Bloomberg TV recently invited me on to their new show, Bloomberg GO, for a short debate with David Barse, CEO of Third Avenue Management, on active versus passive investing.
After stating that funds offered by Third Avenue, which have more than $8 billion in assets under management, had been able to beat their index benchmark, Barse admitted that alpha was hard to deliver because the competition is tough. But he also asserted that it’s 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 my book, “The Incredible Shrinking Alpha,” which I co-authored with Andrew Berkin, the task has become increasingly more difficult over time, with fewer and fewer success stories.
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.
Setting Up The Comparison
Third Avenue’s investment strategy, or 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, we can conclude that the proper benchmarks to which we should compare the returns of their funds are not marketlike indexes (such as the S&P 500). Instead, they should be compared to value indexes. Or better yet, to comparable passively managed value funds (which also possess costs and trading expenses) in the same asset classes.
Thus, to determine if Third Avenue is outperforming passively managed funds, we’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.