Third Avenue Management Defends Its Pursuit of Alpha
Bloomberg TV recently invited me onto their new show, Bloomberg GO, for a short debate on active versus passive investing with David Barse, the CEO of Third Avenue Management.
Barse stated that funds offered by Third Avenue, which has more than $8 billion in assets under management, had been able to beat their index benchmark. He then admitted that alpha was hard to deliver because the competition is tough. He also asserted that delivering alpha is what his firm wants to do, that it’s intellectually challenging and that Third Avenue works hard to do it.
I certainly agree that it’s difficult to deliver alpha. And, as demonstrated in The Incredible Shrinking Alpha, which I co-authored with Andrew Berkin, the task has become increasingly difficult over time with fewer and fewer success stories.
With that said, I would add that investors surely don’t care if Third Avenue finds generating alpha intellectually challenging. Nor do they care if the firm works hard at it. Investors don’t confuse effort with results. So let’s go to our trusty videotape to see if Third Avenue has, in fact, been delivering alpha.
Third Avenue’s investment strategy and philosophy is based on the work of legendary value investors Benjamin Graham and David Dodd. Quoting from the firm’s website: “Third Avenue Management analyzes opportunities based on the balance sheet quality and financial position of companies that issue securities. Our analysis of financial strength informs our judgment of intrinsic value. Once we determine our assessment of what an enterprise is worth, we invest only when we can do so at a significant discount. We buy strength when it is misunderstood and undervalued.”
Given this statement, I conclude that the proper benchmarks to which the returns of their funds should be compared are not market-like indices (such as the S&P 500). Instead, they should be compared to value indices. Or, better yet, to comparable passively managed value funds, which also incur costs and trading expenses, in the same asset classes.
Thus, to determine if Third Avenue has outperformed passively managed funds, I’ll compare the returns of three of their funds – the Third Avenue Small Cap Value Fund (TASCX), the Third Avenue International Value Fund (TAVIX) and the Third Avenue Value Fund (TAVFX) – to the comparable funds run by Dimensional Fund Advisors (DFA) and where available to a comparable Vanguard index fund. (In the interest of full disclosure, my firm, Buckingham, recommends DFA funds when constructing client portfolios.) We’ll begin with TASCX.
Morningstar classifies TASCX as a small-value fund. For the 10- and 15-year periods ending October 13, 2015, TASCX returned 5.20% per year and 8.34% per year, respectively. The fund’s percentile rankings (first percentile is the best) over those periods were 90 and 91, respectively.