TAF 3Q 2012 Report and Shareholder Letters

Third Avenue Value Fund Third Avenue Small-Cap Value Fund Third Avenue Real Estate Value Fund
Third Avenue Inter national Value Fund Third Avenue Focused Credit Fund
PORTFOLIO MANAGER COMMENTARY AND THIRD QUARTER REPORT

JULY 31, 2012
This publication does not constitute an offer or solicitation of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this publication has been obtained from sources we believe to be reliable, but cannot be guaranteed. The information in these portfolio manager letters represents the opinions of the individual portfolio manager and is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed are those of the portfolio manager and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Funds holdings, the Funds performance, and the portfolio managers views are as of July 31, 2012 (except as otherwise stated), and are subject to change without notice. Third Avenue Funds are offered by prospectus only. Prospectuses contain more complete information on advisory fees, distribution charges, and other expenses and should be read carefully before investing or sending money. Please read the prospectus and carefully consider investment objectives, risks, charges and expenses before you send money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investors shares, when redeemed, may be worth more or less than original cost. If you should have any questions, please call 1-800-443-1021, or visit our web site at: www.thirdave.com, for the most recent month-end performance data or a copy of the Funds prospectus. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders. M.J. Whitman LLC, Distributor. Date of first use of portfolio manager commentary: August 28, 2012.
This booklet consists of two separate documents.
THIRD AVENUE FUNDS PORTFOLIO MANAGER COMMENTARY _____________________________________________

CHAIRMANS LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 THIRD AVENUE VALUE FUND (TAVFX, TVFVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 THIRD AVENUE SMALL-CAP VALUE FUND (TASCX, TVSVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 THIRD AVENUE REAL ESTATE VALUE FUND (TAREX, TVRVX) . . . . . . . . . . . . . . . . . . . . . . . . . . 18 THIRD AVENUE INTERNATIONAL VALUE FUND (TAVIX, TVIVX) . . . . . . . . . . . . . . . . . . . . . . . . . 23 THIRD AVENUE FOCUSED CREDIT FUND (TFCIX, TFCVX) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
THIRD AVENUE FUNDS THIRD QUARTER REPORT _____________________________________________

THIRD AVENUE VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 THIRD AVENUE SMALL-CAP VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 THIRD AVENUE REAL ESTATE VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 THIRD AVENUE INTERNATIONAL VALUE FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 THIRD AVENUE FOCUSED CREDIT FUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 NOTES TO PORTFOLIOS OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Third Avenue Value Fund Third Avenue Small-Cap Value Fund Third Avenue Real Estate Value Fund Third Avenue Inter national Value Fund Third Avenue Focused Credit Fund
THIRD QUARTER PORTFOLIO MANAGER COMMENTARY

JULY 31, 2012
Letter from the Chairman (Unaudited)

Passive Minority Investor (OPMI) price fluctuations. In striving to achieve satisfactory returns on an overall risk adjusted basis, Third Avenues approach is markedly different from the approaches used by almost all others who also are primarily OPMIs. Almost all others are influenced strongly by the writings of Graham and Dodd (G&D) and/or the teachings of most academics under the rubric of Modern Capital Theory. (MCT). The basic goal of both G & D and MCT is to study the factors that affect market prices for common stocks in OPMI markets, especially short run factors. For Third Avenue, in contrast, the basic goal is to obtain deep understanding of specific businesses and the securities they issue, especially emphasizing longterm factors. G&D and MCT seemed focused, almost exclusively, on the needs and desires of OPMIs. Third Avenues approach is more balanced, recognizing the needs and actions not only of OPMIs, but also the company itself, creditors, managements, control groups and Wall Street activists. The Third Avenue belief is that underlying values, and growth in underlying values, will eventually be recognized in OPMI market prices, especially if potential catalysts such as changes in control, or going private, exist. G&D and MCT are helpful, and in many senses, essential to understanding OPMI equity markets, trading strategies, and near term price movements in OPMI markets. However, G&D and MCT seem not at all helpful and, in a sense, counterproductive in helping control buyers, distress buyers and long-term investors gain understanding of a business in depth as well as the securities that businesses issue. These shortcomings of G&D and MCT seem attributable to four factors, three of which characterize G&D and all four of which characterize MCT: 1. G&D and MCT believe in the Primacy of the Income Account as measured by recurring earnings and/or cash flow from operations. However, to appraise a business, its securities and its management, an analyst has to weigh three separate factors, not just recurring flows as reflected in income accounts. A decent analysis of the management of any corporation has to assay the people from three general angles:
MARTIN J. WHITMAN
CHAIRMAN OF THE BOARD Dear Fellow Shareholders: For market participants seeking satisfactory returns in mid2012 it seems no longer possible to do so as a cash return investor. Interest rates are just too low. Rather the market participant has to focus on being a total return investor, i.e., income plus capital gains. The futility of being a cash return investor is demonstrated by holding a 2% 10-year Treasury note priced at par. The investment is almost a sure loser. No credit instrument ever achieves a market price much above its call price, no matter how much interest rates go down, so it is hard to foresee meaningful capital appreciation for the Treasury Note. If interest rates go up (seems a reasonable possibility from 2%), the market prices of the Treasury Note will decline. This dire position is ameliorated if the portfolio holding the Treasury Note is continually getting new funds to invest and reinvest so, over the long term the portfolio becomes a dollar averager. Nonetheless, insofar as is feasible given constraints imposed legally and by prudent-man rules, a diminished portion of these portfolios in mid-2012 ought to be invested in investment grade credit instruments and an increasing portion ought to be invested in high quality total return securities. Most of the funds managed at Third Avenue Management (Third Avenue) seek total return by acquiring what is on the bases that guard against investment risk, defined as the threat of a business or its securities suffering permanent impairments, but not market risk, defined as Outside
Letter from the Chairman (continued) (Unaudited)

a) As an operator creating recurring earnings or cash flows. (Earnings are defined as the creation of wealth while consuming cash). b) As an investor, i.e., deal maker. Virtually no public corporation in the U.S. goes as long as five years without being involved in resource conversion activity, such as a merger or acquisition, change of control, going private, including leveraged buy-outs, sale of assets in bulk and spin-offs. c). As a financier, financing, refinancing and reorganizing troubled issuers. Probably more wealth has been created for corporations and promoters in the U.S. by gaining super attractive access to capital markets than any other way. It appears as if the most important talent leveraged buy out (LBO) sponsors bring to deals is super attractive access to capital markets, not only for obtaining attractive secured financing from banks, but also for obtaining mezzanine finance and for access to IPO markets for common stocks. 2. G&D and MCT are involved with short-termism. The most important thing for them to measure is immediate price impact in OPMI markets. This emphasis becomes irrelevant for control buyers and long-term investors, unless the particular asset is to be sold in the immediate future into a market or is margined. Short-termism is not something that contributes to understanding in depth a goingconcern with a perpetual life. For example, both G&D and MCT emphasize the importance of common stock dividends, largely because dividend payments impact immediate market prices. G&D and MCT pretty much ignore the probabilities that retaining earnings can foster future company growth. 3. G&D and MCT overemphasize top-down analysis at the expense of bottom-up analysis. G&D, in particular, attach great importance to forecasting gross domestic product, general stock market levels and interest rates. At this writing a principal top-down concern seems to be whether or not certain European Sovereigns (Portugal, Italy, Ireland, Greece and Spain) will suffer money defaults on outstanding Euro Bonds (I bet they will default sooner or later). At Third Avenue, however, it seems more important to focus on the bottom-up facts, like that the well-financed Wheelock & Company has its common stock selling at a 50% discount from readily ascertainable net asset value (NAV) and that Wheelocks long-term growth prospects seem bright without worrying much about the general economy. 4. For MCT there is a belief in equilibrium pricing, i.e., the price of a security in an efficient market represents a universal value and prices change as the market receives new information. Equilibrium pricing does not exist in the world of corporate valuation. It does exist for a tiny minority of OPMI securities but a somewhat larger proportion of OPMI trading. An efficient market is faced by those involved in sudden death securities analyzable by reference to a very limited number of computer programmable variables and encompass derivative securities such as options and convertibles as well as risk arbitrage situations where there is likely to be a near term workout. For going concerns of any kind of complexity there is no understanding implicit in assuming an efficient market. For most of the securities in Third Avenue portfolios, pricing for the securities would be very different from what it is if prospects for changes of control existed. There just isnt one right price for the vast majority of equities, MCT beliefs notwithstanding. Using the Third Avenue approach it is feasible today as a total return investor to buy into blue chip common stocks which have the following characteristics and which, in my opinion, are attractively priced: Super strong financial position Priced at discount from NAV of 25% or more (Wheelock and Company Common and Henderson Land Common are at discounts of about 50%). These

NAVs do not reflect any control premiums that would exist if any of the issuers were in play. Full comprehensive disclosures in English with audits by the Big Four Trading in markets where protections for OPMIs are strong Prospects seem good that that over the next three to eight years NAV will grow by not less than 10% compounded annually after adding back dividends. If such growth is achieved, the investments seem very likely to be profitable because if they are not, the discounts from NAV would have widened to unconscionable levels. For example, at this writing, Wheelock and Company is selling at HK$28.75 per share; NAV at December 31, 2011 was HK $60.32. Given 10% NAV growth for Wheelock, NAV in three to five years would be HK$ 78.63 and HK$94.09 per share respectively, after allowance for an annual dividend of HK$0.50 per share, the dividend rate established at the end of 2011. For the five years prior to December 31, 2011, after allowance for annual dividends of HK$0.125 per share, Wheelocks growth in NAV was 17% compounded annually. Wheelock Commons NAV increased each of the five years, as seems bound to be the case for 2012. Other than a lack of catalysts, there does not seem to be much, if any, economic justification based on comparative analysis for the existence of any NAV discounts at all for the securities held in the various Third Avenue portfolios, where the NAV discounts average over 25%. In contrast, at July 31, 2012, the S&P 500 index was priced at a 116.2% premium above the book values of the companies making up the S&P Index. The asset-rich Third Avenue common stocks seem to be issues of companies much more strongly financed than the S&P 500 constituents. Also, growth prospects seem, to me, to be far better for the Third Avenue securities than they are for the issues in the S&P 500. Growth in NAV seems a far better measure of how a business performed than is looking at growth in recurring earnings or cash flows from operations simply because the change in NAV measures management performance not only as operators but also as investors and financiers. On a macro basis, long-term growth in NAV seems mighty likely for well financed companies. Book value is only a surrogate for NAV, but often is a meaningful one, at least in the aggregate. In the 18 years prior to December 31, 2011, the book value of the S & P 500 increased in 16 of the 18 years, despite the severe recession which started in 2007-2008. For the last five years, most of the issues held in Third Avenue Value Fund in companies with strong financial positions exceeded the 10% growth bogey, despite the fact that 2007-2012 was a recessionary period. More important to me though are the market results of the three issues that didnt meet the 10% growth bogey: Capital Southwest, Investor AB and Toyota Industries. The market prices of two were modestly higher five years later and one, Toyota Industries, was down about 5% after being barraged by the worst publicity visited on almost any major company during the period. While I, as an OPMI, am a true believer in the Third Avenue approach it would be incomplete if I did not enumerate what I think are the shortcomings of the approach: 1. Third Avenue could deal with a lot of dead head managements who dont care about their OPMI constituencies, in great part because they own little or no common stock in their companies; and also their companies have no need or desire to access capital markets. Obviously, the securities of such issuers should be avoided. These dead-head managements seem to be much more of a problem in Japan than the U.S., in great part because in the U.S. there seems to be much, much more of a change of control threat for underperforming managements than is the case in Japan. The control groups in each of the Hong Kong companies in Third Avenue portfolios are all major shareholders in their companies. Together with the

families, each control group usually owns at least 50% of the outstanding common stock. 2. In concentrating on companies with strong financial positions, Third Avenue is dealing in 2012 with managements willing to sacrifice return on equity (ROE) and return on investment (ROI) for the safety and opportunism inherent in a strong financial position. 3. Third Avenue is involved largely with really deep down discounts from our estimates of NAV. The OPMI markets seem efficient enough to reason that in most cases deep discounts reflect a lack of near to intermediate term catalysts. 4. Third Avenue does not borrow money. Third Avenue pretty much ignores market risk and goes to great lengths to try to avoid investment risk. If one is to borrow money, it is advisable to try to guard against market risk. 5. Most asset-rich securities in the Third Avenue portfolios are general market securities. Near-term price performance seems likely to be dominated by top-down considerations, e.g., the Eurozone. I will write you again when the shareholder letters for the year to end October 31, 2012 are published. Sincerely yours,
Martin J. Whitman
Third Avenue Value Fund (Unaudited)

Number of Shares 130,000 shares 92,333 shares 1,550,000 shares New Positions (continued) Nintendo Co. Ltd. Common Stock (Nintendo Common) Stanley Furniture Co. Inc. Common Stock (Stanley Common) Symantec Corp. Common Stock (Symantec Common) Positions Increased Alleghany Corp. Common Stock (Alleghany Common) Applied Materials, Inc. Common Stock (Applied Materials Common) Comerica, Inc. Common Stock (Comerica Common) Devon Energy Corp. Common Stock (Devon Common) KeyCorp Common Stock (Key Common) Lai Sun Garment Intl., Ltd. Common Stock (Lai Sun Common) Sycamore Networks, Inc. Common Stock (Sycamore Common) Tellabs, Inc. Common Stock (Tellabs Common) White Mountains Insurance Group, Ltd. Common Stock (White Mountains Common) Positions Decreased Brookfield Asset Management, Inc. Class A Common Stock (Brookfield Common)
IAN LAPEY
PORTFOLIO MANAGER OF THIRD AVENUE VALUE FUND Dear Fellow Shareholders: During the quarter we initiated four new positions and added to nine existing positions. A discussion of the significant purchases follows below. We trimmed several large positions (Brookfield Common, Forest City Common, Posco Common, Covanta Common, Toyota Common and Investor AB Common) to maintain prudent position sizes as the Fund continued to experience net redemptions, albeit at more moderate levels as the quarter progressed. We also continued to reduce the Funds Hong Kong exposure (currently 35%, down from 39% on April 30th) to make the portfolio more diversified, a strategy I have discussed in each of the last two shareholder letters. The Fund no longer has any individual positions that exceed 10% of total assets. Finally, we exited a few small non-core positions. The Funds cash position totaled 8% at quarter end.
QUARTERLY ACTIVITY Number of Shares 14,499,000 shares New Positions Daiwa Securities Group, Inc. Common Stock (Daiwa Common) 185,000 shares 607,195 shares 425,000 shares 4,000,000 shares 271,890 shares 3,201,350 shares 10,892 shares 28,201 shares 1,105,000 shares
701,522 shares
Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Value Funds 10 largest issuers, and the percentage of the total net assets each represented, as of July 31, 2012: Henderson Land Development Co., Ltd., 9.88%; Posco (ADR), 8.27%; Wheelock & Co., Ltd., 7.83%; Cheung Kong Holdings, Ltd., 7.81%; Hang Lung Group, Ltd., 4.96%; Toyota Industries Corp., 4.80%; Investor AB, 4.57%; Brookfield Asset Management, Inc., 4.55%; Bank of New York Mellon Corp., 4.53%; and Covanta Holding Corp., 4.52%.
Third Avenue Value Fund (continued) (Unaudited)

Number of Shares 1,447,000 shares 1,348,361 shares 2,849,297 shares Positions Decreased (continued) Cheung Kong Holdings, Ltd. Common Stock (Cheung Kong Common) Covanta Holding Corp. Common Stock (Covanta Common) Forest City Enterprises, Inc. Class A Common Stock (Forest City Common) Hang Lung Group, Ltd. Common Stock (Hang Lung Common) Hang Lung Properties, Ltd. Common Stock (Hang Lung Common) Henderson Land Development Co., Ltd. Common Stock (Henderson Common) Hutchison Whampoa, Ltd. Common Stock (Hutchison Whampoa Common) Investor AB, Class A Common Stock (Investor AB Common) Posco ADR Common Stock (Posco Common) SFSB Inc. Common Stock (SFSB Common) Toyota Industries Corp. Common Stock (Toyota Common) Wharf Holdings, Ltd. Common Stock (Wharf Holdings Common) Positions Eliminated Carver Bancorp, Inc. Common Stock (Carver Common) Cenovus Energy, Inc. Common Stock (Cenovus Common) Forest City Enterprises, Inc. Class B Common Stock (Forest City B Common) PORTFOLIO ADDITIONS
The significant portfolio additions during the quarter fall into three buckets: financials, high tech, and oil and gas exploration and production (E&P). The following is a review of each area.
FINANCIALS
1,297,000 shares 5,448,000 shares 8,101,858 shares
7,789,000 shares
1,298,032 shares 210,472 shares 56,025 shares 70,500 shares 2,239,000 shares
The common stock prices of many global financial institutions are depressed owing to a host of factors including the European sovereign debt crises, a slowing global economy, increased regulation and capital requirements, lingering litigation issues from the 2008-2009 financial crises and several well publicized blow-ups including JP Morgans massive London Whale trading loss. This gloomy environment has created opportunities to buy the common stocks of well-capitalized and prudently managed companies at discounts to tangible book value. The discounts to net asset value are considerably larger when factoring in off-balance sheet assets, which for various financial holdings of the Fund include fee generating assets under management, low cost federally insured deposits and the float of the insurance business that results from being able to invest premiums before paying claims. During the quarter, we added to our positions in the common stocks of two regional banks (KeyCorp and Comerica, Inc.) and two property and casualty insurers (White Mountains Insurance Group and Alleghany Corp.). These investments were discussed in last quarters letter. In all four cases, business performance in 2012 has been healthy and market volatility presented opportunities to add to our holdings at wider discounts to tangible book value during the quarter. We also initiated a new position in the common stock of Daiwa Securities Group, Inc. This investment was sourced by Senior Research Analyst Jakub Rehor and initially purchased in the Third Avenue International Value Fund in late 2011 and discussed in that Funds first quarter shareholder letter. Daiwa is the second largest Japanese brokerage. The company has a strong and profitable retail business and a growing asset management business. Recently, the company has been restructuring its
5,459 shares 752,574 shares 21,798 shares

requirements for a 30% interest in 650,000 acres (no proved wholesale business, and the results have been reflected in reserves) in two oil shale developments in Texas. Devon will two consecutive profitable quarters. Daiwas track record is continue to operate the properties and retain a 70% reasonable, as it largely avoided trouble during the financial ownership interest. The transaction appears to be very crises, and it has a very strong financial position with a attractive for Devon, as Sumitomo is effectively paying up 27.4% capital adequacy ratio versus a required minimum for Devons expertise by funding most of the capital. of 8%. Importantly, the company does not focus on proprietary trading, unlike many of its global peers. While Despite the pressure from falling commodity prices, Devon the companys primary focus is Japan, it also offers continues to have a very strong financial position, with $7 comprehensive stock research pan-Asia. Shares of Daiwa billion of cash compared to $10.6 billion of debt. Net debt were purchased at a 27% discount totals only 14% of capital and to June 30th tangible book value $0.20 per thousand cubic feet The Funds approach to and more than a 35% discount to equivalent (mcfe) of proved estimated net asset value. investing in technology reserves. Devon added to its hedges common stocks is to look for during the quarter and now has OIL AND GAS E&P 65% of its gas production hedged companies with extremely The Fund significantly reduced its for the rest of the year at $3.76 per energy exposure in 2011, exiting its strong financial positions mcfe (versus the current price of position in Cimarex Common. about $3) and 85% of its oil hedged (cash in excess of total During the most recent quarter, the (versus the current price of liabilities and / or net cash of at $97$90). The valuation seems to Fund exited its small position in about Cenovus Common, allocating the at least $1 billion), competent be very compelling at about $9 per capital to Devon Common, which management teams and healthy barrel of oil equivalent (BOE) of appears to be much more proved reserves. In 2009 and 2010, attractively valued. The Fund long-term growth potential. In Devon exited its less attractive Gulf initiated its position in Devon terms of pricing, we pay less of Mexico and international Common in January 2012, and the at a price of about $45 than two times revenues and operationsof proved reserves. More investment has been discussed in per barrel each of the last two shareholder ten times peak earnings, recently, Nexen, a Canadian E&P letters. Devons common stock provided that we believe the company, agreed to be sold to price has been falling recently, CNOOC for about $19 per BOE owing primarily to weakness in next peak will be higher. of proved reserves. Although commodity prices. In Devons Nexens reserves are more heavily recently reported second quarter, weighted to oil, Devons assets carry less development risk oil, natural gas and natural gas liquids prices fell 19%, 54% as evidenced by its much lower percentage of proved and 26%, respectively, compared to a year ago. Nevertheless, undeveloped (PUD) reserves (26% versus 53%). the company reported a profitable and cash flow positive quarter (including proceeds from the closing of its previously HIGH TECH announced joint venture with Sinopec). The company also The Funds approach to investing in technology common announced a new $1.4 billion joint venture with Sumitomo stocks is to look for companies with extremely strong financial Corporation, in which Sumitomo will pay $340 million in positions (cash in excess of total liabilities and / or net cash of cash upon closing and fund 70% of Devons future capital

at least $1 billion), competent management teams and healthy long-term growth potential. In terms of pricing, we pay less than two times revenues and ten times peak earnings, provided that we believe the next peak will be higher. Often, these opportunities only occur when the near-term earnings outlook is poor either owing to cyclical or product timing issues. Given the inherent difficulty in picking the winners and losers in this industry, we usually select a basket of securities, limiting individual positions to 1%-3% of the portfolio. We initiated a position in the common stock of Symantec Corp., a leading provider of security, backup / recovery and storage management software. The companys products are sold to both consumers (through its Norton product line) and corporations. Symantecs end markets seem to be generally healthy and growing, and the software business is very attractive owing to recurring maintenance revenue, high margins (gross margins in excess of 80%) and robust cash flow generation. Symantec has a very strong financial position with $4.1 billion of cash and investments, compared to total debt of $3.0 billion. During the quarter, the company issued $1 billion of long-term debt at very attractive rates (2.75% and 3.9% for five and ten year maturities, respectively). Owing primarily to the weak near term outlook for enterprise IT spending, particularly in Europe, the Fund purchased shares of Symantec Common at only about five times earnings before interest, taxes, depreciation and amortization (EBITDA). Transactions in the software industry typically occur at much higher multiples, including, most notably, Intels purchase of Symantecs competitor, McAfee, in 2011 at about 15 times EBITDA. Subsequent to quarter end, Symantecs CEO was replaced by Chairman Stephen Bennett, who was formerly Intuits CEO from 2003-2007. The move was in response to the weak stock performance of Symantec Common over the last couple of years and enhances the possibility of some type of resource conversion activity to increase shareholder value. The Fund also initiated a small position in Nintendo Common. Based in Japan, Nintendo is a producer of video game hardware and software. Throughout most of its history, the company has been quite profitable owing to successful products, such as the Wii video game console (hardware) and the Super Mario Brothers and The Legend of Zelda software franchises. However, currently the company is losing money because of fierce competition from traditional competitors (Sonys Playstation and Microsofts Xbox), as well as new competition from mobile gaming platforms. Despite these significant challenges, Fund Management believes that the company has numerous levers to return to profitability, including the potential success of some of its upcoming products and / or a shift in its operating model to allow its software to be used on competitors platforms. The shares were purchased at a price that equates to the value of the companys cash and investments, land and 55% ownership stake in the Seattle Mariners, ascribing no value to its tremendous software library and brand name. We added to our positions in the common stocks of telecommunications equipment suppliers Tellabs and Sycamore. These two common stocks are the lone remaining investments from the basket of telecom equipment companies purchased by Third Avenue funds about 10 years ago, that also included the common stocks of Ciena Corp., Comverse Technology, Inc. and Ulticom, Inc. While Sycamore and Tellabs have retained very strong financial positions, the business and stock performance has been disappointing compared to our previous holdings in this industry, resulting in current valuations that are extremely depressed. Shares of Sycamore Common were purchased during the quarter at a discount to the companys cash and investments, meaning that we paid nothing for the existing business, new products, patents and net operating losses totaling about $1 billion. Tellabs Common was purchased at a valuation that equates to about 15% of revenues and only a slight premium to the companys cash and short-term investments despite the companys strong customer base (40 of the top 50 carriers worldwide) and recent business momentum, including second quarter sequential revenue growth of 12%, operating margin improvement of more than 1000 basis points and positive free cash flow. We also added to our position in Applied Materials Common, which was discussed in last quarters letter. The share price has

been weak of late owing to a deteriorating 2012 earnings outlook. Demand for semiconductor capital equipment appears to have been negatively impacted by the slowing global economy. Nevertheless, Applied Materials financial and market positions remain strong, and the shares were purchased at an attractive price of about nine times 2011 earnings.
POTENTIAL IMPACT OF A HARD LANDING IN CHINA ON TAVFS HONG KONG HOLDINGS Debt to Price to Equity NAV ________ _______ TAVF Hong Kong Real Estate and Investment Companies2 Cheung Kong Holdings Ltd. 14% 0.7 Hang Lung Group Ltd. 11% 1.1 Henderson Land Development Co Ltd. 30% 0.6 Wheelock & Co. Ltd. 15% 0.5 _____ ___ Median 15% 0.7 _____ ___ 1 Source Barrons, 7/2/12. Valuation data updated for 7/31/12. 2 Source Company reports. Based on last reported NAV (6/30/12 for Cheung Kong and Hang Lung; 12/31/11 for Henderson and Wheelock). Prices as of 7/31/12.
Barrons recently published a cover story titled FALLING STAR. The Chinese economy is slowing and is likely to slow a lot more. Get ready for a hard landing with growth falling to 3% to 4%. Big trouble for Hong Kong housing stocks. This article prompted a flurry of questions both internally and from clients. The crux of the article is that the economy in China will continue to slow and that residential real estate prices and the common stock prices of leveraged China homebuilders will fall.
Company Name _____________ China Homebuilders1 Debt to Price to Equity NAV ________ _______ 2.1 1.5 1.4 2.2 1.5 0.6 1.0 0.2 0.5 1.2 1.2 0.8 0.5 0.7 0.5 0.9 ___ 1.0 ___
We certainly acknowledge that there has been overinvestment in residential real estate (the article points out that new residential real estate as a percent of GDP has increased to about 14% from 5% in 1998), and we would never own the common stock of a leveraged China homebuilder. Nevertheless we continue to be very excited about our Hong Kong holdings, even with a slowing Chinese economy, for the following reasons: Strong Financial Positions. Unlike the China homebuilders listed in the Barrons article, the companies in whose common stocks the Fund is invested have very strong financial positions. As the table above indicates, the debt to equity ratios of the Funds significant holdings range from 11% to 30% compared to 50% to 374% for the sixteen companies in the Barrons article. These strong financial positions served the Funds holdings well during the Great Recession and Credit Crises in 2008-2009, when none had to raise dilutive equity. I would expect a similar outcome if the 3-4% China GDP growth hard landing scenario discussed in the article materializes. A slow down creates opportunities. Economic slowdowns can create great opportunities for strongly financed companies with opportunistic management teams. Each of our companies is expanding their presence in China and would welcome the opportunity to buy land or other assets at distressed prices. For example, in late 2011, Hang Lung
China Overseas Land & Investment Ltd. 62% China Resources Land Ltd. 101% Everglade Real Estate Group Limited 158% Longfor Properties Co., Ltd. 109% Country Garden Holdings Company Limited 100% Poly (Hong Kong) Investments Limited 166% Shimao Property Holdings Ltd. 139% Hopson Development Holdings Ltd. 86% New World China Land Ltd. 50% Guangzhou R&F Properties Co., Ltd. 126% Agile Property Holdings Ltd. 102% Franshion Properties (China) Ltd. 96% Sino-Ocean Land Holdings Ltd. 95% Yuexiu Property Company Limited 111% Shui On Land Limited 99% Greentown China Holdings Limited 374% _____ Median 102% _____

purchased land in China (Kunming) for the first time since 2009, as the slowdown created a much less competitive government land auction. More recently, in June 2012, Wheelock and Company, whose common stock is owned by the Fund and discussed in this quarters Chairmans letter, announced that its subsidiary, The Wharf Ltd., whose common stock is also a small fund holding, made a $HK 5.1 billion capital infusion into Greentown China. Founded in 1995, Greentown is a leading China homebuilder with a strong brand name and a 41 million square foot land bank. The capital infusion consisted of common stock at a 3% discount to the market price at the time of the announcement and a 9% perpetual security convertible at a 38% premium. Through the transaction, Wharf and Greentown will become strategic partners in China, and Wharf will be represented on Greentowns board. Since the transaction was announced, Greentown China common has appreciated 53% giving Wharf a 35% effective ownership stake and huge paper gain on its investment. The opportunity was created by the softening residential property market over the last year and Greentowns over leveraged balance sheet. This is the type of capital infusion that the Fund would look to make directly in a U.S. company, but in China we are happy to participate through Wheelock and Wharf Common. Discounted valuations. The common stock prices of our Hong Kong holdings already seem to discount a hard landing in China. As the preceding table indicates, our four largest Hong Kong holdings trade at median multiples to reported net asset value of 0.7 times, compared to 1.0 times for the China homebuilders listed in the Barrons article. These discounts are much wider than they have been historically and seem to imply that the net asset values for our holdings will be falling. However, based on the still healthy leasing income growth and the recent robust property development margins, we believe that net asset values will continue to grow. In fact, Hang Lung Group and Cheung Kong recently reported healthy results for the first half of 2012, including leasing income growth of 14% and 33%, respectively. Both companies also reported increases in the fair market values of their investment properties (e.g., office buildings and shopping malls). Surprisingly, despite the well publicized slowdown in the residential property markets in Hong Kong and China, property development margins remained robust (62% for Hang Lung and 39% for Cheung Kong), owing primarily to the companies low cost land bases. Wheelock and Henderson will be reporting by the end of the month, and we also expect their results to be healthy. The Funds performance has improved in 2012, however, it remains very attractively valued. As of July 31, 2012, the Fund traded at only 0.76 times book value, compared to multiples of 2.24 and 1.49 for the S&P 500 and MSCI World indices, respectively. For the most part the Funds performance in 2012 has been driven by the healthy growth in net asset values of its holdings as discounts remain quite wide. I shall write to you again when we publish our fiscal year-end report, dated October 31, 2012. Thank you for your continued interest in the Fund.
Ian Lapey Portfolio Manager Third Avenue Value Fund
10
Third Avenue Small-Cap Value Fund (Unaudited)

Number of Shares 432,505 shares New Positions Acquired (continued) Progress Software Corp. Common Stock (Progress Software Common) Increases in Existing Positions Alleghany Corp. Common Stock (Alleghany Common) Bristow Group, Inc. Common Stock (Bristow Common) Compass Minerals International, Inc. Common Stock (Compass Common) Electro Scientific Industries, Inc. Common Stock (ESI Common) EMCOR Group, Inc. Common Stock (EMCOR Common) Encore Wire Corp. Common Stock (Encore Common) Excel Trust, Inc. Common Stock (Excel Common) ICF International, Inc. Common Stock (ICF Common) Jos. A. Bank Clothiers, Inc. Common Stock (Joseph Bank Common) Leucadia National Corp. Common Stock (Leucadia Common) Mantech International Corp. Class A Common Stock (Mantech Common) Minerals Technologies, Inc. Common Stock (Minerals Technologies Common) Oshkosh Corp. Common Stock (Oshkosh Common)
2,853 shares
CURTIS R. JENSEN
CHIEF INVESTMENT OFFICER & PORTFOLIO MANAGER OF THIRD AVENUE SMALL-CAP VALUE FUND Dear Fellow Shareholders: During the quarter, Small-Cap Value (the Fund) initiated seven new positions, added to 18 of its 64 existing positions, eliminated six positions and reduced its holdings in 14 companies. At July 31, 2012, Small-Cap Value held positions in 62 common stocks, the top 10 positions of which accounted for approximately 23% of the Funds net assets.
Number of Shares 328,302 shares 38,167 shares 217,455 shares 232,225 shares 336,175 shares 255,908 shares New Positions Acquired AVX Corp. Common Stock (AVX Common) Cal-Maine Foods, Inc. Common Stock (Cal-Maine Common) Darling International, Inc. Common Stock (Darling Common) Harman International Industries, Inc. Common Stock (Harman Common) Kennametal, Inc. Common Stock (Kennametal Common) LSB Industries, Inc. Common Stock (LSB Common)
19,464 shares 10,000 shares 83,350 shares 11,014 shares 64 shares 46,882 shares 31,049 shares 33,904 shares 60,000 shares 10,000 shares 7,903 shares
75,000 shares
Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Small-Cap Value Funds 10 largest issuers, and the percentage of the total net assets each represented, as of July 31, 2012: Teleflex, Inc., 2.73%; Seacor Holdings, Inc., 2.54%; Semgroup Corp., 2.44%; Alleghany Corp., 2.37%; Liberty Media Corp., 2.34%; Madison Square Garden, Inc., 2.29%; Oshkosh Corp., 2.20%; Bristow Group, Inc., 2.01%; Broadridge Financial Solutions, Inc., 1.92%; and Segro PLC, 1.92%.
11
Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Number of Shares or Units 18,733 shares 494,237 shares 100,000 shares 2,652 shares 20,000 shares Increases in Existing Positions (continued) Park Electrochemical Corp. Common Stock (Park Common) Rofin-Sinar Technologies, Inc. Common Stock (Rofin-Sinar Common) Segro PLC Common Stock (Segro Common) Superior Industries International, Inc. Common Stock (Superior Common) Unifirst Corp. Common Stock (Unifirst Common) Positions Reduced Ackermans & van Haaren N.V. Common Stock (AvH Common) Alamo Group, Inc. Common Stock (Alamo Common) Alico, Inc. Common Stock (Alico Common) American Eagle Outfitters, Inc. Common Stock (American Eagle Common) AP Alternative Assets, L.P. Limited Partnership (AP Alternative L.P.) Bel Fuse, Inc. Class B Common Stock (Bel Fuse Common) Canfor Corp. Common Stock (Canfor Common) Cloud Peak Energy, Inc. Common Stock (Cloud Peak Common) Cross Country Healthcare, Inc. Common Stock (Cross Country Common) Electronics For Imaging, Inc. Common Stock (EFI Common) Haemonetics Corp. Common Stock (Haemonetics Common) Ingram Micro, Inc. Class A Common Stock (Ingram Common) Number of Shares 6,452 shares 102,356 shares 65,681 shares 23,270 shares 221,041 shares 579,849 shares 154,336 shares 13,976 shares 30,537 shares 625,650 shares 262,424 shares 1,173 shares Positions Reduced (continued) JAKKS Pacific, Inc. Common Stock (JAKKS Common) Kaiser Aluminum Corp. Common Stock (Kaiser Common) Lanxess AG Common Stock (Lanxess Common) Liberty Media Corp. Common Stock (Liberty Common) Madison Square Garden, Inc. Class A Common Stock (MSG Common) P.H. Glatfelter Co. Common Stock (Glatfelter Common) Pioneer Energy Services Corp. Common Stock (Pioneer Common) SEACOR Holdings, Inc. Common Stock (SEACOR Common) SemGroup Corp. Class A Common Stock (SemGroup Common) Tellabs, Inc. Common Stock (Tellabs Common) Vail Resorts, Inc. Common Stock (Vail Resorts Common) Wacker Neuson SE Common Stock (Wacker Common) Positions Eliminated Aeropostale, Inc. Common Stock (Aeropostale Common) Alexander & Baldwin, Inc. Common Stock (Alex Common) Investment Technology Group, Inc. Common Stock (ITG Common) MEMC Electronic Materials, Inc. Common Stock (MEMC Common) Sycamore Networks, Inc. Common Stock (Sycamore Common) Viterra, Inc. Common Stock (Viterra Common)
46,338 shares 4,566 shares 23,682 shares 271,787 shares 50,000 units 39,555 shares 303,100 shares 162,387 shares 150,498 shares 41,840 shares 10,000 shares 344,983 shares
164,639 shares 182,302 shares 667,088 shares 857,266 shares 144,867 shares 232,087 shares
12

QUARTERLY ACTIVITY
Fund Management continued to identify and execute on several new investment ideas during the quarter, four of which are discussed in some detail below. As far as dispositions, the Fund realized a 94% IRR in its relatively brief holding in Aeropostale, evidence that good returns may be made even when connected to difficult businesses like retailing. The Fund completed its successful investments in Alexander Common and Viterra Common, long-time holdings whose values were crystallized via resource conversions1 that unfolded during recent periods. The Fund realized losses on its investments in ITG Common and MEMC Common. Fund Managements thesis for ITG Common coming out of the financial crisis in 2009 rested largely on the assumption that the companys trading and execution platforms, supported by a highly liquid, debt free balance sheet, would benefit as equity markets recovered. While equity markets did recover, heightened competitive conditions and weakness among its institutional investor customers gutted the companys earning power. We do not see these negative trends changing. MEMC, a manufacturer of silicon wafers used in semiconductor fabrication and of solar modules, was overwhelmed by a global supply glut within its solar business and suffered from a complex business model that gobbled up cash, a lethal combination when combined with what had evolved into an inappropriately leveraged capital structure. Followers of the Fund will remember that a small position in Rofin-Sinar Common was initiated during the April quarter2. That position became much more meaningful in the July quarter. Additional shares of Rofin-Sinar were purchased as the discount to our estimate of net asset value widened and became more attractive amidst broader macro
1
and near-term earnings concerns. In our April letter, we noted simply that Rofin-Sinar is an industrial capital equipment company. In plain English, the company makes lasers and parts for lasers lasers for cutting, lasers for welding, lasers for marking materials and lasers for medical equipment. With one of its two headquarters in Germany3, cyclical end markets, more than 40% of sales from Europe and a third from Asia, there is plenty to dislike in the near-term for topdown investors as macro concerns and uncertainty swirl. In a bottom-up analysis, however, there is much more to like for investors with a time horizon beyond a year or two: the balance sheet is rock-solid with about 19% of the companys market cap as net cash and a history of generating excess cash; the company has been profitable every year since listing publicly in 1996; management has an impressive track record of compounding revenue and earnings at double digit rates over the past 10+ years; a service and parts business provides a base of highermargin recurring revenue; shares trade at only a slight premium to book value, while returns on equity have averaged 10%+ as a public company; application expertise and a global support network provide differentiation for products operating in demanding manufacturing environments; prospects for attractive longer-term business growth are reasonable, as lasers take share from more traditional means of cutting, welding and marking materials; and
Resource Conversion, broadly defined, may include activities that help to realize value inherent in a companys assets and liabilities and may include mergers and acquisitions, bulk share repurchases, the acquisition and disposition of assets or refinancing of liabilities. Glencore announced its intention to acquire Viterra in a cash transaction while Alexander and Baldwin split the company into two separate, publicly-listed businesses. 2 Long-time followers of the Fund will recognize Rofin-Sinar as a former holding, exited in 1999. 3 Rofin-Sinar has dual headquarters in Plymouth, Michigan and Hamburg, Germany. The company is incorporated in Delaware.
13

the current market valuation appears to offer limited downside over a reasonable timeframe, yet represents a meaningful discount to precedent transactions in a consolidating market. competent management team and where the shares trade at a significant discount to intrinsic value. In Kennametals case, we view the opportunity to acquire shares in the mid $30s per share, equating to about nine times earnings, an attractive one given our estimate of intrinsic value in excess of $50. Operating in what we view as cyclical growth markets where the growth path is unlikely to be a straight one, Kennametal, nonetheless, ought to have ample opportunities to grow at above average rates in the coming years. The positions initiated in LSB Common and Harman Common reflect the value of patience and the importance of an inventory of investment candidates. LSB Industries is the unlikely combination of a heating, ventilation and air conditioning (HVAC) business and a nitrogen-based chemical products company. The business mix had been more eclectic until the 1990s, when management focused the company on those businesses in which it had a more compelling market position. The HVAC business is a market leader in geothermal and water source heat pumps, which are highly efficient heating and cooling systems. The business is leveraged to commercial, institutional and residential construction, as well as a longer-term trend towards green or more energyefficient construction. We think the business is under earning its potential in an economic recovery, something that we are not paying for at present. The chemicals business provides nitrogen or ammoniabased agricultural, mining and industrial chemicals to the North American market. Low domestic natural gas prices are providing attractive feedstock costs relative to imports, while longer-term cost plus agreements for industrial and mining products mitigate feedstock price volatility and help provide a steadily profitable base load. Our first encounter with LSB Industries occurred at a conference in early 2011, where we were intrigued by its resource conversion potential as a small company with disparate businesses, a healthy balance sheet with a net cash position, and apparent alignment of management with
In sum, Rofin-Sinar has been a very well managed business with an expanding, albeit cyclical, market opportunity. If past is prologue, management is likely to continue compounding value for shareholders at attractive rates, even as a given quarter or year may fall short of the earnings capacity and longer-term business potential. Kennametal is a global producer of tools, highly engineered components and advanced materials serving a broad range of industries, including the energy, construction, aerospace, transportation and machine tool industries. Examples of Kennametals products include radial bearings used in oil and gas drilling operations or grader blades used for road maintenance. These products have to work in environments where thermal shocks, corrosion and other harsh conditions are commonplace. Such demanding conditions require products with wear resistance and long lives on the one hand, but also translate into consumables that provide a high degree of recurring revenue for the business. Kennametals operations are highly cash generative and enjoy strong competitive positions. Meanwhile management seems to be focused on the right things, both commercially and as capital allocators: improving the customer value proposition through innovation, balancing organic growth and acquisitions and sharing excess capital with shareholders via buybacks and a growing dividend. Kennametal derives more than half its sales from outside the U.S., however, where economic headwinds of late have stiffened considerably, while some of the companys end markets, such as oil and gas, have softened for industry specific reasons. For investor/speculators hewing to a shortterm timeframe, these may be legitimate concerns. As investors with a long-term time horizon, we are willing to tolerate temporary weakness in a business when the company has compelling longer-term business prospects, an impregnable financial position, a sensibly incentivized and
14

shareholders given managements ownership of more than 20% of the company. We elected to wait on the sidelines watching the business develop and business value grow until this past quarter when operational issues associated with the restart of a long dormant facility in Pryor, Oklahoma and a separate explosion at an El Dorado, Arkansas plant clouded the near-term earnings picture, providing entre for the Fund. Earnings from the HVAC business, replacement value of the chemical assets, a longer-term feedstock cost advantage provided by U.S. shale gas production and insurance coverage appear to more than offset the near-term disruption and decline in share price. We estimate intrinsic value is north of $40 per share. Harman International is a leading provider of premium branded audio systems, consumer electronics and related technologies found in automobiles, homes and professional venues. Founded in the 1940s by Dr. Sydney Harman4, the companys rich history has produced not only a legacy of highly-regarded and familiar brands such as Becker, Harman/Kardon, JBL, Infinity, Lexicon and Mark Levinson, but also more than 4,000 patents. By 2007, those brands and an enviable growth record attracted the attention of private equity sponsors KKR and Goldman Sachs who proposed and subsequently walked away from a highly-levered transaction that valued the company at $8 billion. The companys growth driver within the auto segment had temporarily fizzled, challenged by cheaper alternatives. The onset of the financial crisis forced the companys newish CEO, Dinesh Paliwal, to cut costs and adopt a more competitive business model. We first looked at Harman Common in 2009 in the aftermath of the failed buyout and have tracked the companys development since. Today, Harman continues to benefit from managements restructuring efforts, including a revamped and somewhat revolutionary and controversial approach to R&D.5 If the
4
companys recently awarded auto business, which today totals more than $16 billion, is any indication, it appears management has struck a pleasing chord with a customer base that is notoriously risk averse and difficult to please. The companys infotainment systems are not only found in the worlds most luxurious automobiles such as Ferrari, BMW and Mercedes, but also in those of developing OEMs such as Geely of China and Tata of India. Harmans automobile infotainment systems appear to sit in the sweet spot of increasing demand for both connectivity and safety. We expect that, along with a growing top line, the companys current order book will generate improving margins at the same time that management aggressively manages its cost structure. Based on the Funds cost basis, which equates to roughly six times 2012 EBITDA, we believe we have identified a growth stock trading at a significant discount to intrinsic value.
FINANCIAL REPRESSION AND RELATIVE INVESTING
Are you a relative investor or an absolute investor? The remarkable level of interest rates and repressive monetary policies in much of the industrialized world seems to be forcing investors to think more than ever in relative terms. The common refrain among strategists, advisors and other market observers is that stocks, or other risk assets, are cheap relative to government bonds, the traditional benchmark for risk free investing. That comparison goes something like the earnings yield on stocks, at 8%, makes them cheaper relative to Treasuries than at any point in the last 50 years. This line of reasoning is even used by many to justify the view that what investors can pay for stocks e.g., the PE ratio, should be much higher than historic levels, pointing out that low interest rates benefit companies by lowering their borrowing costs and by implicitly making streams of corporate cash flow more valuable because the same low rates justify a lower discount rate than in the past. For example, within the
Dr. Harman, who died in 2011, and the company are credited with a number of technical achievements including, for example, redefining the state of the art for motion picture theatre sound in the 1940s and the introduction in 1958 of the worlds first stereo receiver, the TA230. 5 For anyone interested in corporate innovation, I would encourage you to read how Harman changed its product development within the automobile infotainment products segment: A Reverse-Innovation Playbook, Harvard Business Review, April 2012.
15

Small-Cap portfolio Kennametal just refinanced 10-year debt with a coupon of 7.2% by issuing 10-year debt yielding 378%. In simplified form the relationship between what the investor pays6 and the Required Rate of Return (RRR) can be expressed as the following: PE = 1/RRR hurdle of at least 10%, even when maintaining such a hurdle undoubtedly reduces our investable universe. Maintaining an absolute goal provides a margin of safety against (i) a jump in interest rates; (ii) an elevated level of inflation or, perhaps worse, deflation or (iii) adverse business developments. In our discussions we especially noted the following:
In turn, the RRR is a function of that now, more than ever, we Modest Global Growth government bond yields and Prospects. Given the investors risk appetite, or the return had to swim against this tide of recessionary tremors across investors demand over the risk free Europe and a slowdown in thinking and remain absolute rate7. With the 10-year U.S. various parts of Asia and Treasury note yielding a nominal investors, demanding a other emerging markets, rate of 1.6% and assuming investors economically influential minimum return hurdle of at demand a risk premium of 4.1% - a markets to which most global least 10%, even when very rough proxy for historic companies are exposed, we 8 - translates to a 5.7% averages maintaining such a hurdle believe medium-term business discount rate, or a PE ratio of 18x. risks have, in general, risen undoubtedly reduces our All of this may be reasonable, so during the past year or two. investable universe. long as the investor believes one or We are skeptical that highly more of the following: a) that Maintaining an absolute goal accommodative monetary government bond rates remain policies are growth initiatives provides a margin of safety appropriate benchmarks; b) investor as advertised, but much more risk premia remain stable; c) against (i) a jump in interest akin to liquidity hospitals inflationary pressures remain that merely delay the day of rates; (ii) an elevated level of subdued and d) business risks, on reckoning for a growing clutch inflation or, perhaps worse, average, remain unchanged from the of insolvent institutions and past. In wrestling with this valuation deflation or (iii) adverse governments. Our skeptical question my team and I discussed (or sober) view means we have business developments. whether we should consider to assume not only lower lowering our return hurdles, i.e., growth, but also a wider range of outcomes for the incorporating higher PE multiples or lower discount rates businesses underlying the stocks held in the Fund, implying than in the past to value companies, in light of the low interest the use of a more conservative multiple for valuation rate environment. Our discussion made it clear that now, purposes. more than ever, we had to swim against this tide of thinking and remain absolute investors, demanding a minimum return
Alternatively, the analyst might use a multiple of cash flow in place of earnings. For example, one would presumably assign a higher risk premium to a venture capital start up investment than to an investment in a fully leased office building with highly creditworthy tenants. 8 Using geometric average from 1928 2011. See Equity Premia Around the World, Dimson, March, Staunton, London Business School.
6 7
Our discussion made it clear
16

Honey, I Shrunk the Multiple. This reference is not a sequel to the comedy starring Rick Moranis, but a nightmare for common stock investors known in financial parlance as multiple compression. As investors, we have to consider the possibility that we live in an extended period of multiple compression that may impact all equities, where investors are willing to pay less and less for a given amount of earnings. For example, S&P 500 companies, on average, have seen their earnings multiple sliced roughly in half since 2000 despite a nearly doubling in earnings during the past twelve years. In a period of corporate prosperity then, S&P investor returns have basically been flat, as multiple compression undercut corporate progress. PE ratios tend to be correlated with general price trends in the economy. Very high rates of inflation, rapid spikes in inflation or deflation, for example, tend to be correlated with lower PE ratios, while price stability is generally positive for PE ratios9. It seems to us that the Age of Financial Repression and Debt De-leveraging may well be associated with further multiple compression. At best, we can not, as analysts, create an investment thesis that depends on multiple expansion to protect us, nor should we depend on historic, public-market multiples as a guide to the future. Whats the price of money? In nominal terms, the U.S. government can borrow at 0.5% for five years and at 1.6% for 10 years; unfortunately, as the Treasury curve sits today, this puts real returns at negative levels out to about 20 years. Even nominal rates on short-term government debt in selected European countries such as Denmark, France, Germany and Switzerland have turned negative, meaning investors are paying those governments to hold their savings. In short, the price of credit seems to be broken10. Given that, does it make sense for savers to continue comparisons of prospective returns in risky assets with something whose return reflects both utter panic on the part of savers and manipulation by central banks? We think not. Coming out of the Great Recession, we spend a bit more time pondering the macro backdrop against which our portfolio companies exist while eschewing any predictions about the future. We have offered up a few snippets from that thinking above and continue to focus with great urgency and energy on the companies in the portfolio and to seek out qualifying investments that meet our investment criteria. I look forward to writing you again when we publish our Annual Report dated October 31, 2012. Thank you for your continued support. Sincerely,
Curtis R. Jensen Chief Investment Officer and Portfolio Manager Third Avenue Small-Cap Value Fund
10
See Crestmont Research www.crestmontresearch.com For further evidence that the price of credit, or the system that creates it, is broken, look no further than the unfolding Libor scandal.
17
Third Avenue Real Estate Value Fund (Unaudited)
MICHAEL H. WINER
CO-PORTFOLIO MANAGER OF THIRD AVENUE REAL ESTATE VALUE FUND
JASON WOLF
CO-PORTFOLIO MANAGER OF THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders: If portfolio managers were evaluated on the volume of portfolio activity (buys and sells), our quarterly report card might seem to indicate we took the summer off. Rest assured; that is not the case. But sometimes the best action is inaction, especially if one is focused on absolute value instead of relative value when making investment decisions. We have excluded our traditional summary of quarterly investment activity for the simple reason that, during the quarter, activity was inconsequential. In previous quarters, we highlighted the Funds elevated activity levels. In the late summer of 2011, we deployed significant capital to a slate of ideas that had reached attractive valuations as a result of a global market correction. In last quarters letter, we described our sell discipline and how securities may move from the portfolio back to our watch list and how our approach leads to well-lower than average portfolio turnover, as any strategy predicated on
patience must. Portfolio activity is driven by the valuations of our holdings and the valuations of securities that we have identified as potential holdings at the right price. Year-to-date, through July 31, 2012, the Fund generated a return of 20.7%. The Funds annualized one-year, threeyear, five-year, ten-year and since inception (September 1998) returns for the periods ended July 31, 2012 were 15.3%, 12.7%, -1.6%, 8.7% and 10.8%, respectively1. We attribute the recent performance to (i) the continued fundamental improvement of our holdings and (ii) the rebound in market prices from the discounted valuations that we took advantage of during the second half of 2011 when much of the Funds cash reserves were invested. Notwithstanding the Funds solid year-to-date performance, as highlighted below, several of the Funds holdings that we believe have substantial embedded value have yet to contribute significantly to performance, as they have not been fully recognized by the public market or the private market (resource conversion potential).
Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Real Estate Value Funds 10 largest issuers, and the percentage of the total net assets each represented, as of July 31, 2012: Forest City Enterprises, Inc., 7.63%; Brookfield Asset Management, Inc., 5.67%; Hammerson PLC, 5.53%; Cheung Kong Holdings, Ltd., 4.61%; Wheelock & Co., Ltd., 4.29%; Weyerhaeuser Co., 3.92%; Westfield Group, 3.36%; Vornado Realty Trust, 3.27%; Lowes Cos., Inc., 3.17%; and Henderson Land Development Co., Ltd., 3.05%. 1 Fund performance returns are net of fees and assume reinvestment of dividends. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investors shares, when redeemed, may be worth more or less than original cost. Current performance results may be lower or higher than performance numbers quoted. Please call 1-800-443-1021, or visit our web site at: www.thirdave.com, for the most recent month-end performance data or a copy of the Funds prospectus.
18
Third Avenue Real Estate Value Fund (continued) (Unaudited)

and adapting to changing information during the holding We remain cautiously optimistic about the general state of period, ignoring the noise created by media, politicians global real estate and real estate securities given the supportive and so-called market experts and focusing on industry and investment underpinnings for hard assets (e.g., stable cash individual company fundamentals. Being price conscious flows, historically low interest rates, and limited new supply), at initiation is critical despite the constant pressure to put and see no reason this will change over the medium term cash to work. Of equal importance is the crucial art of despite periodic market spasms. This positive backdrop, staying diligent and realistic through the holding period. however, is becoming the consensus view, which invariably Rarely is an investment as simple as buying at a discount leads to a diminished opportunity set for value enthusiasts. and then selling at a target price. Real estate companies Our recent inactivity is a byproduct of this trend. However, NAVs are dynamic, especially as business plans evolve and given the number of risk events on the horizon, opportunities corporate developments (i.e., catalysts) unfold. We must are likely to materialize and we will be properly positioned to monitor corporate developments act decisively given our substantial dry powder (cash and equivalents at Rarely is an investment as and continuously reassess our original investment thesis. As is the fiscal quarter end totaled 13.3% of Fund net assets). In the simple as buying at a discount often the case, our original thesis meantime, we have re-doubled our and then selling at a target may change or drift toward a new result in reanalytical efforts on our existing price. Real estate companies path which could or an outright sizing the position holdings while continuing to survey the landscape for new prospects. For NAVs are dynamic, especially sale. Furthermore, fickle markets example, we have recently initiated as business plans evolve and often go through phases that are unaccommodating to our style, a position in the Senior Notes of JC corporate developments which necessitates a disciplined Penney, a U.S. based department fundamental long-term view to store retailer with substantial real (i.e., catalysts) unfold. We ride out the rough patches. We estate assets. We will further outline must monitor corporate gain confidence in our positions this security next quarter. In developments and by continuously reviewing the addition, we have expanded our Tinvestment blueprint and 2 portfolio, or list of securities that continuously reassess our reevaluating as the company we want to own at lower prices, as original investment thesis. achieves certain milestones laid out our recent focus in analyzing and in our plan. The examples below visiting with European real estate illustrate positions in the portfolio where the business companies has resulted in several new investment prospects. plans changed mid-course and how we adapted. Our style, though, is to be very disciplined and stingy while waiting for our price. In the August 6, 2012 issue of Forbes EQUITY INFUSION TO TURNAROUND SITUATION magazine, the Fund was the subject of an article that (FIRST INDUSTRIAL REALTY TRUST) highlighted our long-term investment approach and several of our holdings in Hong Kong and Australia. The prime takeThe Fund initiated its investment in First Industrial away from the article was summed in the final quote: Says Common during 2010. At the time, the U.S.-based REIT Winer: Patience is not only a virtue here. It is a requirement. owned a diversified portfolio of industrial properties across the country, but it was priced as a high-probabilityInvestment patience means maintaining a strict, pricereorganization candidate. Acknowledging the substantial conscious approach at entry, staying diligent in analyzing headwinds facing the company, we took a view that its
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primary obstacles (too much debt and sub-optimal occupancy) were temporary and surmountable. Our initial business plan involved taking a position in the common stock and then offering to make an equity infusion (direct investment) at a discounted price (significantly below net asset value) to quickly remediate the high debt levels that restricted managements ability to execute on an occupancy recovery that would boost cash flows and create a virtuous value enhancement cycle. Management was against issuing highly-dilutive equity, choosing instead to reduce leverage gradually through diligent organic growth and by selling non-core assets. Management believed that a combination of postponing new developments, discontinuing common dividend payments, and a gradual economic recovery, would help the company steadily rebuild its cash flow over time, allowing for gradual debt reduction and value recovery in the shares. After detailed discussions with management, we supported the plan and adjusted our investment thesis to a more pedestrian-type turnaround. We scaled back our targeted position sizing based on the risk-adjusted return prospects. After two years in this investment we have substantial unrealized gains from our very attractive entry price. Managements path turned out to be successful. Leverage has declined, overall borrowing costs were reduced and occupancy gains have been impressive. The company has completed two equity offerings at prices substantially higher than our entry price. We anticipate the final milestones reinstatement of the common dividend and resumption of value-enhancing development activity - will occur in the near future, which should be the catalyst for First Industrial Common to trade in-line with net asset value and its REIT peers.
REIT CONVERSION TO FUTURE POTENTIAL RESOURCE CONVERSIONS (WEYERHAEUSER)
Weyerhaeuser Common is an example of a security that offers multiple ways to win. The Fund initiated its investment in Weyerhaeuser Common at a significant discount to conservative estimates of NAV during a severe
cyclical downturn in housing and forest products. Weyerhaeuser is one of the largest timberland owners in the U.S., with secondary businesses in homebuilding, wood products, and cellulose fibers. Our initial business plan was to invest prior to the company converting its structure into a real estate investment trust. Weyerhaeusers timber REIT peers traded at much narrower discounts to NAV, notwithstanding our opinion that Weyerhaeuser had a superior financial position and owned higher-quality timberlands. We believed that upon conversion to a REIT, Weyerhaeuser Common would trade more in-line with its REIT peers. Additionally, once Weyerhaeusers subsidiaries (homebuilding and wood products) returned to profitability, they could be candidates for resource conversions (e.g., spin-off or sale). Our initial assessment was correct. In a complex transaction, Weyerhaeuser converted into a REIT in mid-2010. Shortly thereafter, the price-to-value discount shrunk materially. Throughout the housing recession, Weyerhaeusers cellulose fiber division continued to be profitable while its timber, housing and wood products divisions struggled. For the quarter-ended June 30, 2012, the wood products division had its best quarter in six years and the homebuilding division reported increased profits coupled with dramatic improvement in closings and backlog. With the housing market in the U.S. starting to show signs of a recovery, the company may now be in a position to consider spinning off its homebuilding and wood products divisions. While we believe these two divisions could be worth 15% to 20% of Weyerhaeusers value, market participants seem to ignore their value because they have not generated consistent profits throughout the downturn. As a result, Weyerhaeuser Common is still undervalued based on private market comps in the timber industry, but with the U.S. housing recovery gaining momentum and Weyerhaeusers business turning the corner, our patience appears to be paying off. Plus, with recent additions to the Board and upcoming management changes, resource conversion seems more imminent than it did at the time of our initial investment.
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BANKRUPTCY EMERGENCE TO RESOURCE CONVERSION (NEWHALL HOLDING COMPANY)
people and will be the water provider for all future customers in the district. A simple approach to understanding Newhalls current valuation would be to subtract $175 million (estimated value of Valencia Water Company, non-Newhall assets and cash) from the $412 million market cap, resulting in a $237 million valuation for Newhalls 27,850 homesites and 681 commercial acres. Using a conservative valuation of $100,000 per acre for commercial land, the implied valuation for Newhalls homesites is $169 million, or about $6,000 per homesite. Finished lots for single family homes in Valencia are selling for an average of $225,000 and multifamily units are $150,000. Improvement costs and fees (the costs of converting unimproved land to finished, builder-ready lots) are roughly $150,000 for single family and $125,000 for multifamily. Simple math reveals that homesites (paper lots) should be worth $75,000 for single family and $25,000 for multifamily based on current market conditions. It would be improbable to bulk-sell over 27,000 lots (probably a 20-year supply) for the same price as if selling a few hundred lots. Therefore a bulk discount should be applied. Applying a 50% discount to the above paper lot values, and assuming two-thirds of the lots are single family and one-third are multifamily, the implied value for Newhalls 27,850 lots is about $812 million, or $643 million greater than the value implied by the market price of Newhall Units. This back-of-the-envelope calculation results in a total equity value of over $1 billion (compared to the market cap of $412 million). Residual land value analysis is used extensively by appraisers, homebuilders and developers to estimate the underlying value of land. The formula for estimating land value is: Revenue - Profit Margin - Costs = Land Value. Applying residual land value analysis illustrates why land value is so sensitive to home prices. If home prices increase, land values tend to increase more dramatically, particularly if fixed costs (e.g., land improvement and building costs) are relatively stable. The opposite also holds true: as home prices decline, land values decline more dramatically. In 2009, for example, it could be argued that some land actually had negative
It is wise to avoid borrowing money against assets that do not generate predictable cash flow. During the 2008-09 financial crisis, very few leveraged land owners escaped bankruptcy, foreclosure or restructuring. High quality assets with inappropriate debt levels create opportunities for distress investors to buy the fulcrum security (the most senior issue in a capital structure that will participate in a reorganization) at a discount to intrinsic value and then exert influence over the restructuring process. In 2008, the Fund acquired the senior secured bank debt of Landsource, which owned one of the most prime land banks in the U.S., with the expectation that we would influence and participate in the reorganization under a Chapter 11 bankruptcy proceeding. The company emerged from bankruptcy in 2009 with no debt (our debt securities were converted into equity). The Fund is one of the largest equity owners (approximately 9.5% of the outstanding equity) and has representation on the board of directors. Not only did we have influence over the restructuring process and long-term business plan, but we continue to have a seat at the table to help the company implement its business plan. The equity interests in Newhall are not exchange traded because Newhall is closely held by seven holders that control approximately 78.5% of the outstanding units. The 21.5% that is not closely held occasionally trades over-the-counter. The implied equity market capitalization (based on current pricing) is approximately $412 million. This compares to the 2007 pre-bankruptcy appraisal that valued the land holdings at $2.7 billion. Clearly, land values are dramatically lower than five years ago, but the current pricing for Newhall Units represents a mere 15% of the value in 2007. Newhalls primary asset consists of 27,850 homesites and 681 commercial acres in Valencia/Newhall Ranch, located approximately 30 miles north of downtown Los Angeles. The company also owns the Valencia Water Company, a public utility that presently services approximately 115,000
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value, because the costs to develop buildable lots exceeded what a home builder would be willing to pay for them. The table below illustrates how a 20% increase in house prices can result in 112% increase in residual land prices with no cost inflation, and a 76% increase with 10% cost inflation. Newhalls single family homesites might be worth $75,000 each in the current market environment, but the prospects for dramatic appreciation with even modest increases in home prices is very compelling.
20% 20% Appreciation appreciation No cost and 10% inflation ________ ______ cost inflation __ $ 630,000 $ 630,000 (126,000) (126,000) (225,000) (240,000)2 (120,000) _______ (132,000) _______ _ _ 159,000 132,000 112% 76%
House price Less builder profit Less finished lot cost Less building costs Residual Land Value Land residual increase
Base _______ _ $ 525,000 (105,000) (225,000) (120,000) _______ _ 75,000
The obvious question anyone should ask is: with all of the hidden value in Newhall, when will that value be realized by the Fund or recognized by the market? Based on firsthand knowledge, the business plan is on schedule and the company expects to begin selling the first lots in Newhall Ranch by the end of 2014. Prior to that time, the company will need to raise capital to begin construction of infrastructure (grading, utilities, roads, etc.). The company is exploring raising private capital as well as public equity (initial public offering), among other options (including business combinations with other owners of large masterplanned communities). We expect that any such transaction would serve to crystalize value and establish a market price more in line with intrinsic value.
Similar to First Industrial, Weyerhaeuser and Newhall, there is a business plan in place to unlock value in each one of the Funds 28 holdings. Some are in the early innings, like Newhall, Segro, and Tejon Ranch. A number of holdings are in the middle innings, as it seems to us that part of the discount to underlying value has closed but it could be a couple more years until the entire value of the positions are recognized. These include Weyerhaeuser, Brookfield Asset Management, Westfield and Lowes. Meanwhile, a few of the Funds positions seem to be closer to reaching the catalysts necessary to unearth value. Some of the companies that we would characterize as being in the later innings include First Industrial, Forest City, Hammerson and our Australian REITs. As these business plans continue to play out, we fully expect the Funds underlying investments to more closely reflect intrinsic value. And with the Fund currently trading at more than a 15% discount to our conservative estimates of net asset value, on average, and more than a 25% discount to public and private market comps, we believe that investors who share our patient mindset and long-term view will ultimately be rewarded. Sincerely,
Michael H. Winer Co-Portfolio Manager
Jason Wolf Co-Portfolio Manager
Finished lot cost includes 10% cost inflation on $150,000 (land improvement costs only).
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Third Avenue International Value Fund (Unaudited)
AMIT B. WADHWANEY
CO-PORTFOLIO MANAGER OF THIRD AVENUE INTERNATIONAL VALUE FUND Dear Fellow Shareholders: In the most recent quarter, Third Avenue International Value Fund (the Fund) established two new positions, added to positions in the common shares of eight companies, reduced five existing positions and eliminated two positions.
QUARTERLY ACTIVITY: Number of Shares 1,192,120 shares New Positions Acquired Piramal Enterprises Ltd. Common Stock held via swap (Piramal Common) Vivendi S.A. Common Stock (Vivendi Common) Increases in Existing Positions GlaxoSmithKline PLC Common Stock (GSK Common) Guoco Group Ltd. Common Stock (Guoco Common) Kinross Gold Corp. Common Stock (Kinross Common) Nexans S.A. Common Stock (Nexans Common) 100 shares Number of Shares 91,900 shares 815,800 shares 17,123,102 shares
MATTHEW FINE
CO-PORTFOLIO MANAGER OF THIRD AVENUE INTERNATIONAL VALUE FUND
Increases in Existing Positions (continued) Otsuka Corp. Common Stock (Otsuka Common) Precision Drilling Corporation Common Stock (Precision Drilling Common) Rubicon, Ltd. Common Stock (Rubicon Common) Titan Cement Co. S.A. Common Stock (Titan Common) Decreases in Existing Positions Alma Media Corp. Common Stock (Alma Media Common) Mitsui Fudosan Co., Ltd. Common Stock (Mitsui Fudosan Common) Resolution, Ltd. Common Stock (Resolution Common) Viterra, Inc. Common Stock (Viterra Common) Weyerhaeuser Co. Common Stock (Weyerhaeuser Common)
451,133 shares
78,034 shares 219,000 shares 2,181,917 shares 549,550 shares 299,615 shares
20,183 shares 428,000 shares 562,000 shares 61,938 shares
Portfolio holdings are subject to change without notice. The following is a list of Third Avenue International Value Funds 10 largest issuers, and the percentage of the total net assets each represented, as of July 31, 2012: WBL Corp., Ltd., 8.72%; Netia S.A., 5.94%; Weyerhaeuser Co., 3.97%; Sanofi, 3.82%; Taylor Wimpey PLC, 3.66%; White Mountains Insurance Group Ltd., 3.47%; Daiwa Securities Group, Inc., 3.33%; Leucadia National Corp., 3.08%; Munich Re, 2.83%; and Segro PLC, 2.72%.
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Third Avenue International Value Fund (continued) (Unaudited)

Number of shares or warrants 200,900 shares 500,400 warrants Positions Eliminated Dundee Precious Metals, Inc. Common Stock (Dundee Common) Dundee Precious Metals, Inc. June 2012 Warrants (Dundee Warrants)
the sale, Piramal became a company with very little in the way of operating businesses, instead consisting primarily of cash, a $1.6 billion receivable from Abbott Labs (part of the purchase price is being paid in stages), and a couple of small legacy pharmaceutical businesses (principally contract manufacturing and over-the-counter medications). As a result of the deal, Ajay Piramal, a well-respected Indian businessman with a reputation for deal-making who has long been the driving force behind the companys success, had led the company into the fortunate position of having a substantial amount of capital to invest. He returned a portion of that capital to shareholders through a repurchase of 20% of Piramals shares, and has been carefully redeploying the remaining capital into four key areas: (i) growing the legacy pharmaceutical businesses; (ii) reentering the drug discovery business; (iii) acquiring a U.S. healthcare information technology company; and (iv) diversifying into lending and real estate asset management in India, the latter of which represents an area that is capitalstarved at the moment. Piramals substantial liquidity position, its management team with a proven, long-term track record of creating shareholder value (having compounded book value per share at over 20% per annum on average over the past 24 years), and the retreat by many multinational pharmaceutical companies from the very areas in which Piramal is actively looking to invest (leading to the potential for many interesting deals) combine to create a very exciting situation. The fact that we were able to acquire shares of Piramal in the Fund at a nearly 30% discount to what we believe is a conservative estimate of current Net Asset Value (NAV) makes the situation all that much more attractive. Also during the quarter, the Fund initiated a position in the shares of Vivendi S.A. (Vivendi), a company that has intrigued various members of our team for more than five years. The Fund had avoided investing in Vivendis shares for a variety of reasons, not the least of which were the companys long-running addiction to debt-financed acquisitions and
REVIEW OF QUARTERLY ACTIVITY
During the quarter, the Fund made its first investment in India, a market we have followed for over a decade but avoided until recently. Our reticence has primarily resulted from valuation and corporate governance considerations. The long-term growth prospects for the country are quite attractive, which has generally resulted in lofty valuations for publicly-traded Indian equities. But in 2011, Indian stock prices depreciated sharply; the BSE Sensex declined by over 35% in U.S. dollar terms, reflecting both the sharp decline in locally-denominated share prices, in addition to a rapidly weakening Rupee, amid bad government policy, the cooling of what had been an overheated market, and capital flight. Against the backdrop of valuations generally becoming more interesting, we identified an individual opportunity which we find compelling. During the quarter, the Fund purchased shares of Piramal Enterprises Ltd. (Piramal), an Indian-listed holding company with investments in pharmaceuticals, healthcare information technology and financial services. However, Piramal is not merely a collection of interesting businesses and assets; it is a company undergoing a substantial transformation, which we believe has created a very attractive investment opportunity. In 2010, following 25 years of growth and development that propelled the company into an enviable position among Indias largest pharmaceutical companies, Piramal sold its generic pharmaceuticals business, the bulk of its operations at the time, to U.S.-based Abbott Laboratories. The US$3.8 billion transaction was one of the largest ever in the Indian pharmaceutical industry, and was priced at an eye-catching valuation of 30 times EBITDA1. Following
1
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA): one frequently used measure of operating cash flow.
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the absence of any discernible strategy for building shareholder value. In retrospect, the discipline paid off. The stock has performed very poorly over a long period of time. Vivendi spent much of its life as a French water utility, but in the mid-1990s was set on a path to become one of the worlds largest media and telecom empires. The improbable but very rapid transformation of Vivendi into a telecom and media giant was driven by a number of audacious debtfueled acquisitions. By the early 2000s, the tech, media and telecom bubble began to burst and the Vivendi empire famously came crashing down under a mountain of debt. The company spent much of the next decade languishing in the absence of strong management and a reasonable strategy. Most recently, though, considerable change is afoot at Vivendi. The company dismissed the CEO of its largest subsidiary, SFR, which is the second largest telecommunications company in France. SFR had been one of the epicenters of Vivendi mismanagement; the telecom company performed particularly poorly in the areas of cost management and in its failure to adequately address and confront the threat of new and increased competition. Shortly after the dismissal of SFRs CEO, Vivendis board dismissed Vivendis own CEO, apparently as a result of irreconcilable strategic differences. Vivendis Chairman, who, during his own brief stint as CEO of Vivendi in the early 2000s, deleveraged the company considerably, has become the public face of the company and declared a strategic about-face. It appears that none of Vivendis underlying operating businesses are sacred any longer. As part of a broad restructuring effort, a number of its businesses have become subject to possible disposal in the effort to reduce Vivendis debt load and make headway in closing the gap between the share price and the underlying value of the companys investee businesses, several of which are crown jewels within their respective industries. As it stands today, the company controls Frances second largest telecommunications company which, when combined with its control of the incumbent telecommunications company in Morocco and a highly successful Brazilian telecommunications company, would comprise a formidable global telecom business were they to be separated into an independent entity, as has been speculated. Vivendi also controls Canal +, Frances largest television business, as well as Universal Music and ActivisionBlizzard, the worlds largest music and video game businesses, respectively. There is considerable scope for dispositions as well as a sensible reconfiguration of the business into various components, all of which seem increasingly likely. Shares of Vivendi are trading at a considerable discount to our conservative estimate of its net asset value, essentially the current liquidation value of the company, and it appears that the mounting pressure on the companys board has made value enhancing transactions and debt reduction increasingly probable. On the sell-side, during the quarter we eliminated the Funds remaining position in Dundee Precious Metals (Dundee), which we had already been trimming following significant share price appreciation. Without rehashing Dundees history, a number of maneuvers eventually narrowed down the companys once diverse geographic exposures overwhelmingly to one country: Bulgaria. After facing significant regulatory hurdles for the expansion of its operating gold mine there, and a seemingly endless back-andforth with the Bulgarian government, Dundee was finally able to gain the necessary approvals, and much of the promise that had long been in the pipeline began to come to fruition. Dundee, which had for some time became a bit of a show me story for investors who had become impatient with the regulatory delays, saw its stock price performance rebound strongly as a result of these positive developments. Our investments in gold mining companies have tended to focus on companies which operate in and own assets across multiple jurisdictions - preferably reasonable ones - in order to mitigate regulatory and/or political risk through geographic diversification. With this, as well as valuation in mind, we decided to close the book on the successful Dundee investment by eliminating our position. The Fund currently holds investments in two other gold mining companies (Newmont Mining and Kinross Gold) which operate across a wider range of jurisdictions.
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HOLDING COMPANIES IN THE FUND
During the quarter under review, both of the new investments could be seen as falling within the de facto category of holding companies (as distinct from the industry classification that the portfolio report provides). A holding company, for the purposes of the following discussion, is an entity which holds stakes in various other businesses and/or assets that are organized within separate and distinct entities. Because of this structure, analyzing holding companies often requires a greater focus on capital allocation rather than on operating performance; well managed holding companies tend to create more value via resource conversion (e.g., acquisitions, divestitures, spin-offs, etc.) than through operating earnings. Of the two new holdings discussed above, one (Piramal) stumbled into this category, by virtue of the sale of its principal pharmaceutical operating units, and essentially became a holding company with cash receivables, investment holdings and other smaller businesses. The other (Vivendi) has morphed from a water utility to a collection of disparate assets centered around media and telecommunications businesses. Over the last decade, the Fund has held investments in a number of holding companies with a wide variety of origins, operating across many different business and geographic areas and owning a variety of assets, both listed and unlisted, with differing degrees of ownership of underlying assets. As of July 31, 2012, the portfolio includes holdings in 12 companies that might be considered holding companies under the broad characterization above, which collectively make up nearly 32% of Fund assets. Those holding companies that we find attractive (based on the criteria outlined below) tend to produce lumpy reported earnings and uneven increases in shareholder value, which makes them somewhat difficult to analyze using conventional tools such as earnings and discounted cash flow analysis. Some also have complex organizational structures and financial statements which are obscured by certain accounting principles. We believe these traits that may discourage others have contributed to our ability to find opportunities in the holding company space throughout the history of the Fund.
The fact that holding companies (as we characterize them) make up such a significant proportion of Fund assets may, quite understandably, seem odd to many of our clients, if for no other reason than simply because holding companies are relatively uncommon in the United States. However, the holding company is a type of corporate organization that can be found much more frequently outside of the U.S. Because the Fund focuses its efforts primarily on investment opportunities outside of the U.S., it is incumbent upon us as international investors to have a deep understanding of this class of companies. This fact is made all the more important because the very nature of holding companies lends itself to an overly simplified brand of investment analysis which we believe is misguided and wholly insufficient (as we will explain soon enough). Because of their considerable presence in the Fund (both today and historically), and because this is an asset category which we believe is frequently misunderstood, we thought it worthwhile to outline some of the factors that we weigh in considering holding company-type investments in the portfolio.
WHY DO HOLDING COMPANIES EXIST?
Before we explain how we think about and analyze a prospective holding company investment, it makes sense to begin with the question: why do holding companies exist in the first place? Our experience has been that understanding the various origins and purposes of holding companies has proven helpful in spotting pockets of opportunity within this space, while avoiding common pitfalls that could prove painful for investors. Truth be told, holding companies could exist for any of a variety of reasons, depending on their individual circumstances. First, one common purpose of a holding company is to provide an organizational structure by which a controlling shareholder could hold and exercise a disproportionate degree of control (relative to its actual economic stake) over a variety of investments. In these cases, the holding company allows for control or significant influence over its constituent investments through majority or near majority ownership of voting rights. For a simple example, suppose
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Additionally, holding companies sometimes are formed as a result of a family or controlling shareholder who uses the proceeds from its cash generative, legacy business as capital, with which to invest in other industries, ultimately creating a web of disparate business interests. Again we return to the subject of resource conversion, as wealth created by the established business is redeployed into new business areas. This is particularly common in countries with poorly Importantly, while holding companies provide their developed capital markets, where it is difficult to raise controlling shareholders with elements of control over capital at reasonable terms (this might partially explain why subsidiary companies, what is done with the control varies holding companies are less common in the U.S.). In such greatly. While some holding companies actively manage or cases, for a family or business owner who wants to invest in influence the actions of their operating businesses, others new businesses, using the cash generated from the legacy simply hold their stakes passively. As noted earlier, resource business(es) to finance these new endeavors often offers a conversion activities can add considerable value if executed preferable alternative to raising external capital at onerous well, but passive holding companies often forgo this terms and perhaps surrendering a opportunity. In general, holding degree of control to market The attraction of holding company structures that are used holding company primarily to passively maintain company investments is that participants. Ainterests in various structure with control, while effectively sitting on they periodically present an businesses sometimes results from their collection of investments, this use of a cash generative, legacy opportunity to invest in with little or no history of taking business as a financing vehicle for value additive actions, are of little undervalued assets at a further new ventures. interest to us as potential discount as a result of the Other holding companies exist as investments. Later, we will provide holding company structure. such simply by design, having been an example of each, with run in such a structure throughout implications for investors. most, if not all, of their existence, while others find Various other origins and/or purposes of holding companies themselves in a holding company structure almost by abound. Holding companies are sometimes used as financing happenstance, such as the aforementioned Piramal example. vehicles to take advantage of arbitrage opportunities involving differing parent company and subsidiary credit ratings, VALUATION: THE MECHANICAL APPROACH AND ITS SHORTCOMINGS taxation differentials, etc. For example, Hong Kong-listed The attraction of holding company investments is that they Fund holding Guoco Group Limited (Guoco) could issue periodically present an opportunity to invest in undervalued debt in tax friendly jurisdictions where interest payments are assets at a further discount as a result of the holding tax deductible, in order to finance investments and businesses company structure. Typically, the shares of listed holding which subsequently generate profits in other jurisdictions that companies trade at discounts, often sizeable, to the market only lightly tax such profits. In this way, the holding company value of their investments, after netting out liabilities. On is a mechanism by which companies such as Guoco may seek the surface, this analytical exercise seems simple and tax efficiency. straightforward, especially in cases where the holding companies investments mainly consist of listed investments a publicly listed holding company is 51%-owned by its founding family. Further, that holding company, in turn, holds 51% stakes in five different operating businesses. In this case, by virtue of its majority control of the holding company, the founding family controls those five operating businesses, even though the familys effective economic interest in each operating business is only about 26% (51% x 51%).
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with readily ascertainable market values (their respective stock prices). Indeed, many market participants and analysts who follow holding companies tend to focus heavily on their explicit discount to NAV. For example, suppose the market value of Holding Company As listed investments and other assets sum to $100 per share (after deducting total liabilities). If Company As common stock is trading at $70 per share, then that company is trading at a 30% discount to NAV. Once calculated, there seems to be a temptation to focus on the level of this explicit, market-determined discount to NAV. Further, it is not uncommon to see some in the analytical community who then seemingly focus on this explicit discount relative to those of other holding companies (Company A is cheaper than Company B which is currently trading at a 20% discount to NAV, but not as cheap as Company C which is at a 35% discount) and also relative to that companys own history (Company A is cheap relative to its average historical discount of only 25% to NAV). While this methodology seems perfectly reasonable, we believe it is necessary to go deeper in determining which holding company investments are attractive enough to add to the Funds portfolio. Most holding companies trade at discounts to NAV based on the market value of their investment holdings that narrow and widen during ups and downs in the market. Additionally, the valuations of the underlying investments - those shares of which are held by the holding company - wax and wane as market sentiment and industry conditions fluctuate and as certain businesses fall into and out of favor among investors and traders. Because of this, relying on market-based NAV calculations without a deeper understanding of the valuations, risks and exposures of the underlying holdings may very well be misguided. Assessing the investment attractiveness of a holding company is not solely a mechanical exercise of estimating the arithmetical discount and deciding if this is large enough as the basis of purchase. It entails assessing the attractiveness of the underlying assets, valuing them conservatively, determining if these are actually undervalued and then calculating the discount to NAV based upon this conservative valuation. The objective of this exercise is to buy ascertainably cheap (and attractive) assets at a discount, rather than any assets at a discount. As an oversimplified example, imagine a holding company of high-tech stocks. Suppose it traded at a 30% discount to NAV both in 1999 and in 2001. But in 1999, the good old days for many tech stocks, its underlying holdings were trading at priceto-earnings (P/E) multiples of 50, whereas in 2001, after the dot-com bubble burst, the average P/E of its holdings was 8. Through this lens it is easy to see how a 30% discount in one case might not be as attractive as a 30% discount in the other. With this issue in mind, we begin our assessment of the valuation of a potential holding company investment with a wary, skeptical eye. Our objective when investing in holding companies (focusing solely on valuation, for now) is to buy cheap underlying businesses and assets, which are, in turn, subject to an additional discount at the holding company level. Often, this entails buying when the underlying businesses are out of fashion and, therefore, available at bargain prices, even before the discount to NAV that comes on top at the holding company level. Ideally, as and when the underlying assets/securities are repriced upward to more normal (i.e., less depressed) levels, the discount to NAV at the holding company level may narrow at the same time, providing for the potential for a rate of return which could be higher than that which would have been obtained by directly investing in the underlying assets. In a sense, buying businesses cheaply at an additional discount creates the potential for magnified returns if conditions normalize, somewhat akin to a margin account but with free leverage and without the risk of a margin call.
ITS NOT ALL ABOUT THE DISCOUNT!
We believe that our approach to holding company valuation analysis effectively addresses the shortcomings of the simpler, purely mechanical approach to NAV calculation. However, we cannot emphasize enough that an attractive
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statistical discount to NAV even one based on draconian assumptions is a necessary, but not sufficient condition for inclusion in the Funds portfolio. As detailed above, we disagree with the purely mathematical approach that many analysts apply to valuation. However, even if we were all on the same page regarding our calculations of discounts to NAV, we believe that many holding company analyses that we have seen are flawed in that they weigh too heavily the importance of the discount, while seemingly giving less weight to other factors that, nevertheless, contribute heavily to determining whether or not the investment is ultimately profitable. With respect to a holding companys underlying businesses and assets, obviously their general attractiveness, risks, and exposures are vital to the investment thesis. Additionally, it is imperative to consider a host of other factors, which, if ignored, could derail an investment that appears attractive on the basis of valuation alone.
SAFETY AND THE AVOIDANCE OF INVESTMENT RISK
A variation of the case above would be a leveraged parent company, with relatively well financed holdings underneath. In times of economic or capital market stress, such a holding company might seek to extract cash or liquidity from its subsidiaries. While such an action might alleviate the financial stress at the parent company level, the liquidity drained from its subsidiaries might impair their ability to efficiently operate their respective businesses, ultimately compromising the aggregate value of the collection of assets and augmenting the risk exposures of the underlying businesses as a result of their weakening financial positions. From the perspective of a potential holding company investor, it is easy to see how each scenario would not only add downside risk but reduce the upside potential of the investment as well. A large discount to NAV alone is highly unlikely to be enough to drive superior investment performance in the face of a vulnerable financial position. For these reasons, we seek to avoid either of these situations by investing in holding companies that are well-financed, both at the holding company and subsidiary level.
HOLDING COMPANY CONTROL: CONTRIBUTING TO WEALTH CREATION OR DETRACTING FROM IT?
For holding companies, like all of our other investments, one criterion in security selection for the Fund that is of paramount importance revolves around the safety of the investment, with a view toward avoiding situations which run the risk of permanent loss of invested capital. In evaluating the safety of holding companies, there are two layers of consideration, as in the case of assessing their cheapness: at the underlying holdings and at the level of the holding company. This process entails scrutiny not just of the financial risk (borrowings, commitments, contingencies, etc.) at each of these levels, but also the business risk. A seemingly safe model that we have encountered on a variety of occasions is that of holding companies which are debt free at the parent level, but with investments in leveraged subsidiary entities underneath, with said entities having non-recourse debt. Alas, in periods of economic downturn combined with capital market stress, the financial difficulties experienced by these leveraged entities was such that it threatened to wipe out the parents equity in the holding, forcing the parent company to make an equity investment in the holding, the non-recourse nature of the debt notwithstanding.
A holding company that meets our criteria of financial strength and attractive valuation, as outlined above, begins to get exciting from our perspective. Unfortunately, this is still not a strong enough basis on which we would commit the Funds capital. Of particular issue, holding companies are almost by definition controlled by insiders. For this reason, it is essential that we are able to gain some level of comfort that the holding company in question is structured and intended to generate wealth for all of its shareholders, not just insiders. A strong financial position and attractive valuation could nevertheless fail to translate into strong returns if the company is run by insiders who either enrich themselves at the expense of shareholders, or destroy shareholder value through poor decision-making or benign neglect. There are numerous factors we consider in assessing whether the holding company contributes to value creation for shareholders or detracts from it, including those discussed below, among others.
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One of the more objective elements in this analysis is the determination of the operating costs of the holding company itself. While holding companies typically do not directly operate businesses that generate cash flows instead, they usually hold stakes in separate investee companies which operate businesses they, nevertheless, have their own collection of operating costs (including compensation) which must be borne by the shareholder. Necessarily, these must be modest; we seek to avoid situations where onerous operating costs at the holding company level impose excessive costs on shareholders. The operating cost discussion is related to a point made earlier about our preference for companies which have a history of proactively taking value accretive actions, rather than of passively sitting on a collection of assets, insulated from the threat of loss of control by the holding company structure. To put it somewhat bluntly, if shareholders must pay the insiders of holding companies (through their operating costs), the pay should at least be justified by valueadded contributions made by those insiders. Making matters worse, inertia or inaction can take a toll on shareholder returns that greatly exceeds operating costs. To illustrate an example of this, we point to a tale of two European automobile manufacturers, French Peugeot S.A. (Peugeot) and Italian Fiat S.p.A. (Fiat). Peugeot and Fiat share many similarities: both companies are controlled by holding companies (note: neither of which are held in the Fund), operate in a very difficult industry that faces formidable headwinds in the continental European mass market, have relatively weak competitive positions outside of Europe, and had generally been long-time beneficiaries of strong local banking relationships and supportive local governments. Not surprisingly, the global financial crisis hit each of these companies particularly hard and exposed them as not competitive enough on a global scale. In the depths of the financial crisis, Peugeots holding company remained passive, to our knowledge taking few (if any) truly aggressive actions to confront its challenges. On
2
the other hand, Fiats holding company, Exor S.p.A. (Exor) has been far more aggressive. Sergio Marchionne, hired by Exor to be the CEO of Fiat, structured the acquisition of Chrysler in what we see as a very clever and opportunistic deal designed to address Fiats exposure to the long-term problems facing the European auto market. In addition, Exor also oversaw the 2011 de-merger of truck and agricultural equipment maker Fiat Industrial S.p.A. from Fiat (Auto), and eliminated the multiple share class structure at each. Cost cutting at Fiat has been impressive, helping the carmaker (even excluding Chrysler) remain modestly profitable in the current environment, while Peugeot is suffering substantial losses. The resulting difference in stock price performance has been astounding; from March 31, 2009 through July 31, 2012, Fiat common stock generated a total return for shareholders of over 80%, while Peugeot produced a negative total shareholder return of -47%2. We provide this example as an illustration of how important proactive versus passive management tends to be to the performance of holding companies and their subsidiaries. Shareholders of Peugeots holding company have suffered as a result of its inactivity amid crisis, while shareholders of Fiats holding company have benefitted from their bold actions. Of course, taking bold actions can be as harmful to shareholder returns as they have been helpful in the case of Fiat; a controlling shareholder that takes aggressive, but foolish, action could do much more harm than a passive controlling shareholder. To that point, another of the softer factors to be weighed in assessing the investment attractiveness of a holding company is the nature of its investment activity, principally the quality of the purchase and sale decisions made by management. Considerable wealth for shareholders can be, and is, created by shrewd resource conversion activities. For example, Fund holding White Mountains Insurance Group, Ltd. has increased its NAV per share by roughly 16% per year on average since its Initial Public Offering in 1985, primarily through
Source: Bloomberg (returns are in euros).
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business acquisitions and divestitures, rather than through operating earnings; one recent example was its sale of Esurance to The Allstate Corp. at an excellent price of over two times tangible book. The Esurance sale at a juicy premium to book value provides a good example of how well run companies like White Mountains can build shareholder wealth over time. White Mountains has proven that it is not a one-trick pony in this area. In recent years, White Mountains has taken advantage of its strong balance sheet to aggressively repurchase its own shares at a meaningful discount to NAV another way to increase NAV per share over time including over $490 million worth of its shares during the first six months of 2012 alone. We seek to invest in holding companies that are run by management teams with good track records of value creation through resource conversion, such as White Mountains. What might be lost on anyone who focuses almost exclusively on the level of discount to NAV, is that if the Funds holdings are able to compound NAV at reasonably attractive rates and their track records attest to their ability to do so we believe we are likely to do well over time, independent of the potential for discounts to narrow at the holding company and/or subsidiary level. One example of this is the Funds investment in Compagnie Nationale a Portefeuille S.A. (CNP), a long time position that was eliminated in May 2011 following a buyout offer from its controlling shareholder (Belgian billionaire Albert Frere). We initiated the position at an estimated discount to NAV of about 20% and sold into the privatization about six years later at an estimated discount of 7%. Yet the CNP investment generated an average annual return of around 13.5% compounded over its six year life for the Fund, accumulating to more than double our original investment, due largely to its ability to increase NAV over time, with only a modest contribution coming from the closure of the discount. Thus when looking at holding companies, we prefer those run by controlling shareholders who boast a long-term track record of building shareholder value, and who have the ability to take advantage of resource conversion activities going forward. Along a similar vein, in addition to assessing the historical track record of creating value through major transactions, another softer factor to consider when assessing management of these holding companies, assuming that they exert some control over their holdings, is the quality of the ongoing oversight that has been maintained over these holdings. For example, former Fund holding Lundbergforetagen AB (Lundbergs) has held stakes, both directly and indirectly, in Swedish bank Svenska Handelsbanken AB (Handelsbanken), with representation on Handelsbankens Board. The conservatism and prudence with which Handelsbanken seems to have been operated is evidenced by the fact that Handelsbanken was alone among its closest Swedish peers (such as Swedbank AB, Nordea Bank AB, and Skandinaviska Enskilda Banken AB), in that Handelsbanken was not forced to raise capital during the most recent global financial crisis of 2008-2009. From our perspective, we look for holding companies where management participates in prudent, fruitful oversight of its investee companies, while we seek to avoid the absentee landlords that sit passively on their investments, without adequate oversight. Notably, because of the holding companys closed-end-like nature, it allows for investments in less liquid assets, facilitating an ability to engage in longer-term investing, in contradistinction to their open-ended peers, where the less predictable redemption patterns can on occasion cause the portfolio of open-ended entities to be tilted toward more liquid holdings. This closed-end structure works particularly to the advantage of skilled management teams who have a track record of successful deal-making and oversight of their investee companies, as highlighted above. A thorough evaluation of these indicators of whether a holding company adds to or subtracts from value is essential in any analysis of holding companies because they are usually controlled by one or more insiders, making corporate governance considerations particularly important. With Boards of Directors heavily populated by insiders, and the potential for related-party transactions
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that may be opaque to the eyes of outsiders, particular attention must be paid to whether the controlling shareholders have built a history of building value for all shareholders over time. In this regard, we weigh a concrete track record of value creation (as noted above in the cases of White Mountains, Exor, et al.) much more heavily than a management teams words. In sum, holding companies periodically offer attractive investment opportunities, but the individual security selection process must be much more involved than simply calculating a statistical discount to NAV and making an investment decision based primarily on that figure. We believe that the holding companies found in the Fund consist of those that offer much more than just static discounts to NAV. They consist of well-financed companies that own stakes in quality assets, at reasonable prices, that are made even more attractive by the discount at the holding company level. Furthermore, we believe they are run by quality management teams and/or controlling shareholders who have proven to be adept at prudently overseeing their holdings and at building value for all shareholders over the long term. In our opinion, imposing these criteria on the universe of holding company securities when selecting holdings for the Fund helps to stack the odds in our favor in terms of providing upside potential and downside protection.
Geographical Distribution of Investments Country _____ South Korea Taiwan Austria Switzerland Norway New Zealand Greece Chile Brazil India Finland Equities-total Cash & Other Total % of Net Assets ___________ 2.65 2.53 2.47 2.45 2.10 1.89 1.88 1.60 1.37 0.96 0.11 ______ 93.85 6.15 ______ 100.00% ______ ______
Note that the table above should be viewed as an ex-post listing of where our investments reside, period. As we have noted in prior letters, there is no attempt to allocate the portfolio assets among countries (or sectors) based upon an overarching macroeconomic view or index-related considerations. We look forward to writing to you again when we publish our Annual Report for the period ended October 31, 2012. Sincerely,
At the end of July 2012, the geographical distribution of securities held by the Fund was as follows:
Country _____ Japan United Kingdom Singapore United States Germany France Canada Poland Hong Kong Bermuda % of Net Assets ___________ 11.09 10.01 9.59 8.58 7.19 6.70 6.19 5.94 5.08 3.47
Amit Wadhwaney Co-Portfolio Manager, Third Avenue International Value Fund
Matthew Fine Co-Portfolio Manager, Third Avenue International Value Fund
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Third Avenue Focused Credit Fund (Unaudited)
THOMAS LAPOINTE
PORTFOLIO MANAGER OF THIRD AVENUE FOCUSED CREDIT FUND
Dear Fellow Shareholders, Third Avenue Focused Credit Fund (the Fund) seeks to produce superior total returns over time. In pursuit of this, we often initiate investments during troubled times for issuers of debt securities. At the time of our initial investment in a company, the near-term earnings outlook is often weak, which is why we are able to buy securities at deep discounts from their fundamental value. Because we take the long-term view of each investment, quarterly financial results are not the focus of our analysis. However, the quarterly disclosures do give us insight into the companys operations, its industry, and the larger economy. What we see in the high-yield bond and loan markets right now are quality companies with proven track records of cash flow generation issuing securities with yields between 5-6%, and durations of five years or longer. New issuers include companies like CIT Group, Lyondell, Community Health, Univision, MediaCom and GM. These are high-yield companies with good current business outlooks issuing new debt to retire older, more expensive obligations. That
they are able to do this supports our thesis that high-yield default rates will remain below average. When the vast majority of new debt issuance is used to refinance existing debt and extend the maturity runway, it is not an environment where you will typically see a major credit crisis. When debt is raised to fund leveraged buyouts, M&A, speculative CapEx, or new business models, there is danger ahead. What we are not seeing now are prior warning signs, like when companies such as Windstream borrowed to build out infrastructure with no realistic plan to pay for it. Even though strong companies are accessing the capital markets, most of these new issues are not attractive to us, in light of the risks that these companies face. Issues that pay such low coupons have very little cushion against hiccups. Some of these companies, two or three years on, will not look as good as they do today and they will become candidates for the portfolio when we can purchase their securities at large discounts to par. Investors buying new issues at current prices must expect diminished returns going forward. We are not willing to make that concession.
Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Focused Credit Funds 10 largest issuers, as of July 31, 2012: Lehman Brothers Holdings, 5.80%; IntelSat Luxembourg SA, 3.80%; Sprint Capital Corp., 3.47%; Energy Future Holdings Corp./TXU Corp., 3.26%; Citycenter Holdings, LLC, 3.22%; Hercules Offshore, Inc., 3.14%; Nuveen Investments, Inc., 2.98%; Cemex Finance, 2.94%; Caesars Entertainment Operating Co., Inc., 2.70%; and Clear Channel Communications, Inc., 2.70%.
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Third Avenue Focused Credit Fund (continued) (Unaudited)

We have been saying for the past two years that the U.S. economy is improving perhaps more robustly than many observers think. The year-over-year results of our portfolio companies can help provide micro-level proof of that thesis. Despite worries about a U.S. double dip recession, a hard landing in China, and the recession in Europe, we continue to believe that the U.S. economy, where the majority of our holdings are domiciled and derive revenues, will be stronger a year from now than it is today. We believe that default rates should remain low, due to a lack of maturities and also because corporate balance sheets remain strong. The following highlights from the quarterly results of the Funds largest holdings indicate that fundamentals continue to improve, in spite of a slowing macroeconomic environment and deteriorating sentiment around the world. Intelsat is a 3.8% position in the Fund, and the investment is providing us a cash yield of approximately 11%. In August, the company reported second quarter results delivering stable earnings, with revenue down 1% to $639 million, while adjusted EBITDA eased downward 2% to $492 million year over year. We expect that earnings will improve, due to heavy capex investments that will begin to bear fruit partly in 2012 and to a greater extent in 2013. The companys backlog of contracts remains steady at over $10 billion, greater than five times its annual earnings. In May, Intelsat filed for an initial public offering, though it is not an event we think will get much real attention until next year. The offering will allow the company to continue to focus on retiring its most expensive debt, as it did when it recently redeemed its 11% and 9% notes to issue 7% bonds. As the bonds we hold are among the most levered in the capital structure, we stand to benefit most from the equity raise. Our valuation analysis and valuations suggested by comparable companies suggest a valuation of about nine times next years EBITDA, which would provide plenty of coverage for our bonds. Most promising, Intelsat signed several long-term contracts for its next generation of telecommunications satellites, with customers including Harris CapRock Communications, Panasonic Avionic Corporation and MTN Satellite Communications. Energy Future Holdings (TXU), a 3.3% distressed position, with an 11-14% yield to maturity, released a mixed earnings report that did not surprise us. Revenues on the Oncor utility side (where we are invested) continued to rise and the company remains in the midst of a large capex project which should ultimately boost the underlying rate base and provide greater cash dividends to the company parent. Meanwhile, on the power generation side, the baseload business (where we are not invested) remains under significant pressure due to the low price of natural gas; in the short term, the companys hedges are making up for any shortfall, but as these run out, cash flow and liquidity will dry up quickly. We do not expect any value from the power side for our holding company bonds. As such, we are pleased to see that the utility continues to perform well, while the parent company further distances itself from the merchant power business. Proceeds from a recent bond issuance will be used to pay off completely an intercompany note that should significantly reduce the risk that a restructuring at the power generator could drag the parent into a reorganization. CityCenter Holdings, a 3.2% position yielding almost 11%, had an excellent quarter, as the property generated record property-level EBITDA of $71 million, up 11% from the prior year, despite a difficult comparison caused by a high table hold (excellent casino luck) in the first quarter of 2011. All aspects of the business improved, from the Aria casino to the Crystals mall, and it does seem that the property is growing nicely into its capital structure. We view the companys choice of switching to paying cash for our bonds interest (instead of payment in kind) as a further sign that the parent company sees the CityCenter as having matured and we view these bonds as among the most attractive in the gaming space. Sprint Nextel, a 3.5% holding that we purchased last year at a significant discount, reported higher revenues and EBITDA. Second quarter sales of $8.8 billion
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grew 6% year over year and EBITDA of $1.5 billion grew 10% year over year. Average revenue per user (ARPU) increased 16% year over year, to $63.38, driven by data-devouring smartphones. The company sold 1.5 million iPhones in the quarter and postpaid churn decreased to 1.69%, its best ever. Sprint Nextels Network Vision deployment appears on track and will deploy 12,000 new LTE (4G) sites by the end of 2012. We continue to believe Sprint Nextel, the third largest wireless company (50 million subscribers), is a great business that will benefit from rapid broadband data growth. The company had $8 billion of liquidity, as of June 30th, 2012, and also increased its 2012 EBITDA outlook to $4.5-$4.6 billion. reported flat revenues of $1.6 billion during the second quarter and cash flow up 6% on flat revenues. Its Radio, Domestic Outdoor and International Outdoor businesses all exceeded expectations. Media advertising tends to be the first hit taken in a slowing economy, but Clear Channels unique reach and dominance in key markets has allowed it to keep sales up despite the headwinds.
Caesars Entertainment, a 2.7% position and also a distressed investment with a 20% yield, reported middling results in the recent quarter. Cash flow at the operating company level was off 5%, as almost all regions saw a decline in gaming revenue; while some regions saw an increase in visitors, almost all saw a decline in spend per visit. The company did crystallize Hercules Offshore, a 3.1% position, with a 10-11% further cost cuts and expects to yield, reported a 35% yearextract more savings in the future over-year increase in EBIDTA. Hercules jack-up rig business We have been saying for the while opening several promising reported its fifth straight past two years that the U.S. new projects. Additionally, the company continues to extend its quarter of revenue growth and, economy is improving runway by chipping away at 2015 says management, customers are not pulling back from perhaps more robustly than maturities and issuing longer-term debt. drilling operations in response many observers think. to volatile oil prices. Hercules Cemex, a 2.9% position in the jack-up fleet is nearly 100% Fund, has closely tracked the utilized. stabilization of, and now Nuveen Investments, a 3% position, reported flattish results after seeing outflows resulting from the departure of one of its star portfolio managers. Nuveen continues to diversify its business by both asset class and distribution channel and should be able to refinance some of its more expensive debt. The company generated adjusted EBDITA of $129 million during the quarter, consistent with results from the 2011 quarter. Nuveen has proven, despite losing some key personnel, that it has an attractive brand and that there is adequate and growing demand for its investment products. Clear Channel Communications, a 2.7% position and a distressed investment yielding north of 20%, improvement in, U.S. housing sales and construction. We were able to purchase Cemex bonds at distressed prices, yielding between 15-17%. Recent earnings were helped by improved pricing in every region, offset by lower volumes in every region on a like-to-like basis. EBITDA was the highest it has been in several years, with the highlight that U.S. EBITDA finally entered positive territory. Better still, guidance for the U.S. was increased to high single digit growth, compared with previous guidance of mid-single digits. This is especially important given that the U.S. contributes 20% of the companys revenues (currently contributing only 4% of EBITDA). A goal of the company is that the U.S. will contribute about a third
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of EBITDA. While debt levels and credit ratios remain elevated ($17 billion debt and gross total leverage of seven times cash flow), we sit in bonds with some of the most robust guarantees in the capital structure with several turns of value below us. On the back of a stronger housing market, Ainsworth, another distressed company yielding between 15-20%, reported much improved results. Second quarter sales increased $10 million year over year, to $90 million, and EBITDA increased from $2.7 million to $17.1 million. Benchmark oriented strand board (OSB) prices in Western Canada increased 54% year over year, to $232/msf, due to increased demand from a pick-up in new home starts. While housing activity remains muted (though it has now climbed above trough levels throughout the U.S.), we believe Ainsworth will be a primary beneficiary when new home starts rebound in North America. As of June 30th, 2012, Ainsworths liquidity was $59 million and the company has several options for additional sources of capital. The company expects a positive second half, based on industry forecasts for housing starts of between 723,000 and 800,000, 19% to 27% higher than 610,000 starts in 2011.
RECENT ACTIVITY
During the quarter, the Fund established 15 toehold positions, no small number given the 50-70 issuers we usually hold. The fixed-income markets consist of private transactions between buyers and sellers. Taking toehold positions gives the Fund the opportunity to buy larger swathes of an issue as prices become even more favorable. As we wait for a better entry point, we are being paid attractive current yield. We continue to scour the market for value and look to build meaningful positions at the right price. While you will be able to see these small $2-10 million positions in our holdings report, they are truly starter positions. We invested about 7% of the Fund in these names. For the most part, they are stressed and distressed secondary purchases of securities that have fallen 10-30 points and yield between 10- 20%. They all have some issues, and the market has punished the securities because of their near-term outlook. We have the ability to double and triple our investments in these companies when we see a clearer picture of the world markets and improvements in their fundamentals or if we are able to purchase them at lower prices. Even in a low default environment, we expect the markets will continue to provide us with select distressed opportunities as they have done in the past. Today, about 50% of the high yield and loan market trades at yields of 5% or lower and are priced at $106 (even though the company only owes you $100). The average price of a security in the Fund is $87. That nerarly 20 point price difference represents part of the possible future returns not available from more traditional high-yield products. We do not own any of these low yielding securities, as they are more highly correlated to Treasury prices and will feel the pain if interest rates increase, they have longer durations so the price impact will be more meaningful. Most of these companies have a very low chance of defaulting, but all of them have the chance of a misstep over the next 1-3 years, and when they do, we will be there to analyze the issues, assess the risks and possibly purchase securities 20-40% below where they were issued. This is what we do. We are different in that way. We can go years without owning a
These companies, which are the Funds major holdings outside of Lehman Brothers, represent a wide collection of industries and geographies. Lehman Brothers, which is undergoing an orderly liquidation, is exceeding expectations and will be making its next distribution on October 1st. Though signs of a global slowdown are evident, we see good reason for optimism, as managers improve operating results and strengthen balance sheets. For these companies, all massive cash generators, the capital markets remain accessible. We have also seen healthy resilience in sales of products that you might expect would decline, including advertising at Clear Channel and attendance at City Center. Overall, it is a picture of companies bracing for hard times, which certainly could pay unexpected dividends in the event that conditions are better than expected.
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unwilling to pay. Although our macroeconomic view is that the world is healing and that the U.S., in particular, is improving, we remain aware that significant tail risks emanate from Europe and China. In some ways, our large cash position acts as a hedge or even a short against current high-yield prices, and will provide us the firepower to buy In a nutshell, we invest our capital (your capital) when we bonds and loans at more attractive levels. Our security see opportunities to make double digit returns in stressed selection process is bottom up, but in the face of such and distressed securities. In the past year, we purchased macroeconomic turbulence, our price consciousness is many of these: Sprint 25-30 points below where it was stricter than ever. The Funds trading after they lowered earnings elevated cash can be deployed In a nutshell, we invest and the stock sank to all-time lows; quickly as opportunities arise, or if Cemex, 30 points below par after our capital (your capital) we get some clarity from Europe. they lowered earnings guidance; when we see opportunities to The Funds toehold positions are Ainsworth was down 20 points akin to a runners starting block make double digit returns when the market was uncertain that positions us for optimum about liquidity and lumber prices. in stressed and distressed performance. Our toehold positions all fit this securities. In the past year, we As always, we thank you for your category, They were purchased for support of the Fund and we look an average price of $85 and yield purchased many of these. forward to writing you again at the an average 14%. Since the end of the Funds fiscal year on October 31, 2012. inception of the Fund nearly three years ago, we have returned 8.5% annually, despite some mistakes and Sincerely, setbacks. The current invested portfolio yields between 1112% and, because of the low dollar price of its investments, has the potential to generate excess total return in the future. steel company or a coal or chemical company or any industry. We don't have benchmarks and industry weights that we must adhere to regardless of the attractiveness of that sector of the market. We don't need to be fully invested. The Funds cash position remains at 28%. This elevated cash level is the result of the risks to the market presented by Europe, which we have written about in past letters. The global search for yield has driven prices up to levels we are Thomas Lapointe Portfolio Manager Third Avenue Focused Credit Fund
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Third Avenue Value Fund Third Avenue Small-Cap Value Fund Third Avenue Real Estate Value Fund Third Avenue Inter national Value Fund Third Avenue Focused Credit Fund
THIRD QUARTER REPORT

July 31, 2012
THIRD AVENUE FUNDS
Privacy Policy Third Avenue Funds (the Funds) respect your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain personal information about you. This is the information we collect from you on applications or other forms and from the transactions you make with us, our affiliates, or third parties. We do not disclose any information about you or any of our former customers to anyone, except to our affiliates (which may include the Funds affiliated money management entities) and service providers, or as otherwise permitted by law. To protect your personal information, we permit access only by authorized employees. Be assured that we maintain physical, electronic and procedural safeguards that comply with federal standards to guard your personal information. Proxy Voting Policies and Procedures The Funds have delegated the voting of proxies relating to their voting securities to the Funds investment adviser pursuant to the advisers proxy voting guidelines. A description of these proxy voting guidelines and procedures, as well as information relating to how a Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available by August 31, each year (i) without charge, upon request, by calling (800) 443-1021, (ii) on the website of the Securities and Exchange Commission (SEC) at http://www.sec.gov, and (iii) on the Funds website www.thirdave.com. Schedule of Portfolio HoldingsForm N-Q The Funds file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds Form N-Q is available on the SECs website at http://www.sec.gov, and may be reviewed and copied at the SECs Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Third Avenue Trust Third Avenue Value Fund Portfolio of Investments at July 31, 2012 (Unaudited)
Principal Amount ($) Security Value (Note 1) Shares Security Value (Note 1)
Corporate Bonds & Notes - 0.15% Consumer Products - 0.15% 18,550,467 Home Products International, Inc., 2nd Lien, Convertible, PIK, 6.000%, due 3/20/17 (b) (c) (d) $ Total Corporate Bonds & Notes (Cost $18,550,467) Shares Preferred Stocks - 0.01% Insurance & Reinsurance - 0.01% 4,626 Ecclesiastical Insurance, 8.625% (United Kingdom) 1,022,245 RS Holdings Corp., Convertible, Class A (a) (b) (c) (d) Total Preferred Stocks (Cost $1,022,630) Common Stocks - 91.76% Annuities & Mutual Fund Management & Sales - 4.53% 5,812,879 Bank of New York Mellon Corp. (The) Automotive - 4.80% 4,875,900 Toyota Industries Corp. (Japan) Consumer Products - 0.00%# 526,368 Home Products International, Inc. (a) (b) (c) (d) Depository Institutions - 4.56% 10,393,450 Chong Hing Bank, Ltd. (Hong Kong) 675,000 Comerica, Inc. 10,963,132 KeyCorp
4,175,710 4,175,710
8,350 212,126 220,476
123,698,065 131,126,604
26,318 16,619,441 20,391,750 87,485,793 124,496,984
Diversified Operations - 6.16% 3,674,212 Brookfield Asset Management, Inc., Class A (Canada) $ 124,225,108 1,564,000 Hutchison Whampoa, Ltd. (Hong Kong) 14,097,721 5,163,822 Wharf (Holdings), Ltd. (The) (Hong Kong) 29,965,310 168,288,139 Financial Insurance - 0.02% 37 Manifold Capital Holdings, Inc. (a) (b) (c) (d) 555,000 Holding Companies - 21.67% 80,770 Capital Southwest Corp. 8,432,388 16,220,000 Cheung Kong Holdings, Ltd. (Hong Kong) 213,555,908 6,195,177 Investor AB, Class A (Sweden) 124,802,666 159,010,000 Lai Sun Garment International, Ltd. (Hong Kong) (a) (c) 16,609,037 1,231,142 RHJ International (Belgium) (a) 5,756,256 1,982,750 RHJ International (Belgium) (a) (d) 9,270,431 54,464,500 Wheelock & Co., Ltd. (Hong Kong) 213,863,080 592,289,766 Home Furnishings - 0.01% 92,333 Stanley Furniture Co., Inc. (a) 377,642 Insurance & Reinsurance - 1.48% 68,099 Alleghany Corp. (a) 23,549,315 127,500 Olympus Re Holdings, Ltd. (Bermuda) (a) (b) (d) 145,350 9,337 RS Holdings Corp., Class A (a) (b) (c) (d) 1,937 32,520 White Mountains Insurance Group, Ltd.1 16,604,387 40,300,989
See accompanying notes to the Portfolios of Investments.
Third Avenue Trust Third Avenue Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Value Shares Security (Note 1) Common Stocks (continued) Manufactured Housing - 3.07% 983 Fleetwood Homes, Inc. (a) (b) (c) (d) $ 83,842,729 Mutual Holding Companies - 0.01% 147,903 SFSB, Inc. (a) (c) 340,177 Non-U.S. Real Estate Operating Companies - 16.62% 20,882,000 Hang Lung Group, Ltd. (Hong Kong) 135,448,773 13,719,000 Hang Lung Properties, Ltd. (Hong Kong) 48,827,730 46,311,196 Henderson Land Development Co., Ltd. (Hong Kong) 269,935,144 454,211,647 Oil & Gas Production & Services - 3.46% 1,125,344 Devon Energy Corp. 66,530,337 1,263,624 EnCana Corp. (Canada) 28,115,634 94,645,971 Securities Brokerage - 2.00% 14,499,000 Daiwa Securities Group, Inc. (Japan) 54,748,224 Semiconductor Equipment Manufacturers - 1.76% 4,414,207 Applied Materials, Inc. 48,070,714 Software - 1.43% 130,000 Nintendo Co. Ltd. (Japan) 14,560,000 1,550,000 Symantec Corp. (a) 24,412,500 38,972,500 Steel & Specialty Steel - 8.27% 2,841,500 POSCO, ADR (South Korea) 225,984,495 Shares 2,085,374 12,897,668 Value Security (Note 1) Telecommunications Equipment - 2.64% Sycamore Networks, Inc. (a) (c) $ 29,716,580 Tellabs, Inc. 42,433,328 72,149,908 U.S. Real Estate Operating Companies - 4.75% FNC Realty Corp. (a) (b) (c) 6,641,537 Forest City Enterprises, Inc., Class A (a) 76,075,166 Tejon Ranch Co. (a) (c) 47,214,136 129,930,839 Utilities, Utility Service Companies & Waste Management - 4.52% Covanta Holding Corp. (c) 123,585,309 Total Common Stocks (Cost $2,407,658,012) 2,507,642,020
9,487,910 5,391,578 1,816,627
7,193,557
Investment Amount ($) Limited Partnerships - 0.01% Insurance & Reinsurance - 0.01% 1,805,000 Insurance Partners II Equity Fund, L.P. (a) (b) 378,942 Total Limited Partnerships (Cost $32,494) 378,942 Total Investment Portfolio - 91.93% (Cost $2,427,263,603) 2,512,417,148 Other Assets less Liabilities - 8.07% 220,537,887 NET ASSETS - 100.00% $ 2,732,955,035
Third Avenue Trust Third Avenue Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Value Investor Class: Net assets applicable to 554,992 shares outstanding Net asset value, offering and redemption price per share Institutional Class: Net assets applicable to 59,384,547 shares outstanding Net asset value, offering and redemption price per share
Notes: ADR: American Depositary Receipt. PIK: Payment-in-kind. (a) Non-income producing security. (b) Fair-valued security. (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Security subject to restrictions on resale.
Shares/ Principal Amount _______ 983 526,368 $18,550,467 Carrying Acquisition Value Issuer Cost Per Unit _______________________ _________ ________ Fleetwood Homes, Inc. 8/14/09-4/29/11 $68,785,900 $85,292.70 Home Products International, Inc. 5/30/07 54,667,471 0.05 Home Products International, Inc. 2nd Lien, Convertible, PIK, 6.000%, due 3/20/17 3/16/07- 4/10/12 18,550,467 22.51 Manifold Capital Holdings, Inc. 9/24/97-11/10/06 42,781,514 15,000.00 Olympus Re Holdings, Ltd. 12/20/01 12,019,608 1.14 RHJ International 3/29/05-3/14/07 50,259,540 4.68 RS Holdings Corp., Class A 5/9/03 9,105 0.21 RS Holdings Corp., Convertible, Class A Pfd. 3/18/02-4/20/04 1,013,140 0.21 Acquisition Date ________
Country Concentration % of
25,286,412 $45.56
Hong Kong United States South Korea Japan Canada Sweden Belgium Bermuda United Kingdom Total
$2,707,668,623 $45.60
Net Assets ________ 35.09% 30.54 8.27 7.33 5.57 4.57 0.55 0.01 0.00# _______ 91.93% _______ _______
# Amount represents less than 0.01% of total net assets.
37 127,500 1,982,750 9,337 1,022,245
At July 31, 2012, these restricted securities had a total market value of $98,229,601 or 3.59% of net assets of the Fund.
#
1
U.S. unless otherwise noted. Amount represents less than 0.01% of total net assets. Incorporated in Bermuda.
Third Avenue Trust Third Avenue Small-Cap Value Fund Portfolio of Investments at July 31, 2012 (Unaudited)
Shares Security Preferred Stocks - 0.29% U.S. Real Estate Investment Trust - 0.29% 74,250 Excel Trust, Inc., 8.125% $ Total Preferred Stocks (Cost $1,856,250) Common Stocks - 78.86% Auto Supply - 1.06% 408,182 Superior Industries International, Inc. Chemicals & Industrial Materials - 6.78% 145,417 Compass Minerals International, Inc. 93,178 Lanxess AG (Germany) 131,029 Minerals Technologies, Inc. 240,721 Sensient Technologies Corp. 60,514 Stepan Co. 91,296 Westlake Chemical Corp. Computer Peripherals - 1.29% 485,487 Lexmark International, Inc., Class A Consulting and Information Technology Services - 3.25% 406,719 ICF International, Inc. (a) 520,456 ManTech International Corp., Class A Consumer Products - 3.30% 38,167 Cal-Maine Foods, Inc. 232,225 Harman International Industries, Inc. 319,410 JAKKS Pacific, Inc. 101,155 J&J Snack Foods Corp. Value (Note 1) Shares 328,302 615,937 363,844 789,946 188,550 Security Electronic Components - 5.55% AVX Corp. Bel Fuse, Inc., Class B (c) Electronics for Imaging, Inc. (a) Ingram Micro, Inc., Class A (a) Park Electrochemical Corp. Energy Services - 7.96% Bristow Group, Inc. Pioneer Energy Services Corp. (a) SEACOR Holdings, Inc. (a) SemGroup Corp., Class A (a) Value (Note 1) $ 3,197,661 11,105,344 5,319,399 11,841,291 5,092,736 36,556,431 13,209,314 6,431,743 16,756,557 16,058,871 52,456,485 3,907,658 4,857,593 8,765,251 4,127,448 6,203,676 17,956,323 28,287,447
1,935,698 1,935,698
6,975,830
10,519,466 6,477,541 8,377,994 8,533,559 5,365,171 5,419,331 44,693,062
288,602 799,968 197,252 476,383
Forest Products & Paper - 1.33% 330,700 Canfor Corp. (Canada) (a) 305,317 P.H. Glatfelter Co. Healthcare - 4.29% 905,142 Cross Country Healthcare, Inc. (a) 86,270 Haemonetics Corp. (a) 281,712 Teleflex, Inc. Holding Companies - 6.35% 136,517 Ackermans & van Haaren N.V. (Belgium) 731,866 JZ Capital Partners, Ltd. (Guernsey) 1,590,916 JZ Capital Partners, Ltd. Limited Voting Shares (Guernsey) (d) 368,007 Leucadia National Corp. 473,984,230 PYI Corp., Ltd. (Hong Kong)1 (c)
8,491,168
9,993,086 11,413,600 21,406,686 1,440,041 9,370,279 5,116,948 5,845,747 21,773,015
10,467,972 3,975,911 8,642,758 7,978,392 10,757,505 41,822,538
Third Avenue Trust Third Avenue Small-Cap Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Shares Security Value (Note 1) Shares Security Value (Note 1) 12,404,858 25,566,313 7,038,599
Common Stocks (continued) Industrial Capital Equipment Manufacturers - 2.54% 557,327 Electro Scientific Industries, Inc. $ 539,701 Rofin-Sinar Technologies, Inc. (a) Industrial Equipment - 5.50% 129,283 Alamo Group, Inc. 255,908 LSB Industries, Inc. (a) 644,485 Oshkosh Corp. (a) 656,772 Wacker Neuson SE (Germany) Industrial Services - 3.08% 217,455 Darling International, Inc. (a) 257,364 EMCOR Group, Inc. 158,759 UniFirst Corp. Insurance & Reinsurance - 5.55% 45,182 Alleghany Corp. (a) 194,536 Arch Capital Group, Ltd. (Bermuda) (a) 9,824 E-L Financial Corp., Ltd. (Canada) 306,831 HCC Insurance Holdings, Inc. Media - 4.63% Liberty Media Corp. - Liberty Capital, Series A (a) Madison Square Garden, Co. (The), Class A (a) Metals Manufacturing - 3.88% Encore Wire Corp. Kaiser Aluminum Corp.
Metals Manufacturing (continued) 336,175 Kennametal, Inc. $ 6,916,428 9,784,779 16,701,207 3,701,372 8,222,324 14,513,802 9,769,881 36,207,379 3,592,357 6,776,394 9,941,489 20,310,240 15,624,387 7,547,997 3,967,413 9,401,302 36,541,099 432,505 Mining - 1.07% 425,293 Cloud Peak Energy, Inc. (a) Non-U.S. Real Estate Investment Trust - 1.92% 3,402,250 SEGRO PLC (United Kingdom) Oil & Gas Production & Services - 0.40% 46,137 Cimarex Energy Co. Retail - 1.82% 273,669 American Eagle Outfitters, Inc. 148,269 Jos. A. Bank Clothiers, Inc. (a) Securities Trading Services - 1.92% Broadridge Financial Solutions, Inc. Software - 1.28% Progress Software Corp. (a) Telecommunications Equipment - 0.82% Tellabs, Inc. U.S. Real Estate Investment Trust - 0.48% Excel Trust, Inc. U.S. Real Estate Operating Companies - 2.81% Alico, Inc. Vail Resorts, Inc. Total Common Stocks (Cost $478,069,996)
12,626,016
2,615,507 5,697,789 6,265,848 11,963,637
596,785
12,633,938 8,407,897
1,635,257
5,379,996
162,854 415,637
15,405,988 15,066,841 30,472,829 6,523,173 6,638,282
261,105
3,195,925
205,209 252,024
238,072 121,714
5,998,259 12,510,471 18,508,730 519,397,225
Third Avenue Trust Third Avenue Small-Cap Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Units Security Limited Partnerships - 1.45% Holding Companies - 1.45% 950,000 AP Alternative Assets, L.P. (Guernsey) (a) (b) (d) Total Limited Partnerships (Cost $19,000,000) Value (Note 1)
Notes: (a) Non-income producing security. (b) Fair-valued security. (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Security subject to restrictions on resale.
Shares/ Units ________ Issuer _______________________ 950,000 AP Alternative Assets, L.P. 1,590,916 JZ Capital Partners, Ltd. Limited Voting Shares Acquisition Date ________ 6/8/06 Acquisition Cost ________ $19,000,000 Carrying Value Per Unit ______ $10.07 5.43
9,566,500 9,566,500
Principal Amount ($) Short Term Investments - 13.66% U.S. Government Obligations - 13.66% 90,000,000 U.S. Treasury Bills, 0.10%-0.14%, due 10/25/12-12/13/12 89,969,580 Total Short Term Investments (Cost $89,963,531) 89,969,580 Total Investment Portfolio - 94.26% (Cost $588,889,777) 620,869,003 Other Assets less Liabilities - 5.74% 37,837,139 NET ASSETS - 100.00% $ 658,706,142 Investor Class: Net assets applicable to 394,994 shares outstanding $ 8,231,035 Net asset value, offering and redemption price per share $20.84 Institutional Class: Net assets applicable to 31,166,643 shares outstanding $ 650,475,107 Net asset value, offering and redemption price per share $20.87
6/16/09-6/19/09 5,409,402
At July 31, 2012, these restricted securities had a total market value of $18,209,258 or 2.76% of net assets of the Fund.
U.S. unless otherwise noted. Annualized yield at date of purchase. Incorporated in Bermuda. % of Net Assets ________ 80.94% 3.37 2.47 1.92 1.63 1.59 1.19 1.15 _______ 94.26% _______ _______
Country Concentration
United States* Guernsey Germany United Kingdom Hong Kong Belgium Canada Bermuda Total
* Includes cash equivalents.
Third Avenue Trust Third Avenue Real Estate Value Fund Portfolio of Investments at July 31, 2012 (Unaudited)
Principal Amount ($) Security Value (Note 1) Shares or Units Security Value (Note 1)
Corporate Bonds & Notes - 0.73% Department Stores - 0.01% 190,000 J.C. Penney Corp., Inc., 6.375%, due 10/15/36 U.S. Homebuilder - 0.72% 11,320,000 K. Hovnanian Enterprises, Inc., 10.625%, due 10/15/16 Total Corporate Bonds & Notes (Cost $10,564,118)
Non-U.S. Real Estate Investment Trusts (continued) 5,240,298 Westfield Group (Australia) $ $ 137,987 Non-U.S. Real Estate Operating Companies - 31.62% Brookfield Asset Management, Inc., Class A (Canada) CapitaLand, Ltd. (Singapore) Cheung Kong Holdings, Ltd. (Hong Kong) City Developments Ltd. (Singapore) Daibiru Corp. (Japan) Hang Lung Properties Ltd. (Hong Kong) Henderson Land Development Co., Ltd. (Hong Kong) Hongkong Land Holdings, Ltd. (Hong Kong) 1 Hysan Development Co., Ltd. (Hong Kong) Quintain Estates & Development PLC (United Kingdom) (a) Songbird Estates PLC (United Kingdom) (a) Wheelock & Co., Ltd. (Hong Kong)
55,070,030 333,483,567
11,829,400 11,967,387
2,746,126 10,079,500 5,727,000 3,389,950 3,362,300 8,377,000
92,846,520 24,299,662 75,402,878 31,872,722 23,713,629 29,814,849 49,957,154 17,640,570 48,108,388 17,057,890 36,514,591 70,296,868 517,525,721 51,811,375
Shares or Units Common Stocks - 84.25% Forest Products & Paper - 3.92% 2,751,058 Weyerhaeuser Co. (d) Non-U.S. Homebuilder - 2.91% 68,711,973 Taylor Wimpey PLC (United Kingdom) Non-U.S. Real Estate Consulting/Management - 1.17% 3,309,535 Savills PLC (United Kingdom) Non-U.S. Real Estate Investment Trusts - 20.38% 9,746,440 Centro Retail Australia (Australia) 7,785,904 Centro Retail Australia, Class Action True-Up Securities (Australia) (a) (b) (e) 29,880,091 Commonwealth Property Office Fund (Australia) 673,655 Derwent London PLC (United Kingdom) 41,415,719 Dexus Property Group (Australia) 12,457,812 Hammerson PLC (United Kingdom) 24,713,436 Mirvac Group (Australia) 8,839,052 SEGRO PLC (United Kingdom)
64,237,204
8,570,857 2,940,095 11,373,967
47,562,535
19,131,190
21,869,072 22,721,694
20,997,094 1,309,147 33,598,897 20,585,018 43,088,336 90,452,051 35,580,580 32,802,414
17,902,500
Retail-Building Products - 3.17% 2,042,230 Lowes Cos., Inc. U.S. Real Estate Investment Trusts - 6.17% 3,723,831 First Industrial Realty Trust, Inc. (a) 641,794 Vornado Realty Trust
47,441,607 53,589,799 101,031,406
Third Avenue Trust Third Avenue Real Estate Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Shares or Units Security Value (Note 1) Notional Amount ($) Security Value (Note 1)
Common Stocks (continued) U.S. Real Estate Operating Companies - 14.91% 500,500 Consolidated-Tomoka Land Co. (c) $ 14,084,070 6,490,864 FNC Realty Corp. (a) (b) 4,543,605 8,846,798 Forest City Enterprises, Inc., Class A (a) (c) 124,828,320 29,513,141 Newhall Holding Co. LLC, Class A Units (a) (c) 39,104,912 941,627 Tejon Ranch Co. (a) 24,472,886 7,354,979 Thomas Properties Group, Inc. (c) 37,069,094 244,102,887 Total Common Stocks (Cost $1,235,428,816) 1,378,885,885 Investment Amount ($) Limited Partnerships - 1.69% Investment Fund - 1.69% 37,000,000 Alliance Bernstein Legacy Securities (C1) L.P.2 (b) Total Limited Partnerships (Cost $37,000,000)
Purchased Options - 0.00%# Foreign Currency Put Options - 0.00%# (a) 35,000,000 Australian Currency, strike 0.9830 AUD, expires 8/6/12 50,000,000 Australian Currency, strike 0.9530 AUD, expires 9/5/12 49,000,000 Australian Currency, strike 0.9535 AUD, expires 9/5/12 Total Purchased Options (Cost $2,809,363) Total Investment Portfolio - 86.67% (Cost $1,285,802,297) Other Assets less Liabilities - 13.33% (f) (g) NET ASSETS - 100.00%
19 9,532 19,155 28,706
1,418,529,980 218,195,508 $ 1,636,725,488
27,648,002 27,648,002
Investor Class: Net assets applicable to 2,086,093 shares outstanding $ Net asset value, offering and redemption price per share
50,917,381 $24.41
Institutional Class: Net assets applicable to 64,698,285 shares outstanding $ 1,585,808,107 Net asset value, offering and redemption price per share $24.51
Third Avenue Trust Third Avenue Real Estate Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Notes: AUD: Australian Dollar (a) Non-income producing security. (b) Fair-valued security. (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Security is a Real Estate Investment Trust. (e) Class Action True-up Securities were issued to Centro Retail Australia holders who were not exposed to related shareholder class action suits against certain pre-aggregation Centro entities on behalf of existing group members. (f) A portion of this security is segregated for future fund commitment. (g) Includes $27,580,000 of cash restricted as collateral for forward foreign currency contracts and written options to broker. U.S. unless otherwise noted. # Amount represents less than 0.01% of total net assets. 1 Incorporated in Bermuda. 2 Cayman Islands exempted limited partnership.
Country Concentration % of
United States Hong Kong United Kingdom Australia Canada Singapore Japan Total
Net Assets ________ 30.60% 17.79 16.14 11.59 5.67 3.43 1.45 _______ 86.67% _______ _______
Schedule of Written Options Notional Amount ($)/ Number of Contracts 35,000,000 49,000,000 50,000,000 5,000
AUD: Australian Dollar
Security Australian Currency, Call Australian Currency, Call Australian Currency, Call Lowes Cos., Inc., Put (Premiums received $3,117,397)
Expiration Date 8/6/12 9/5/12 9/5/12 8/18/12
Strike Price 1.0375 AUD 0.9745 AUD 0.9745 AUD $25.00
Value $ (508,084) (3,610,878) (3,682,394) (260,000) _________ $(8,061,356) _________ _________
Schedule of Forward Foreign Currency Contracts Contracts to Buy 9,613,426,595 JPY Contracts to Sell 11,628,710,000 JPY
JPY: Japanese Yen
Counterparty Settlement Date JPMorgan Chase Bank, N.A. 10/29/12 Counterparty Settlement Date JPMorgan Chase Bank, N.A. 10/29/12
Settlement Value $125,297,166 Settlement Value $145,000,000
Value at 7/31/12 $123,181,151 Value at 7/31/12 $149,003,882
Unrealized Depreciation $(2,116,015) Unrealized Depreciation $(4,003,882)
Third Avenue Trust Third Avenue International Value Fund Portfolio of Investments at July 31, 2012 (Unaudited)
Shares Security Common Stocks and Warrants - 92.89% Advertising - 2.39% 958,400 Asatsu-DK, Inc. (Japan) $ Agriculture - 0.75% 538,564 Viterra, Inc. (Canada) (b) Automotive - 1.90% 439,290 Daimler AG (Germany) Building & Construction Products/Services - 2.33% 10,482,120 Tenon, Ltd. (New Zealand) (a) (c) 1,358,362 Titan Cement Co. S.A. (Greece) (a) Capital Goods - 2.14% Nexans S.A. (France) Corporate Services - 0.86% 22,522,784 Boardroom, Ltd. (Singapore) (c) Diversified Operations - 3.97% 1,204,745 Antarchile S.A. (Chile) 3,039,200 Hutchison Whampoa, Ltd. (Hong Kong) 565,134 Electronic Components - 8.72% WBL Corp., Ltd. (Singapore) (c) Forest Products & Paper - 5.41% 68,518,625 Rubicon, Ltd. (New Zealand) (a) (c) 1,966,368 Weyerhaeuser Co. (d) 37,050,140 Holding Companies - 12.26% 7,939,408 GP Investments, Ltd., BDR (Bermuda) (a) (c) 3,733,400 Guoco Group, Ltd. (Hong Kong)1 1,644,208 Leucadia National Corp. Value (Note 1) Shares Security Holding Companies (continued) 592,505 LG Corp. (South Korea) $ 469,645 Pargesa Holding S.A. (Switzerland) Insurance - 8.76% 284,772 Allianz SE (Germany) 230,350 Munich Re (Germany) 78,722 White Mountains Insurance Group, Ltd.1 Investment Companies - 1.38% 4,954,528 Resolution, Ltd. (Guernsey) Investment Technology Services - 1.32% 172,806 OTSUKA Corp. (Japan) Media - 0.85% 218,706 Alma Media Corp. (Finland) 451,133 Vivendi S.A. (France) Metals & Mining - 3.14% 2,234,046 Kinross Gold Corp. (Canada) 22,869 Kinross Gold Corp. Warrants, expires 9/17/14 (Canada) (a) 397,186 Newmont Mining Corp. Oil & Gas Production & Services - 5.93% 993,802 EnCana Corp. (Canada) 1,647,210 Petroleum Geo-Services ASA (Norway) 2,792,400 Precision Drilling Corp. (Canada) (a) Value (Note 1) 30,656,975 28,357,649 141,824,805 28,412,729 32,763,811 40,194,666 101,371,206 16,001,893
27,614,188 8,624,757 22,003,957
5,263,133 21,727,374 26,990,507 24,729,915 9,954,622 18,492,305 27,395,010 45,887,315 100,932,156 16,646,901 45,914,693 62,561,594
15,262,226 1,291,666 8,581,485 9,873,151 18,668,101 9,179 17,662,861 36,340,141
22,112,095 24,294,609 22,220,025 68,626,729
15,846,271 31,317,481 35,646,429
10
Third Avenue Trust Third Avenue International Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Shares Security Common Stocks and Warrants (continued) Other Financial - 2.53% 62,589,892 Yuanta Financial Holding Co., Ltd. (Taiwan) $ Pharmaceuticals - 6.06% 1,124,397 GlaxoSmithKline PLC (United Kingdom) 540,537 Sanofi (France) Real Estate - 11.45% Atrium European Real Estate, Ltd. (Jersey) 1,531,000 Mitsui Fudosan Co., Ltd. (Japan) 8,490,300 SEGRO PLC (United Kingdom) (d) 61,235,872 Taylor Wimpey PLC (United Kingdom) 6,417,961 Value (Note 1) Notional Value Amount ($) Security (Note 1) Purchased Options - 0.71% Foreign Currency Put Options - 0.71% (a) 85,700,000 Euro Currency, strike 1.2725 Euro, expires 11/21/12 $ 3,599,752 50,650,000 Euro Currency, strike 1.2725 Euro, expires 11/21/12 2,132,038 50,650,000 Euro Currency, strike 1.273 Euro, expires 11/21/12 2,124,767 61,500,000 Japan Currency, strike 87.94 Yen, expires 3/14/13 187,575 61,500,000 Japan Currency, strike 87.94 Yen, expires 3/14/13 198,016 Total Purchased Options (Cost $10,032,585) 8,242,148 Total Investment Portfolio - 93.60% (Cost $1,157,524,962) 1,082,881,517 Other Assets less Liabilities - 6.40% (e) 74,044,804 NET ASSETS - 100.00% $1,156,926,321 Investor Class: Net assets applicable to 1,064,941 shares outstanding $ 16,162,948 Net asset value, offering and redemption price per share $15.18 Institutional Class: Net assets applicable to 75,078,059 shares outstanding $1,140,763,373 Net asset value, offering and redemption price per share $15.19
29,215,920
25,887,821 44,207,858 70,095,679
28,625,524 29,904,717 31,508,169 42,387,566 132,425,976
Securities Brokerage - 3.33% Daiwa Securities Group, Inc. (Japan) 38,534,080 Telecommunications - 5.94% 38,601,902 Netia S.A. (Poland) (a) (c) 68,749,365 Transportation - 1.47% 2,504,000 Seino Holdings Co., Ltd. (Japan) 17,019,187 Total Common Stocks and Warrants (Cost $1,147,492,377) 1,074,639,369 10,205,000
11
Third Avenue Trust Third Avenue International Value Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Notes: BDR: Brazilian Depositary Receipt. (a) Non-income producing security. (b) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Security is a Real Estate Investment Trust. (e) Includes $520,000 of cash restricted as collateral for equity swap contracts to broker. U.S. unless otherwise noted. 1 Incorporated in Bermuda.
Country Concentration % of Net Assets ________ United States Japan Singapore United Kingdom Germany France Canada Poland Hong Kong South Korea Taiwan Jersey Switzerland Norway New Zealand Greece Chile Guernsey Bermuda Finland Total 12.76% 11.09 9.59 8.63 7.19 6.70 6.19 5.94 5.08 2.65 2.53 2.47 2.45 2.10 1.89 1.88 1.60 1.38 1.37 0.11 _______ 93.60% _______ _______
Schedule of Written Options Notional Amount ($) 41,777,298 41,793,713 70,715,127

EUR: Euro.
Security Euro Currency, Put Euro Currency, Put Euro Currency, Put (Premiums received $519,193)
Expiration Date 11/21/12 11/21/12 11/21/12
Strike Price 1.05 EUR 1.05 EUR 1.05 EUR
Value $53,266 49,678 103,065 _________ $206,009 _________ _________
Schedule of Equity Swap Contracts Average Floating Security Cost Rate Piramal Enterprises Ltd. INR 511.56 (a) USD-Federal Funds-H.15
Counterparty Morgan Stanley Capital Services LLC
Expiration Date 6/19/14
Notional Shares 1,192,120
Unrealized Appreciation $253,169
(a) Fund pays floating rate and variance under average cost and receives variance over average cost. INR: Indian Rupee. USD: U.S. Dollar.
12
Third Avenue Trust Third Avenue Focused Credit Fund Portfolio of Investments at July 31, 2012 (Unaudited)
Principal Amount Security Corporate Bonds & Notes - 62.12% Consumer Products - 1.59% 17,750,000 Armored Autogroup, Inc., 9.500%, due 11/1/18 (a) $ Energy - 6.82% Energy XXI Gulf Coast, Inc.: 11,000,000 9.250%, due 12/15/17 10,000,000 7.750%, due 6/15/19 7,161,982 GMX Resources, Inc., PIK, 11.000%, due 12/1/17 Hercules Offshore, Inc.: 17,068,000 10.500%, due 10/15/17 (a) 14,500,000 10.250%, due 4/1/19 (a) Platinum Energy Solutions, Inc.: 5,000,000 1st Lien, 14.250%, due 3/1/15 5,169,354 2nd Lien, 14.250%, due 3/1/15 Financials - 10.13% American General Institutional Capital A, 7.570%, due 12/1/45 (a) Lehman Brothers Holdings, Inc.*: due 9/26/08 due 11/24/08 due 12/23/08 due 3/23/09 due 1/24/13 due 9/26/14 due 5/2/18 Marsico Holdings LLC/Marsico Co. Notes Corp., PIK, 10.625%, due 1/15/20 (a) Nuveen Investments, Inc., 10.500% due 11/15/15 Value (Note 1) Principal Amount Security Food & Beverage - 1.96% 7,504,000 American Seafoods Group LLC/ American Seafoods Finance, Inc., 10.750%, due 5/15/16 (a) $ 2,665,000 Chiquita Brands International, Inc., 4.250%, due 8/15/16 9,945,000 Harmony Foods Corp., 10.000%, due 5/1/16 (a) Value (Note 1)
15,908,437
7,185,080 1,982,094 10,392,525 19,559,699
12,237,500 10,550,000 6,141,400 17,238,680 14,137,500 3,900,000 4,032,096 68,237,176
11,650,000
12,290,750 7,595,000 6,125,000 2,990,225 23,765,000 2,475,000 12,500,000 2,512,500 1,320,000 29,784,000 101,357,475
31,000,000 25,000,000 12,205,000 97,000,000 10,000,000 50,000,000 10,000,000 12,000,000 29,200,000
Gaming & Entertainment - 7.66% 36,511,000 Caesars Entertainment Operating Co., Inc., 12.750%, due 4/15/18 CityCenter Holdings LLC/CityCenter Finance Corp., PIK: 30,442,532 10.750%, due 1/15/17 931 10.750%, due 1/15/17 (a) 720,000 Jacobs Entertainment, Inc., 9.750%, due 6/15/14 6,850,000 Marina District Finance Co., Inc., 9.875%, due 8/15/18 13,399,000 Shingle Springs Tribal Gaming Authority, 9.375%, due 6/15/15 (a) Healthcare - 3.26% 10,000,000 InVentiv Health, Inc., 10.000%, due 8/15/18 (a) 2,000,000 Kindred Healthcare, Inc., 8.250%, due 6/1/19 Radiation Therapy Services, Inc.: 2,000,000 8.875%, due 1/15/17 18,275,000 9.875%, due 4/15/17 8,808,000 Rotech Healthcare, Inc., 10.750%, due 10/15/15
27,018,140 32,231,031 986 705,600 6,439,000 10,250,235 76,644,992
8,300,000 1,910,000 1,890,000 12,015,813 8,521,740 32,637,553
13
Third Avenue Trust Third Avenue Focused Credit Fund Portfolio of Investments (continued) at July 31, 2012 (Unaudited)
Principal Amount Security Corporate Bonds & Notes (continued) Home Construction - 7.78% 29,773,394 Ainsworth Lumber Co., Ltd., PIK, 11.000%, due 7/29/15 (Canada) (a) $ 24,717,000 CEMEX Espaa Luxembourg, 9.250%, due 5/12/20 (Luxembourg)3 (a) 6,500,000EUR CEMEX Finance LLC, 9.625%, due 12/14/17 (a) 3,410,000 K. Hovnanian Enterprises, Inc., 10.625%, due 10/15/16 17,600,000 New Enterprise Stone & Lime Co., Inc., PIK, 13.000%, due 3/15/18 (a) Media/Cable - 7.71% Clear Channel Communications, Inc.: 9.000%, due 3/1/21 PIK, 11.000%, due 8/1/16 Intelsat Luxembourg SA, 11.250%, due 2/4/17 (Luxembourg) Radio One, Inc., 15.000%, due 5/24/16 Spanish Broadcasting System, Inc., 12.500%, due 4/15/17 (a) Metals & Mining - 1.08% AK Steel Corp., 7.625%, due 5/15/20 Inmet Mining Corp., 8.750%, due 6/1/20 (Canada) (a) Value (Note 1) Principal Amount Security Paper & Packaging - 0.99% 1,000,000 Reynolds Group Issuer, Inc./ Reynolds Group Issuer LLC, 9.000%, due 4/15/19 8,000,000 Tekni-Plex, Inc., 9.750%, due 6/1/19 (a) 1,000,000 Verso Paper Holdings LLC/ Verso Paper, Inc., 11.375%, due 8/1/16 Value (Note 1)
1,022,500 8,340,000 505,000 9,867,500
26,647,188 21,998,130 7,448,200 3,563,450 18,128,000 77,784,968
Services - 1.26% 9,873,000 EnergySolutions, Inc./ EnergySolutions LLC, 10.750%, due 8/15/18 4,000,000 Realogy Corp., 11.500%, due 4/15/17 Technology - 2.94% 16,250,000 EVERTEC, LLC/EVERTEC Finance Corp., 11.000%, due 10/1/18 3,000,000 First Data Corp., 12.625%, due 1/15/21 8,250,000 TransUnion Holding Co., Inc., PIK, 9.625%, due 6/15/18 (a) Telecommunications - 4.89% 5,000,000 Clearwire Communications LLC/ Clearwire Finance, Inc., 12.000%, due 12/1/15 (a) 8,758,000 Digicel Group, Ltd., 10.500%, due 4/15/18 (Jamaica)1 (a) 38,600,000 Sprint Capital Corp., 6.875%, due 11/15/28
8,564,828 4,010,000 12,574,828
10,000,000 32,367,289 36,450,000 3,000,000 9,000,000
8,400,000 18,611,191 38,044,687 2,490,000 9,540,000 77,085,878
17,387,500 3,045,000 8,951,250 29,383,750
1,000,000 10,000,000
850,000 9,900,000 10,750,000
4,750,000 9,436,745 34,740,000 48,926,745
14
Principal Amount Security Corporate Bonds & Notes (continued) Transportation Services - 0.47% 5,000,000 CEVA Group PLC, 11.500%, due 4/1/18 (United Kingdom) (a) $ Utilities - 3.58% 5,060,000 Dynegy Holdings LLC, due 2/15/12* Energy Future Holdings Corp.: 9,250,000 10.875%, due 11/1/17 6,487,200 PIK, 11.250%, due 11/1/17 18,000,000 Energy Future Intermediate Holding Co. LLC, 11.750%, due 3/1/22 (a) Total Corporate Bonds & Notes (Cost $624,722,224) Principal Amount ($) Term Loans - 3.71% Aerospace - 1.53% Aveos Fleet Performance, Inc. (Cayman Islands)*: 2,574,468 Revolving Credit, due 3/12/13 3,180,308 Term Loan, due 3/12/13 6,985,729 Term Loan BA1, PIK, due 3/12/15 7,167,231 Term Loan BA2, PIK, due 3/12/15 Gaming & Entertainment - 0.58% Dallas Stars L.P., Term Loan, 3.591%, due 11/17/16 (c) Hicks Sport Group LLC, Term Loan B, due 12/22/10* Value (Note 1) Security Telecommunications - 1.60% 15,000,000 Lonestar Intermediate Super Holdings, LLC, Term Loan, 11.000%, due 8/7/19 (c) $ Total Term Loans (Cost $44,453,665) Municipal Bonds - 0.27% Gaming & Entertainment - 0.27% 5,200,000 New York City, NY, Industrial Development Agency Civic Facility Revenue, Bronx Parking Development Co. LLC OID, 5.750%, due 10/1/37 Total Municipal Bonds (Cost $3,055,310) Shares Preferred Stocks - 1.20% Financials - 1.20% 280,000 Ally Financial Inc., Series A, 8.500% (c) 500,000 Federal Home Loan Mortgage Corp., Series Z, 8.375% (c)(d) 208,000 Federal National Mortgage Association, Series M, 4.750% (d) 417,000 Federal National Mortgage Association, Series 0, 7.000% (c)(d) 500,000 Federal National Mortgage Association, Series S, 8.250% (c)(d) 1,000,000 Federal National Mortgage Association, Series T, 8.250% (d) Total Preferred Stocks (Cost $13,851,800) Principal Amount ($) Value (Note 1)
4,706,250 3,200,450 8,140,000 5,741,172 18,720,000 35,801,622 621,226,873
15,975,000 37,130,365
2,684,292 2,684,292
6,510,000 1,031,250 491,400 1,042,500 961,250 1,940,000 11,976,400
2,432,872 3,013,342 4,890,010 5,017,061 15,353,285
3,920,508 8,596,651
3,352,034 2,450,046 5,802,080
15
Shares Security Private Equities - 0.87% Aerospace - 0.00%# 284,571 Aveos Holding Co. (Cayman Islands) (d) Financials - 0.16% 4,568,957 Cerberus CG Investor I LLC (d) 4,568,918 Cerberus CG Investor II LLC (d) 2,284,632 Cerberus CG Investor III LLC (d) Utilities - 0.71% Bosque Power Co., LLC (d) Total Private Equities (Cost $9,623,967) Value (Note 1) Shares or Units Security Transportation Services - 0.23% 374,795 Scorpio Tankers, Inc. (Monaco)2 (d) $ Total Common Stocks & Warrants (Cost $10,890,220) Value (Note 1) 2,252,518 16,350,976
35,571 639,654 639,649 319,848 1,599,151 7,104,100 8,738,822
14,956
Shares or Units Common Stocks & Warrants - 1.64% Energy - 0.97% 45,681 Compton Petroleum Corp., Warrants, expires 8/23/14 (Canada) (d) 25 Platinum Energy Solutions, Inc. Units (b)(d)(f)(g) 8,000 Platinum Energy Solutions, Inc., Warrants (b)(d) Financials - 0.26% 60,000 American Capital Agency Corp. (i) 3,268,312 Centro Retail Australia, Class Action True-Up Securities (Australia) (b) (d) (h) Services - 0.18% Kelly Services, Inc., Class A
Number of Contracts Purchased Options - 0.06% Equity Put Options - 0.06% (d) 1,000 Overseas Shipping Group, strike $12, expires 10/20/12 Total Purchased Options (Cost $522,029) Total Investment Portfolio - 69.87% (Cost $707,119,215) Other Assets less Liabilities - 30.13% (e) NET ASSETS - 100.00%
635,000 635,000
698,742,728 301,386,662 $ 1,000,129,390
1,594 8,685,600 974,320 9,661,514 2,108,400 549,544 2,657,944 1,779,000
Investor Class: Net assets applicable to 32,739,150 shares outstanding $ 325,368,945 Net asset value, offering and redemption price per share $9.94 Institutional Class: Net assets applicable to 67,965,040 shares outstanding $ 674,760,445 Net asset value, offering and redemption price per share $9.93
150,000
16
Notes: EUR: Euro. PIK: Payment-in-kind. OID: Original Issue Discount. (a) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. (b) Fair-valued security. (c) Variable rate security. The rate disclosed is in effect as of July 31, 2012. (d) Non-income producing security. (e) Includes $340,000 of cash restricted as collateral for forward foreign currency contracts to broker. (f) Security subject to restrictions on resale.
Acquisition Units Date ________ Issuer __________________________ ________ 25 Platinum Energy Solutions, Inc. Units 2/28/11 Acquisition Cost ________ Carrying Value Per Unit ______
Country Concentration
% of
Net Assets ________ United States Luxembourg Canada Cayman Islands Jamaica United Kingdom Monaco Australia Total 56.97% 6.00 3.66 1.54 0.94 0.47 0.23 0.06 ________ 69.87% ________ ________
$2,500,000 $347,424.00
At July 31, 2012, the restricted security had a total market value of $8,685,600 or 0.87% of net assets of the Fund.
(g) Includes 6,185,600 shares of common stock and 2,500 shares of preferred stock. (h) Class Action True-up Securities were issued to Centro Retail Australia holders who were not exposed to related shareholder class action suits against certain pre-aggregation Centro entities on behalf of existing group members. (i) Security is a Real Estate Investment Trust. * Issuer in default. # Amount represents less than 0.01% of total net assets. U.S. unless otherwise noted. Denominated in U.S. Dollars unless otherwise noted. 1 Incorporated in Bermuda. 2 Incorporated in Marshall Islands. 3 Incorporated in Spain.
Schedule of Forward Foreign Currency Contracts Contracts to Sell 4,000,000 EUR 1,000,000 EUR
EUR: Euro
Counterparty Settlement Date JPMorgan Chase Bank, N.A. 10/3/12 JPMorgan Chase Bank, N.A. 10/9/12
Settlement Value $ 5,422,400 1,336,400
Value at 7/31/12 $4,925,543 1,231,492
Unrealized Appreciation $496,857 104,908 _______ $601,765 _______ _______
17
Third Avenue Trust Notes to Portfolios of Investments July 31, 2012 (Unaudited)
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: Third Avenue Trust (the Trust) is an open-end, management investment company organized as a Delaware business trust pursuant to a Trust Instrument dated October 31, 1996. The Trust currently consists of five non-diversified (within the meaning of Section 5(b)(2) of the Investment Company Act), separate investment series: Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund, Third Avenue International Value Fund and Third Avenue Focused Credit Fund (each a Fund and, collectively, the Funds). Third Avenue Management LLC (the Adviser) provides investment advisory services to each of the Funds in the Trust. Accounting policies: The policies described below are followed consistently by the Funds and are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). Security valuation: Generally, the Funds investments are valued at market value. Securities traded on a principal stock exchange, including The NASDAQ Stock Market, Inc. (NASDAQ), are valued at the last quoted sales price, the NASDAQ official closing price, or in the absence of closing sales prices on that day, securities are valued at the mean between the closing bid and asked price. In accordance with procedures approved by the Trusts Board of Trustees (the Board), the Funds have retained a third party provider that, under certain circumstances, applies a statistical model to provide fair value pricing for foreign equity securities with principal markets that are no longer open when a Fund calculates its net asset value (NAV), and certain events have occurred after the principal markets have closed but prior to the time as of which the Funds compute their NAVs. Debt instruments with maturities greater than 60 days, including floating rate loan securities, are valued on the basis of prices obtained from a pricing service approved as reliable by the Board or otherwise pursuant to policies and procedures approved by the Board. Temporary cash investments are valued at cost, plus accrued interest, which approximates market value. Short-term debt securities with 60 days or less to maturity may be valued at amortized cost. Each Fund may invest up to 15% of its total net assets in securities which are not readily marketable, including those which are restricted as to disposition under applicable securities laws (restricted securities). Restricted securities and other securities and assets for which market quotations are not readily available are valued at fair value, as determined in good faith by the Trusts Valuation Committee as authorized by the Board of the Trust, under procedures established by the Board. At July 31, 2012, such securities had a total fair value of $95,979,649 or 3.51% of net assets of Third Avenue Value Fund, $9,566,500 or 1.45% of net assets of Third Avenue Small-Cap Value Fund, $33,500,754 or 2.05% of net assets of Third Avenue Real Estate Value Fund, and $10,209,464 or 1.02% of net assets of Third Avenue Focused Credit Fund. There were no fair valued securities for Third Avenue International Value Fund at July 31, 2012. Among the factors that may be considered by the Trusts Valuation Committee in determining fair value are: the type of security, trading in unrestricted securities of the same issuer, the financial condition of the issuer, the percentage of the Funds beneficial ownership of the
18
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) issuers common stocks and debt securities, the operating results of the issuer and the discount from market value of any similar unrestricted securities of the issuer at the time of purchase and liquidation values of the issuer. The fair values determined in accordance with these procedures may differ significantly from the amounts which would be realized upon disposition of the securities. Restricted securities often have costs associated with subsequent registration. The restricted securities currently held by the Funds are not expected to incur any material future registration costs. Fair value measurements: In accordance with Financial Accounting Standards Board Accounting Standard Codification (FASB ASC) FASB ASC 820-10, Fair Value Measurements and Disclosures, the Funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure the fair value. Fair value is defined as the price that a Fund would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market for the investment under current market conditions. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The three levels of the fair value hierarchy are as follows: Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date; Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; Level 3 Significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
A financial instruments level within the fair value hierarchy is based on the lowest level of any input both individually and in aggregate that is significant to the fair value measurement. However, the determination of what constitutes observable requires significant judgment by the Fund. The Fund considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
19
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) The following are certain inputs and techniques that the Funds generally use to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with U.S. GAAP. Equity Securities (Common and Preferred Stock)Equity securities traded in inactive markets and certain foreign equity securities are valued using inputs which include broker-dealer quotes, recently executed transactions adjusted for changes in the benchmark index, or evaluated price quotes received from independent pricing services that take into account the integrity of the market sector and issuer, the individual characteristics of the security, and information received from broker-dealers and other market sources pertaining to the issuer or security. To the extent that these inputs are observable, the values of equity securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. U.S. Treasury ObligationsU.S. Treasury obligations are valued by independent pricing services based on pricing models that evaluate the mean between the most recently quoted bid and ask price. The models also take into consideration data received from active market makers and broker-dealers, yield curves, and the spread over comparable U.S. Treasury issues. The spreads change daily in response to market conditions and are generally obtained from the new issue market and broker-dealer sources. To the extent that these inputs are observable, the values of U.S. Treasury obligations are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. Corporate Bonds & NotesCorporate bonds and notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, live trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services based primarily on broker-dealer quotations from relevant market makers and recently executed transactions in securities of the issuer or comparable issuers. The broker-dealer quotations received are supported by credit analysis of the issuer that takes into consideration credit quality assessments, daily trading activity, and the activity of the underlying equities, listed bonds and sector specific trends. To the extent that these inputs are observable, the values of corporate bonds and notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. Forward Foreign Currency ContractsForward foreign currency contracts are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, actual trading information and foreign currency exchange rates gathered from leading market makers and foreign currency exchange trading centers throughout the world. To the extent that these inputs are observable, the values of forward foreign currency contracts are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.
20
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) Term LoansTerm loans are valued by independent pricing services based on the average of quoted prices received from multiple dealers or valued relative to other benchmark securities when broker-dealer quotes are unavailable. To the extent that these inputs are observable, the values of term loans are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. Municipal BondsMunicipal bonds are valued by independent pricing services based on pricing models that take into account, among other factors, information received from market makers and broker-dealers, current trades, bid-ask lists, offerings, market movements, the callability of the bond, state of issuance, benchmark yield curves, and bond insurance. To the extent that these inputs are observable, the values of municipal bonds are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. OptionsOptions are valued by independent pricing services or by brokers based on pricing models that take into account, among other factors, changes in the price of the underlying securities, time until expiration, and volatility of the underlying security. To the extent that these inputs are observable, the values of options are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3. Equity SwapsEquity Swap values are based on the performance of the underlying security which is valued by independent pricing services. The performance is based on the change in the price of the underlying securities. To the extent that this input is observable, the value of the equity swap is categorized as Level 2. To the extent that this input is unobservable, the value is categorized as Level 3.
21
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) The following is a summary by level of inputs used to value the Funds investments as of July 31, 2012:
Third Avenue Value Fund _________ _________ Level 1: Quoted Prices Investments in Securities: Common Stocks & Warrants: Consumer Products Energy Financials Insurance & Reinsurance Non-U.S. Real Estate Investment Trusts Services U.S. Real Estate Operating Companies Others# Purchased Options: Equity Put Options Preferred Stocks: Insurance & Reinsurance Others#
Total for Level 1 Securities
Third Avenue Small-Cap Value Fund _________ _________
Third Avenue Real Estate Value Fund _________ _________
Third Avenue International Value Fund _________ _________
Third Avenue Focused Credit Fund _________ _________
$ 21,773,015 $ $ $ 40,153,702 36,541,099 12,626,016 332,174,420 123,289,302 18,508,730 200,454,370 2,252,986,145 429,948,365 801,299,431 1,074,639,369 8,350
1,594 2,108,400 1,779,000 2,252,518 635,000
11,976,400 _________ ____1,935,698 _________ _________ __________ __________ __________ __________ __________ __________ _ ______ _ _ _2,416,437,499 __521,332,923 _1,333,928,221 _1,074,639,369 ___18,752,912 __________ __________ __________ __________ __________ _________ ________ _________ _________ _______
Level 2: Other Significant Observable Inputs Investments in Securities: Common Stocks: U.S. Real Estate Operating Companies 39,104,912 Debt Securities issued by the U.S. Treasury and other government corporations and agencies: Municipal Bonds# 2,684,292 Corporate Bonds & Notes# 11,967,387 611,686,873 Term Loans# 21,777,080 Private Equities: Financials 1,599,151 Utilities 7,104,100 Purchased Options: Foreign Currency Put Options 28,706 8,242,148 Short Term Investments: U.S. Government Obligations 89,969,580 _________ __________ _________ _________ _________ __________ __________ __________ __________ __________ _ _ _ _ Total for Level 2 Securities _________ ___89,969,580 ___51,101,005 ____8,242,148 __644,851,496 __________ __________ __________ __________ __________ _ _______ _______ ______ ________
22
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) Summary by Level of Inputs (continued):
Third Avenue Value Fund _________ _________ Level 3: Significant Unobservable Inputs Investments in Securities: Common Stocks & Warrants: Consumer Products Energy Financial Insurance Financials Insurance & Reinsurance Manufactured Housing Non-U.S. Real Estate Investment Trusts U.S. Real Estate Operating Companies Limited Partnerships: Holding Companies Insurance & Reinsurance Investment Fund Preferred Stocks: Insurance & Reinsurance Corporate Bonds & Notes# Term Loans# Private Equities: Aerospace Total for Level 3 Securities Total Value of Investments Investments in Other Financial Instruments: Level 1: Quoted Prices Put Options Written Level 2: Other Significant Observable Inputs Call/Put Options Written Equity Swap Contracts Forward Foreign Currency Contracts Total Appreciation/(Depreciation) of Other Financial Instruments
Third Avenue Small-Cap Value Fund _________ _________
Third Avenue Real Estate Value Fund _________ _________
Third Avenue International Value Fund _________ _________
Third Avenue Focused Credit Fund _________ _________
26,318 $ 555,000 147,287 83,842,729 6,641,537 378,942 212,126 4,175,710
$ 9,566,500
$ 1,309,147 4,543,605 27,648,002
9,659,920 549,544 9,540,000 15,353,285
_________ __________ _ ___95,979,649 __________ _______ $2,512,417,148 __________ __________

$
_________ __________ _ ____9,566,500 __________ ______ $ _________ __620,869,003 _ ________

$
_________ __________ _ ___33,500,754 __________ _______ $1,418,529,980 __________ __________
_________ __________ _ _________ __________ _ $1,082,881,517 __________ __________
______35,571 __________ ____ ___35,138,320 __________ _______ $__________ __698,742,728 ________
(260,000) $
(7,801,356) 206,009 253,169 (6,119,897) _________ _________ __________ _________ _____601,765 __________ __________ __________ __________ __________ _ _ _ _____ $__________ _________ $__(14,181,253) $__________ $__________ _____ _____ _________ $ _________ __________ _____459,178 _____601,765 _ _ _ ________
The value of securities that transferred from Level 2 on October 31, 2011 to Level 1 on July 31, 2012 for Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund and Third Avenue International Value Fund were $1,941,399,556, $94,718,250, $867,102,436 and $879,735,363, respectively. These changes were primarily the result of certain securities trading outside the U.S. whose values were adjusted by the application of fair value factors as described under the security valuation note on page 18. Please refer to the Portfolios of Investments for industry specifics of the portfolio holdings.
Transfers from Level 1 to Level 2, or from Level 2 to Level 1 are recorded utilizing values as of the beginning of the period.
23
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) Following is a reconciliation of Level 3 investments for which significant unobservable inputs were used to determine fair value:
Net change in unrealized appreciation/ (depreciation) attributable to securities still held at period end _____________
Balance as of 10/31/11 (fair value) ___________ Third Avenue Value Fund Common Stocks: Auto Supply Consumer Products Financial Insurance Insurance & Reinsurance Manufactured Housing U.S. Real Estate Operating Companies Corporate Bonds & Notes# Limited Partnerships: Insurance & Reinsurance Preferred Stocks: Insurance & Reinsurance Total
Net change in unrealized appreciation/ (depreciation) ___________
Net sales _________
Paymentin-kind interest ________
Realized gain/(loss) _________
Balance as of 7/31/12 (fair value) __________
* 26,318 555,000 145,847 80,843,000 6,641,537 1,593,899 534,952
$ 6,063,328 1,440 5,213,829 2,041,506 (156,010) 18,103 ___________ $13,182,196 ___________ ___________
(2,657,793)
$ (6,063,328) $ 26,318 555,000 147,287 443,693 83,842,729 6,641,537 4,175,710 378,942
1,440 5,213,829 2,041,506 (156,010)
540,305
194,023 ___________ $90,534,576 ___________ ___________
___________ $(2,657,793) ___________ ___________
212,126 ________ ____________ ___________ $540,305 $ (5,619,635) ___________ $95,979,649 ________ ____________ ________ ____________ ___________
18,103 ___________ $ 7,118,868 ___________ ___________
Third Avenue Small-Cap Value Fund Common Stocks: Forest Products & Paper $ 1,375,955 Limited Partnerships: Holding Companies 9,167,500 ___________ Total $10,543,455 ___________ ___________ * #
$41,392,353 1,399,000 ___________ $42,791,353 ___________ ___________
(2,153)
$(42,766,155) $
(497,500) ___________ $ (499,653) ___________ ___________
(502,500) 9,566,500 ________ ____________ ___________ $ ____________ ___________ ________ $(43,268,655) $ 9,566,500 ________ ____________ ___________
1,399,000 ___________ $ 1,399,000 ___________ ___________
Securities have zero values. Securities disposed with $0 proceeds due to bankruptcy. Redemption-in-kind transaction. Please refer to the Portfolios of Investments for industry specifics of the portfolio holdings.
24
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited)
Net change in unrealized appreciation/ (depreciation) Balance attributable to as of securities still 7/31/12 held at (fair value) _____________ _________ period end
Balance as of Net 10/31/11 purchases/ Realized (fair value) (sales) gain/(loss) ___________ _________ _________ Third Avenue Real Estate Value Fund Common Stocks: Non-U.S. Real Estate Investment Trusts $ $ 1,309,147 $ ** $ U.S. Real Estate Operating Companies 4,543,605 Limited Partnerships: Investment Fund 37,324,299 (10,676,297) 1,000,000 ___________ ____________ ___________ _____________ Total $41,867,904 ____________ ___________ _____________ ___________ $ (9,367,150) $ 1,000,000 _____________ ____________ ___________ $ ___________ Third Avenue International Value Fund Common Stocks: Forest Products & Paper $ 4,618,680 $132,027,855 $ Third Avenue Focused Credit Fund Common Stocks & Warrants: Energy $13,119,000 Financials Services * Corporate Bonds & Notes# Private Equities: Aerospace 10,891,763 Financials 1,599,151 Utilities 5,065,900 Term Loans# 27,607,381 ___________ Total $58,283,195 ___________ ___________ * ** #
Net change in unrealized appreciation/ (depreciation) ___________
Transfer out Level 3 __________
$ 1,309,147 $ 1,309,147 4,543,605
27,648,002 (10,676,297) ____________ ___________ ____________ $ ___________ ____________ $33,500,754 ____________ ____________ ___________ $ (9,367,150) ____________
(7,227) $(136,639,308) $
$ (3,459,080) $ (124,998) $ 549,544 ** 764,333 8,775,667
124,998 $
$ 9,659,920 $ (3,459,080) 549,544 549,544 9,540,000 764,333
(6,358,558) (1,443,400) (3,054,234) 35,571 (6,358,558) (1,599,151) (5,065,900) (4,171,650) 439,826 (8,522,272) 15,353,285 (4,171,650) ____________ ___________ _____________ ____________ ___________ ____________ $ (12,675,411) ___________ $ (2,929,236) ____________ $35,138,320 $(12,675,411) ____________ ___________ _____________ ____________ ___________ ____________ ____________ $ 7,647,095 _____________ $(15,187,323) ___________ ____________
Securities have zero values. Securities received through corporate action with zero cost. Security sold with $0 proceeds. Includes amortization discount of $20,667. Includes amortization discount of $65,413 and payment-in-kind interest of $374,413. Please refer to the Portfolios of Investments for industry specifics of the portfolio holdings.
25
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) Transfers into, and out of, Level 3 are recorded utilizing values as of the beginning of the period. Transfers from Level 2 to Level 3 are due to the lack of quoted prices or other observable inputs. Transfers from Level 3 to Level 2 are due to the availability of quoted prices or other observable inputs. The Trusts Valuation Committee employs various methods for calibrating the valuation approach related to securities categorized within Level 3 of the fair value hierarchy. These methods may include regular due diligence of the Trusts pricing vendors, a regular review of key inputs and assumptions, transaction back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing and stale prices and large movements in market value and reviews of any market related activities. Additionally, the pricing of all fair value holdings is subsequently reported to the Trusts Board. The significant unobservable inputs used in the fair value measurement of the Trusts private investments may include: (i) an estimation of a normalized earnings levels for a particular investment and the likelihood of achieving those normalized earnings; (ii) certain discounts applied to a selection of comparable investments; (iii) available analyst, media or other financial reports; and (iv) consideration of other securities outstanding for a particular issuer. Significant changes in any of those inputs in isolation may result in a significantly lower or higher fair value measurement. Security transactions: Security transactions are accounted for on a trade date basis. Foreign currency translation and foreign investments: The books and records of the Funds are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows: Investments and assets and liabilities denominated in foreign currencies: At the prevailing rates of exchange on the valuation date. Investment transactions: At the prevailing rates of exchange on the date of such transactions.
Term loans: The Funds typically invest in loans which are structured and administered by a third party entity (the Agent) that acts on behalf of a group of lenders that make or hold interests in the loan. These securities generally pay interest at rates which are periodically pre-determined by reference to a base lending rate plus a premium. These base lending rates are generally either the lending rate offered by one or more major European banks, such as the London Interbank Offered Rate (LIBOR) or the prime rate offered by one or more major United States banks, or the certificate of deposit rate. These securities are generally considered to be restricted, as the Funds are ordinarily contractually obligated to receive approval from the Agent bank and/or borrower prior to disposition. Remaining maturities of term loans may be less
26
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) than the stated maturities shown as a result of contractual or optional payments by the borrower. Such prepayments cannot be predicted with certainty. The interest rate disclosed reflects the rate in effect on July 31, 2012. Forward foreign currency contracts: The Funds may be exposed to foreign currency risks associated with portfolio investments and therefore may use forward foreign currency contracts to hedge or manage these exposures. The Funds also may buy forward foreign currency contracts to gain exposure to currencies. Forward foreign currency contracts are valued at the forward rate and are markedto-market daily. The change in market value is included in unrealized appreciation/(depreciation) on investments and foreign currency translations. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Funds portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. During the period ended July 31, 2012, Third Avenue Real Estate Value Fund and Third Avenue Focused Credit Fund used forward foreign currency contracts for hedging against foreign currency risks. Option contracts: The Funds may purchase and sell (write) put and call options on various instruments including securities and foreign currency to manage and hedge exchange rate risks within their portfolios and also to gain long or short exposure to the underlying instruments. An option contract gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying item at a fixed exercise price on a certain date or during a specified period. The cost of securities acquired through the exercise of a call option is increased by the premiums paid. The proceeds from securities sold through the exercise of a purchased put option are decreased by the premiums paid. Investments in over-the-counter option contracts require the Funds to fair value or mark-to market the options on a daily basis, which reflects the change in the market value of the contracts at the close of each days trading. The cost of purchased options that expire unexercised are treated by the Funds, on expiration date, as realized losses on investments. When the Funds write an option, an amount equal to the premium received by the Funds is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Funds, on the expiration date, as realized gains on written options. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as
27
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Funds have a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the security or currency purchased by the Funds. In purchasing and writing options, the Funds bear the market risk of an unfavorable change in the price of the underlying security or the risk that the Funds may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Funds purchasing a security or currency at a price different from the current market value. The Funds may execute transactions in both listed and over-the-counter options. Listed options involve minimal counter-party risk since listed options are guaranteed against default by the exchange on which they trade. When purchasing over-the-counter options, the Funds bear the risk of economic loss from counterparty default, equal to the market value of the option. During the period ended July 31, 2012, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund, Third Avenue International Value Fund and Third Avenue Focused Credit Fund used purchased options on equity, index and foreign currency to gain long exposure to the underlying instruments and/or to protect against losses in foreign currencies. As of July 31, 2012, Third Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund no longer held any purchased options on foreign currency and purchased options on index respectively. During the period ended July 31, 2012, Third Avenue Real Estate Value Fund used written call options on foreign currency for hedging against foreign currency risks and written put options on equity to gain long exposure to the underlying instruments. Third Avenue International Value Fund used written put options on foreign currency for hedging against foreign currency risks. Swap agreements: The Funds may enter into total return, interest rate, equity and other swap agreements. Interest rate swap agreements generally involve the agreement by a fund to pay a counterparty a fixed or floating rate on a fixed notional amount and to receive a fixed or floating rate on a fixed notional amount, but may also include an agreement to pay or receive payments derived from changes in interest rates. Periodic payments are generally made during the life of the swap agreement according to the terms and conditions of the agreement and at termination or maturity. Total return swap agreements involve the commitments to pay or receive an amount generally determined by reference to a security, index or other measure in exchange for a specific market linked return, based on notional amounts. To the extent that the total return of the security, index or other measure underlying the transaction exceeds or falls short of the offsetting interest ratebased obligation, the fund will receive or make a payment to the counterparty. During the period ended July 31, 2012, Third Avenue International Value Fund participated in equity swap contracts. Details of the open swap contracts at period end are included in the Funds Portfolio of Investments under the caption Equity Swap Contracts. During the period ended July 31, 2012, Third Avenue International Value Fund used equity swap contracts to gain exposure to the underlying investments.
28
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited) Swaptions: The Funds may purchase or write swap options (swaptions) in an attempt to gain additional protection against the effects of interest rate fluctuations. Swaptions are similar to options on securities except that instead of selling or purchasing the right to buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into an interest rate swap agreement at or before the expiration date of the option, determined by the style of the swaption. In purchasing and writing swaptions, the Funds bear the risk of an unfavorable change in the price of the underlying interest rate swap or the risk that the Funds may not be able to enter into a closing transaction due to an illiquid market. The Funds execute transactions in over-the-counter swaptions. Transactions in over-the-counter swaptions may expose the Funds to the risk of default by the counterparty to the transaction. In the event of default by the counterparty, the Funds maximum amount of loss is the premium paid (as purchaser) or the unrealized gain of the contract (as writer). Floating rate obligations: The Funds may invest in debt securities with interest payments or maturity values that are not fixed, but float in conjunction with an underlying index or price. These securities may be backed by corporate issuers. The indices and prices upon which such securities can be based include interest rates and currency rates. Floating rate securities pay interest according to a coupon which is reset periodically.
2. INVESTMENTS
Unrealized appreciation/(depreciation): The following information is based upon the book basis of investment securities as of July 31, 2012:
Value Fund ________ Small-Cap Value Fund ________ Real Estate Value Fund ________ International Value Fund _________ Focused Credit Fund _________
Gross unrealized appreciation Gross unrealized depreciation Net unrealized appreciation/ (depreciation) Aggregate book cost
$ 639,312,964
$ 92,750,461 $ 268,380,219 $
81,601,495
$ 46,911,660 _ (55,288,147) _________ _____ ____
__(554,159,419) ___________ __(135,652,536) __(156,244,940) ____________ _(60,771,235) ___ ____ __________ _________ _ _____ ____ _____ ____
$ ___________ ____________ _ 85,153,545 $2,427,263,603 ____________ ____________ ____________ ____________
$ _________ $ ___ ____ ___________ __ 132,727,683 __ (74,643,445) _ 31,979,226 _ _____ $ ____ _____ ____ $588,889,777 __ _____ $1,285,802,297 __ ____ $1,157,524,962 ___________ __________ ___ _____ __ ____ ___________ __ _____ __________ ___ _____ ____ _____ ____ _____
$ (8,376,487) _ _________ _____ ____ $707,119,215 _ _________ _____ ____ _ _________ _____ ____
29
Third Avenue Trust Notes to Portfolios of Investments (continued) July 31, 2012 (Unaudited)
3. COMMITMENTS AND CONTINGENCIES
At July 31, 2012, Third Avenue Real Estate Value Fund had the following commitment and contingency:
Issuer _____ Alliance Bernstein Legacy Securities (C1) L.P. Type _____ Limited Partnership Amount of Commitment __________ Funded Commitment __________ Value of Segregated Securities ________
$40,000,000
$37,000,000
$3,000,000
In the normal course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Funds maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. For additional information regarding the accounting policies of the Funds, refer to the most recent financial statements in the N-CSR filing at www.sec.gov.
30
BOARD OF TRUSTEES Jack W. Aber Marvin Moser David M. Barse Eric Rakowski William E. Chapman, II Martin Shubik Lucinda Franks Charles C. Walden Edward J. Kaier Martin J. Whitman OFFICERS Martin J. Whitman Chairman of the Board David M. Barse President, Chief Executive Officer Vincent J. Dugan Chief Financial Officer, Treasurer Michael A. Buono Controller W. James Hall General Counsel, Secretary Joseph J. Reardon Chief Compliance Officer Tara Dempsey Assistant Secretary TRANSFER AGENT BNY Mellon Investment Servicing (U.S.) Inc. P.O. Box 9802 Providence, RI 02940-8002 610-239-4600 800-443-1021 (toll-free) INVESTMENT ADVISER Third Avenue Management LLC 622 Third Avenue New York, NY 10017 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 300 Madison Avenue New York, NY 10017 CUSTODIAN JPMorgan Chase Bank, N.A. 14201 Dallas Parkway, 2nd Floor Dallas, TX 75254
Third Avenue Funds 622 Third Avenue New York, NY 10017 Phone 212-888-5222 Toll Free 800-443-1021 Fax 212-888-6757 www.thirdave.com

TAF 3Q 2012 Report and Shareholder Letters

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TAF 3Q 2012 Report and Shareholder Letters

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Third Avenue Value Fund Third Avenue Small-Cap Value Fund Third Avenue Real Estate Value Fund

PORTFOLIO MANAGER COMMENTARY AND THIRD QUARTER REPORT

This booklet consists of two separate documents.

THIRD AVENUE FUNDS PORTFOLIO MANAGER COMMENTARY _____________________________________________

THIRD AVENUE FUNDS THIRD QUARTER REPORT _____________________________________________

THIRD QUARTER PORTFOLIO MANAGER COMMENTARY

Letter from the Chairman (Unaudited)

Letter from the Chairman (continued) (Unaudited)

Letter from the Chairman (continued) (Unaudited)

Letter from the Chairman (continued) (Unaudited)

Third Avenue Value Fund (Unaudited)

Third Avenue Value Fund (continued) (Unaudited)

1,297,000 shares 5,448,000 shares 8,101,858 shares

5,459 shares 752,574 shares 21,798 shares

Third Avenue Value Fund (continued) (Unaudited)

Third Avenue Value Fund (continued) (Unaudited)

Third Avenue Value Fund (continued) (Unaudited)

Third Avenue Value Fund (continued) (Unaudited)

Ian Lapey Portfolio Manager Third Avenue Value Fund

Third Avenue Small-Cap Value Fund (Unaudited)

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Our discussion made it clear

Third Avenue Small-Cap Value Fund (continued) (Unaudited)

Third Avenue Real Estate Value Fund (Unaudited)

Third Avenue Real Estate Value Fund (continued) (Unaudited)

Third Avenue Real Estate Value Fund (continued) (Unaudited)

Third Avenue Real Estate Value Fund (continued) (Unaudited)

Third Avenue Real Estate Value Fund (continued) (Unaudited)

Base _______ _ $ 525,000 (105,000) (225,000) (120,000) _______ _ 75,000

Michael H. Winer Co-Portfolio Manager

Jason Wolf Co-Portfolio Manager

Third Avenue International Value Fund (Unaudited)

20,183 shares 428,000 shares 562,000 shares 61,938 shares

Third Avenue International Value Fund (continued) (Unaudited)

REVIEW OF QUARTERLY ACTIVITY

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Source: Bloomberg (returns are in euros).

Third Avenue International Value Fund (continued) (Unaudited)

Third Avenue International Value Fund (continued) (Unaudited)

Amit Wadhwaney Co-Portfolio Manager, Third Avenue International Value Fund

Matthew Fine Co-Portfolio Manager, Third Avenue International Value Fund

Third Avenue Focused Credit Fund (Unaudited)

Third Avenue Focused Credit Fund (continued) (Unaudited)

Third Avenue Focused Credit Fund (continued) (Unaudited)

Third Avenue Focused Credit Fund (continued) (Unaudited)

Third Avenue Focused Credit Fund (continued) (Unaudited)

THIRD QUARTER REPORT

THIRD AVENUE FUNDS

8,350 212,126 220,476

26,318 16,619,441 20,391,750 87,485,793 124,496,984

See accompanying notes to the Portfolios of Investments.

9,487,910 5,391,578 1,816,627

See accompanying notes to the Portfolios of Investments.

# Amount represents less than 0.01% of total net assets.

37 127,500 1,982,750 9,337 1,022,245

Value $ (508,084) (3,610,878) (3,682,394) (260,000) _____ $(8,061,356) _ _____

Value $53,266 49,678 103,065 _____ $206,009 _ _____