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.
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.
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