Curtis Jensen on the Appreciation in Small Caps

Bridget Hughes: Hi, this is Bridget Hughes with Morningstar. I'm here in New York
at Third Avenue Management talking with Curtis Jensen, who runs
the Third Avenue Small Cap Value Fund.

Curtis, I've read your recent shareholder letter, and you said that
you were wary and cautious of the rapid and relentless appreciation
of small caps. Since we've had this recent pullback of the last
couple of weeks, how are you feeling now?

Curtis Jensen: Well, the pullback has definitely helped us in terms of getting
much closer to implementing some new ideas in the portfolio. In
fact, in this current quarter, you're going to see a few new names
popping up, a couple of names in the technology sector for
example. And we're very close on implementing. Yesterday, for
example, last couple of days; we've been very close in
implementing some new names.

So our inventory is much more interesting than it's been even in
the last few weeks. And we continue to identify new ideas.
Whether its industrials, whether it's technology, financials, and
we're even peeking again back at the energy sector.

Bridget Hughes: Now, you're one of the few small-cap funds that have as big a non-
U.S. stake as you do, with about 30% in foreign stocks. I read also
that you have hedged out your currency exposure to the euro and to
the yen. I'm just wondering what the rationale is behind that?

Curtis Jensen: So the fund's exposure today is primarily in the Canadian dollar,
the euro, and the yen, as you point out. We want to protect
ourselves against a catastrophic outcome in those currencies, as a
way of protecting the portfolio overall. So we think of buying put
options as one way to protect the portfolio, a form of cheap
insurance in the portfolio. And, of course, it does represent a cost,
and so we're wary of that.

And we try to implement puts when we see there's an opportunity
to buy it cheaply. And, again, it's a way of trying to protect against
a catastrophic outcome.

Bridget Hughes: And it's an opportunistic play.

Curtis Jensen: It is opportunistic. When we started, for example, our investments
in Japan, we had no hedge on the yen. The yen, at that point, two
or three years ago, was north of 120. We thought the odds were
stacked in our favor that the yen, while it could get weaker of
course, that the odds were that it could strengthen from there. And
so we had no hedges until just this late last year when the yen went
under 90. We thought that the odds had turned, and it was time to
consider hedging at that point.

Similarly, with the euro, we had no hedge for a while in the euro
ran up to north of 1.50, I think, late last year. And as it started
pulling back--and as we started seeing events unfold in Europe--we
decided it was time to implement hedges there as well.

Bridget Hughes: And even with this pullback, and a better pipeline, and more
inventory to look at, Third Avenue's mantra of "safe and cheap," I
imagine, continues to ring in your ears. Can you talk about how
you think about the downside, even when there are good
valuations?

Curtis Jensen: Sure, and you said the magic word: "downside." When we think
about implementing a new name, we always consider the downside
first, as opposed to how much money we might make on the
upside, a couple of the names that might be an interesting example.

One is, late last year. We started a position in a company called
HCC Insurance. It's a specialty P&C company with lines of
business including medial stop-loss, offshore marine oil and gas
businesses, D&O, and E&O, a surety business. The company's
been a very good underwriter for many, many years. It's been an
opportunistic approach to entering new markets, and we think the
reserving has been good.

So we've been buying the stock when it's been at a discount to
book value. We think the book value is solid. There are two
percent dividends at the company right now and probably trading
at eight or nine time’s earnings. So we think there's downside
protection in the form of a strong balance sheet and quite a
reasonable valuation.

Another name could be a company like Bristow Group, the largest
provider of aviation services to the offshore oil and gas industry,
including helicopters, as well as fixed wing aircraft. The company
today is probably trading at about 10 or 12 times earnings. It's
trading at a significant discount to liquidation value of the fleet. So
we think investors have protection in the asset value there. The
balance sheet is quite reasonable, and the nature of the business is
such that there is some stability in the business in the form of long-
term contracts with their customers.

So, again, the focus is on protecting our downside first. And then,
thinking about what potentially good surprises might happen down
the road.

Bridget Hughes: Right. Well, thank you, Curtis, for your time, and we'll talk again
soon.

Curtis Jensen: Thanks for having me.

Bridget Hughes: Thanks.