Martin Whitman hardly thought about slowing down when he turned 66. Instead, he started a mutual fund.
Today, at 76, Whitman manages nearly US$4 billion in public and private assets, much of it in the Third Avenue Value Funds, a group of three value funds with impressive records. The flagship fund, also called Third Avenue Value, which he started in 1990, had a five-year annualized return of 15.7 percent through June 30, compared with an average of 13.19 percent for all small-cap value funds tracked by Morningstar Inc.
PHOTO: NY TIMES
But there are signs that even Whitman must slacken his pace. In the fund group's semiannual report to shareholders for the period ended April 30, Whitman, known for his tell-it-like-it-is style, laid the groundwork for his succession. He announced that he had stepped down as co-manager of the other two funds, Third Avenue Small-Cap Value and Third Avenue Real Estate Value, but that he would still manage the flagship fund. Sole responsibility for the small-cap fund now falls to Curtis Jensen, co-manager since its inception in 1997; responsibility for the real estate fund falls to Michael H. Winer, co-manager since its inception in 1998.
Whitman began planning his succession in 1995, when he hired Jensen, a star student of his at the Yale University School of Management, and began assembling a team of analysts with strengths in various disciplines. If Whitman had to choose someone today to succeed him as chairman of the fund group, Jensen would get the job, Whitman said.
"If I have to pick one, it's Curtis," he said.
Whitman, however, does not plan to leave soon. In his semiannual report, he said he expected to work as long as he remained "compos mentis," of sound mind.
He enjoys his job. "It's not really hard work," Whitman said in a conference room in the modest Midtown Manhattan offices of his companies: Third Avenue Value Funds; MJ Whitman Advisers, a private investment adviser; and MJ Whitman Inc, a broker-dealer.
Whitman is a buy-and-hold investor. Typically, only 5 to 10 percent of the securities in the three funds are sold in a year, a low rate even for value funds. (The turnover rate in the average small-cap value fund is 70 percent, according to Morningstar Inc) Most of the work is up front, searching for investments -- bonds and stocks -- that are no more than 50 percent of their takeover value. That is, they must be "cheap," he added.
Whitman emphasized that any securities he buys must also be safe, which he defined as "financially strong." He looks for businesses with high-quality assets, like lots of cash on hand or valuable, readily salable properties, or for companies with few if any liabilities.
Whitman also looks for value in companies that are either in bankruptcy or headed that way, buying the distressed securities at a discount. He buys the bonds of companies that others believe may default -- if he thinks there is a reasonable chance that the company can turn around its fortunes.
In such situations, Whitman often buys enough of a company's debt to have a hand in any turnaround.
The soft economy this year has put more companies close to the edge. Many found it easy to raise money in recent years by issuing high-yield securities, or junk bonds. Now that yields to maturity on many of these bonds exceed 20 percent, they make good buys for investors with tenacity. This year, distressed assets of the flagship Third Avenue Value fund climbed to 10 percent of its US$2.5 billion in total assets, from only 2 percent at the end of 2000.
In a classic example of distressed investing, Whitman bought the senior unsecured debt of the USG Corp, the wallboard maker in Chicago. The escalating costs to US Gypsum, a USG subsidiary, from legal settlements with victims of asbestos-related diseases prompted USG to announce last month that it might file for bankruptcy.
The mere mention of asbestos might send many mutual fund managers scurrying for safety. Today, the Third Avenue Value fund is USG's largest creditor, holding US$158.1 million of its debt, more than half of the outstanding public debt. Third Avenue's claims on the corporation will be senior to any asbestos claims, said Whitman, who described USG as "a very well-run, very well-capitalized company."
While the time may be ripe for distressed investing, Whitman said he was not sure it was right for most mutual funds, which are intended to be passive investing vehicles.
"Distressed investing done well is by its nature not passive investing," he said. "You have to get in there and bang heads."
Still, Whitman said some distressed securities were suitable passive investments. An example is the first mortgage bonds of Pacific Gas & Electric, a unit of the PG&E Corp that filed for Chapter 11 protection in April. The PG&E unit has more than US$4 billion in debt. Whitman, with a US$7 million stake, does not expect to ever own enough of it to play a management role. In any case, by his analysis, PG&E should never miss an interest payment. Whitman bought the bonds with a yield to maturity of 25 percent.
In other cases, Whitman and his staff are heavily involved in their companies, often sitting on court-appointed committees of unsecured creditors.
A Third Avenue official is the co-chairman of such a committee in the Chapter 11 case of Armstrong World Industries, a subsidiary of Armstrong Holdings that is also involved in an asbestos liability case.
Although distressed companies often end up paying Third Avenue Value Funds' bills for its involvement, the company does not earn extra fees for this work. If it did, it could not be classified as a mutual fund company, Whitman said.
A hedge fund, however, can earn fee income, and a share of a business' profits. As a result, MJ Whitman Advisers has started one -- the Aggressive Conservative fund, a reference to a 1979 book that Whitman wrote with Martin Shubik, The Aggressive Conservative Investor -- and is selling it to institutional investors. The hedge fund, managed by Whitman, Winer and Peter Faulkner, who manages a similar hedge fund for individual investors, has about US$8 million in assets under management.
Whitman continues to plug away in his role as sounding board for his proteges. In a characteristic remark, Whitman called his wife, Lois, 75, founder and executive director of the Children's Rights Division of Human Rights Watch, the real overachiever. She is still working, he said, and working "a lot harder than I am."
ROLLER-COASTER RIDE: More than five earthquakes ranging from magnitude 4.4 to 5.5 on the Richter scale shook eastern Taiwan in rapid succession yesterday afternoon Back-to-back weather fronts are forecast to hit Taiwan this week, resulting in rain across the nation in the coming days, the Central Weather Administration said yesterday, as it also warned residents in mountainous regions to be wary of landslides and rockfalls. As the first front approached, sporadic rainfall began in central and northern parts of Taiwan yesterday, the agency said, adding that rain is forecast to intensify in those regions today, while brief showers would also affect other parts of the nation. A second weather system is forecast to arrive on Thursday, bringing additional rain to the whole nation until Sunday, it
CONDITIONAL: The PRC imposes secret requirements that the funding it provides cannot be spent in states with diplomatic relations with Taiwan, Emma Reilly said China has been bribing UN officials to obtain “special benefits” and to block funding from countries that have diplomatic ties with Taiwan, a former UN employee told the British House of Commons on Tuesday. At a House of Commons Foreign Affairs Committee hearing into “international relations within the multilateral system,” former Office of the UN High Commissioner for Human Rights (OHCHR) employee Emma Reilly said in a written statement that “Beijing paid bribes to the two successive Presidents of the [UN] General Assembly” during the two-year negotiation of the Sustainable Development Goals. Another way China exercises influence within the UN Secretariat is
LANDSLIDES POSSIBLE: The agency advised the public to avoid visiting mountainous regions due to more expected aftershocks and rainfall from a series of weather fronts A series of earthquakes over the past few days were likely aftershocks of the April 3 earthquake in Hualien County, with further aftershocks to be expected for up to a year, the Central Weather Administration (CWA) said yesterday. Based on the nation’s experience after the quake on Sept. 21, 1999, more aftershocks are possible over the next six months to a year, the agency said. A total of 103 earthquakes of magnitude 4 on the local magnitude scale or higher hit Hualien County from 5:08pm on Monday to 10:27am yesterday, with 27 of them exceeding magnitude 5. They included two, of magnitude
Taiwan’s first drag queen to compete on the internationally acclaimed RuPaul’s Drag Race, Nymphia Wind (妮妃雅), was on Friday crowned the “Next Drag Superstar.” Dressed in a sparkling banana dress, Nymphia Wind swept onto the stage for the final, and stole the show. “Taiwan this is for you,” she said right after show host RuPaul announced her as the winner. “To those who feel like they don’t belong, just remember to live fearlessly and to live their truth,” she said on stage. One of the frontrunners for the past 15 episodes, the 28-year-old breezed through to the final after weeks of showcasing her unique