||||||
Unaffiliated | 61,750,821 | 168,306,793 | ||||||
Third Avenue Real Estate Value Fund | ||||||||
Affiliated | 13,750,444 | 2,290,324 | ||||||
Unaffiliated | 437,169,100 | 1,740,601,643 | ||||||
Third Avenue International Value Fund | ||||||||
Affiliated | — | 11,341,811 | ||||||
Unaffiliated | 20,138,288 | 77,554,802 |
Written options transactions during the period are summarized as follows:
Third Avenue Value Fund
Equity Options Written | |||||||||
Number of Contracts | Premiums Received | ||||||||
Options outstanding at October 31, 2015 | 3,171 | $ | 214,962 | ||||||
Options written | 2,929 | 428,796 | |||||||
Options terminated in closing purchase transactions | (650 | ) | (65,500 | ) | |||||
Options exercised | (5,050 | ) | (479,778 | ) | |||||
Options expired | (400 | ) | (98,480 | ) | |||||
Options outstanding at October 31, 2016 | — | $ | — |
49 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Third Avenue Real Estate Value Fund
Currency Options Written | |||||||||
Notional Amount‡ | Premiums Received | ||||||||
Options outstanding at October 31, 2015 | 88,000,000 | $ | 304,075 | ||||||
Options written | 91,000,000 | 347,905 | |||||||
Options terminated in in closing purchase transactions | (42,000,000 | ) | (190,909 | ) | |||||
Options expired | (137,000,000 | ) | (461,071 | ) | |||||
Options outstanding at October 31, 2016 | — | $ | — |
‡ | In Australian Dollars. |
3. INVESTMENT ADVISORY SERVICES, ADMINISTRATION AND SERVICE FEE AGREEMENTS AND EXPENSE OFFSET ARRANGEMENT
Each Fund has an Investment Advisory Agreement with the Adviser for investment advice and certain management functions. The terms of the Investment Advisory Agreements provide the annual advisory fees based on the total average daily net assets for the Funds which are indicated as below. These fees are calculated daily and paid monthly.
Fund | Annual Management Fee | ||
Third Avenue Value Fund | 0.90% | ||
Third Avenue Small-Cap Value Fund | 0.90% | ||
Third Avenue Real Estate Value Fund | 0.90% | ||
Third Avenue International Value Fund | 1.25% |
Additionally, the Adviser pays certain expenses on behalf of the Funds which are partially reimbursed by the Funds, including service fees due to third parties, the compensation expense for the Funds’ Chief Compliance Officer and Associate Director of Compliance and other miscellaneous expenses. At October 31, 2016, Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund, and Third Avenue International Value Fund had amounts payable to the Adviser of $20,655, $4,680, $30,843, and $1,842 respectively, for reimbursement of expenses paid by the Adviser.
Until March 1, 2017 (subject to renewal), whenever each Fund’s normal operating expenses, including the investment advisory fee and most other operating expenses, but excluding taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items, exceeds the expense limitation based on each Fund’s average daily net assets, the Adviser has agreed to waive a portion of its advisory fees and/or reimburse each Fund in an amount equal to that excess. The expense limitations for each Fund are disclosed in its corresponding Financial Highlights. Below are the corresponding contingent liabilities to the Adviser in effect as of October 31, 2016:
Expenses Waived through Fiscal Periods ending | |||||||||||||||
October 31, 2014 | October 31, 2015 | October 31, 2016 | |||||||||||||
Subject to Repayment until October 31, | |||||||||||||||
Fund | Expiration Date | 2017 | 2018 | 2019 | |||||||||||
Third Avenue Small-Cap Value Fund | 2/28/2017 | $ | — | $ | — | $ | 171,158 | ||||||||
Third Avenue International Value Fund | 2/28/2017 | 517,819 | 547,840 | 538,118 |
The waived fees and reimbursed expenses may be paid to the Adviser during the following three-year period after the end of the fiscal year in which an expense is waived or reimbursed by the Adviser, to the extent that the payment of such fees and expenses would not cause a Fund to exceed the expense limitations.
The Trust has entered into an Administration Agreement with the Adviser pursuant to which the Adviser, as administrator, is responsible for providing various administrative services to the Trust. The Adviser has in turn entered into a Sub-Administration Agreement with BNY Mellon Investment Servicing (U.S.) Inc. (“BNY Mellon”) pursuant to which BNY Mellon provides certain of these administrative services on behalf of the Adviser. Each
50 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Fund pays the Adviser a fee calculated at an annual rate of 0.0055% of the average daily net assets of each respective Fund for such services. The Adviser pays BNY Mellon an annual sub-administration fee for sub-administration services provided to the Trust equal to $203,483, including $20,870 for Third Avenue Focused Credit Fund.
Both the Trust and the Adviser have entered into agreements with financial intermediaries to provide recordkeeping, processing, shareholder communications and other services to customers of the intermediaries investing in the Funds and have agreed to compensate the intermediaries for providing those services. Certain of those services would be provided by the Funds if the shares of each customer were registered directly with the Funds’ transfer agent. Accordingly, the Funds have agreed to reimburse a portion of the intermediary fees paid by the Adviser pursuant to provisions adopted by the Board. Each Fund pays a portion of the intermediary fees attributable to shares of the Fund not exceeding the estimated expense the Fund would have paid its transfer agent had each customer’s shares been registered directly with the transfer agent instead of held through the intermediary accounts. The Adviser pays the remainder of the fees. The fees incurred by the Funds are reflected as shareholder servicing fees in the Statements of Operations. For the year ended October 31, 2016, such fees amounted to $1,309,999 for Third Avenue Value Fund, $338,999 for Third Avenue Small-Cap Value Fund, $2,600,001 for Third Avenue Real Estate Value Fund, and $162,999 for Third Avenue International Value Fund.
The Funds have an expense offset arrangement in connection with their custodian contract. Credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds’ custodian expenses. The following amounts are the reduction of expenses due to this arrangement for the year ended October 31, 2016. These amounts are reflected as “Expenses reduced by custodian fee expense offset arrangement” in the Statements of Operations.
Fund | Custody Credit | |||
Third Avenue Value Fund | $35,208 | |||
Third Avenue Small-Cap Value Fund | 7,330 | |||
Third Avenue Real Estate Value Fund | 41,814 | |||
Third Avenue International Value Fund | 3,671 |
4. LINE OF CREDIT
During 2016, the Trust and Third Avenue Variable Series Trust were participants in a single committed, unsecured $100,000,000 line of credit with The Bank of Nova Scotia, to be used only for temporary or emergency purposes. This commitment was terminated on April 20, 2016. The interest on the loan would be calculated at a variable rate based on the LIBOR, Federal Funds or Prime Rates. A commitment fee of 0.25% per annum of the available line of credit was charged, of which each participating series of the Trust and Third Avenue Variable Series Trust paid its pro rata share, based on the ratio of its individual net assets to the net assets of all participants at the time the fee was due and payable. The fee was paid quarterly in arrears and is included in “Miscellaneous” expenses in the Statement of Operations. As of October 31, 2016, there were no loans outstanding under the line of credit for the Funds.
51 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
5. RELATED PARTY TRANSACTIONS
Investment in affiliates:
A summary of the Funds’ transactions in securities of affiliated issuers for the year ended October 31, 2016 is set forth below:
Third Avenue Value Fund
Name of Issuer: | Shares/ Principal Amount Held at Oct. 31, 2015 | Gross Purchases and Additions | Gross Sales and Reductions | Shares/ Principal Amount Held at Oct. 31, 2016 | Value at Oct. 31, 2016 | Investment Income Nov. 1, 2015- Oct. 31, 2016 | ||||||||||||||||||
Cavco Industries, Inc.* | 1,279,481 | — | 836,408 | 443,073 | $ | 40,939,945 | $ | — | ||||||||||||||||
Home Products International, Inc. | 526,368 | — | — | 526,368 | — | — | ||||||||||||||||||
Home Products International, Inc., 2nd Lien, Convertible, 6.000% Payment-in-kind Interest, due 3/20/17 | 22,814,735 | 1,389,417 | 1 | — | 24,204,15 | 2 | 17,402,785 | 1,389,417 | 1 | |||||||||||||||
Manifold Capital LLC* | 37 | — | 37 | — | — | — | ||||||||||||||||||
Tejon Ranch Co. | 1,221,894 | — | 4,100 | 1,217,794 | 27,205,518 | — | ||||||||||||||||||
Tejon Ranch Co., Warrants, expire 8/31/16* | 200,255 | — | 200,255 | 2 | — | — | — | |||||||||||||||||
Total Affiliates | $ | 85,548,248 | $ | 1,389,417 |
1 | PIK interest. |
2 | Share decrease due to corporate action. |
* | As of October 31, 2016, no longer an affiliate. |
Third Avenue Real Estate Value Fund
Name of Issuer: | Shares/ Units Held at Oct. 31, 2015 | Gross Purchases and Additions | Gross Sales and Reductions | Shares/ Units Held at Oct. 31, 2016 | Value at Oct. 31, 2016 | Investment Income Nov. 1, 2015- Oct. 31, 2016 | ||||||||||||||||||
First Industrial Realty Trust, Inc.* | 7,021,031 | — | 5,312,800 | 1,708,231 | $ | 45,114,381 | $ | — | ||||||||||||||||
FivePoint Holdings, LLC, Class A Units | 28,847,217 | — | — | 28,847,217 | 93,753,455 | — | ||||||||||||||||||
Tenon, Ltd.** | — | 4,942,453 | 1,288,462 | 3,653,991 | 6,636,922 | 314,389 | ||||||||||||||||||
Trinity Place Holdings, Inc.** | 3,369,445 | 836,841 | 1 | — | 4,206,286 | 40,632,712 | — | |||||||||||||||||
Total Affiliates | $ | 186,137,470 | $ | 314,389 |
1 | Share increase due to corporate action. |
* | As of October 31, 2016, no longer an affiliate. |
** | As of October 31, 2015, not an affiliate. |
Third Avenue International Value Fund
Name of Issuer: | Shares Held at Oct. 31, 2015 | Gross Purchases and Additions | Gross Sales and Reductions | Shares Held at Oct. 31, 2016 | Value at Oct. 31, 2016 | Investment Income Nov. 1, 2015- Oct. 31, 2016 | ||||||||||||||||||
Rubicon, Ltd. | 56,796,558 | — | 9,719,408 | 47,077,150 | $ | 7,742,897 | $ | — | ||||||||||||||||
Tenon, Ltd. | 9,750,898 | — | 5,473,247 | 4,277,651 | 7,769,705 | 324,310 | ||||||||||||||||||
Total Affiliates | $ | 15,512,602 | $ | 324,310 |
Certain employees of the Adviser serve as members of the board of directors of companies in which the Funds have investments. As a result of such service, for the year ended October 31, 2016, the Funds received the following board member fees from these companies that board members employed by the Adviser agreed to have paid directly to the benefit of the Funds. These fees are included in “Other Income” on the accompanying Statements of Operations.
Fund | Fees | |||
Third Avenue Value Fund | $ | 102,323 | ||
Third Avenue Real Estate Value Fund | 72,078 |
52 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
6. DISTRIBUTION EXPENSES
The Board has adopted a distribution plan (the “Plan”) pursuant to Rule 12b-1 under the Investment Company Act. The Plan provides that, as compensation for distribution and related services provided to Third Avenue Value Fund Investor Class (“TVFVX”), Third Avenue Small-Cap Value Fund Investor Class (“TVSVX”), Third Avenue Real Estate Value Fund Investor Class (“TVRVX”), and Third Avenue International Value Fund Investor Class (“TVIVX”), each Fund’s Investor Class accrues a fee calculated at the annual rate of 0.25% of average daily net assets of the class. Such fees may be paid to institutions that provide distribution services. The amount of fees paid during any period may be more or less than the cost of distribution and other services provided. Financial Industry Regulatory Authority rules impose a ceiling on the cumulative distribution fees paid. The Plan complies with those rules.
For the year ended October 31, 2016, distribution expenses were as follows:
Fund | Distribution Fees | |||
Third Avenue Value Fund | $ | 44,865 | ||
Third Avenue Small-Cap Value Fund | 15,282 | |||
Third Avenue Real Estate Value Fund | 789,506 | |||
Third Avenue International Value Fund | 11,341 |
7. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of each class of beneficial interest with $0.001 par value.
Transactions in capital stock of each class were as follows:
Third Avenue Value Fund
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Investor Class | Investor Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 33,327 | $ | 1,650,130 | 80,064 | $ | 4,564,619 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 39,489 | 1,943,257 | 30,896 | 1,758,912 | ||||||||||||
Shares redeemed* | (324,983 | ) | (15,414,722 | ) | (146,758 | ) | (8,205,313 | ) | ||||||||
Net decrease | (252,167 | ) | $ | (11,821,335 | ) | (35,798 | ) | $ | (1,881,782 | ) |
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Institutional Class | Institutional Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 320,705 | $ | 15,557,898 | 593,598 | $ | 33,445,497 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 2,324,998 | 114,389,913 | 1,898,244 | 108,086,010 | ||||||||||||
Shares redeemed* | (10,829,026 | ) | (525,833,988 | ) | (7,716,816 | ) | (437,794,891 | ) | ||||||||
Net decrease | (8,183,323 | ) | $ | (395,886,177 | ) | (5,224,974 | ) | $ | (296,263,384 | ) |
53 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Third Avenue Small-Cap Value Fund
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Investor Class | Investor Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 26,055 | $ | 521,081 | 97,876 | $ | 2,380,380 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 58,070 | 1,106,819 | 88,642 | 2,021,921 | ||||||||||||
Shares redeemed* | (257,343 | ) | (4,821,200 | ) | (116,738 | ) | (2,749,020 | ) | ||||||||
Net increase/(decrease) | (173,218 | ) | $ | (3,193,300 | ) | 69,780 | $ | 1,653,281 |
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Institutional Class | Institutional Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 315,774 | $ | 6,136,673 | 485,190 | $ | 11,425,840 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 2,358,829 | 45,313,002 | 4,170,137 | 95,537,834 | ||||||||||||
Shares redeemed* | (6,067,099 | ) | (116,865,673 | ) | (5,374,897 | ) | (126,795,093 | ) | ||||||||
Net decrease | (3,392,496 | ) | $ | (65,415,998 | ) | (719,570 | ) | $ | (19,831,419 | ) |
Third Avenue Real Estate Value Fund
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Investor Class | Investor Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 2,334,996 | $ | 66,856,635 | 5,862,169 | $ | 186,764,845 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 738,578 | 21,352,283 | 390,789 | 12,259,047 | ||||||||||||
Shares redeemed* | (8,903,248 | ) | (251,954,820 | ) | (3,723,575 | ) | (117,704,165 | ) | ||||||||
Net increase/(decrease) | (5,829,674 | ) | $ | (163,745,902 | ) | 2,529,383 | $ | 81,319,727 |
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Institutional Class | Institutional Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 8,221,550 | $ | 237,805,212 | 27,069,838 | $ | 865,549,605 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 4,941,140 | 143,540,124 | 2,983,065 | 94,026,227 | ||||||||||||
Shares redeemed* | (55,937,866 | ) | (1,581,249,979 | ) | (23,007,435 | ) | (735,032,997 | ) | ||||||||
Net increase/(decrease) | (42,775,176 | ) | $ | (1,199,904,643 | ) | 7,045,468 | $ | 224,542,835 |
54 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Third Avenue International Value Fund
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Investor Class | Investor Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 29,295 | $ | 412,928 | 69,961 | $ | 1,137,094 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 5,394 | 75,354 | 40,798 | 681,324 | ||||||||||||
Shares redeemed* | (139,142 | ) | (1,918,945 | ) | (417,525 | ) | (6,921,918 | ) | ||||||||
Net decrease | (104,453 | ) | $ | (1,430,663 | ) | (306,766 | ) | $ | (5,103,500 | ) |
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Institutional Class | Institutional Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 291,318 | $ | 3,829,460 | 561,097 | $ | 9,172,035 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 182,457 | 2,543,459 | 1,227,087 | 20,443,272 | ||||||||||||
Shares redeemed* | (5,300,685 | ) | (74,473,976 | ) | (8,259,316 | ) | (136,252,544 | ) | ||||||||
Net decrease | (4,826,910 | ) | $ | (68,101,057 | ) | (6,471,132 | ) | $ | (106,637,237 | ) |
* | Redemption fees are netted with redemption amounts. |
Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund, and Third Avenue International Value Fund charge a redemption fee of 1%, 1%, 1%, and 2%, respectively, for shares redeemed or exchanged for shares of another series of the Trust within 60 days or less of the purchase date.
8. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Funds’ maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred.
In 2016, the Third Avenue Focused Credit Fund became party to various derivative, securities class action and books and records lawsuits.
In 2016, the Adviser became party to various derivative and securities class action lawsuits.
9. RISKS RELATING TO CERTAIN INVESTMENTS
Foreign Securities and Emerging Markets Risk:
Foreign securities from a particular country or region may be subject to currency fluctuations and controls, or adverse political, social, economic or other developments that are unique to that particular country or region. Therefore, the prices of foreign securities in particular countries or regions may, at times, move in a different direction from those of U.S. securities. From time to time, foreign capital markets may exhibit more volatility than those in the U.S., and the securities markets of emerging market countries can be extremely volatile. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed countries, and, as a result, the securities markets of emerging market countries can be more volatile than more developed markets may be.
High Yield and Distressed Risk:
The Funds’ investments in high-yield debt securities (commonly known as “junk bonds”) and distressed securities may expose the Funds to greater risks than if the Funds only owned higher-grade securities. The value of high-yield, lower quality securities is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. The prices of high yield securities can fall in response to negative news about the issuer or its industry, or the economy in general to a greater extent than those of higher rated securities. Issuers of high-yield securities are not as strong financially as those with higher credit ratings, so the securities are usually considered speculative investments. These issuers are more vulnerable to financial setbacks and recession than are more creditworthy issuers, which may impair their ability to make interest and principal payments. The
55 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Funds may also invest in distressed securities, which the Adviser considers to be issued by companies that are, or might be, involved in reorganizations or financial restructurings, either out of court or in bankruptcy. The Funds’ investments in distressed securities typically may involve the purchase of high-yield bonds, bank debt or other indebtedness of such companies.
Debt Securities Risk:
The market value of a debt security may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. The debt securities market can be susceptible to increases in volatility and decreases in liquidity. Increases in volatility and decreases in liquidity may be caused by a rise in interest rates (or the expectation of a rise in interest rates), which are at or near historic lows in the United States and in other countries. During periods of reduced market liquidity, a Fund may not be able to readily sell debt securities at prices at or near their perceived value. If a Fund needed to sell large blocks of debt securities to meet shareholder redemption requests or to raise cash, those sales could further reduce the prices of such securities.
Prices of bonds and other debt securities tend to move inversely with changes in interest rates. Typically, a rise in rates will adversely affect debt securities and, accordingly, will cause the value of a Fund’s investments in these securities to decline. When interest rates fall, the values of already-issued securities generally rise, although investments in new securities may be at lower yields. The prices of high-yield debt securities (“junk bonds”), unlike investment grade securities, may fluctuate unpredictably and not necessarily inversely with changes in interest rates.
The rates on floating debt instruments adjust periodically with changes in market interest rates. Although these instruments are generally less sensitive to interest rate changes than fixed rate instruments, the value of floating rate loans and other floating rate securities may decline if their interest rates do not rise as quickly, or as much, as general interest rates. An unexpected increase in Fund redemption requests, including requests from shareholders who may own a significant percentage of a Fund’s shares, which may be triggered by market turmoil or an increase in interest rates, could cause the Fund to sell its holdings at a loss or at undesirable prices and adversely affect the Fund’s share price and increase the Fund’s liquidity risk, Fund expenses and/or taxable distributions. Economic and other developments can adversely affect debt securities markets.
Market Risk:
Prices of securities have historically fluctuated. The market value of a security may decline due to general market conditions that are not related to the particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. A security’s market value also may decline because of factors that affect the particular company, such as management performance, financial leverage, and reduced demand for the company’s products or services, or factors that affect the company’s industry, such as labor shortages or increased production costs and competitive conditions within an industry. The value of the Funds will similarly fluctuate and you could lose money.
Liquidity Risk:
Liquidity risk exists when particular investments are difficult to sell. The Funds may not be able to sell these investments at the best prices or at the value the Funds place on them. In such a market, the value of such investments and a Fund’s share price may fall dramatically, even during periods of declining interest rates. Investments that are illiquid or that trade in lower volumes may be more difficult to value. The market for high-yield debt securities (“junk bonds”) may be less liquid and therefore these securities may be harder to value or sell at an acceptable price, especially during times of market volatility or decline. Investments in foreign securities tend to have greater exposure to liquidity risk than U.S. securities. Liquidity can decline unpredictably in response to overall economic conditions or credit tightening. Investments in private debt instruments, restricted securities, and securities having substantial market and/or credit risk may involve greater liquidity risk.
Counterparty risk:
The Funds are exposed to counterparty risk, or the risk that an institution or other entity with which the Funds have unsettled or open transactions will default. The potential loss to the Funds could exceed the value of the financial assets recorded in the Funds’ financial statements. Financial assets, which potentially expose the Funds to counterparty risk, consist principally of cash due from counterparties and investments. The Adviser seeks to minimize the Funds’ counterparty risk by performing reviews of each counterparty and by minimizing concentration of counterparty risk by undertaking transactions with multiple customers and counterparties on recognized and reputable exchanges. Delivery of securities sold is only made once the Funds have received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.
At October 31, 2016, the Funds had counterparty concentration of credit risk primarily with Goldman, Sachs International, Morgan Stanley Capital Services LLC and UBS AG.
The Funds are party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, over-the-counter derivatives and foreign exchange contracts entered into by the Funds and those
56 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
counterparties. The ISDA Master Agreements contain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements of the Funds.
The considerations and factors surrounding the settlement of certain purchases and sales made on a delayed-delivery basis are governed by Master Securities Forward Transaction Agreements (“Master Forward Agreements”) between the Funds and select counterparties. The Master Forward Agreements maintain provisions for, among other things, initiation and confirmation, payment and transfer, events of default, termination, and maintenance of collateral.
The counterparty risk associated with certain contracts may be reduced by master netting arrangements to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Funds’ overall exposure to counterparty risk with respect to transactions subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement.
Collateral requirements:
For derivatives traded under an ISDA Master Agreement and/or Master Forward Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and the counterparty.
Cash collateral that has been pledged to cover obligations of a Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold (e.g. $500,000) before a transfer is required, which is determined at the close of business of a Fund and any additional required collateral is delivered to/pledged by a Fund on the next business day. Typically, a Fund and its counterparties are not permitted to sell, re-pledge or use the collateral they receive. To the extent amounts due to a Fund from its counterparties are not fully collateralized, contractually or otherwise, a Fund bears the risk of loss from counterparty non-performance. The Funds attempt to mitigate counterparty risk by entering into agreements only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Funds do not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities.
Third Avenue Real Estate Value Fund
At October 31, 2016, the Fund’s derivative assets and liabilities (by type) on a gross basis are as follows:
Assets | Liabilities | |||||||
Derivative Financial Instruments: | ||||||||
Options | $ | 209,532 | $ | — | ||||
Forward Foreign Currency Contracts | — | 611,020 | ||||||
Total derivative assets and liabilties in the Statement of Assets and Liabilities | 209,532 | 611,020 | ||||||
Derivatives not subject to a master netting agreement or similiar agreement (“MNA”) | — | — | ||||||
Total derivative assets and liabilities subject to a MNA | $ | 209,532 | $ | 611,020 |
The following tables present the Fund’s derivative assets by counterparty net of amounts available for offset under a MNA and net of the related collateral received by the Fund as of October 31, 2016:
Amount of | ||||||||||||||||||||
Assets | ||||||||||||||||||||
Subject to a | Derivatives | Non-cash | Cash | Net Amount | ||||||||||||||||
MNA by | Available | Collateral | Collateral | of Derivative | ||||||||||||||||
Counterparty | Counterparty | for Offset1 | Received2 | Received2 | Assets3 | |||||||||||||||
UBS AG | $ | 209,532 | $ | — | $ | — | $ | (209,532 | ) | $ | — |
1 | The amount of derviatives for offset is limited to the amount of assets and/or liabilites that are subject to a MNA. |
2 | Excess of collateral received from the individual counterparty may not be shown for financial reporting purposes. |
3 | Net amount represents the net amount receivable from the counterparty in the event of default. |
57 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
The following tables present the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of October 31, 2016:
Amount of | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||
Subject to a | Derivatives | Non-cash | Cash | Net Amount | ||||||||||||||||
MNA by | Available | Collateral | Collateral | of Derivative | ||||||||||||||||
Counterparty | Counterparty | for Offset1 | Pledged2 | Pledged2 | Liabilities3 | |||||||||||||||
Goldman Sachs International | $ | 305,498 | $ | — | $ | — | $ | (305,498 | ) | $ | — | |||||||||
Morgan Stanley Capital Services LLC | 305,522 | — | — | (305,522 | ) | — | ||||||||||||||
$ | 611,020 | $ | — | $ | — | $ | (611,020 | ) | $ | — |
1 | The amount of derviatives for offset is limited to the amount of assets and/or liabilites that are subject to a MNA. |
2 | Excess of collateral pledged to the individual counterparty may not be shown for financial reporting purposes. |
3 | Net amount represents the net amount payable to the counterparty in the event of default. |
Loans and other direct debt instruments:
The Funds may invest in loans and other direct debt instruments issued by corporate borrowers. These loans represent amounts owed to lenders or lending syndicates (loans and loan participations) or to other parties. Direct debt instruments may involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to the Fund in the event of fraud or misrepresentation. In addition, loan participations involve a risk of insolvency of the lending bank or other financial intermediary. The markets in loans are not regulated by federal securities laws or the SEC.
Cash concentration:
The Funds’ cash balances are held at a major regional U.S. bank. The Funds’ cash balances, which typically exceed Federal Deposit Insurance Corporation insurance coverage, subject the Funds to a concentration of credit risk. The Funds regularly monitor the credit ratings of this financial institution in order to mitigate the credit risk that exists with the balances in excess of insured amounts.
Off-balance sheet risk:
The Fund enters into derivatives which may represent off-balance sheet risk. Off-balance sheet risk exists when the maximum potential loss on a particular investment is greater than the value of such investment as reflected in the Statement of Assets and Liabilities.
Focused Investing:
The Funds hold relatively concentrated portfolios that may contain fewer securities or industries than the portfolios of other mutual funds. Holding a relatively concentrated portfolio may increase the risk that the value of a Fund could decrease because of the poor performance of one or a few investments. Concentrated positions may be difficult to liquidate.
10. FEDERAL INCOME TAXES
The amount of dividends and distributions paid by the Funds from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax law and regulations which may differ from U.S. GAAP. Such dividends and distributions are recorded by the Funds on the ex-dividend date. In order to present accumulated undistributed net investment income (loss), accumulated net realized gain (loss) on investments and foreign currency transactions and capital stock on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made. “Book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their tax-basis treatment. Temporary differences do not require reclassification. Permanent differences are primarily due to reclassification of certain transactions involving foreign securities and currencies, investments in passive foreign investment companies, real estate investment trusts (“REITs”) and partnerships, the difference in the treatment of amortization of discount on certain debt instruments, certain derivative instruments and other book to tax adjustments. Net investment income (loss), net realized capital gain (loss) on investments and foreign currency transactions and net assets were not affected by these changes. For the year ended October 31, 2016, the adjustments were as follows:
58 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
Increase/(Decrease) | ||||||||||||
to Undistributed | ||||||||||||
Net Realized Gain (Loss) | ||||||||||||
Increase/(Decrease) | on Investments and | |||||||||||
Increase/(Decrease) | to Accumulated Net | Foreign Currency | ||||||||||
to Capital Stock | Investment Income (Loss) | Transactions | ||||||||||
Third Avenue Value Fund | $ | — | $ | 5,507,319 | $ | (5,507,319 | ) | |||||
Third Avenue Small-Cap Value Fund | — | 1,472,244 | (1,472,244 | ) | ||||||||
Third Avenue Real Estate Value Fund | — | 15,294,993 | (15,294,993 | ) | ||||||||
Third Avenue International Value Fund | (33,029 | ) | (199,807 | ) | 232,836 |
The tax character of dividends and distributions paid during the year ended October 31, 2016 was as follows:
Ordinary | Net | |||||||||||
Income | Capital Gains | Total | ||||||||||
Third Avenue Value Fund | $ | 20,160,573 | $ | 100,389,540 | $ | 120,550,113 | ||||||
Third Avenue Small-Cap Value Fund(a) | 800,048 | 46,700,145 | 47,500,193 | |||||||||
Third Avenue Real Estate Value Fund(a) | 23,653,654 | 150,217,300 | 173,870,954 | |||||||||
Third Avenue International Value Fund | 243,534 | 2,447,520 | 2,691,054 |
The tax character of dividends and distributions paid during the fiscal year ended October 31, 2015 was as follows:
Ordinary | Net | |||||||||||
Income | Capital Gains | Total | ||||||||||
Third Avenue Value Fund | $ | 78,644,432 | $ | 39,157,507 | $ | 117,801,939 | ||||||
Third Avenue Small-Cap Value Fund(a) | 11,449,218 | 89,550,031 | 100,999,249 | |||||||||
Third Avenue Real Estate Value Fund | 42,607,116 | 70,314,067 | 112,921,183 | |||||||||
Third Avenue International Value Fund | 22,150,205 | — | 22,150,205 |
At October 31, 2016 , the accumulated undistributed earnings on a tax basis were:
Undistributed | Net | |||||||||||
Ordinary Income | Capital Gains | |||||||||||
Third Avenue Value Fund(a) | $ | 19,643,715 | $ | 71,533,818 | ||||||||
Third Avenue Small-Cap Value Fund | 1,374,411 | 25,342,334 | ||||||||||
Third Avenue Real Estate Value Fund | 13,564,840 | 16,438,083 | ||||||||||
Third Avenue International Value Fund | 807,885 | — |
This differs from the amount shown on the Statement of Assets and Liabilities primarily due to cumulative timing differences.
(a) Includes short-term capital gains, which are taxed as ordinary income.
As of October 31, 2016, Third Avenue International Value Fund has a capital loss carryforward which should be available to offset certain capital gains generated in future years as follows:
Capital Losses incurred | ||||||||||||
in a post-enactment year | Short-Term | Long-Term | Total | |||||||||
Year-ended Oct. 31, 2016 | $ | — | $ | 6,463,286 | $ | 6,463,286 |
The Regulated Investment Company Modernization Act of 2010 generally allows capital losses incurred in a taxable year beginning after December 22, 2010 (“post-enactment year”) to be carried forward for an unlimited period to the extent not utilized. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses.
59 |
Third Avenue Trust
Notes to Financial Statements (continued)
October 31, 2016
The U.S. federal income tax basis of the Funds’ investments and the total unrealized appreciation/(depreciation) as of October 31, 2016 were as follows:
Total Net | ||||||||||||||||||||||||
Total Unrealized | Other | Unrealized | ||||||||||||||||||||||
Tax Basis | Appreciation/ | Cost Basis | Appreciation/ | |||||||||||||||||||||
of Investments | Appreciation | (Depreciation) | (Depreciation) | Adjustments | (Depreciation) | |||||||||||||||||||
Third Avenue Value Fund | $ | 1,012,698,588 | $ | 245,968,943 | $ | (132,014,658 | ) | $ | 113,954,285 | $ | (55,624 | ) | $ | 113,898,661 | ||||||||||
Third Avenue Small-Cap Value Fund | $ | 228,094,087 | $ | 67,576,607 | $ | (11,034,874 | ) | $ | 56,541,733 | $ | (57,121 | ) | $ | 56,484,612 | ||||||||||
Third Avenue Real Estate Value Fund | $ | 1,351,071,858 | $ | 476,000,708 | $ | (72,148,333 | ) | $ | 403,852,375 | $ | (113,381 | ) | $ | 403,738,994 | ||||||||||
Third Avenue International Value Fund | $ | 159,757,618 | $ | 19,545,327 | $ | (60,988,128 | ) | $ | (41,442,801 | ) | $ | (301,448 | ) | $ | (41,744,249 | ) |
The difference between book and tax basis total unrealized appreciation/(depreciation) is primarily attributable to deferred losses on wash sales, mark-to-market treatment of investments in certain passive foreign investment companies, investments in REITs and partnerships, differences in the treatment of amortization of discount on certain debt instruments, and other timing differences. Other cost basis adjustments are primarily attributable to unrealized appreciation/(depreciation) on receivables and payables on foreign currency, written options and other book to tax differences.
11. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no events, except those listed below, that would require additional disclosure in the Funds’ financial statements.
On December 14, 2016, the Funds made the following per share distribution to shareholders of record on December 13, 2016. This information would not be used in completing your income tax returns as it may not represent final tax information.
Ordinary | Short-Term | Long-Term | Total | |||||||||||||
Income | Capital Gains | Capital Gains | Distributions | |||||||||||||
Third Avenue Value Fund Investor Class | $ | 0.3000 | $ | 0.4723 | $ | 3.2272 | $ | 3.9995 | ||||||||
Third Avenue Value Fund Institutional Class | 0.4485 | 0.4723 | 3.2272 | 4.1480 | ||||||||||||
Third Avenue Small-Cap Value Fund Investor Class | 0.0649 | — | 1.8584 | 1.9233 | ||||||||||||
Third Avenue Small-Cap Value Fund Institutional Class | 0.1262 | — | 1.8584 | 1.9846 | ||||||||||||
Third Avenue Real Estate Value Fund Investor Class | 0.1628 | — | 0.2830 | 0.4458 | ||||||||||||
Third Avenue Real Estate Value Fund Institutional Class | 0.2544 | — | 0.2830 | 0.5374 | ||||||||||||
Third Avenue International Value Fund Investor Class | 0.7050 | — | — | 0.7050 | ||||||||||||
Third Avenue International Value Fund Institutional Class | 0.7370 | — | — | 0.7370 |
60 |
Third Avenue Trust
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
Third Avenue Trust
In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund and Third Avenue International Value Fund (hereafter referred to as the “Funds”) as of October 31, 2016, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of October 31, 2016 by correspondence with the custodian, agent banks and brokers, and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
December 23, 2016
61 |
Third Avenue Trust
Annual Renewal of Investment Advisory Agreements
October 31, 2016 (Unaudited)
At a meeting of the Board of Trustees of the Trust (the “Board”) held on June 8 and 9, 2016, the Trustees, including a majority of the Trustees who are not “interested persons” (as the term is defined in the Investment Company Act) of the Trust (the “Independent Trustees”), approved the renewal of each Fund’s Investment Advisory Agreement (collectively, the “Agreements”). Prior to voting on the Agreements, the Independent Trustees met separately with their independent legal counsel for a discussion of the Adviser’s presentation and materials referred to below.
In advance of the meeting, the Independent Trustees, through their independent legal counsel, requested extensive materials, and the Adviser provided them, to assist the Board in considering the renewal of the Agreements. The Independent Trustees also constituted an ad hoc committee to work with representatives of the Adviser to evaluate the adequacy and extent of the information to be provided for their consideration. This committee communicated frequently with the Adviser’s representatives and independent legal counsel. At its meeting held on June 8 and 9, 2016, the Board engaged in a detailed discussion of the materials with the Adviser. In considering the Agreements, the Trustees did not identify any single overriding factor and instead considered all factors collectively. As a part of their decision-making process, the Trustees considered information derived from their service on the Funds’ Boards and their familiarity with the Adviser and its investment process. Among other things, they noted that the Adviser has managed each Fund since its inception, and expressed their belief that a long-term relationship with a capable, conscientious adviser is in the best interest of the Funds. The following is a summary of the discussions and conclusions regarding the material factors that formed the basis for the Board’s approval.
Factors Considered
A. Financial Condition of the Adviser; Advisory Fees; Profitability
The Trustees received a presentation from representatives of the Adviser, including a report prepared by Broadridge Financial Solutions, Inc., and reviewed, among other things:
1. | the financial condition of the Adviser to determine that the Adviser is solvent and sufficiently well-capitalized to perform its ongoing responsibilities to the Funds, notwithstanding the potential for a continued decrease in assets under management; |
2. | the information sources and methodology used in the selection of funds included in the comparison universe and the competitive fund group used in comparative analyses of each Fund’s advisory fees and expense ratios and in analyzing the Fund’s performance; |
3. | each Fund’s advisory fee and total expenses versus those of the comparison universe and competitive fund group, focusing on the total expense ratio of each Fund and the funds in its respective comparison universe and competitive fund group; |
4. | performance analyses of each Fund and funds in its comparison universe and competitive fund group; |
5. | a comparison of fees paid to the Adviser versus fees paid by similar funds advised and sub-advised by the Adviser, as well as any similar separate advisory accounts; |
6. | information presented in respect of economies of scale, noting that each Fund’s assets had declined significantly over the last five years (except for the Real Estate Value Fund), and that all of the Funds had suffered significant redemptions in 2016 to-date; that the Adviser has agreed to waive its fees and/or reimburse expenses to maintain an expense limitation for each Fund; and the extensive resources that the Adviser continues to dedicate to its business even while Fund assets generally have declined in recent years; |
7. | the profitability to the Adviser resulting from each Agreement (including the fall-out benefits noted below), reviewing the dollar amount of expenses allocated and revenue received by the Adviser and the method used to determine such expenses and corresponding profit; and |
8. | fallout benefits, including (i) fees for providing administrative services and (ii) research services received by the Adviser in connection with executing Fund Portfolio transactions. |
B. Description of Personnel and Services Provided by the Adviser
The Trustees reviewed with representatives of the Adviser, and considered:
1. | the nature, extent and quality of services rendered to the Funds, including the Adviser’s investments, senior management and operational personnel (and efforts being made to retain key staff during a period of net redemptions), and the oversight of day-to-day operations of the Funds provided by the Adviser; |
2. | the Adviser’s research and portfolio management capabilities, particularly the intensive research undertaken in connection with the Adviser’s deep value philosophy; |
3. | the value added over time through the Adviser’s active management style that includes participation in corporate restructurings and other activist |
62 |
Third Avenue Trust
Annual Renewal of Investment Advisory Agreements (continued)
October 31, 2016 (Unaudited)
investments; and
4. | the Adviser’s experience operating funds registered under the 1940 Act and its dedication to providing high quality services to the Funds in the long term. |
C. Investment Performance of the Funds and Adviser
1. | The Trustees reviewed total return information for each Fund versus the comparison universe and competitive funds group for various periods. The Trustees also reviewed information pertaining to the Funds’ risk adjusted performance and risk measures. |
Conclusions
The Trustees concluded that the nature, extent and quality of the services provided by the Adviser are adequate and appropriate. The Trustees considered and evaluated each Fund’s performance over various time periods in light of market conditions, the Adviser’s investing style and circumstances particular to that Fund. While the Trustees expressed concern about the performance for the Funds, they understood the relevant circumstances. They also considered the advisory fee and expense ratio of each Fund and evaluated the comparisons to those of funds in the comparable universe and competitive fund group and the performance analysis, as discussed in the Adviser’s presentation.
The Trustees discussed the Adviser’s profitability, and it was noted that, among other things, the profitability percentage for each Fund was below the maximum profitability levels found in relevant court cases upholding board approval of particular advisory agreements. The Trustees concluded, in light of considerations noted above, to approve each Fund’s fee, although the Trustees agreed to continue to closely monitor the Funds’ performance, fees and expenses. The Trustees also considered the advisory fees charged for similar funds advised and sub-advised by the Adviser in the past, as well as any separate advisory accounts, and reviewed the nature of the services provided and differences, from the Adviser’s perspective, in managing the Funds as compared to advisory services provided to other advised and sub-advised funds and any separate accounts. As in the past, the Trustees recognized that differences in fees paid were consistent with the differences in services provided by the Adviser.
The Trustees considered whether material economies of scale are present and, if present, are shared with the Funds and considered each Fund’s fee structure, and the extensive resources that the Adviser dedicates to its investment advisory process to the benefit of the Funds. The Trustees concluded that, because of declining overall assets in each Fund, material economies of scale were not present to be shared with the Funds. The Trustees noted that, while assets of the Real Estate Value Fund had increased in 2015, that Fund had suffered significant redemptions in 2016 to-date.
63 |
Third Avenue Trust
Management of the Trust
(Unaudited)
Information pertaining to the Trustees and officers of the Trust is set forth below. The fund complex includes five portfolios in the Third Avenue Trust and one portfolio in the Third Avenue Variable Series Trust. The Statement of Additional Information (SAI) includes additional information about the Trustees and is available upon request, without charge, by calling (800) 443-1021.
Interested Trustee | ||||||||
Name, Date of Birth & Address | Term of Office and Length of Time Served* | Position(s) Held With Registrant | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Trustee | ||||
Martin J. Whitman** DOB: September 1924 622 Third Avenue New York, NY 10017 | Trustee from 7/99 to 12/16 | Chairman and Trustee | Chairman (3/90 to 12/16) (5 funds) of Third Avenue Trust; Chairman (7/99 to 12/16) of Third Avenue Variable Series Trust; CEO, President and Director (10/74 to Present) of Martin J. Whitman & Co., Inc. (formerly M.J. Whitman & Co., Inc.) (private investment company); Chartered Financial Analyst. | Director (1991 to 2011) of Nabors Industries, Inc. (international oil drilling services). |
64 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Independent Trustees | ||||
Correspondence intended for any Independent Trustee may be sent to: Third Avenue Management LLC, 622 Third Avenue, 32nd Floor, New York, NY 10017. | ||||
Term of Office | Position(s) | |||||||
and Length of | Held With | Principal Occupation(s) | Other Directorships | |||||
Name & Date of Birth | Time Served* | Registrant | During Past 5 Years | Held by Trustee | ||||
William E. Chapman, II DOB: September 1941 | Trustee since 8/02 | Trustee | President and Owner (1998 to Present) of Longboat Retirement Planning Solutions (consulting firm). | Trustee, The AMG Funds (1999 to Present) (45 portfolios); Director of Harding, Loevner Funds, Inc. (2008 to Present) (9 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios); Trustee (5/02 to 6/13) of Bowdoin College; Director, The Mutual Fund Directors Forum (2010 to Present); Director, Sarasota Memorial Healthcare Foundation (2011 to Present) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). | ||||
Lucinda Franks DOB: July 1946 | Trustee since 2/98 | Trustee | Journalist and author (1969 to Present). | Trustee of Third Avenue Variable Series Trust (7/99 to Present). | ||||
Edward J. Kaier DOB: September 1945 | Trustee since 8/02 | Trustee | Partner (7/07 to Present) at Teeters Harvey Gillboy & Kaier LLP (law firm). | Trustee, The AMG Funds (1999 to Present) (45 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). |
65 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Independent Trustees | ||||||||
Term of Office | Position(s) | |||||||
and Length of | Held With | Principal Occupation(s) | Other Directorships | |||||
Name & Date of Birth | Time Served* | Registrant | During Past 5 Years | Held by Trustee | ||||
Eric Rakowski DOB: June 1958 | Trustee since 8/02 | Trustee | Professor (1990 to Present) at University of California at Berkeley School of Law. | Trustee, The AMG Funds (1999 to Present) (47 portfolios); Director of Harding, Loevner Funds, Inc. (2008 to Present) (9 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). | ||||
Patrick Reinkemeyer DOB: March 1965 | Trustee since 1/15 | Trustee | President, SilverPepper LLC (2011 to Present). | Trustee of Third Avenue Variable Series Trust (1/15 to Present). | ||||
Martin Shubik DOB: March 1926 | Advisory Trustee since 3/16*** | Advisory Trustee | Seymour H. Knox Professor (1975 to 2007) of Mathematical Institutional Economics, Yale University; Emeritus (2007 to Present). | Trustee or Director of Third Avenue Variable Series Trust or its predecessor (7/99 to 3/16). | ||||
Charles C. Walden DOB: July 1944 | Trustee since 5/96 | Trustee**** | President and Owner (2006 to Present) of Sound Capital Associates, LLC (consulting firm); Chartered Financial Analyst. | Director, Special Opportunities Fund, Inc. (2009 to Present) and Trustee of Third Avenue Variable Series Trust (7/99 to Present). |
* | Each Trustee serves until his or her successor is duly elected and qualified. |
** | Mr. Whitman is an “interested Trustee” of the Trust due to his employment with and indirect ownership interests in the Adviser. Mr. Whitman resigned his position as Chairman and Trustee as of December 10, 2016. |
*** | Mr. Shubik was a Trustee of the Trust from July 1999 untill March 2016 and now acts in an Advisory Trustee capacity. |
**** | At a Board meeting held on December 15, 2016, Mr. Walden was appointed Chairman of the Board. |
66 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Principal Trust Officers Who Are Not Trustees | ||||||
Position(s) | ||||||
Held With | Other Directorships | |||||
Name, Date of Birth & Address | Registrant | Principal Occupation(s) During Past 5 Years | Held by Officer | |||
Vincent J. Dugan DOB: September 1965 622 Third Avenue New York, NY 10017 | Treasurer and CFO | Treasurer and Chief Financial Officer (CFO) (9/04 to Present) (5 funds) of Third Avenue Trust; Treasurer and CFO (9/04 to Present) of Third Avenue Variable Series Trust; Chief Operating Officer (COO) and CFO (8/04 to Present) of Third Avenue Management LLC; COO and CFO (8/04 to Present) of Third Avenue Holdings Delaware LLC; COO and CFO (8/04 to Present) of M.J. Whitman LLC and subsidiaries; COO and CFO (8/04 to Present) of certain other funds advised by Third Avenue Management LLC (8/04 to Present). Director of one other fund advised by Third Avenue Management LLC (2005-2015). | N/A | |||
Michael A. Buono DOB: May 1967 622 Third Avenue New York, NY 10017 | Controller | Controller (5/06 to Present) (5 funds) of Third Avenue Trust, Third Avenue Variable Series Trust, Third Avenue Management LLC and M.J. Whitman LLC and subsidiaries. | N/A | |||
W. James Hall III DOB: July 1964 622 Third Avenue New York, NY 10017 | President, General Counsel and Secretary | General Counsel and Secretary (6/00 to Present) (5 funds) and President (12/15 to Present) (5 funds) of Third Avenue Trust; General Counsel and Secretary (9/00 to Present) and President (12/15 to Present) of Third Avenue Variable Series Trust; General Counsel and Secretary (9/00 to Present) of EQSF Advisers, Inc., and its succesor, Third Avenue Management LLC; General Counsel and Secretary (5/00 to Present) of M.J. Whitman, Inc. and its succesor M.J. Whitman LLC; General Counsel and Secretary of certain other funds advised by Third Avenue Management LLC (7/02 to Present). | N/A | |||
Joseph J. Reardon DOB: April 1960 622 Third Avenue New York, NY 10017 | Chief Compliance Officer | Chief Compliance Officer (4/05 to Present) (5 funds) of Third Avenue Trust, Third Avenue Variable Series Trust and Third Avenue Management LLC. | N/A |
67 |
Third Avenue Trust
Schedule of Shareholder Expenses
(Unaudited)
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, such as redemption fees; and (2) ongoing costs, including management fees, shareholder servicing fees, distribution fees (if applicable) and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period, May 1, 2016 and held for the six month period ended October 31, 2016.
Actual Expenses
For each Class of each Fund in the table below, the first line provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of each Class in the table below provides information about hypothetical account values and hypothetical expenses based on the Class’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Class’ actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Class of the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of each Class in the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The example also assumes all dividends and distributions have been reinvested.
Expenses Paid | ||||||||
Beginning | Ending | During the Period | ||||||
Account Value | Account Value | May 1, 2016 to | Annualized | |||||
May 1, 2016 | October 31, 2016 | October 31, 2016* | Expense Ratio | |||||
Third Avenue Value Fund | ||||||||
Investor Class | ||||||||
Actual | $1,000 | $1,024.40 | $7.23 | 1.42% | ||||
Hypothetical | $1,000 | $1,018.00 | $7.20 | 1.42% | ||||
Institutional Class | ||||||||
Actual | $1,000 | $1,025.60 | $5.91 | 1.16% | ||||
Hypothetical | $1,000 | $1,019.30 | $5.89 | 1.16% | ||||
Third Avenue Small-Cap Value Fund | ||||||||
Investor Class | ||||||||
Actual | $1,000 | $1,055.90 | $7.23 | 1.40% | ||||
Hypothetical | $1,000 | $1,018.10 | $7.10 | 1.40% | ||||
Institutional Class | ||||||||
Actual | $1,000 | $1,057.00 | $5.95 | 1.15% | ||||
Hypothetical | $1,000 | $1,019.36 | $5.84 | 1.15% | ||||
Third Avenue Real Estate Value Fund | ||||||||
Investor Class | ||||||||
Actual | $1,000 | $1,023.90 | $6.92 | 1.36% | ||||
Hypothetical | $1,000 | $1,018.30 | $6.90 | 1.36% | ||||
Institutional Class | ||||||||
Actual | $1,000 | $1,025.20 | $5.65 | 1.11% | ||||
Hypothetical | $1,000 | $1,019.56 | $5.63 | 1.11% | ||||
Third Avenue International Value Fund | ||||||||
Investor Class | ||||||||
Actual | $1,000 | $1,055.50 | $8.53 | 1.65% | ||||
Hypothetical | $1,000 | $1,016.84 | $8.36 | 1.65% | ||||
Institutional Class | ||||||||
Actual | $1,000 | $1,057.00 | $7.24 | 1.40% | ||||
Hypothetical | $1,000 | $1,018.10 | $7.10 | 1.40% |
* | Expenses (net of fee waivers and expense offset arrangement) are equal to the Class’ annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184) divided by 366. |
68 |
Third Avenue Trust
Federal Tax Status of Dividends and Distributions
(Unaudited)
The following information represents the tax status of dividends and distributions paid by the Funds during the fiscal year ended October 31, 2016. This information is presented to meet regulatory requirements and no current action on your part is required. The information reported below will differ from the actual amounts taxable to shareholders for the calendar year ending December 31, 2016.
Information necessary to complete your income tax returns for the calendar year ending December 31, 2016 will be issued by the Funds in the early part of 2017.
The Funds are required to make certain designations including to designate the portion of any distributions made to shareholders during their fiscal year beginning on November 1, 2015 and ending on October 31, 2016 that were from capital gains. Depending upon your instructions, distributions from the Funds were either paid to you in cash or reinvested into your account.
The following is the breakdown of dividends and distributions paid by each Fund during fiscal year ended October 31, 2016:
Third Avenue | Third Avenue | Third Avenue | Third Avenue | |||||||||||||||||||||||||||||||||||||
Value Fund | Small-Cap Value Fund | Real Estate Value Fund | International Value Fund | |||||||||||||||||||||||||||||||||||||
Institutional Cl. | Investor Cl. | Institutional Cl. | Investor Cl. | Institutional Cl. | Investor Cl. | Institutional Cl. | Investor Cl. | |||||||||||||||||||||||||||||||||
Ordinary Income | $ | 0.6800 | $ | 0.5224 | $ | - | $ | - | $ | 0.1189 | $ | 0.0422 | $ | 0.0295 | $ | - | ||||||||||||||||||||||||
Short-Term Capital Gains Distributions (treated as ordinary income) | - | - | 0.0464 | 0.0464 | 0.1147 | 0.1147 | - | - | ||||||||||||||||||||||||||||||||
Long-Term Capital Gains Distributions | 3.3725 | 3.3725 | 2.7102 | 2.7102 | 1.3752 | 1.3752 | 0.2032 | 0.2032 | ||||||||||||||||||||||||||||||||
Total Dividends and Distributions | $ | 4.0525 | $ | 3.8949 | $ | 2.7566 | $ | 2.7566 | $ | 1.6088 | $ | 1.5321 | $ | 0.2327 | $ | 0.2032 |
With respect to ordinary dividends paid by the Funds during their fiscal year ended October 31, 2016, the Funds designate the maximum allowable amounts under section 854 of the Internal Revenue Code. Such designated amounts shall not be less than the following with respect to ordinary dividends:
Qualified | Dividends Received | |||||||
Dividend Income | Deduction | |||||||
for Individuals | for Corporations | |||||||
Third Avenue Value Fund | $ | 20,160,573 | 75.01 | % | ||||
Third Avenue Small-Cap Value Fund | 800,047 | 100.00 | % | |||||
Third Avenue Real Estate Value Fund | 17,379,040 | 7.69 | % | |||||
Third Avenue International Value Fund | 616,294 | 29.98 | % |
The following Fund intends to elect to pass through to shareholders the income taxes paid to foreign countries which may be eligible for the foreign tax credit in accordance with Section 853 of the Internal Revenue Code. Gross foreign source income and foreign tax expense for the year ended October 31, 2016 are as follows:
Gross Foreign | Foreign Tax | |||||||
Source Income | Pass Through | |||||||
Third Avenue International Value Fund | $ | 3,563,261 | $ | 247,797 |
69 |
BOARD OF TRUSTEES
William E. Chapman, II | Patrick Reinkemeyer | |||
Lucinda Franks | Charles C. Walden | |||
Edward J. Kaier | Martin J. Whitman | |||
Eric Rakowski | ||||
Martin Shubik — Advisory Trustee |
OFFICERS
Martin J. Whitman — Chairman of the Board
Vincent J. Dugan — Chief Financial Officer, Treasurer
Michael A. Buono — Controller
W. James Hall — President, General Counsel, Secretary
Joseph J. Reardon — Chief Compliance Officer
TRANSFER AGENT
BNY Mellon Investment Servicing (U.S.) Inc.
P.O. Box 9802
Providence, RI 02940-8002
610-239-4600
800-443-1021 (toll-free)
INVESTMENT ADVISER
Third Avenue Management LLC
622 Third Avenue
New York, NY 10017
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
CUSTODIAN
JPMorgan Chase Bank, N.A.
383 Madison Avenue, 4th Floor
New York, NY 10179
Third Avenue Management LLC is a New York-based global asset manager that has adhered to a proven value investment philosophy since its founding in 1986. Third Avenue’s disciplined approach seeks to maximize long-term, risk-adjusted returns by focusing on corporate financial stability, and price conscious, opportunistic security selection throughout the capital structure.
If you would like further information about Third Avenue Funds, please contact your Relationship Manager at: |
www.thirdave.com | 622 Third Avenue | 212.906.1160 | |||||
third-ave-management | New York, NY 10017 | clientservice@thirdave.com |
Third Avenue Focused Credit Fund
ANNUAL REPORT
OCTOBER 31, 2016
THIRD AVENUE FUNDS
Privacy Policy
Third Avenue Focused Credit Fund (the “Fund”) respects your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain personal information about you. This is the information we collect from you on applications or other forms and from the transactions you make with us, our affiliates, or third parties. We do not disclose any information about you or any of our former customers to anyone, except to our affiliates (which may include the Fund’s affiliated money management entities) and service providers, or as otherwise permitted by law. To protect your personal information, we permit access only by authorized employees. Be assured that we maintain physical, electronic and procedural safeguards that comply with federal standards to guard your personal information.
Proxy Voting Policies and Procedures
The Fund has delegated the voting of proxies relating to its voting securities to the Fund’s investment adviser pursuant to the adviser’s proxy voting guidelines. A description of these proxy voting guidelines and procedures, as well as information relating to how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available by August 31 each year (i) without charge, upon request, by calling (800) 443-1021, (ii) at the website of the Securities and Exchange Commission (the “SEC”) at http://www.sec.gov, and (iii) on the Fund’s website www.focusedcreditfund.com.
Schedule of Portfolio Holdings—Form N-Q
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov, and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Third Avenue Trust
Third Avenue Focused Credit Fund
Portfolio Management Discussion
October 31, 2016 (Unaudited)
At October 31, 2016, the audited net asset value attributable to each of the 117,815,945 common shares outstanding of the Third Avenue Focused Credit Fund Institutional Class was $5.02 per share. This compares with audited net asset value at October 31, 2015 of $6.48 per share, adjusted for subsequent distributions to shareholders.
Average Annual Returns for the periods ended October 31, 2016 | ||||||||||||||||
One Year Ended 10/31/16 | Three Year | Five Year | Since Inception (8/31/09) | |||||||||||||
Third Avenue Focused Credit Fund Institutional Class | (19.11 | %) | (12.38 | %) | (2.88 | %) | 0.61 | % | ||||||||
Bloomberg Barclays U.S Corporate High Yield Bond Index | 10.14 | % | 4.55 | % | 7.17 | % | 9.43 | % | ||||||||
Credit Suisse Leveraged Loan Index | 6.30 | % | 3.60 | % | 5.07 | % | 6.14 | % |
The Third Avenue Focused Credit Fund (the “Fund”) returned -19.11% during the fiscal year ended October 31, 2016. The Bloomberg Barclays U.S. Corporate High Yield Bond Index returned 10.14% over the same period. The Fund has suspended redemptions and has been in liquidation since it was granted an exemptive order from the Securities and Exchange Commission in December 2015.
The relative under-performance of the Fund was due primarily to under-performance of certain companies whose securities are held by the Fund, and not by liquidity or valuation issues. The top two detractors over the period were Affinion International Holdings Ltd. and Corporate Risk Holdings. Affinion is a global company managing consumer membership, insurance and loyalty programs. The investment has been a disappointment in the past year. The company went through an out-of-court restructuring in the second half of 2015. The company still faces challenges, but the Fund’s investment adviser believes there is potential value for the equity of the security.
Corporate Risk Holdings (CRH) was formerly known as Altegrity. CRH is a global, diversified risk and information services company serving commercial customers and government entities. The company filed for bankruptcy in February 2015 after suddenly losing a major background screening contract from the U.S. government. The company emerged from bankruptcy in September 2015. CRH had three main business segments: Kroll (corporate background checks and advisory), OnTrack (information security, e-discovery) and HireRight (technology-enabled employment background screening, drug and health screening, and employment eligibility). The company sold OnTrack in October 2016. The cash from the sale will be used mainly to pay down debt and de-leverage the company.
The top two contributors to the Fund over the last fiscal year were New Enterprise Stone & Lime Co., Inc. (New Enterprise) and iHeart Communications, Inc. New Enterprise is one of the largest aggregate producers (crushed stone) and highway construction companies in the United States.
iHeart Communications is the largest radio broadcaster in the United States and one of the largest outdoor billboard companies in the world. The price of the security has recovered over the last few months of the fiscal year, while also paying a 12% coupon. The Fund has been selling opportunistically as part of the liquidation.
The Fund disposed of 62 issues during the fiscal year and made several liquidating distributions.
THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND’S PERFORMANCE AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS, A GUARANTEE OF FUTURE RESULTS NOR INVESTMENT ADVICE. VIEWS EXPRESSED ARE THOSE OF THE INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO’S HOLDINGS, THE FUND’S PERFORMANCE, AND THE INVESTMENT TEAM’S VIEWS ARE AS OF OCTOBER 31, 2016, AND ARE SUBJECT TO CHANGE.
The Fund’s investments in high-yield and distressed securities may expose the Fund to greater risks than if the Fund only owned higher-grade securities. The value of high-yield, lower quality securities is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. Issuers of high-yield securities are not as strong financially as those with higher credit ratings, so the securities are usually considered speculative investments.
Performance figures for periods greater than 1 year are annualized. Past performance is no guarantee of future results; returns include reinvestment of all distributions. The above represents past performance and current performance may be lower or higher than performance quoted above. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Please note these
1 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Portfolio Management Discussion (continued)
October 31, 2016 (Unaudited)
returns have been calculated utilizing the industry standard methodology which assumes all distributions are reinvested by the shareholder. Given that the Fund has not permitted reinvestments since December 9, 2015, shareholders would only realize these rates of return if they invested the proceeds paid since that date at the rate earned by the Fund.
If you should have any questions, or for updated information (including performance data current to the most recent month-end), please call 1-800-443-1021 or go to our web site at www.focusedcreditfund.com. Current performance may be lower or higher than performance quoted.
The Bloomberg Barclays U.S. Corporate High Yield Bond Index comprises issues that have at least $150 million par value outstanding, a maximum credit rating of Ba1 or BB+ (including defaulted issues) and at least one year to maturity. The Credit Suisse Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated leveraged loan market. The Bloomberg Barclays U.S. Corporate High Yield Bond Index and the Credit Suisse Leveraged Loan Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of all distributions.
2 |
Third Avenue Trust
Third Avenue Focused Credit Fund - Institutional Class
Comparison of a $10,000 Investment
(Unaudited)
Performance Illustration
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE FOCUSED CREDIT FUND – INSTITUTIONAL CLASS (TFCIX),
THE BLOOMBERG BARCLAYS U.S. CORPORATE HIGH YIELD BOND INDEX AND THE CREDIT SUISSE LEVERAGED LOAN INDEX
FROM INCEPTION OF THE FUND (8/31/09) THROUGH OCTOBER 31, 2016
Average Annual Total Return | |||
1 Year | 3 Years | 5 Years | Since Inception (8/31/09) |
(19.11%) | (12.38%) | (2.88%) | 0.61% |
* Assumes reinvestment of all distributions.
As with all mutual funds, past performance does not indicate future results. Performance may reflect fee waivers, expense offset arrangement and/or recovery. Total return would have been lower if the Adviser had not waived certain expenses. Conversely, total return would have been higher if the Adviser had not recovered previously waived expenses. Also, the returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares.
3 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Industry Diversification
(Unaudited)
The summary of the Fund’s investments as of October 31, 2016 is as follow:
4 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Portfolio of Investments
at October 31, 2016
Principal Amount‡ | Security† | Value (Note 1) | ||||||
Corporate Bonds & Notes - 33.01% | ||||||||
Chemicals - 0.00% | ||||||||
17,478,774 | Reichhold Industries, Inc., due 5/8/17 (a)(b)(c) | $ | — | |||||
Consumer Products - 13.34% | ||||||||
Ideal Standard International S.A. (Luxembourg): | ||||||||
32,473,670 | EUR | Series B, 11.750% Cash or 15.750% Payment-in-kind Interest, due 5/1/18 (a)(b)(d)(e) | 35,648,136 | |||||
39,331,288 | EUR | Series C, 11.750% Cash or 17.750% Payment-in-kind Interest, due 5/1/18 (a)(b)(d)(e)(f) | 43,176,122 | |||||
78,824,258 | ||||||||
Energy - 0.94% | ||||||||
20,150,000 | IronGate Energy Services LLC, due 7/1/18 (a)(c) | 5,541,250 | ||||||
Manufacturing - 7.80% | ||||||||
54,492,575 | Liberty Tire Recycling LLC, 2nd Lien, 11.000% Payment-in-kind Interest, due 3/31/21 (a)(b)(d)(e) | 46,078,921 | ||||||
Media/Cable - 2.48% | ||||||||
38,043,351 | iHeartCommunications, Inc., 12.000% Cash and 2.000% Payment-in-kind Interest, due 2/1/21 (e) | 14,646,690 | ||||||
Metals & Mining - 0.32% | ||||||||
New World Resources N.V. (Netherlands): | ||||||||
41,058,552 | EUR | 8.000% Cash or 11.000% Payment-in-kind Interest, due 4/7/20 (a)(e) | 1,802,890 | |||||
14,475,933 | EUR | 4.000% Cash or 8.000% Payment-in-kind Interest, due 10/7/20 (a)(e) | 79,455 | |||||
1,882,345 | ||||||||
Services - 6.36% | ||||||||
37,561,158 | Corporate Risk Holdings LLC, 11.500% Cash or 13.500% Payment-in-kind Interest, due 1/2/20 (a)(b)(d)(e) | 37,561,158 | ||||||
Transportation Services - 1.77% | ||||||||
16,000,000 | CEVA Group PLC, 9.000% due 9/1/21 (United Kingdom) (a) | 10,480,000 | ||||||
Total Corporate Bonds & Notes (Cost $317,092,579) | 195,014,622 | |||||||
Term Loans - 10.08% | ||||||||
Chemicals - 1.60% | ||||||||
Reichhold Holdings International B.V., Term Loan (Netherlands): | ||||||||
4,693,058 | 12.000% Cash or 14.000% Payment-in-kind Interest, due 3/31/17 (b)(e) | 4,693,058 | ||||||
2,859,703 | 15.000% Cash or Payment-in-kind Interest, due 3/31/17 (b)(e) | 2,859,703 | ||||||
1,900,212 | Reichhold LLC II, Term Loan, 12.000% Cash or 14.000% Payment-in-kind Interest, due 3/31/17 (b)(e) | 1,900,212 | ||||||
9,452,973 |
Principal Amount‡ | Security† | Value (Note 1) | ||||||
Energy - 2.24% | ||||||||
743,713 | Geokinetics Holdings USA, Inc., Term Loan, 2nd Lien, 5.000% Cash and 8.000% Payment-in-kind Interest, due 8/10/18 (b)(d)(e) | $ | 661,904 | |||||
17,943,648 | Hercules Offshore, Inc., Term Loan, 1st Lien, 10.500%, due 5/6/20 (g) | 12,560,554 | ||||||
13,222,458 | ||||||||
Financials - 0.01% | ||||||||
Concrete Investment I, Term Loan (Luxembourg): | ||||||||
17,860 | EUR | Tranche A2, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (b)(e)(g) | 19,606 | |||||
12,635 | EUR | Tranche A3, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (b)(e)(g) | 13,870 | |||||
Concrete Investment II, Term Loan (Luxembourg): | ||||||||
22,769 | EUR | Tranche A2, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (b)(e)(g) | 24,995 | |||||
3,159 | EUR | Tranche A3, 2.000% Cash or Payment-in-kind Interest, due 10/31/17 (b)(e)(g) | 3,467 | |||||
61,938 | ||||||||
Gaming & Entertainment - 2.40% | ||||||||
14,531,288 | Majestic Star Casino LLC, Term Loan, 1st Lien, 12.500% Cash or 14.500% Payment-in-kind Interest, due 6/1/20 (b)(e) | 14,168,006 | ||||||
Manufacturing - 3.61% | ||||||||
21,971,875 | Liberty Tire Recycling Holdco, LLC, Term Loan B, 9.000%, due 7/7/20 (d)(g) | 21,312,719 | ||||||
Services - 0.15% | ||||||||
16,592,044 | Education Management II LLC, Term Loan B, 2.000% Cash and 6.500% Payment-in-kind Interest, due 7/2/20 (e)(g) | 912,562 | ||||||
Utilities - 0.07% | ||||||||
500,000 | Longview Power, LLC, Revolver, 6.540%, due 4/13/20 (b)(d)(g) | 437,500 | ||||||
Total Term Loans (Cost $68,684,947) | 59,568,156 | |||||||
Shares | ||||||||
Common Stocks & Warrants - 19.37% | ||||||||
Energy - 2.05% | ||||||||
124,461 | Geokinetics, Inc. (b)(d)(f)(h) | 4,717,072 | ||||||
45,252 | Geokinetics, Inc., Warrants, expire 9/1/26 (b)(d)(h) | 1,714,598 | ||||||
812,533 | Hercules Offshore, Inc. (h) | 1,381,307 | ||||||
50,000 | Platinum Energy Holdings, Inc. (b)(d)(f)(h) | 92,500 | ||||||
10,874 | Platinum Energy Holdings, Inc., Warrants, expire 10/4/18 (b)(d)(f)(h) | — |
The accompanying notes are an integral part of the financial statements.
5 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Portfolio of Investments (continued)
at October 31, 2016
Shares | Security† | Value (Note 1) | ||||||
Common Stocks & Warrants (continued) | ||||||||
Energy (continued) | ||||||||
1,118,548 | Prairie Provident Resources, Inc. (Canada) (h) | $ | 708,839 | |||||
53 | Thunderbird Resources Equity, Inc. (b)(h) | 3,498,357 | ||||||
12,112,673 | ||||||||
Manufacturing - 0.00% | ||||||||
3,430,293 | LTR Holdings, Inc. (b)(d)(h) | — | ||||||
Media/Cable - 1.27% | ||||||||
2,127,789 | Radio One, Inc., Class D (d)(h) | 5,319,473 | ||||||
639,603 | Spanish Broadcasting System, Inc., Class A (d)(h) | 2,174,650 | ||||||
7,494,123 | ||||||||
Services - 13.59% | ||||||||
462,266 | Affinion Group Holdings, Inc., Warrants, expire 11/9/20 (b)(d)(h) | 3,693,505 | ||||||
1,751,734 | Affinion Group Holdings, Inc., Class A (d)(h) | 14,013,872 | ||||||
522 | Affinion Group Holdings, Inc., Class C (b)(d)(h) | — | ||||||
549 | Affinion Group Holdings, Inc., Class D (b)(d)(h) | — | ||||||
31,594 | Corporate Risk Holdings Corp. (b)(d)(h) | — | ||||||
6,248,652 | Corporate Risk Holdings I, Inc. (d)(h) | 62,486,520 | ||||||
106,353,817 | Education Management Corp. (h) | 74,448 | ||||||
80,268,345 | ||||||||
Transportation Services - 0.25% | ||||||||
4,710 | CEVA Holdings LLC (Marshall Islands) (f)(h) | 1,454,185 | ||||||
Utilities - 2.21% | ||||||||
4,550,000 | Longview Intermediate Holdings C, LLC (d)(h) | 13,081,250 | ||||||
Total Common Stocks & Warrants (Cost $276,809,001) | 114,410,576 | |||||||
Convertible Preferred Stocks - 0.90% | ||||||||
Services - 0.01% | ||||||||
118,341 | Education Management Corp., Class A-1 (a)(h) | 33,136 | ||||||
Transportation Services - 0.89% | ||||||||
4,435 | CEVA Holdings LLC, Series A-1 (Marshall Islands) (f)(h) | 2,006,937 | ||||||
10,196 | CEVA Holdings LLC, Series A-2 (Marshall Islands) (f)(h) | 3,275,359 | ||||||
5,282,296 | ||||||||
Total Convertible Preferred Stocks (Cost $26,000,752) | 5,315,432 | |||||||
Preferred Stocks - 3.25% | ||||||||
Financials - 3.25% | ||||||||
100,000 | Federal Home Loan Mortgage Corp., 5.300% (h) | 455,000 | ||||||
57,515 | Federal Home Loan Mortgage Corp., Series G (h) | 257,380 | ||||||
51,655 | Federal Home Loan Mortgage Corp., Series L (h) | 235,030 | ||||||
207,640 | Federal Home Loan Mortgage Corp., Series M (h) | 985,252 |
Shares | Security† | Value (Note 1) | ||||||
Financials (continued) | ||||||||
323,473 | Federal Home Loan Mortgage Corp., Series P, 6.000% (h) | $ | 1,727,346 | |||||
217,280 | Federal Home Loan Mortgage Corp., Series R, 5.700% (h) | 1,086,400 | ||||||
165,000 | Federal Home Loan Mortgage Corp., Series S (h) | 813,450 | ||||||
612,722 | Federal Home Loan Mortgage Corp., Series V, 5.570% (h) | 1,562,441 | ||||||
380,064 | Federal Home Loan Mortgage Corp., Series W, 5.660% (h) | 934,957 | ||||||
477,900 | Federal National Mortgage Association, Series M, 4.750% (h) | 2,590,218 | ||||||
992,950 | Federal National Mortgage Association, Series O (h) | 5,858,405 | ||||||
674,800 | Federal National Mortgage Association, Series T, 8.250% (h) | 2,705,948 | ||||||
Total Preferred Stocks (Cost $33,129,281) | 19,211,827 | |||||||
Private Equities - 1.27% | ||||||||
Chemicals - 0.87% | ||||||||
10,555 | Reichhold Cayman L.P. & G.P. (Cayman Islands) (b)(h) | 5,158,228 | ||||||
Consumer Products - 0.40% | ||||||||
1,451,633,736,282 | Ideal Standard International Equity S.A. Alpecs (Luxembourg) (b)(d)(f)(h) | 2,358,437 | ||||||
Total Private Equities (Cost $13,535,864) | 7,516,665 | |||||||
Principal Amount($) | ||||||||
Short-Term Investments - 23.69% | ||||||||
U.S. Government Obligations - 23.69% | ||||||||
140,000,000 | U.S. Treasury Bill, 0.150%, due 12/1/16 (i) | 139,982,500 | ||||||
Total Short-Term Investments (Cost $139,982,500) | 139,982,500 | |||||||
Total Investment Portfolio - 91.57% (Cost $875,234,924) | 541,019,778 | |||||||
Other Assets less Liabilities - 8.43% (j)(k) | 49,835,153 | |||||||
NET ASSETS - 100.00% | $ | 590,854,931 |
Notes:
(a) | Security is exempt from registration pursuant to Rule 144A under the Securities Act of 1933. |
This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. | |
(b) | Fair-valued security. |
(c) | Issue in default. |
(d) | Affiliated issuers - as defined in the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). |
(e) | Payment-in-kind (“PIK”) security. Income may be paid as additional securities or cash at the discretion of the issuer. |
The accompanying notes are an integral part of the financial statements.
6 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Portfolio of Investments (continued)
at October 31, 2016
(f) | Security subject to restrictions on resale. |
Shares/ Principal Amount1 | Issuer | Acquisiton Date | Cost | Market Value Per Unit | |||||||||||
4,710 | CEVA Holdings LLC | 5/29/13 | $ | 5,355,643 | $ | 308.74 | |||||||||
4,435 | CEVA Holdings LLC, Series A-1, Convertible Preferred | 5/29/13 | 4,435,223 | 452.52 | |||||||||||
10,196 | CEVA Holdings LLC, Series A-2, Convertible Preferred | 5/29/13 | 13,298,434 | 321.24 | |||||||||||
124,461 | Geokinetics, Inc. | 5/22/13 - 5/14/14 | 13,060,780 | 37.90 | |||||||||||
1,451,633,736,282 | Ideal Standard International Equity S.A. Alpecs | 10/31/14 | 9,915,530 | 0.002 | |||||||||||
39,331,288 | EUR | Ideal Standard International S.A., Series C, 11.750% Cash or 17.750% Payment-in-kind Interest, due 5/1/18 | 10/31/14 - 5/2/16 | 47,361,300 | 109.78 | ||||||||||
50,000 | Platinum Energy Holdings, Inc. | 10/4/13 | 695,746 | 1.85 | |||||||||||
10,874 | Platinum Energy Holdings, Inc., Warrants, expire 10/4/18 | 10/4/13 | 9,743 | 0.00 |
EUR: Euro. | ||
1) | Denominated in U.S. Dollars unless otherwise noted. | |
2) | Amount less than $0.01. | |
At October 31, 2016, these restricted securities had a total market value of $57,080,612 or 9.66% of net assets. |
(g) | Variable rate security. The rate disclosed is in effect as of October 31, 2016. |
(h) | Non-income producing security. |
(i) | Annualized yield at date of purchase. |
(j) | A portion is segregated for future fund commitments. |
(k) | Includes restricted cash pledged to counterparty as collateral management for forward foreign currency contracts. |
† | U.S. issuer unless otherwise noted. |
‡ | Denominated in U.S. Dollars unless otherwise noted. |
EUR: Euro.
Country Concentration
% of | ||||
Net Assets | ||||
United States* | 72.32 | % | ||
Luxembourg | 13.75 | |||
United Kingdom | 1.77 | |||
Netherlands | 1.60 | |||
Marshall Islands | 1.14 | |||
Cayman Islands | 0.87 | |||
Canada | 0.12 | |||
Total | 91.57 | % |
* Includes cash equivalents, classified as Short-Term Investments on the Portfolio of Investments. |
Schedule of Forward Foreign Currency Contracts
Settlement | Settlement | Value at | Unrealized | |||||||||||||
Contracts to Sell | Counterparty | Date | Value | 10/31/16 | Depreciation | |||||||||||
75,725,000EUR | JPMorgan Chase Bank, N.A. | 11/29/16 | $ | 82,754,779 | $ | 83,223,767 | $ | (468,988 | ) |
The accompanying notes are an integral part of the financial statements.
7 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Statement of Assets and Liabilities
As of October 31, 2016
Assets: | |||||
Investments at value (Notes 1 and 5): | |||||
Unaffiliated issuers† | $ | 246,491,441 | |||
Affiliated issuers‡ | 294,528,337 | ||||
Total investments# | 541,019,778 | ||||
Cash | 176,747,598 | ||||
Dividends and interest receivable | 12,209,162 | ||||
Receivable for securities sold | 65,224 | ||||
Restricted cash for unfunded commitments (Note 8) | 895,646 | ||||
Restricted cash pledged to counterparty for collateral management | 500,000 | ||||
Other assets | 325,714 | ||||
Total assets | 731,763,122 | ||||
Liabilities: | |||||
Payable for securities purchased | 139,982,500 | ||||
Unrealized depreciation on forward foreign currency contracts | 468,988 | ||||
Payables to trustees and officers | 40,295 | ||||
Accrued expenses | 416,408 | ||||
Total liabilities | 140,908,191 | ||||
Net assets | $ | 590,854,931 | |||
Summary of net assets: | |||||
Capital stock, $0.001 par value, | $ | 1,677,577,722 | |||
Accumulated undistributed net investment income | 11,556,929 | ||||
Accumulated net realized loss on investments and foreign currency transactions | (763,469,479 | ) | |||
Net unrealized appreciation/(depreciation) on investments, unfunded commitments and translation of foreign currency denominated assets and liabilities | (334,810,241 | ) | |||
Net assets applicable to capital shares outstanding | $ | 590,854,931 | |||
Institutional Class | |||||
Net assets | $ | 590,854,931 | |||
Outstanding shares of beneficial interest, unlimited number of shares authorized | 117,815,945 | ||||
Net asset value, offering and redemption price per share± | $ | 5.02 | |||
† | Cost of unaffiliated issuers | $ | 464,903,779 | ||
‡ | Cost of affiliated issuers | $ | 410,331,145 | ||
# | Total cost | $ | 875,234,924 | ||
± | Redemption price is gross of redemption fees (Note 7) |
The accompanying notes are an integral part of the financial statements.
8 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Statement of Operations
For the Year Ended October 31, 2016
Investment Income: | ||||
Dividends - unaffiliated issuers | $ | 375,989 | ||
Interest - unaffiliated issuers | 32,025,149 | |||
Interest - affiliated issuers (Note 5) | 7,296,162 | |||
Interest - payment-in-kind unaffiliated issuers (Note 1) | 2,391,106 | |||
Interest - payment-in-kind affiliated issuers (Notes 1 and 5) | 20,569,001 | |||
Other income | 300,325 | |||
Total investment income | 62,957,732 | |||
Expenses: | ||||
Investment advisory fees (Note 3) | 5,031,027 | |||
Shareholder servicing fees (Note 3) | 837,478 | |||
Auditing and tax fees | 309,224 | |||
Transfer agent fees | 146,001 | |||
Reports to shareholders | 72,997 | |||
Accounting fees | 110,359 | |||
Administration fees (Note 3) | 36,894 | |||
Custodian fees | 35,168 | |||
Trustees’ and officers’ fees and expenses | 284,001 | |||
Insurance | 165,595 | |||
Legal fees | 1,189,999 | |||
Distribution fees (Note 6) | 55,061 | |||
Registration and filing fees | 82,575 | |||
Interest | 34,771 | |||
Miscellaneous | 35,998 | |||
Total expenses | 8,427,148 | |||
Less: Expenses waived (Note 3) | (5,496,226 | ) | ||
Expenses reduced by custodian fee expense offset arrangement (Note 3) | (22,621 | ) | ||
Net expenses | 2,908,301 | |||
Net investment income | 60,049,431 | |||
Realized and unrealized gain/(loss) on investments, unfunded commitments and foreign currency transactions: | ||||
Net realized loss on investments - unaffiliated issuers | (486,302,788 | ) | ||
Net realized gain on investments - affiliated issuers | 143,002 | |||
Net realized gain on foreign currency transactions | 2,517,107 | |||
Net change in unrealized appreciation/(depreciation) on investments | 215,916,234 | |||
Net change in unrealized appreciation on unfunded commitments | 4,646,437 | |||
Net change in unrealized appreciation/(depreciation) on translation of other assets and liabilities denominated in foreign currency | (1,548,247 | ) | ||
Net change in unrealized appreciation on deferred taxes | 107,941 | |||
Net loss on investments and foreign currency transactions | (264,520,314 | ) | ||
Net decrease in net assets resulting from operations | $ | (204,470,883 | ) |
The accompanying notes are an integral part of the financial statements.
9 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Statement of Changes in Net Assets
For the Year | For the Year | |||||||||
Ended | Ended | |||||||||
October 31, 2016 | October 31, 2015 | |||||||||
Operations: | ||||||||||
Net investment income | $ | 60,049,431 | $ | 202,368,221 | ||||||
Net realized loss | (483,642,679 | ) | (358,640,230 | ) | ||||||
Net change in unrealized appreciation/(depreciation) | 219,122,365 | (293,320,939 | ) | |||||||
Net decrease in net assets resulting from operations | (204,470,883 | ) | (449,592,948 | ) | ||||||
Dividends and Distributions to Shareholders from: | ||||||||||
Net investment income: | ||||||||||
Investor Class | (17,851,803 | ) | (57,754,614 | ) | ||||||
Institutional Class | (36,870,495 | ) | (139,515,610 | ) | ||||||
Net realized gains: | ||||||||||
Investor Class | — | (4,768,998 | ) | |||||||
Institutional Class | — | (10,581,494 | ) | |||||||
Return of capital: | ||||||||||
Investor Class | (33,532,654 | ) | — | |||||||
Institutional Class | (69,246,221 | ) | — | |||||||
Decrease in net assets from dividends and distributions | (157,501,173 | ) | (212,620,716 | ) | ||||||
Capital Share Transactions:** | ||||||||||
Proceeds from sale of shares | 27,993,990 | 883,975,358 | ||||||||
Net asset value of shares issued in reinvestment of dividends and distributions | 22,804,577 | 184,106,567 | ||||||||
Redemption fees | 49,894 | 197,253 | ||||||||
Cost of shares redeemed | (467,236,947 | ) | (2,006,871,462 | ) | ||||||
Net decrease in net assets resulting from capital share transactions | (416,388,486 | ) | (938,592,284 | ) | ||||||
Net decrease in net assets | (778,360,542 | ) | (1,600,805,948 | ) | ||||||
Net assets at beginning of period | 1,369,215,473 | 2,970,021,421 | ||||||||
Net assets at end of period* | $ | 590,854,931 | $ | 1,369,215,473 | ||||||
* Including accumulated undistributed net investment income/(distributions in excess of net investment income) of | $ | 11,556,929 | $ | 37,817,211 | ||||||
** On August 26, 2016, the Fund combined share classes so that all shares of the Investor share class were converted into shares of the Institutional share class (see Note 7). |
The accompanying notes are an integral part of the financial statements.
10 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Statement of Cash Flows
For the Year Ended October 31, 2016
Cash Flows from Operating Activities: | ||||
Net decrease in net assets resulting from operations | $ | (204,470,883 | ) | |
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities: | ||||
Purchases of long-term securities | (174,040,437 | ) | ||
Proceeds from sales and paydowns of long-term securities | 580,229,416 | |||
Purchases of short-term securities | (667,222,892 | ) | ||
Proceeds from sales of short-term securities | 816,999,813 | |||
Net change in unrealized (appreciation)/depreciation on investments, unfunded commitments and deferred taxes | (220,670,612 | ) | ||
Net realized losses from investment transactions | 486,159,786 | |||
Payment-in-kind interest income and other non-cash receipt of income | (22,960,107 | ) | ||
Amortization of premium and discount - net | (7,256,591 | ) | ||
Decrease in restricted cash pledged for collateral management and unfunded commitments | 86,953,279 | |||
Decrease in interest and dividends receivable | 13,350,623 | |||
Decrease in foreign capital tax payable | 107,941 | |||
Decrease in prepaid expenses, other assets and other receivables | 1,701,968 | |||
Net change in unrealized (appreciation)/depreciation on forward foreign currency contracts | 1,422,269 | |||
Decrease in payable to Adviser | (897,996 | ) | ||
Decrease in accrued expenses and other liabilities | (427,068 | ) | ||
Net Cash Provided by Operating Activities | 688,978,509 | |||
Cash Flows from Financing Activities: | ||||
Proceeds from issuance of shares | 36,992,672 | |||
Cash payments on shares redeemed net of redemption fees | (474,881,941 | ) | ||
Distributions paid to shareholders | (134,696,596 | ) | ||
Net Cash Used by Financing Activities | (572,585,865 | ) | ||
Cash: | ||||
Net change in cash | 116,392,644 | |||
Cash at beginning of year | 60,354,954 | |||
Cash at end of year | $ | 176,747,598 | ||
Cash Flow Information: | ||||
Cash paid for interest | $ | 34,771 | ||
Noncash Operating and Financing Activities: | ||||
Capital shares issued in reinvestment of distributions paid to shareholders | $ | 22,804,577 | ||
Noncash investment transactions - Dividend reinvestments and payment-in-kind interest income | 23,021,968 |
The accompanying notes are an integral part of the financial statements.
11 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Financial Highlights
Selected data (for share outstanding throughout each period) and ratios are as follows:
Years Ended October 31, | |||||||||||||||||||||||||
2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||||||||
Institutional Class: | |||||||||||||||||||||||||
Net asset value, beginning of period | $ | 7.82 | $ | 10.60 | $ | 11.07 | $ | 10.24 | $ | 10.50 | |||||||||||||||
Income/(loss) from investment operations: | |||||||||||||||||||||||||
Net investment income@ | 0.68 | 0.83 | 1.12 | 0.92 | 0.79 | ||||||||||||||||||||
Net gain/(loss) on investment transactions (both realized and unrealized)1 | (2.14 | ) | (2.74 | ) | (0.77 | ) | 0.77 | 0.13 | |||||||||||||||||
Total from investment operations | (1.46 | ) | (1.91 | ) | 0.35 | 1.69 | 0.92 | ||||||||||||||||||
Less dividends and distributions to shareholders: | |||||||||||||||||||||||||
Dividends from net investment income | (0.47 | ) | (0.81 | ) | (0.82 | ) | (0.86 | ) | (0.72 | ) | |||||||||||||||
Distributions from net realized gain | — | (0.06 | ) | — | — | (0.46 | ) | ||||||||||||||||||
Distributions from return of capital | (0.87 | ) | — | — | — | — | |||||||||||||||||||
Total dividends and distributions | (1.34 | ) | (0.87 | ) | (0.82 | ) | (0.86 | ) | (1.18 | ) | |||||||||||||||
Net asset value, end of period | $ | 5.02 | $ | 7.82 | $ | 10.60 | $ | 11.07 | $ | 10.24 | |||||||||||||||
Total return2 | (19.11 | %) | (19.20 | %) | 2.93 | % | 16.91 | % | 9.89 | % | |||||||||||||||
Ratios/Supplemental Data: | |||||||||||||||||||||||||
Net assets, end of period (in thousands) | $ | 590,855 | $ | 956,546 | $ | 2,049,107 | $ | 1,016,021 | $ | 649,492 | |||||||||||||||
Ratio of expenses to average net assets | |||||||||||||||||||||||||
Before fee waivers and expense offset arrangement | 1.73 | % | 0.93 | % | 0.92 | % | 0.91 | % | 0.89 | % | |||||||||||||||
After fee waivers and expense offset arrangement3 | 0.60 | %# | 0.93 | % | 0.92 | % | 0.91 | % | 0.89 | % | |||||||||||||||
Before interest expense | 0.59 | % | 0.93 | % | 0.88 | % | 0.91 | % | 0.89 | % | |||||||||||||||
Ratio of net investment income to average net assets | 12.36 | % | 8.95 | % | 9.62 | % | 8.48 | % | 7.94 | % | |||||||||||||||
Portfolio turnover rate | 31 | % | 48 | % | 53 | % | 58 | % | 72 | % |
1 | Includes redemption fees of less than $0.01 per share. |
2 | Performance figures may reflect fee waivers and/or expense offset arrangement. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense offset arrangement, the total return would have been lower. Total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period and redemption on the last day of the period and is not annualized. |
3 | As a result of an expense limitation, the ratio of expenses (exclusive of taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items) to average net assets will not exceed 0.95%. |
@ | Calculated based on the average number of shares outstanding during the period. |
# | The Adviser waived a portion of its fees. |
The accompanying notes are an integral part of the financial statements.
12 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements
October 31, 2016
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization:
Third Avenue Focused Credit Fund (the “Fund”) is a separate non-diversified (within the meaning of Section 5(b)(2) of the Investment Company Act of 1940) investment series of Third Avenue Trust (the “Trust”). The Trust, a Delaware business trust, is registered under the Investment Company Act of 1940 as an open-end management investment company. Third Avenue Management LLC (the “Adviser”) provides investment advisory services to the Fund.
On December 9, 2015, the Trust’s Board of Trustees (the “Board”) adopted a plan of liquidation (the “Plan of Liquidation”) for the Fund. Pursuant to the Plan of Liquidation, a cash distribution of $69 million (the “First Liquidating Distribution”) was paid to shareholders and the remaining assets of the Fund were contributed to a liquidating trust, FCF Liquidation Trust (the “Liquidating Trust”). Sales of Fund shares were terminated. Interests in the Liquidating Trust would then be distributed in-kind to Fund shareholders. Subsequent to the Board’s adoption of the Plan of Liquidation, the Plan of Liquidation was modified (the “Modified Plan of Liquidation”). Pursuant to the Modified Plan of Liquidation, the First Liquidating Distribution was paid to Fund shareholders; however, the remaining assets which had been contributed to the Liquidating Trust were returned to the Fund which was to serve as the vehicle to liquidate the Fund’s remaining assets. Pursuant to an exemptive order issued by the SEC on December 16, 2015, all redemptions in the Fund are suspended and subscriptions to the Fund are not accepted, retroactive to December 10, 2015. Effective December 10, 2015, the Adviser has waived its investment advisory and administration fees from the Fund. The First Liquidating Distribution of $0.58613 per share was paid in cash on December 16, 2015, to shareholders of record of Fund Institutional and Investor classes as of December 9, 2015. A second cash distribution of $0.54362 per share was paid on June 15, 2016, to shareholders of record of Fund Institutional and Investor classes as of June 14, 2016. The Fund is currently in liquidation.
Accounting policies:
The policies described below are followed consistently by the Fund in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Fund is an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 946-Investment Companies, which is part of U.S. GAAP.
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates.
Security valuation:
Generally, the Fund’s investments are valued at market value. Securities traded on a principal stock exchange, including The NASDAQ Stock Market, Inc. (“NASDAQ”), are valued at the last quoted sales price, the NASDAQ official closing price, or, in the absence of closing sales prices on that day, securities are valued at the mean between the closing bid and asked price. In accordance with procedures approved by the Board, debt instruments with maturities greater than 60 days, including floating rate loan securities, are valued on the basis of prices obtained from a pricing service approved by the Board or otherwise pursuant to policies and procedures approved by the Board. Forward foreign currency contracts valued independently by service providers or by broker quotes based on pricing models are valued at the forward rate and are marked-to-market daily. Short-term cash investments are valued at cost, plus accrued interest, which approximates market value. Short-term debt securities with 60 days or less to maturity may be valued at amortized cost.
The Adviser has established a Valuation Committee (the “Committee”) which is responsible for overseeing the pricing and valuation of all securities held in the Fund. The Committee operates under pricing and valuation policies and procedures established by the Adviser and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value determinations (and oversight of third parties used in the valuation process determinations), and 2) regular monitoring of the Adviser’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate.
Securities for which market quotations are not readily available are valued at “fair value,” as determined in good faith by the Committee as authorized by the Board, under procedures established by the Board. At October 31, 2016, such securities had a total fair value of $208,479,355 or 35.28% of the Fund’s net assets. Among the factors that may be considered by the Committee in determining fair value are: prior trades in the security in question, trades in similar securities of the same or other issuers, the type of security, trading in marketable securities of the same issuer, the financial condition of the issuer, comparable multiples of similar issuers, the operating results of the issuer and liquidation value of the issuer. See Fair Value Measurements below for additional detail on fair value measurements for financial reporting purposes. The fair values determined in accordance with these procedures may differ significantly from the amounts which would be realized upon disposition of the securities. The recent high yield and distressed
13 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
credit market instability has made it more difficult to obtain market quotations on certain securities owned by the Fund.
Fair value measurements:
In accordance with FASB ASC 820-10, Fair Value Measurements and Disclosures, the Fund discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. Fair value is defined as the price that the Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment under current market conditions. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
• Level 1 — Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date;
• Level 2 — Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active;
• Level 3 — Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input both individually and in aggregate that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Fund. The Fund considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
The following are certain inputs and techniques that the Fund generally uses to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with U.S. GAAP.
Equity Securities (Common Stocks, Preferred Stocks, and Warrants)—Equity securities traded in inactive markets and certain foreign equity securities are valued using inputs which include broker-dealer quotes, recently executed transactions adjusted for changes in the benchmark index, or evaluated price quotes received from independent pricing services or brokers that take into account the integrity of the market sector and issuer, the individual characteristics of the security, and information received from broker-dealers and other market sources pertaining to the issuer or security. To the extent that these inputs are observable, the values of equity securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
U.S. Government Obligations—U.S. Government obligations are valued by independent pricing services based on pricing models that evaluate the mean between the most recently quoted bid and ask price. The models also take into consideration data received from active market makers and broker-dealers, yield curves, and the spread over comparable U.S. Government issues. The spreads change daily in response to market conditions and are generally obtained from the new issue market and broker-dealer sources. To the extent that these inputs are observable, the values of U.S. Government obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Corporate Bonds & Notes—Corporate bonds and notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services or brokers using various inputs and techniques, which include broker-dealer quotations, live trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services or brokers based primarily on broker-dealer quotations from relevant market makers and recently executed transactions in securities of the issuer or comparable issuers. The broker-dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed bonds and sector specific trends. To the extent that these inputs are observable, the values of corporate bonds and notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Forward Foreign Currency Contracts—Forward foreign currency contracts are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, actual trading information and foreign currency exchange rates gathered from leading market makers and foreign currency exchange trading centers throughout the world. To the extent that these inputs are observable, the values of forward
14 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
foreign currency contracts are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
Term Loans—Term loans are valued by independent pricing services based on the average of evaluated quoted prices received from multiple dealers or valued relative to other benchmark securities when broker-dealer quotes are unavailable. Inputs may include quoted prices for similar investments in active markets, interest rates, coupon rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which is then discounted to calculate fair values. To the extent that these inputs are observable, the values of term loans are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
The following is a Summary by Level of Inputs used to value the Fund’s investments as of October 31, 2016:
Level 1: Quoted Prices† | ||||
Investments in Securities: | ||||
Common Stocks: | ||||
Energy | $ | 2,090,146 | ||
Media/Cable | 7,494,123 | |||
Preferred Stocks: | ||||
Financials | 16,920,715 | |||
Total for Level 1 Securities | 26,504,984 | |||
Level 2: Other Significant Observable Inputs† | ||||
Investments in Securities: | ||||
Preferred Stocks: | ||||
Financials | 2,291,112 | |||
Corporate Bonds & Notes | 30,667,940 | |||
Term Loans | 912,562 | |||
Short-Term Investments: | ||||
U.S. Government Obligations | 139,982,500 | |||
Total for Level 2 Securities | 173,854,114 | |||
Level 3: Significant Unobservable Inputs | ||||
Investments in Securities: | ||||
Common Stocks & Warrants: | ||||
Energy | 10,022,527 | * | ||
Manufacturing | — | * | ||
Services | 80,268,345 | * | ||
Transportation Services | 1,454,185 | |||
Utilities | 13,081,250 | |||
Convertible Preferred Stocks: | ||||
Services | 33,136 | |||
Transportation Services | 5,282,296 | |||
Corporate Bonds & Notes | 164,346,682 | * | ||
Term Loans | 58,655,594 | |||
Private Equities: | ||||
Chemicals | 5,158,228 | |||
Consumer Products | 2,358,437 | |||
Total for Level 3 Securities | 340,660,680 | |||
Total Value of Investments | $ | 541,019,778 | ||
Investments in Other Financial Instruments: | ||||
Level 2: Other Significant Observable Inputs | $ | (468,988 | ) | |
Forward Foreign Currency Contracts - Liabilities | ||||
Total Value or Appreciation/(Depreciation) of Other Financial Instruments | $ | (468,988 | ) |
† | The value of securities that were transferred from Level 2 to Level 1 was $14,659,260. The transfer was due to the availability of quoted prices in active markets at period end. The value of securities that were transferred from Level 1 to Level 2 was $668,775. The transfer was due to lack of quoted prices in active markets at period end. |
* | Includes investments fair valued at zero. |
Transfers from Level 1 to Level 2, or from Level 2 to Level 1, are recorded utilizing values as of the beginning of the period.
15 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
The following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
Corporate Bonds & Notes | Term Loans | Common Stocks & Warrants | Preferred & Convertible Preferred Stocks | Private Equities | Total | |||||||||||||||||||
Balance as of 10/31/15 (fair value) | ||||||||||||||||||||||||
Automotive | $ | — | $ | — | $ | — | $ | — | $ | 4,250,000 | $ | 4,250,000 | ||||||||||||
Chemicals | — | * | 8,989,922 | — | — | 14,643,720 | 23,633,642 | |||||||||||||||||
Consumer Products | 67,173,143 | — | — | — | 6,864,045 | 74,037,188 | ||||||||||||||||||
Energy | — | * | 7,799,732 | 16,493,010 | * | 2,143,843 | (a) | 487,769 | 26,924,354 | |||||||||||||||
Financials | — | 2,067,635 | — | — | — | 2,067,635 | ||||||||||||||||||
Gaming & Entertainment | — | 16,725,951 | — | — | — | 16,725,951 | ||||||||||||||||||
Manufacturing | 48,958,986 | 20,696,255 | 21,782,361 | * | — | — | 91,437,602 | |||||||||||||||||
Media/Cable | — | * | — | — | — | — | — | |||||||||||||||||
Services | 33,658,828 | * | — | 1,063,538 | * | 355,023 | (b) | — | 35,077,389 | |||||||||||||||
Technology | 3,233,570 | — | — | — | — | 3,233,570 | ||||||||||||||||||
Transfer in to Level 3^ | ||||||||||||||||||||||||
Metals & Mining | 17,783,791 | — | — | — | — | 17,783,791 | ||||||||||||||||||
Services | — | — | 89,043,291 | — | — | 89,043,291 | ||||||||||||||||||
Transportation Services | — | — | 2,649,324 | 9,268,412 | (b) | — | 11,917,736 | |||||||||||||||||
Utilities | — | — | 38,675,000 | — | — | 38,675,000 | ||||||||||||||||||
Purchases | ||||||||||||||||||||||||
Energy | — | 37,415,928 | — | ‡ | — | — | 37,415,928 | |||||||||||||||||
Services | — | — | 50,295,923 | — | — | 50,295,923 | ||||||||||||||||||
Utilities | — | 500,000 | — | — | — | 500,000 | ||||||||||||||||||
Sales | ||||||||||||||||||||||||
Automotive | — | — | — | — | (3,500,000 | ) | (3,500,000 | ) | ||||||||||||||||
Chemicals | — | — | — | — | (8,417,500 | ) | (8,417,500 | ) | ||||||||||||||||
Energy | — | + | (22,984,903 | ) | (915,001 | )+ | (1,496,576 | )(a) | (200 | ) | (25,396,680 | ) | ||||||||||||
Financials | — | (1,941,475 | ) | — | — | — | (1,941,475 | ) | ||||||||||||||||
Gaming & Entertainment | — | (2,891,578 | ) | — | — | — | (2,891,578 | ) | ||||||||||||||||
Manufacturing | — | (222,500 | ) | — | + | — | — | (222,500 | ) | |||||||||||||||
Media/Cable | (30,905 | ) | — | — | — | — | (30,905 | ) | ||||||||||||||||
Services | — | + | — | (480,923 | )+ | — | — | (480,923 | ) | |||||||||||||||
Technology | (3,092,980 | ) | — | — | — | — | (3,092,980 | ) | ||||||||||||||||
Bond discount/(premium) | ||||||||||||||||||||||||
Chemicals | (422,271 | ) | 231,332 | — | — | — | (190,939 | ) | ||||||||||||||||
Consumer Products | 1,907,289 | — | — | — | — | 1,907,289 | ||||||||||||||||||
Energy | — | 369,963 | — | — | — | 369,963 | ||||||||||||||||||
Gaming & Entertainment | — | 121,255 | — | — | — | 121,255 | ||||||||||||||||||
Manufacturing | 56,615 | 182,702 | — | — | — | 239,317 | ||||||||||||||||||
Metals & Mining | 1,723,332 | — | — | — | — | 1,723,332 | ||||||||||||||||||
Payment-in-kind | ||||||||||||||||||||||||
Chemicals | — | 463,051 | — | — | — | 463,051 | ||||||||||||||||||
Consumer Products | 12,060,785 | — | — | — | — | 12,060,785 | ||||||||||||||||||
Energy | — | 1,722,061 | — | — | — | 1,722,061 | ||||||||||||||||||
Financials | — | 17,738 | — | — | — | 17,738 | ||||||||||||||||||
Manufacturing | 5,533,589 | — | — | — | — | 5,533,589 | ||||||||||||||||||
Metals & Mining | 5,792,913 | — | — | — | — | 5,792,913 | ||||||||||||||||||
Services | 3,902,330 | — | — | — | — | 3,902,330 | ||||||||||||||||||
Return of capital | ||||||||||||||||||||||||
Energy | — | — | (530,000 | ) | — | — | (530,000 | ) | ||||||||||||||||
Net change in unrealized gain/(loss) | ||||||||||||||||||||||||
Automotive | — | — | — | — | 4,550,000 | 4,550,000 | ||||||||||||||||||
Chemicals | 422,271 | (231,332 | ) | — | — | (3,140,047 | ) | (2,949,108 | ) | |||||||||||||||
Consumer Products | (2,316,959 | ) | — | — | — | (4,505,608 | ) | (6,822,567 | ) | |||||||||||||||
Energy | — | 9,251,319 | 21,590,379 | (647,267 | )(a) | 1,482,213 | 31,676,644 | |||||||||||||||||
Financials | — | 441,707 | — | — | — | 441,707 | ||||||||||||||||||
Gaming & Entertainment | — | 82,577 | — | — | — | 82,577 | ||||||||||||||||||
Manufacturing | (8,470,269 | ) | 646,624 | (21,782,361 | ) | — | — | (29,606,006 | ) |
16 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
Reconciliation of Level 3 investments (continued)
Corporate Bonds & Notes | Term Loans | Common Stocks & Warrants | Preferred & Convertible Preferred Stocks | Private Equities | Total | |||||||||||||||||||
Metals & Mining | $ | (23,417,691 | ) | $ | — | $ | — | $ | — | $ | — | $ | (23,417,691 | ) | ||||||||||
Services | — | — | (59,019,882 | ) | (321,887 | )(b) | — | (59,341,769 | ) | |||||||||||||||
Technology | (3,233,570 | ) | — | — | — | — | (3,233,570 | ) | ||||||||||||||||
Transportation Services | — | — | (1,195,139 | ) | (3,986,116 | )(b) | — | (5,181,255 | ) | |||||||||||||||
Utilities | — | (62,500 | ) | (25,593,750 | ) | — | — | (25,656,250 | ) | |||||||||||||||
Net realized gain/(loss) | ||||||||||||||||||||||||
Automotive | — | — | — | — | (5,300,000 | ) | (5,300,000 | ) | ||||||||||||||||
Chemicals | — | — | — | — | 2,072,055 | 2,072,055 | ||||||||||||||||||
Energy | — | (20,351,642 | ) | (26,615,861 | ) | — | (1,969,782 | ) | (48,937,285 | ) | ||||||||||||||
Financials | — | (523,667 | ) | — | — | — | (523,667 | ) | ||||||||||||||||
Gaming & Entertainment | — | 129,801 | — | — | — | 129,801 | ||||||||||||||||||
Manufacturing | — | 9,638 | — | — | — | 9,638 | ||||||||||||||||||
Media/Cable | 30,905 | — | — | — | — | 30,905 | ||||||||||||||||||
Services | — | — | (633,602 | ) | — | — | (633,602 | ) | ||||||||||||||||
Technology | 3,092,980 | — | — | — | — | 3,092,980 | ||||||||||||||||||
Balance as of 10/31/16 (fair value) | ||||||||||||||||||||||||
Automotive | — | — | — | — | — | — | ||||||||||||||||||
Chemicals | — | * | 9,452,973 | — | — | 5,158,228 | 14,611,201 | |||||||||||||||||
Consumer Products | 78,824,258 | — | — | — | 2,358,437 | 81,182,695 | ||||||||||||||||||
Energy | — | 13,222,458 | 10,022,527 | * | — | — | 23,244,985 | |||||||||||||||||
Financials | — | 61,938 | — | — | — | 61,938 | ||||||||||||||||||
Gaming & Entertainment | — | 14,168,006 | — | — | — | 14,168,006 | ||||||||||||||||||
Manufacturing | 46,078,921 | 21,312,719 | — | * | — | — | 67,391,640 | |||||||||||||||||
Media/Cable | — | — | — | — | — | — | ||||||||||||||||||
Metals & Mining | 1,882,345 | — | — | — | — | 1,882,345 | ||||||||||||||||||
Services | 37,561,158 | — | 80,268,345 | * | 33,136 | (b) | — | 117,862,639 | ||||||||||||||||
Technology | — | — | — | — | — | — | ||||||||||||||||||
Transportation Services | — | — | 1,454,185 | 5,282,296 | (b) | — | 6,736,481 | |||||||||||||||||
Utilities | — | 437,500 | 13,081,250 | — | — | 13,518,750 | ||||||||||||||||||
Total | $ | 164,346,682 | $ | 58,655,594 | $ | 104,826,307 | $ | 5,315,432 | $ | 7,516,665 | $ | 340,660,680 | ||||||||||||
Net change in unrealized gain/(loss) related to securities still held as of October 31, 2016: | $ | (33,782,648 | ) | $ | 2,286,748 | $ | (113,914,937 | ) | $ | (4,308,003 | ) | $ | (7,645,655 | ) | $ | (157,364,495 | ) |
^ | Transfers in/(out of) level 3 are recorded utilizing values as of the beginning of the period. The transfers are due to increase/decrease in trading activities at period end. |
* | Includes investments fair valued at zero. |
+ | Includes disposal of investments with $0 proceeds due to corporate actions. |
‡ | Investments acquired through corporate actions with zero cost. |
(a) | Preferred Stocks |
(b) | Convertible Preferred Stocks |
17 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
Quantitative Information about Level 3 Fair Value Measurements
(amounts in thousands)
Range | ||||||||||
Fair Value at | (Weighted | |||||||||
10/31/16 | Valuation Technique(s) | Unobservable Inputs(s) | Average) | |||||||
Corporate Bonds | $ 162,464 | Book Value | Restructuring value | $84.56-$109.78 | ||||||
Common Stocks | 91,110 | Broker Quote | # | $0.00*-$308.74 | ||||||
Term Loans | 33,873 | Broker Quote | # | $70.00-$97.00 | ||||||
Term Loans | 24,120 | Book Value | Restructuring value | $87.50-$109.78 | ||||||
Private Equities | 7,517 | Book Value | Restructuring value | $0.00*-$488.70 | ||||||
Convertible Preferred Stocks | 5,315 | Broker Quote | # | $0.28-$452.52 | ||||||
Common Stocks | 4,717 | Market Comparable Companies | Revenue multiple | 0.71x | ||||||
Warrants | 3,694 | Broker Quote | # | $7.99 | ||||||
Common Stocks | 3,591 | Book Value | Restructuring value | $1.85-$66,006.74 | ||||||
Corporate Bonds | 1,882 | Broker Quote | # | $0.55-$4.39 | ||||||
Other (a) | 2,378 | |||||||||
$ 340,661 |
# | Valuation techniques and significant unobservable inputs used by third-party pricing vendors or brokers, such as those described in Note 1, were not provided to the Adviser. The appropriateness of fair values for these securities is based on results of back testing, broker due diligence, unchanged price review and consideration of macro or security specific events. |
(a) | Includes securities less than 0.50% of net assets of the Fund. |
* | Amount less than $0.01. |
The significant unobservable inputs used in the fair value measurement of the Fund’s investments are listed above. Generally, a change in the assumptions used in any input in isolation may be accompanied by a change in another input. Significant changes in any of the unobservable inputs may significantly impact the fair value measurement. The impact is based on the relationship between each unobservable input and the fair value measurement. Significant increases (decreases) in enterprise multiples may increase (decrease) the fair value measurement. Significant increases (decreases) in the discount for marketability may decrease (increase) the fair value measurement.
Security transactions and investment income:
Security transactions for financial statement purposes are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date or, for certain foreign dividends, as soon as the Fund becomes aware of the dividends. Interest income is determined on the basis of coupon interest accrued using the effective interest method which adjusts for amortization of premiums and accretion of discounts. Dividend income on the Statement of Operations are shown net of any foreign taxes withheld on income from foreign securities. Payments received from certain investments held by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. These amounts may subsequently be reclassified upon receipt of information from the issuer. Realized gains and losses from securities transactions are recorded on an identified cost basis.
Foreign currency translation and foreign investments:
The books and records of the Fund are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows:
• | Investments and assets and liabilities denominated in foreign currencies: At the prevailing rates of exchange on the valuation date. | |
• | Investment transactions and investment income: At the prevailing rates of exchange on the date of such transactions. |
The net assets of the Fund are presented at market values using the foreign exchange rates at the close of the period. The Fund does not generally isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the investments held.
Similarly, the Fund does not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of investments sold during the period. Accordingly, realized and unrealized foreign currency gains/(losses) are included in the reported net realized gain/(loss) and unrealized appreciation/(depreciation) on investments transactions and balances.
Net realized gains/(losses) on foreign currency transactions represent net foreign exchange gains/(losses) from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains/(losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of net unrealized appreciation/(depreciation) on the Statement of Assets and Liabilities. The change in net unrealized currency gains/(losses) for the period is reflected on the Statement of Operations.
Pursuant to U.S. federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains
18 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
and losses realized on sales and maturities of foreign denominated debt securities are generally treated as ordinary income.
Payment-in-kind securities:
The Fund may invest in PIKs. PIKs may make a payment at each interest payment date in additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds. The daily market quotations of the original bonds may include the accrued interest (referred to as a “dirty” price) and require a pro-rata adjustment from the unrealized appreciation or depreciation on investments to interest receivable on the Statement of Assets and Liabilities.
For the year ended October 31, 2016, the total in-kind payments with respect to PIK securities that were received by the Fund in the amounts of $22,960,107 or 36.47% of total investment income are shown as a separate line item on the Statement of Operations.
Term loans:
The Fund typically invests in loans which are structured and administered by a third party entity (the “Agent”) that acts on behalf of a group of lenders that make or hold interests in the loan. These securities generally pay interest at rates which are periodically pre-determined by reference to a base lending rate plus a premium. These base lending rates are generally either the lending rate offered by one or more major European banks, such as the London Interbank Offered Rate (“LIBOR”) or the prime rate offered by one or more major United States banks, or the certificate of deposit rate.
These securities are ordinarily contractually obligated to receive approval from the Agent bank and/or borrower prior to disposition. Remaining maturities of term loans may be less than the stated maturities shown as a result of contractual or optional payments by the borrower. Such prepayments cannot be predicted with certainty. The interest rate disclosed reflects the rate in effect on October 31, 2016.
Forward foreign currency contracts:
The Fund may be exposed to foreign currency risks associated with portfolio investments and therefore may use forward foreign currency contracts to hedge or manage these exposures. The Fund also may buy forward foreign currency contracts to gain exposure to currencies. The change in market value is included in unrealized appreciation/(depreciation) on investments and foreign currency translations. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Fund’s portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts.
During the period ended October 31, 2016, the Fund used forward foreign currency contracts for hedging against foreign currency risks.
Summary of derivatives information:
The following table presents the value of derivatives held as of October 31, 2016, by their primary underlying risk exposure and respective location on the Statements of Assets and Liabilities:
Statement of Assets and | Forward Foreign | |||||
Derivative Contract | Liabilities Location | Currency Contracts | ||||
Liabilities: | ||||||
Foreign currency contracts | Unrealized depreciation on forward foreign currency contracts | $(468,988) |
The following tables present the effect of derivatives on the Statement of Operations during the year ended October 31, 2016, by primary risk exposure:
Amount of Realized Gain/(Loss) on Derivatives Recognized in Income | ||||
Forward Foreign | ||||
Derivative Contract | Currency Contracts | |||
Foreign currency contracts | $852,620(a) | |||
Amount of Change in Unrealized Appreciation/(Depreciation) on Derivatives Recognized in Income | ||||
Forward Foreign | ||||
Derivative Contract | Currency Contracts | |||
Foreign currency contracts | $(1,422,269)(b) |
(a) | Included in “Net realized gain on foreign currency transactions”. |
(b) | Included in “Net change in unrealized appreciation/(depreciation) on translation of other assets and liabilities denominated in foreign currency”. |
19 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
Derivatives volume:
The tables below disclose the volume of the Fund’s forward foreign currency contracts and options activities during the year ended October 31, 2016 (amounts denominated in U.S. Dollars). Please refer to the tables in the Summary of derivatives information for derivative-related gains and losses associated with volume activity (measured at each month-end).
Forward Foreign Currency Contracts: | ||||
Average Settlement Value Purchased | $ | 1,642,446 | ||
Average Settlement Value Sold | 86,740,899 |
Floating rate obligations:
The Fund may invest in debt securities with interest payments or maturity values that are not fixed, but float in conjunction with an underlying index or price. These securities may be backed by corporate issuers. The indices and prices upon which such securities can be based include interest rates and currency rates. Floating rate securities pay interest according to a coupon which is reset periodically.
Dividends and distributions to shareholders:
The amount of dividends and distributions paid to shareholders from net investment income and net realized capital gains on disposition of securities, respectively is determined in accordance with U.S. federal income tax law and regulations which may differ from U.S. GAAP.
Commencing with the First Liquidating Distribution, which was made on December 16, 2015, all distributions are intended to be part of a series of liquidating distributions which will result in the complete liquidation of the Fund. Reinvestment of liquidating distributions is not permitted.
Income tax information:
The Fund has complied with the requirements of the Internal Revenue Code applicable to regulated investment companies and intends to distribute all of its taxable net investment income and net realized capital gains, if any, to its shareholders. Therefore, no provision for U.S. federal income taxes is included on the accompanying financial statements. The Fund may, in the future, become a taxpayer if it determines it is in the best interests of the shareholders.
Income, including capital gains, from investments in foreign securities received by the Fund may be subject to income, withholding or other taxes imposed by foreign countries.
Management has analyzed the tax positions taken on the Fund’s U.S. federal income tax returns for all open tax years (generally the current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Fund’s financial statements. This conclusion may be subject to future review and adjustment at a later date based upon factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof. The Fund is subject to possible examination by the relevant taxing authorities for tax years for which the applicable statutes of limitations have not expired.
Expense allocation:
Expenses attributable to the Fund are charged to it. Expenses attributable to the Trust are generally allocated using the ratio of each series’ average net assets relative to the total average net assets of the Trust. Certain expenses are shared with Third Avenue Variable Series Trust, an affiliated fund group. Such costs are allocated using the ratio of the series’ average net assets relative to the total average net assets of each series of the Trust and Third Avenue Variable Series Trust.
Share class accounting:
Prior to the share class conversion on August 26, 2016 (described in Note 7), investment income, common expenses and realized/unrealized gains/(losses) on investments were allocated to the two classes of shares of the Fund on the basis of daily net assets of each class; and fees relating to a specific class was charged directly to that share class.
Trustees’ and officers’ fees:
The Trust does not pay any fees to its officers for their services as such, except for the Chief Compliance Officer and the Associate Director of Compliance, to whom the Trust paid $345,420, including $46,399 from the Fund, for the year ended October 31, 2016. The Trust does pay, together with Third Avenue Variable Series Trust, Trustees who are not “interested persons” (as defined in the Investment Company Act of 1940) of the Trust (“independent Trustee”) a fee of $5,000 for each meeting of the Board that each independent Trustee attends, in addition to reimbursing all independent Trustees for travel and incidental expenses incurred by them in connection with their attendance at meetings. If a special meeting is required, Trustees will each receive $2,500. The Trust, together with Third Avenue Variable Series Trust, also pays each independent Trustee an annual retainer of $65,000 (the lead independent Trustee receives an additional retainer of $12,000). The Trustees on the Audit Committee each receive
20 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
$2,000 for each audit committee meeting and the audit committee chairman receives an annual retainer of $6,000. Effective March 2016, one of the Trustees now acts in an Advisory Trustee capacity. The Advisory Trustee receives an annual retainer of $32,500 and a fee of $2,500 for each Board meeting the Trustee attends.
During the year ended October 31, 2016, the Third Avenue Focused Credit Fund Demand Review Committee and Third Avenue Focused Credit Fund Oversight Committee were established. Each Trustee who serves on both of these Committees is paid $30,000 annually by the Fund, and each Trustee who serves only as a member of the Fund’s Demand Review Committee is paid $20,000 annually by the Fund.
2. INVESTMENTS
Purchases and sales/conversions:
The aggregate cost of purchases and aggregate proceeds from sales and conversions of investments, excluding short-term investments, from unaffiliated and affiliated issuers (as defined in the Investment Company Act of 1940 as ownership of 5% or more of the outstanding voting securities of these issuers) for the year ended October 31, 2016 were as follows:
Purchases | Sales | |||||||
Affiliated | $ | 72,955,110 | $ | 693,960 | ||||
Unaffiliated | 94,713,782 | 514,024,168 |
3. INVESTMENT ADVISORY SERVICES, ADMINISTRATION AND SERVICE FEE AGREEMENTS AND EXPENSE OFFSET ARRANGEMENT
The Fund has an Investment Advisory Agreement with the Adviser for investment advice and certain management functions. The terms of the Investment Advisory Agreements provide that the Fund pay the Adviser an advisory fees at an annual rate of 0.75% based on the Fund’s total average daily net assets. These fees are calculated daily and paid monthly. The Adviser waived its advisory fees effective December 10, 2015.
Additionally, the Adviser pays certain expenses on behalf of the Fund which are partially reimbursed by the Fund, including service fees due to third parties, the compensation expense for the Fund’s Chief Compliance Officer and Associate Director of Compliance and other miscellaneous expenses. Effective December 10, 2015, the Fund no longer reimburses the Adviser for its pro rata share of the service fee expense. At October 31, 2016, the Fund had amounts payable to the Adviser of $5,940, for reimbursement of expenses paid by the Adviser.
Until March 1, 2017 (subject to renewal), whenever the Fund’s normal operating expenses, including the investment advisory fee and most other operating expenses, but excluding taxes, interest, brokerage commissions, acquired fund fees and expenses, and extraordinary items, exceeds the expense limitation based on the Fund’s average daily net assets, the Adviser has agreed to waive a portion of its advisory fees and/or reimburse the Fund in an amount equal to that excess. The expense limitations for the Fund are disclosed in the Financial Highlights. Effective December 10, 2015, the Adviser will not seek any recoupment from the Fund for previously waived and/or reimbursed expenses.
The Fund has entered into an Administration Agreement with the Adviser pursuant to which the Adviser, as administrator, is responsible for providing various administrative services to the Trust. The Adviser has in turn entered into a Sub-Administration Agreement with BNY Mellon Investment Servicing (U.S.) Inc. (“BNY Mellon”) pursuant to which BNY Mellon provides certain of these administrative services on behalf of the Adviser. The Fund pays the Adviser a fee calculated at an annual rate of 0.0055% of the average daily net assets of the Fund for such services. The Adviser pays BNY Mellon an annual sub-administration fee for sub-administration services provided to the Trust equal to $203,483, including $20,870 from the Fund. The Adviser waived its administration fees effective December 10, 2015.
Both the Fund and the Adviser have entered into agreements with financial intermediaries to provide record keeping, processing, shareholder communications and other services to customers of the intermediaries investing in the Fund and have agreed to compensate the intermediaries for providing those services. Certain of those services would be provided by the Fund if the shares of each customer were registered directly with the Fund’s transfer agent. Accordingly, the Fund has agreed to reimburse a portion of the intermediary fees paid by the Adviser pursuant to provisions adopted by the Board. The Fund pays a portion of the intermediary fees attributable to shares of the Fund not exceeding the estimated expense the Fund would have paid its transfer agent had each customer’s shares been registered directly with the transfer agent instead of held through the intermediary accounts. The Adviser pays the remainder of the fees. The fees incurred by the Fund are reflected as shareholder servicing fees in the Statements of Operations. For the period from November 1, 2015 to December 9, 2015, such fees amounted to $120,266 for the Fund. The Adviser waived the Fund’s commitment to share in such expenses effective December 10, 2015.
The Fund has an expense offset arrangement in connection with its custodian contract. Credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund’s custodian expenses. The expense reduction amount due to this arrangement for the year ended October 31, 2016 was $22,621, and the amount is reflected as “Expenses reduced by custodian fee expense offset arrangement” in the Statement of Operations.
21 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
4. LINE OF CREDIT
During 2016, the Trust and Third Avenue Variable Series Trust were participants in a single committed, unsecured $100,000,000 line of credit with The Bank of Nova Scotia, to be used only for temporary or emergency purposes. This commitment was terminated on April 20, 2016. The interest on the loan was calculated at a variable rate based on the LIBOR, Federal Funds or Prime Rates. A commitment fee of 0.25% per annum of the available line of credit was charged, of which each series of the Trust and Third Avenue Variable Series Trust paid its pro rata share, based on the ratio of its individual net assets to the net assets of all participants at the time the fee was due and payable. The fee was paid quarterly in arrears and is included in “Miscellaneous” expenses in the Statement of Operations. From November 27, 2015 to December 9, 2015, $51,100,000 of the line of credit was utilized by the Fund. The interest and commitment fee related to the loan was $34,771 and is reflected as “Interest” in the Statement of Operations.
5. RELATED PARTY TRANSACTIONS
Investment in affiliates:
A summary of the Fund’s transactions in securities of affiliated issuers for the year ended October 31, 2016 is set forth below:
Shares/ | Shares/ | |||||||||||||||||||||||
Principal Amount† | Gross | Gross | Principal Amount† | Investment Income | ||||||||||||||||||||
Held at Oct. 31, | Purchases | Sales and | Held at Oct. 31, | Value at | Nov. 1, 2015- | |||||||||||||||||||
Name of Issuer: | 2015 | and Additions | Reductions | 2016 | Oct. 31, 2016 | Oct. 31, 2016 | ||||||||||||||||||
Affinion Group Holdings Inc., Warrants, expire 11/9/20 | — | 462,266 | 1 | — | 462,266 | $ | 3,693,505 | $ | — | |||||||||||||||
Affinion Group Holdings, Inc., Class A | — | 1,751,734 | 1 | — | 1,751,734 | 14,013,872 | — | |||||||||||||||||
Affinion Group Holdings, Inc., Class C | — | 522 | 1 | — | 522 | — | — | |||||||||||||||||
Affinion Group Holdings, Inc., Class D | — | 549 | 1 | — | 549 | — | — | |||||||||||||||||
Corporate Risk Holdings Corp. | 31,594 | — | — | 31,594 | — | — | ||||||||||||||||||
Corporate Risk Holdings I, Inc. | 6,248,652 | — | — | 6,248,652 | 62,486,520 | — | ||||||||||||||||||
Corporate Risk Holdings LLC, 11.500% Cash or 13.500% Payment-in-kind Interest, due 1/2/20 | 33,658,828 | 3,902,330 | 2 | — | 37,561,158 | 37,561,158 | 4,426,398 | 4 | ||||||||||||||||
Corporate Risk Holdings LLC, Escrow, due 7/1/20** | 36,181,786 | — | 36,181,786 | 3 | — | — | — | |||||||||||||||||
Corporate Risk Holdings LLC, Escrow, due 7/1/20** | 120,047,350 | — | 120,047,350 | 3 | — | — | — | |||||||||||||||||
Geokinetics, Inc. | 124,461 | — | — | 124,461 | 4,717,072 | — | ||||||||||||||||||
Geokinetics, Inc., Warrants, expire 9/1/26* | — | 45,252 | 1 | — | 45,252 | 1,714,598 | — | |||||||||||||||||
Geokinetics Holdings USA, Inc., Term Loan, 2nd Lien 5.000% Cash and 8.000% Payment-in-kind Interest, due 8/10/18* | — | 743,713 | 2 | — | 743,713 | 661,904 | 14,657 | 4 | ||||||||||||||||
Global Geophysical Services, Inc.** | 3,786,564 | — | 3,786,564 | 3 | — | — | — | |||||||||||||||||
Global Geophysical Services, Inc., Escrow, due 5/1/14** | 15,599,000 | — | 15,599,000 | 3 | — | — | — | |||||||||||||||||
Global Geophysical Services, Inc., Escrow, due 5/1/17** | 45,925,000 | — | 45,925,000 | 3 | — | — | — | |||||||||||||||||
Global Geophysical Services, Inc., Term Loan B, 15.500% Cash or Payment-in-kind Interest, due 8/9/17** | 15,599,464 | 1,716,132 | 17,315,596 | — | — | — | ||||||||||||||||||
Global Geophysical Services, Inc., Warrants** | 262,913 | — | 262,913 | 3 | — | — | — | |||||||||||||||||
Ideal Standard International S.A., Series B, 11.750% Cash or 15.750% Payment-in-kind Interest, due 5/1/18 | 27,905,497 | EUR | 4,568,173 | 2,EUR | — | 32,473,670 | 35,648,136 | 7,483,542 | 4 | |||||||||||||||
Ideal Standard International S.A., Series C, 11.750% Cash or 17.750% Payment-in-kind Interest, due 5/1/18 | 33,180,416 | EUR | 6,150,872 | 2,EUR | — | 39,331,288 | 43,176,122 | 8,704,717 | 4 | |||||||||||||||
Ideal Standard International Equity S.A. Alpecs | 1,451,633,736,282 | — | — | 1,451,633,736,282 | 2,358,437 | — | ||||||||||||||||||
Liberty Tire Recycling Holdco, LLC, Term Loan B, 9.000%, due 7/7/20 | 22,194,375 | — | 222,500 | 21,971,875 | 21,312,719 | 2,418,961 | ||||||||||||||||||
Liberty Tire Recycling LLC, 2nd Lien, 11.000% Payment-in-kind Interest, due 3/31/21 | 48,958,986 | 5,533,589 | 2 | — | 54,492,575 | 46,078,921 | 4,797,635 | 4 | ||||||||||||||||
Longview Intermediate Holdings C, LLC | 4,550,000 | — | — | 4,550,000 | 13,081,250 | — |
22 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
Investment in affiliates (continued)
Shares/ | Shares/ | |||||||||||||||||||||||
Principal Amount† | Gross | Gross | Principal Amount† | Investment Income | ||||||||||||||||||||
Held at Oct. 31, | Purchases | Sales and | Held at Oct. 31, | Value at | Nov. 1, 2015- | |||||||||||||||||||
Name of Issuer: | 2015 | and Additions | Reductions | 2016 | Oct. 31, 2016 | Oct. 31, 2016 | ||||||||||||||||||
Longview Power, LLC, Revolver, 6.540%, due 4/13/20* | — | 500,000 | — | 500,000 | $ | 437,500 | $ | 19,253 | ||||||||||||||||
LTR Holdings, Inc. | 3,430,293 | — | — | 3,430,293 | — | — | ||||||||||||||||||
LTR Holdings, Inc., Warrants, expire 12/12/19** | 45,000 | — | 45,000 | 3 | — | — | — | |||||||||||||||||
Phosphate Holdings, Inc.** | 478,500 | — | 478,500 | — | — | — | ||||||||||||||||||
Platinum Energy Holdings, Inc. | 50,000 | — | — | 50,000 | 92,500 | — | ||||||||||||||||||
Platinum Energy Holdings, Inc., Warrants, expire 10/4/18 | 10,874 | — | — | 10,874 | — | — | ||||||||||||||||||
Radio One, Inc., Class D | 2,311,360 | — | 183,571 | 2,127,789 | 5,319,473 | — | ||||||||||||||||||
Reichhold Cayman L.P. & G.P.** | 29,055 | — | 18,500 | 10,555 | 5,158,228 | — | ||||||||||||||||||
Reichhold Holdings International B.V., Term Loan, 12.000% Cash or 14.000% Payment-in-kind Interest, due 3/31/17** | 4,421,726 | 271,332 | 2 | — | 4,693,058 | 4,693,058 | — | |||||||||||||||||
Reichhold Holdings International B.V., Term Loan, 15.000% Cash or Payment-in-kind Interest, due 3/31/17** | 2,667,984 | 191,719 | 2 | — | 2,859,703 | 2,859,703 | — | |||||||||||||||||
Reichhold Industries, Inc., due 5/8/17** | 17,478,774 | — | — | 17,478,774 | — | — | ||||||||||||||||||
Reichhold LLC II, Term Loan, 12.000% Cash or 14.000% Payment-in-kind Interest, due 3/31/17** | 1,900,212 | — | — | 1,900,212 | 1,900,212 | — | ||||||||||||||||||
Spanish Broadcasting System, Inc., Class A | 681,637 | — | 42,034 | 639,603 | 2,174,650 | — | ||||||||||||||||||
Total Affiliates | $ | 309,139,538 | $ | 27,865,163 |
1 | Share increase due to corporate action. |
2 | Includes PIK interest. |
3 | Share decrease due to corporate action. |
4 | Includes interest and Payment-in-kind interest. |
* | As of October 31, 2015, not an affiliate. |
** | As of October 31, 2016, no longer an affiliate. |
† | Denominated in U.S. dollars unless otherwise noted. |
EUR | Euro |
Certain employees of the Adviser serve as members of the board of directors of companies in which the Fund has investments. As a result of such service, for the year ended October 31, 2016, the Fund received $159,475 in board member fees from these companies that board members employed by the Adviser agreed to have paid directly to the benefit of the Fund. These fees are included in “Other Income” on the accompanying Statement of Operations.
6. DISTRIBUTION EXPENSES
The Board has adopted a distribution plan (the “Plan”) pursuant to Rule 12b-1 under the Investment Company Act. The Plan provides that, as compensation for distribution and related services provided to the Fund’s Investor Class, the Fund’s Investor Class accrues a fee calculated at the annual rate of 0.25% of average daily net assets of the class. Such fees may be paid to institutions that provide distribution services. The amount of fees paid during any period may be more or less than the cost of distribution and other services provided. Financial Industry Regulatory Authority rules impose a ceiling on the cumulative distribution fees paid. The Plan complies with those rules. Payments by the Fund were suspended on December 10, 2015, and the Board terminated the Plan with respect to the Fund effective December 31, 2015.
For the period from November 1, 2015 to December 9, 2015, the distribution expenses for the Fund were $55,061.
7. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue an unlimited number of shares of each class of beneficial interest with $0.001 par value. The Fund is not issuing new shares, and redemptions in the Fund are currently suspended pursuant to an order from the SEC.
23 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
On August 26, 2016, the Fund combined share classes so that all shares of the Investor share class were converted into shares of the Institutional share class.
Transactions in capital stock were as follows:
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Investor Class | Investor Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 934,028 | $ | 6,935,491 | 20,542,816 | $ | 190,873,062 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 1,186,798 | 7,904,073 | 6,477,929 | 60,668,559 | ||||||||||||
Shares redeemed* | (16,374,936 | ) | (118,879,558 | ) | (61,127,281 | ) | (561,668,709 | ) | ||||||||
Shares converted to Institutional Class* | (38,411,259 | ) | (528,269,076 | ) | — | — | ||||||||||
Net decrease | (52,665,369 | ) | $ | (632,309,070 | ) | (34,106,536 | ) | $ | (310,127,088 | ) | ||||||
For the Year Ended October 31, 2016 | For the Year Ended October 31, 2015 | |||||||||||||||
Institutional Class | Institutional Class | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Shares sold | 2,857,103 | $ | 21,058,499 | 73,136,327 | $ | 693,102,296 | ||||||||||
Shares Issued upon reinvestment of dividends and distributions | 2,240,677 | 14,900,504 | 13,254,166 | 123,438,008 | ||||||||||||
Shares redeemed* | (48,024,503 | ) | (348,307,495 | ) | (157,428,382 | ) | (1,445,005,500 | ) | ||||||||
Shares converted from Investor Class* | 38,497,997 | 528,269,076 | — | — | ||||||||||||
Net increase/(decrease) | (4,428,726 | ) | $ | 215,920,584 | (71,037,889 | ) | $ | (628,465,196 | ) |
* | Redemption fees are netted with redemption amounts. |
Prior to December 9, 2015, the Fund charged a redemption fee of 2%, for shares redeemed or exchanged for shares of another series of the Trust within 60 days or less of the purchase date.
8. COMMITMENTS AND CONTINGENCIES
At October 31, 2016, the Fund had the following commitments and contingencies:
Issuer | Type | Amount of Commitment | Funded Commitment | Value of Segregated Cash | |||||||||||||
Geokinetics Holdings USA, Inc. | Term Loan | $ | 802,877 | $ | 657,231 | $ | 145,646 | ||||||||||
Longview Power, LLC | Revolver | 1,250,000 | 500,000 | 750,000 | |||||||||||||
$ | 2,052,877 | $ | 1,157,231 | $ | 895,646 |
In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.
In 2016, the Fund became party to various derivative, securities class action and books and records lawsuits.
In 2016, the Adviser became party to various derivative and securities class action lawsuits.
24 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
9. RISKS RELATING TO CERTAIN INVESTMENTS
Foreign Securities and Emerging Markets Risk:
Foreign securities from a particular country or region may be subject to currency fluctuations and controls, or adverse political, social, economic or other developments that are unique to that particular country or region. Therefore, the prices of foreign securities in particular countries or regions may, at times, move in a different direction from those of U.S. securities. From time to time, foreign capital markets may exhibit more volatility than those in the U.S., and the securities markets of emerging market countries can be extremely volatile. Emerging market countries can generally have economic structures that are less diverse and mature, and political systems that are less stable, than those of developed countries, and, as a result, the securities markets of emerging market countries can be more volatile than more developed markets may be.
High Yield and Distressed Risk:
The Fund’s investments in high-yield debt securities (commonly known as “junk bonds”) and distressed securities may expose the Fund to greater risks than if the Fund only owned higher-grade securities. The value of high-yield, lower quality securities is affected by the creditworthiness of the issuers of the securities and by general economic and specific industry conditions. The prices of high yield securities can fall in response to negative news about the issuer or its industry, or the economy in general to a greater extent than those of higher rated securities. Issuers of high-yield securities are not as strong financially as those with higher credit ratings, so the securities are usually considered speculative investments. These issuers are more vulnerable to financial setbacks and recession than are more creditworthy issuers, which may impair their ability to make interest and principal payments. The Fund may also invest in distressed securities, which the Adviser considers to be issued by companies that are, or might be, involved in reorganizations or financial restructurings, either out of court or in bankruptcy. The Fund’s investments in distressed securities typically may involve the purchase of high-yield bonds, bank debt or other indebtedness of such companies.
Debt Securities Risk:
The market value of a debt security may decline due to general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. The debt securities market can be susceptible to increases in volatility and decreases in liquidity. Increases in volatility and decreases in liquidity may be caused by a rise in interest rates (or the expectation of a rise in interest rates), which are at or near historic lows in the United States and in other countries. During periods of reduced market liquidity, the Fund may not be able to readily sell debt securities at prices at or near their perceived value. If the Fund needed to sell large blocks of debt securities to meet shareholder redemption requests or to raise cash, those sales could further reduce the prices of such securities.
Prices of bonds and other debt securities tend to move inversely with changes in interest rates. Typically, a rise in rates will adversely affect debt securities and, accordingly, will cause the value of the Fund’s investments in these securities to decline. When interest rates fall, the values of already-issued securities generally rise, although investments in new securities may be at lower yields. The prices of high-yield debt securities (“junk bonds”), unlike investment grade securities, may fluctuate unpredictably and not necessarily inversely with changes in interest rates.
The rates on floating debt instruments adjust periodically with changes in market interest rates. Although these instruments are generally less sensitive to interest rate changes than fixed rate instruments, the value of floating rate loans and other floating rate securities may decline if their interest rates do not rise as quickly, or as much, as general interest rates. An unexpected increase in Fund redemption requests, including requests from shareholders who may own a significant percentage of the Fund’s shares, which may be triggered by market turmoil or an increase in interest rates, could cause the Fund to sell its holdings at a loss or at undesirable prices and adversely affect the Fund’s share price and increase the Fund’s liquidity risk, Fund expenses and/or taxable distributions. Economic and other developments can adversely affect debt securities markets.
Market Risk:
Prices of securities have historically fluctuated. The market value of a security may decline due to general market conditions that are not related to the particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. A security’s market value also may decline because of factors that affect the particular company, such as management performance, financial leverage, and reduced demand for the company’s products or services, or factors that affect the company’s industry, such as labor shortages or increased production costs and competitive conditions within an industry. The value of the Fund will similarly fluctuate and you could lose money.
Liquidity Risk:
Liquidity risk exists when particular investments are difficult to sell. The Fund may not be able to sell these investments at the best prices or at the value the Fund place on them. In such a market, the value of such investments and a Fund’s share price may fall dramatically, even during periods of declining interest rates. Investments that are illiquid or that trade in lower volumes may be more difficult to value. The market for high-yield debt securities (“junk bonds”) may be less liquid and therefore these securities may be harder to value or sell at an acceptable price, especially during times of market volatility
25 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
or decline. Investments in foreign securities tend to have greater exposure to liquidity risk than U.S. securities. Liquidity can decline unpredictably in response to overall economic conditions or credit tightening. Investments in private debt instruments, restricted securities, and securities having substantial market and/or credit risk may involve greater liquidity risk.
Counterparty risk:
The Fund is exposed to counterparty risk, or the risk that an institution or other entity with which the Fund has unsettled or open transactions will default. The potential loss to the Fund could exceed the value of the financial assets recorded in the Fund’s financial statements. Financial assets, which potentially expose the Fund to counterparty risk, consist principally of cash due from counterparties and investments. The Adviser seeks to minimize the Fund’s counterparty risk by performing reviews of each counterparty and by minimizing concentration of counterparty risk by undertaking transactions with multiple customers and counterparties on recognized and reputable exchanges. Delivery of securities sold is only made once the Fund has received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.
At October 31, 2016, the Fund had counterparty concentration of credit risk primarily with JPMorgan Chase Bank, N.A.
The Fund is a party to International Swaps and Derivatives Association, Inc. Master Agreements (“ISDA Master Agreements”) with select counterparties that govern transactions, over-the-counter derivatives and foreign exchange contracts entered into by the Fund and those counterparties. The ISDA Master Agreements contain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements of the Fund.
The considerations and factors surrounding the settlement of certain purchases and sales made on a delayed-delivery basis are governed by Master Securities Forward Transaction Agreements (“Master Forward Agreements”) between the Fund and select counterparties. The Master Forward Agreements maintain provisions for, among other things, initiation and confirmation, payment and transfer, events of default, termination, and maintenance of collateral.
The counterparty risk associated with certain contracts may be reduced by master netting arrangements to the extent that if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Fund’s overall exposure to counterparty risk with respect to transactions subject to master netting arrangements can change substantially within a short period, as it is affected by each transaction subject to the arrangement.
Collateral requirements:
For derivatives traded under an ISDA Master Agreement and/or Master Forward Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Fund and the counterparty.
Cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Fund, if any, is noted in the Schedule of Investments. Generally, the amount of collateral due from or to a party has to exceed a minimum transfer amount threshold (e.g. $500,000) before a transfer is required, which is determined at the close of business of the Fund and any additional required collateral is delivered to/pledged by the Fund on the next business day. Typically, a Fund and its counterparties are not permitted to sell, re-pledge or use the collateral they receive. To the extent amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. The Fund attempts to mitigate counterparty risk by entering into agreements only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties.
For financial reporting purposes, the Fund does not offset derivative assets and derivative liabilities that are subject to netting arrangements in the Statement of Assets and Liabilities.
At October 31, 2016, the Fund’s derivative assets and liabilities (by type) on a gross basis are as follows:
Assets | Liabilities | |||||||
Derivative Financial Instruments: | ||||||||
Forward Foreign Currency Contracts | $ | — | $ | 468,988 | ||||
Total derivative assets and liabilties in the Statement of Assets and Liabilities | — | 468,988 | ||||||
Derivatives not subject to a master netting agreement or similiar agreement (“MNA”) | — | — | ||||||
Total derivative assets and liabilities subject to a MNA | $ | — | $ | 468,988 |
26 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
The following tables present the Fund’s derivative liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral pledged by the Fund as of October 31, 2016:
Counterparty | Amount of Liabilities Subject to a MNA by Counterparty | Derivatives Available for Offset1 | Non-cash Collateral Pledged2 | Cash Collateral Pledged2 | Net Amount of Derivative Liabilities3 | |||||||||||||||
JPMorgan Chase Bank N.A. | $ | 468,988 | $ | — | $ | — | $ | (468,988 | ) | $ | — |
1 | The amount of derviatives for offset is limited to the amount of assets and/or liabilites that are subject to a MNA. |
2 | Excess of collateral pledged to the individual counterparty may not be shown for financial reporting purposes. |
3 | Net amount represents the net amount payable to the counterparty in the event of default. |
Loans and other direct debt instruments:
The Fund invests in loans and other direct debt instruments issued by corporate borrowers. These loans represent amounts owed to lenders or lending syndicates (loans and loan participations) or to other parties. Direct debt instruments may involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to the Fund in the event of fraud or misrepresentation. In addition, loan participations involve a risk of insolvency of the lending bank or other financial intermediary. The markets in loans are not regulated by federal securities laws or the SEC.
Cash concentration:
The Fund’s cash balance is held at a major regional U.S. bank. The Fund’s cash balance, which typically exceeds Federal Deposit Insurance Corporation insurance coverage, subjects the Fund to a concentration of credit risk. The Fund regularly monitors the credit ratings of this financial institution in order to mitigate the credit risk that exists with the balances in excess of insured amounts.
Off-balance sheet risk:
The Fund enters into derivatives which may represent off-balance sheet risk. Off-balance sheet risk exists when the maximum potential loss on a particular investment is greater than the value of such investment as reflected in the Statement of Assets and Liabilities.
Focused Investing:
The Fund holds a relatively concentrated portfolio that may contain fewer securities or industries than the portfolios of other mutual funds. Holding a relatively concentrated portfolio may increase the risk that the value of the Fund could decrease because of the poor performance of one or a few investments. Concentrated positions may be difficult to liquidate.
10. Federal Income Taxes
Prior to December 9, 2015 adoption of the Plan of Liquidation the amount of dividends and distributions paid by the Funds was based upon the Fund’s net investment income and net realized capital gains. These amounts are determined in accordance with U.S. federal income tax law and regulations which may differ from U.S. GAAP. Distributions paid by the Fund after the adoption of the Plan of Liquidation will generally be treated as part of a series of liquidating distributions for U.S. federal income tax purposes.
Dividends and distributions, including liquidating distributions, are recorded by the Funds on the ex-dividend date. In order to present accumulated undistributed net investment income (loss), accumulated net realized gain (loss) on investments and foreign currency transactions and capital stock on the Statement of Assets and Liabilities that more closely represent their tax character, certain adjustments have been made. “Book/tax” differences are either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their tax-basis treatment. Temporary differences do not require reclassification. Permanent differences are primarily due to reclassification of certain transactions involving foreign securities and currencies, and partnerships, the difference in the treatment of amortization of discount on certain debt instruments, certain derivative instruments and other book to tax adjustments. Net investment income (loss), net realized capital gain (loss) on investments and foreign currency transactions and net assets were not affected by these changes. For the year ended October 31, 2016, the adjustments were as follows.
Increase/(Decrease) to Capital Stock | Increase/(Decrease) to Accumulated Net Investment Income (Loss) | Increase/(Decrease) to Undistributed Net Realized Gain (Loss) on Investments and Foreign Currency Transactions | ||||||||
$ | 132 | $ | (31,587,415 | ) | $ | 31,587,283 |
27 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Notes to Financial Statements (continued)
October 31, 2016
The tax character of dividends and distributions paid during the year ended October 31, 2016 was as follows:
Ordinary Income | Net Capital Gains | Liquidating Distributions | Total | |||||||||||
$ | 24,498,692 | $ | — | $ | 133,002,481 | $ | 157,501,173 |
The tax character of dividends and distributions paid during the fiscal year ended October 31, 2015 was as follows:
Ordinary Income | Net Capital Gains | Total | ||||||||||||
$ | 212,620,716 | $ | — | $ | 212,620,716 |
At October 31, 2016 , the accumulated undistributed earnings on a tax basis were:
Undistributed Ordinary Income | Net Capital Gains | |||||||||||||
$ | — | $ | — |
This differs from the amount shown on the Statement of Assets and Liabilities primarily due to cumulative timing differences.
As of October 31, 2016, Third Avenue Focused Credit Fund has a capital loss carryforward which should be available to offset certain capital gains generated in future years as follows:
Capital Losses incurred in a post-enactment year | Short-Term | Long-Term | Total | |||||||||
Year-ended Oct. 31, 2015 | $ | 89,657,034 | $ | 217,650,552 | $ | 307,307,586 | ||||||
Year-ended Oct. 31, 2016 | $ | 75,379,494 | $ | 378,176,547 | $ | 453,556,041 | ||||||
Total | $ | 165,036,528 | $ | 595,827,099 | $ | 760,863,627 |
The Regulated Investment Company Modernization Act of 2010 generally allows capital losses incurred in a taxable year beginning after December 22, 2010 (“post-enactment year”) to be carried forward for an unlimited period to the extent not utilized. Post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses.
The U.S. federal income tax basis of the Funds’ investments and the total unrealized appreciation/(depreciation) as of October 31, 2016 were as follows:
Tax Basis of Investments | Appreciation | (Depreciation) | Total Unrealized Appreciation/ (Depreciation) | Other Cost Basis Adjustments | Total Net Unrealized Appreciation/ (Depreciation) | |||||||||||||||||
$ | 866,752,837 | $ | 24,813,835 | $ | (350,546,894 | ) | $ | (325,733,059 | ) | $ | (126,107 | ) | $ | (325,859,166 | ) |
11. SUBSEQUENT EVENTS
Pursuant to the Modified Plan of Liquidation, a cash distribution of approximately $30 million was paid to the Fund’s shareholders on November 8, 2016 (the “Third Liquidating Distribution”). The Third Liquidating Distribution of $0.25463 per share was paid to shareholders of record of the Fund as of November 7, 2016. In addition, a cash distribution of approximately $140 million was paid to the Fund’s shareholders on November 29, 2016 (the “Fourth Liquidating Distribution”). The Fourth Liquidating Distribution of $1.18829 per share was paid to shareholders of record of the Fund as of November 28, 2016. Internal Revenue Service Forms 8937 - Report of Organizational Actions Affecting Basis of Securities - providing further detail with respect to the tax treatment of these two distributions to the Fund’s shareholders have been posted to the Fund’s website at www.focusedcreditfund.com.
28 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
Third Avenue Trust – Third Avenue Focused Credit Fund
In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations, of cash flows and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Third Avenue Focused Credit Fund (hereafter referred to as the “Fund”) as of October 31, 2016, the results of its operations and cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of October 31, 2016 by correspondence with the custodian, agent banks and brokers, and the application of alternative auditing procedures where securities purchased had not been received, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
December 23, 2016
29 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Annual Renewal of Investment Advisory Agreement
October 31, 2016 (Unaudited)
At a meeting of the Board of Trustees of the Trust (the “Board”) held on June 8 and 9, 2016, the Trustees, including a majority of the Trustees who are not “interested persons” (as the term is defined in the Investment Company Act) of the Trust (the “Independent Trustees”), approved the renewal of the Fund’s Investment Advisory Agreement (the “Agreement”). Prior to voting on the Agreement, the Independent Trustees met separately with their independent legal counsel for a discussion of the Adviser’s presentation and materials referred to below.
In advance of the meeting, the Independent Trustees, through their independent legal counsel, requested extensive materials, and the Adviser provided them, to assist the Board in considering the renewal of the Agreement. As the Fund is in liquidation and has suspended redemptions pursuant to an exemptive order (the “Order”) issued by the Securities and Exchange Commission, the Adviser is not managing the Fund in accordance with its historic investment objective, strategies or policies, and is not receiving any fee pursuant to the Agreement. Therefore, the Independent Trustees requested information primarily relating to the Adviser’s services as investment adviser of the Fund during its liquidation.
The Independent Trustees constituted an ad hoc 15(c) committee to work with representatives of the Adviser to evaluate the adequacy and extent of the information to be provided for their consideration. This committee communicated frequently with the Adviser’s representatives and independent legal counsel. In addition, the Independent Trustees constituted an ad hoc Focused Credit Fund Oversight Committee that meets with representatives of the Adviser on a bi-weekly basis to oversee, among other things, matters related to the liquidation of the Fund.
At its meeting held on June 8 and 9, 2016, the Board engaged in a detailed discussion of the materials with the Adviser. In considering the Agreement, the Trustees did not identify any single overriding factor and instead considered all factors collectively. As a part of their decision-making process, the Trustees considered information derived from their service on the Fund’s Board and their familiarity with the Adviser. The following is a summary of the discussions and conclusions regarding the material factors that formed the basis for the Board’s approval.
Factors Considered
The Trustees received a presentation from representatives of the Adviser and reviewed the services being provided by the Adviser to the Fund and the financial condition of the Adviser to determine that the Adviser is solvent and sufficiently well-capitalized to perform its ongoing responsibilities to the Fund. The Trustees considered, among other things:
1. | the Adviser’s efforts to ensure the Fund’s continued compliance with the Order; |
2. | the Adviser’s familiarity with the Fund’s portfolio holdings; |
3. | the Adviser’s expertise in investing in distressed companies and restructurings; |
4. | the Adviser’s liquidation strategy for Fund holdings and progress and performance in the liquidation of assets; |
5. | the Adviser’s progress making cash distributions to shareholders; |
6. | the Adviser’s efforts to ensure continued compliance with Subchapter M of the Internal Revenue Code; |
7. | the Adviser’s efforts to retain portfolio managers and other employees; |
8. | the efforts of the Adviser to mitigate the impact of any recent or anticipated staff reductions or other changes on the services provided to the Fund; and |
9. | the feasibility of finding another party to manage the Fund’s liquidation. |
As the Fund is in liquidation, the Board did not consider the investment performance of the Fund or the Adviser. The Board also noted that the Adviser is not being paid a fee for its services and does not receive any other fall-out benefits as a result of the services it provides to the Fund. Therefore, the Board did not consider comparative advisory fees or expense ratios, the profitability to the Adviser resulting from the Agreement or economies of scale.
Conclusions
The Trustees concluded that the nature, extent and quality of the services provided by the Adviser are adequate and appropriate under the circumstances. The Trustees concluded, in light of considerations noted above, to approve the Agreement.
30 |
Third Avenue Trust
Management of the Trust
(Unaudited)
Information pertaining to the Trustees and officers of the Trust is set forth below. The fund complex includes five portfolios in the Third Avenue Trust and one portfolio in the Third Avenue Variable Series Trust. The Statement of Additional Information (SAI) includes additional information about the Trustees and is available upon request, without charge, by calling (800) 443-1021.
Interested Trustee
Name, Date of Birth & Address | Term of Office and Length of Time Served* | Position(s) Held With Registrant | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Trustee | ||||
Martin J. Whitman** DOB: September 1924 622 Third Avenue New York, NY 10017 | Trustee from 7/99 to 12/16 | Chairman and Trustee | Chairman (3/90 to 12/16) (5 funds) of Third Avenue Trust; Chairman (7/99 to 12/16) of Third Avenue Variable Series Trust; CEO, President and Director (10/74 to Present) of Martin J. Whitman & Co., Inc. (formerly M.J. Whitman & Co., Inc.) (private investment company); Chartered Financial Analyst. | Director (1991 to 2011) of Nabors Industries, Inc. (international oil drilling services). |
31 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Independent Trustees
Correspondence intended for any Independent Trustee may be sent to: Third Avenue Management LLC, 622 Third Avenue, 32nd Floor, New York, NY 10017.
Name & Date of Birth | Term of Office and Length of Time Served* | Position(s) Held With Registrant | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Trustee | ||||
William E. Chapman, II DOB: September 1941 | Trustee since 8/02 | Trustee | President and Owner (1998 to Present) of Longboat Retirement Planning Solutions (consulting firm). | Trustee, The AMG Funds (1999 to Present) (45 portfolios); Director of Harding, Loevner Funds, Inc. (2008 to Present) (9 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios); Trustee (5/02 to 6/13) of Bowdoin College; Director, The Mutual Fund Directors Forum (2010 to Present); Director, Sarasota Memorial Healthcare Foundation (2011 to Present) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). | ||||
Lucinda Franks DOB: July 1946 | Trustee since 2/98 | Trustee | Journalist and author (1969 to Present). | Trustee of Third Avenue Variable Series Trust (7/99 to Present). | ||||
Edward J. Kaier DOB: September 1945 | Trustee since 8/02 | Trustee | Partner (7/07 to Present) at Teeters Harvey Gillboy & Kaier LLP (law firm). | Trustee, The AMG Funds (1999 to Present) (45 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). |
32 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Independent Trustees
Name & Date of Birth | Term of Office and Length of Time Served* | Position(s) Held With Registrant | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Trustee | ||||
Eric Rakowski DOB: June 1958 | Trustee since 8/02 | Trustee | Professor (1990 to Present) at University of California at Berkeley School of Law. | Trustee, The AMG Funds (1999 to Present) (47 portfolios); Director of Harding, Loevner Funds, Inc. (2008 to Present) (9 portfolios); Trustee of Aston Funds (2010 to Present) (27 portfolios) and Trustee of Third Avenue Variable Series Trust (8/02 to Present). | ||||
Patrick Reinkemeyer DOB: March 1965 | Trustee since 1/15 | Trustee | President, SilverPepper LLC (2011 to Present). | Trustee of Third Avenue Variable Series Trust (1/15 to Present). | ||||
Martin Shubik DOB: March 1926 | Advisory Trustee since 3/16*** | Advisory Trustee | Seymour H. Knox Professor (1975 to 2007) of Mathematical Institutional Economics, Yale University; Emeritus (2007 to Present). | Trustee or Director of Third Avenue Variable Series Trust or its predecessor (7/99 to 3/16). | ||||
Charles C. Walden DOB: July 1944 | Trustee since 5/96 | Trustee**** | President and Owner (2006 to Present) of Sound Capital Associates, LLC (consulting firm); Chartered Financial Analyst. | Director, Special Opportunities Fund, Inc. (2009 to Present) and Trustee of Third Avenue Variable Series Trust (7/99 to Present). | ||||
* | Each Trustee serves until his or her successor is duly elected and qualified. |
** | Mr. Whitman is an “interested Trustee” of the Trust due to his employment with and indirect ownership interests in the Adviser. Mr. Whitman resigned his position as Chairman and Trustee as of December 10, 2016. |
*** | Mr. Shubik was a Trustee of the Trust from July 1999 untill March 2016 and now acts in an Advisory Trustee capacity. |
**** | At a Board meeting held on December 15, 2016, Mr. Walden was appointed Chairman of the Board. |
33 |
Third Avenue Trust
Management of the Trust (continued)
(Unaudited)
Principal Trust Officers Who Are Not Trustees
Name, Date of Birth & Address | Position(s) Held With Registrant | Principal Occupation(s) During Past 5 Years | Other Directorships Held by Officer | |||
Vincent J. Dugan DOB: September 1965 622 Third Avenue New York, NY 10017 | Treasurer and CFO | Treasurer and Chief Financial Officer (CFO) (9/04 to Present) (5 funds) of Third Avenue Trust; Treasurer and CFO (9/04 to Present) of Third Avenue Variable Series Trust; Chief Operating Officer (COO) and CFO (8/04 to Present) of Third Avenue Management LLC; COO and CFO (8/04 to Present) of Third Avenue Holdings Delaware LLC; COO and CFO (8/04 to Present) of M.J. Whitman LLC and subsidiaries; COO and CFO (8/04 to Present) of certain other funds advised by Third Avenue Management LLC (8/04 to Present). Director of one other fund advised by Third Avenue Management LLC (2005-2015). | N/A | |||
Michael A. Buono DOB: May 1967 622 Third Avenue New York, NY 10017 | Controller | Controller (5/06 to Present) (5 funds) of Third Avenue Trust, Third Avenue Variable Series Trust, Third Avenue Management LLC and M.J. Whitman LLC and subsidiaries. | N/A | |||
W. James Hall III DOB: July 1964 622 Third Avenue New York, NY 10017 | President, General Counsel and Secretary | General Counsel and Secretary (6/00 to Present) (5 funds) and President (12/15 to Present) (5 funds) of Third Avenue Trust; General Counsel and Secretary (9/00 to Present) and President (12/15 to Present) of Third Avenue Variable Series Trust; General Counsel and Secretary (9/00 to Present) of EQSF Advisers, Inc., and its succesor, Third Avenue Management LLC; General Counsel and Secretary (5/00 to Present) of M.J. Whitman, Inc. and its succesor M.J. Whitman LLC; General Counsel and Secretary of certain other funds advised by Third Avenue Management LLC (7/02 to Present). | N/A | |||
Joseph J. Reardon DOB: April 1960 622 Third Avenue New York, NY 10017 | Chief Compliance Officer | Chief Compliance Officer (4/05 to Present) (5 funds) of Third Avenue Trust, Third Avenue Variable Series Trust and Third Avenue Management LLC. | N/A |
34 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Schedule of Shareholder Expenses
(Unaudited)
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, such as redemption fees; and (2) ongoing costs, including management fees, shareholder servicing fees, distribution fees (if applicable) and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. Although the Fund is no longer charging redemption fees or paying management fees, shareholder servicing fees, or distribution fees, this example is required to be included pursuant to SEC rules.
The example is based on an investment of $1,000 invested at the beginning of the period, May 1, 2016 and held for the six month period ended October 31, 2016.
Actual Expenses
The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Class’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as redemption fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The example also assumes all dividends and distributions have been reinvested.
Beginning Account Value May 1, 2016 | Ending Account Value October 31, 2016 | Expenses Paid During the Period May 1, 2016 to October 31, 2016* | Annualized Expense Ratio | |||||
Institutional Class | ||||||||
Actual | $1,000 | $1,032.70 | $0.87 | 0.17% | ||||
Hypothetical | $1,000 | $1,024.28 | $0.87 | 0.17% |
* | Expenses (net of fee waivers and expense offset arrangement) are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184) divided by 366. |
35 |
Third Avenue Trust
Third Avenue Focused Credit Fund
Federal Tax Status of Dividends and Distributions
(Unaudited)
The following information represents the tax status of dividends and distributions paid by the Fund during the fiscal year ended October 31, 2016. This information is presented to meet regulatory requirements and no current action on your part is required. The information reported below will differ from the actual amounts taxable to shareholders for the calendar year ending December 31, 2016.
Information necessary to complete your income tax returns for the calendar year ending December 31, 2016 will be issued by the Fund in the early part of 2017.
The following is the breakdown of dividends and distributions paid by the Fund during fiscal year ended October 31, 2016:
Ordinary Income | $ | 24,498,692 | ||
Liquidating Distributions | 133,002,481 | |||
Total Dividends and Distributions | $ | 157,501,173 |
36 |
BOARD OF TRUSTEES
William E. Chapman, II | Patrick Reinkemeyer | |||
Lucinda Franks | Charles C. Walden | |||
Edward J. Kaier | Martin J. Whitman | |||
Eric Rakowski |
Martin Shubik — Advisory Trustee
OFFICERS
Martin J. Whitman — Chairman of the Board
Vincent J. Dugan — Chief Financial Officer, Treasurer
Michael A. Buono — Controller
W. James Hall — President, General Counsel, Secretary
Joseph J. Reardon — Chief Compliance Officer
TRANSFER AGENT
BNY Mellon Investment Servicing (U.S.) Inc.
P.O. Box 9802
Providence, RI 02940-8002
610-239-4600
800-443-1021 (toll-free)
INVESTMENT ADVISER
Third Avenue Management LLC
622 Third Avenue
New York, NY 10017
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
CUSTODIAN
JPMorgan Chase Bank, N.A.
383 Madison Avenue, 4th Floor
New York, NY 10179
The information in this booklet is intended for shareholders of the Third Avenue Focused Credit Fund (“the Fund” or “Focused Credit Fund”) which has been operating pursuant to a plan of liquidation since December 16, 2015. For more information, please visit our website or contact your Relationship Manager at: |
www.focusedcreditfund.com | 622 Third Avenue | 212.906.1160 | |
New York, NY 10017 | creditupdates@thirdave.com |
Item 2. Code of Ethics.
At October 31, 2016, the Trust had a code of ethics (the “Code of Ethics”) that applies to its principal executive officer and principal financial officer. This Code of Ethics is attached as Exhibit (a) (1) hereto.
Item 3. Audit Committee Financial Expert.
The Trust’s Board of Trustees has determined that Messrs. William Chapman and Charles Walden, members of the Audit Committee of the Board, are “audit committee financial experts” (“ACFE”) as defined by the Securities and Exchange Commission (“SEC”) and has designated Mr. Chapman as the Committee’s ACFE. Each of Messrs. Chapman and Walden are “independent” as defined by the SEC for purposes of ACFE determinations. Under applicable securities laws, a person who is determined to be an ACFE will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an ACFE. The designation or identification of a person as an ACFE does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the Audit Committee and Board of Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the Trust’s principal accountant for the audit of the Trust’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $455,000, including out of pocket expenses of approximately $7,000, for the fiscal year ended October 31, 2016 and $420,000, including out of pocket expenses of approximately $7,000, for the fiscal year ended October 31, 2015.
(b) Audit-Related Fees. There were no fees billed in each of the last two fiscal years for assurance and related services by the Trust’s principal accountant that are reasonably related to the performance of the audit of the Trust’s financial statements and are not reported above in Item 4(a). There were no audit-related services provided to the Trust’s investment adviser or any entity controlling, controlled by, or under common control with the Trust’s investment adviser that provides ongoing services to the Trust (“Service Affiliates”) during each of the last two years that were required to be pre-approved by the Trust’s Audit Committee.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the Trust’s principal accountant for tax compliance, tax advice and tax planning were $313,000 for the fiscal year ended October 31, 2016 and $265,000 for the fiscal year ended October 31, 2015. These services related to the preparation of tax returns and the review of tax-related issues. There were no tax services provided to Service Affiliates during each of the last two fiscal years that were required to be pre-approved by the Trust’s Audit Committee.
(d) All Other Fees. There were no fees billed in each of the last two fiscal years for products and services provided by the Trust’s principal accountant, other than the services reported above in Items 4(a) through (c). There were no other services provided to Service Affiliates during each of the last two fiscal years that were required to be pre-approved by the Trust’s Audit Committee.
(e) Audit Committee Pre-Approval Policies and Procedures.
(i) The Audit Committee pre-approves the Trust’s accountant’s engagement for audit and non-audit services to the Trust and certain non-audit services to the Service Affiliates on a case-by-case basis. Pre-approval considerations include whether the proposed services are compatible with maintaining the accountant’s independence.
(ii) There were no services provided to the Trust or Service Affiliates during the last two fiscal years for which the pre-approval requirement was waived pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not Applicable.
(g) The aggregate non-audit fees billed by the Trust’s accountant for services rendered to the Trust and Service Affiliates for each of the last two fiscal years were $313,000 for the fiscal year ended October 31, 2016 and $265,000 for the fiscal year ended October 31, 2015.
(h) The Audit Committee has considered whether the provision of non-audit services to the Service Affiliates that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the independence of the Trust’s accountant.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchase of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The Trust’s principal executive officer and principal financial officer have evaluated the Trust’s disclosure controls and procedures within 90 days of this filing and have concluded that the Trust’s disclosure controls and procedures are reasonably designed to ensure that information required to be disclosed by the Trust in this Form N-CSR is recorded, processed, summarized, and reported within the required time periods and that information required to be disclosed by the Trust in the report that it files or submits on Form N-CSR is accumulated and communicated to the Trust’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) The Trust’s principal executive officer and principal financial officer are aware of no changes in the Trust’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Trust’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) | Code of Ethics |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act. |
(a)(3) | Not applicable |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the 1940 Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Third Avenue Trust
By: | /s/ W. James Hall |
Name: | W. James Hall |
Title: | Principal Executive Officer |
Date: | December 23, 2016 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the 1940 Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ W. James Hall |
Name: | W. James Hall |
Title: | Principal Executive Officer |
Date: | December 23, 2016 |
By: | /s/ Vincent J. Dugan |
Name: | Vincent J. Dugan |
Title: | Principal Financial Officer |
Date: | December 23, 2016 |