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T h i r d Av e n u e Va l u e F u n d

T h i r d Av e n u e S m a l l - C a p Va l u e F u n d

T h i r d Av e n u e R e a l E s t a t e Va l u e F u n d

T h i r d Av e n u e I n t e r n a t i o n a l Va l u e F u n d

T h i r d Av e n u e F o c u s e d C r e d i t F u n d

F O U R T H Q U A R T E R P O R T F O L I O M A N A G E R C O M M E N TA R Y
October 31, 2009
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 October 31, 2009, 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 investor’s 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 our
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 December 7, 2009.
Third Avenue Value Fund
Principal Amount or
Number of Shares Positions Increased
$30,000,000 CIT Group Senior Unsecured Notes
(“CIT Notes”)
5,017,952 shares Sycamore Networks Common Stock
(“Sycamore Common”)
Positions Decreased
120,000 shares Chong Hing Bank LTD
Common Stock
(“Chong Hing Common”)
MARTIN J. WHITMAN IAN LAPEY $59,020,000 Forest City Enterprises
CO-CHIEF INVESTMENT OFFICER CO-PORTFOLIO MANAGER OF Senior Unsecured Notes
& CO-PORTFOLIO MANAGER OF THIRD AVENUE VALUE FUND (“Forest City Seniors”)
THIRD AVENUE VALUE FUND $66,000,000 Nortel Network Senior Unsecured
Debentures (“Nortel Seniors”)
14,083,385 shares MBIA Inc. Common Stock
Dear Fellow Shareholders: (“MBIA Common”)
At October 31, 2009, the audited net asset value attributed Position Eliminated
to the 127,537,907 shares outstanding of the Third $86,654,000 GMAC Senior Unsecured Notes
Avenue Value Fund (“TAVF”, “Third Avenue”, or the (“GMAC Seniors”)
“Fund”) was $44.60 per share. This compares with an
unaudited net asset value at July 31, 2009 of $42.14 per The several credit instruments sales – Forest City Seniors,
share and an audited net asset value, adjusted for a Nortel Seniors and GMAC Seniors – all resulted in the
subsequent distribution, of $34.98 per share at October realization of substantial profits for TAVF. In the cases of
31, 2008. At November 27, 2009, the unaudited net asset the Forest City Seniors and the GMAC Seniors, these were
value was $44.64 per share. mostly acquired at yields to maturity of 30% to over 50%.
Analysis indicated that both instruments were highly likely
QUARTERLY ACTIVITY to remain performing loans as proved to be the case. The
Number of Shares New Position Acquired positions were sold at prices around, or better than, a 12%
500 shares Fleetwood Homes Inc. Common Stock yield to maturity. Note that the lower the yield to maturity
(“Fleetwood Common”) is, the greater the dollar market price for a specific credit
instrument. The Nortel Seniors are participating in what
amounts to the liquidation of Nortel after the sale of all its

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Value Fund’s 10 largest issuers,
and the percentage of the total net assets each represented, as of October 31, 2009: Henderson Land Development Co., Ltd.,
14.86%; Cheung Kong Holdings, 12.01%; Toyota Industries Corp., 8.85%; Posco (ADR), 6.28%; Wheelock & Co., Ltd.,
4.92%; Wharf Holdings, Ltd., 4.61%; Nabors Industries, Ltd., 4.06%; Brookfield Asset Management, Inc., 3.67%; Investor AB,
3.22%; and Covanta Holding Corp., 2.66%.

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assets pursuant to Section 363 of Chapter 11 of the U.S. Sycamore’s management is aligned with outside passive
Bankruptcy Act. The Fund’s cost basis for the Nortel minority shareholders through management’s 31%
Seniors was around $17; the average selling price for the common stock ownership and very modest cash
Nortel Seniors was approximately $58. compensation. Chairman Gururaj Deshpande and CEO
Dan Smith previously ran Cascade Communications,
The Fund acquired the CIT Notes on the theory that there
which was ultimately sold in a very profitable transaction
was about a 10% to 15% probability that CIT could
for shareholders. At Sycamore, Deshpande and Smith have
succeed in a voluntary exchange; and an 80% to 85%
avoided making expensive acquisitions and have right-
probability that CIT would have to reorganize in a pre-
sized the business to minimize cash burn ($17 million in
packaged Chapter 11 Reorganization. As expected, the
fiscal 2009). The company recently announced a 30%
voluntary exchange failed and on November 1st, CIT filed
headcount reduction including the closure of its New
for Chapter 11 Relief with a pre-packaged Plan of
Jersey office. Employee headcount is expected to decline to
Reorganization. TAVF seems likely to do okay with its
300 from 492.
holdings in a reorganized CIT – new bonds and new
common stock. On November 19, 2009, the company announced that it
would pay a cash dividend of $1 per share payable on
SYCAMORE COMMON
December 15th to shareholders of record as of November
During the quarter, the Fund added to its position in 30th. Even after the payment of this dividend, the
Sycamore Common by acquiring approximately 5 million company should have an extremely strong financial
shares at an average cost of $2.87 per share. Sycamore is a position with cash well in excess of $600 million that
Massachusetts-based telecommunications equipment should enable it to fund growth both organically and
company that was founded in 1998. The company took through acquisitions.
advantage of the dot-com bubble by raising more than $1
FLEETWOOD COMMON
billion in an initial public offering and secondary offering
in 1999 and 2000, respectively. The Fund invested $35 million for 50% of the common
stock of FH Holding, Inc., a jointly owned corporation
Sycamore’s technology has been validated by several
with Cavco Industries. As discussed in the last quarterly
customer wins including Sprint, Korea Telecom, NTT,
letter, this corporation was formed to purchase assets from
Vodafone, China Netcom and the U.S. Department of
Fleetwood Enterprises, which filed for bankruptcy in
Defense. Nevertheless, Sycamore’s business results have
March 2009. The assets consisted primarily of seven
been disappointing as a public company. In fiscal 2009
operating manufactured housing plants, one office
(July 31st year end), the company reported a net loss of
building, one idled plant and all related equipment,
$53.6 million ($0.19 per share) on revenues of only $63.4
inventory, receivables and trade names. Since the assets
million.
were purchased in a 363 bankruptcy auction, they were
The main attraction of Sycamore Common to Fund purchased “free and clear” from most liabilities other than
Management is the company’s balance sheet. At fiscal year assumed warranties. On August 17th, FH Holding, Inc.
end, Sycamore had $927 million in cash and government completed the purchase for $25.8 million. Subsequently,
securities ($3.26 per share) compared to $31 million in the name of the joint venture was changed to Fleetwood
total liabilities. The company also had federal and state net Homes Inc. (“Fleetwood”).
operating losses (“NOLs”) of $768 million and $187
Manufactured housing industry conditions have remained
million, respectively.
depressed; through August, industry shipments were down

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43% compared to last year. Nevertheless, Fleetwood’s hand, if MBIA can get away with the asset stripping,
performance has been respectable since the transaction MBIA’s adjusted book value might be around $20 per
closed. For the month-and-a-half period ending share and MBIA would be left with a very well-capitalized
September 30, 2009, Fleetwood reported a slight net loss going concern insurance subsidiary guaranteeing only
but would have been profitable excluding legal fees municipal obligations. We believe that there is a strong
associated with the transaction. Fleetwood generated possibility that MBIA will be unable to defend the claims
approximately $4 million in free cash flow owing primarily brought by the various plaintiffs challenging the
to resumption of normal terms with suppliers resulting in transaction. On that basis, Fund Management decided
a build of accounts payable. As of September 30th, the that it ought to start to sell MBIA Common at prices of
company had a very strong financial position with $48 $5.90 per share or better.
million of cash and no debt.
Three suits against the MBIA asset stripping have been
We are expecting industry conditions to remain very brought by a hedge fund, nineteen major banks, and Third
challenging during the winter, particularly in the Avenue, which owns $362.2 million of insurance
company’s northern facilities (Oregon and Idaho). subsidiary Surplus Notes. It is MBIA’s position that the
Nevertheless, the business should not burn significant asset stripping is a “done deal” because it was approved (in
cash. Fleetwood’s strong financial position should enable it a secret process) by the New York Insurance Department,
to capitalize on the weakness of many of its competitors and can only be set aside in an Article 78 proceeding where
and pursue other growth opportunities during the it has to be shown that the actions of the Superintendent
downturn. of Insurance were “arbitrary and capricious”. Regardless of
the outcome, Fund Management was able to sell 73% of
MBIA COMMON
the Fund’s holdings of MBIA Common. Fund
As we have previously written about in prior letters, in Management will continue to be opportunistic in selling
February of this year, MBIA, Inc. effected a transaction in the remaining holdings of MBIA Common.
which over $5 billion of liquid assets were removed from
EAST ASIA – WHERE ASSET ALLOCATION,
MBIA Corp., as was virtually all the profitable going
RELATIVE SAFETY AND DEEP VALUE MEET
concern business of MBIA Corp. That transaction is now
the subject of multiple litigations. Put simply, if MBIA, At October 31, 2009, over 59% of Fund net assets were
Inc., the parent company, can get away with the asset invested in the common stocks of extremely well-financed
stripping from its principal insurance subsidiary, which companies located in East Asia. Forty-three percent of
was approved by the New York Insurance Department on such investments were in eight real estate and private
February 19th, MBIA Corp.’s ability to make good on its equity companies headquartered in Hong Kong, all also
liabilities for losses realized in guaranteeing structured having major presences in mainland China. Almost 9%
finance obligations (almost all are guarantees of residential was in one issuer, Toyota Industries, headquartered in
mortgage obligations as well as commercial and real estate Japan. Another 6% was in a steel company, Posco,
obligations) and international finance obligations will have headquartered in South Korea.
been severely impaired. MBIA Inc. itself characterizes the
The outlook for dynamic growth over the next five to
asset stripping as “ring fencing” MBIA Inc. from all
seven years seems far more assured in East Asia, especially
structured finance obligations. On the one hand, if MBIA
mainland China, than seems to be the case for the United
Inc. can be blocked from the asset stripping, it seems
States. In terms of asset allocation, therefore, shouldn’t a
probable that MBIA Common is valueless. On the other

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U.S. Investor seek to have a portion of his portfolio Shau Kee, respectively. Both gentlemen are now 80 years
invested in East Asian equities? A good case can be made old. Their departures from their companies, when, as, and
that TAVF is a good vehicle to use to achieve such an asset if, would give rise to some concern at Third Avenue.
allocation because the Fund’s East Asian investments seem However, as far as Fund Management can tell, the next
to combine relative safety with deep discounts from generation of Cheung Kong and Henderson Land
underlying value. executives, seems capable and quite involved in acting in
the best interests of common stockholders.
There are special risks that arise from making equity
investments in East Asia. There are threats of political Nonetheless, the Third Avenue portfolio of East Asian
instability in China, especially West China. To continue to equities seems to deliver a certain degree of protection
thrive, perhaps 400 million Chinese will have to enter the against the special risks described in the two preceding
middle class during the next five paragraphs. First, most of the
to seven years. Cultural differences companies are headquartered in
are hard for U.S. analysts to “The outlook for dynamic Hong Kong, an area following
understand. Corruption may be growth over the next five British traditions of government
rife, especially within local and law enforcement. Hong Kong
Chinese governments. Much of to seven years seems far securities law is comprehensive
China remains a command more assured in East Asia, and provides excellent protections
economy, rather than a market especially mainland China, and disclosure for outside, passive,
economy. Additionally, there may investors, such as TAVF. The
be asset bubble risk in China. The than seems to be the case companies in which the Fund has
Japanese economy is moribund, in for the United States. In terms invested are all blue chips and
great part we think, because,
unlike the U.S., there are almost of asset allocation, therefore, most are majority owned and
managed by billionaire families
no prospects for changes in shouldn’t a U.S. Investor which seem to have large
control of Japanese corporations. seek to have a portion of communities of interest with
Viewed from a South Korean Third Avenue, as fellow holders of
point of view, North Korea is his portfolio invested in common stock. These
downright scary. East Asian equities?” managements seem particularly
well qualified to deal with
Fund Management however, has a
conditions in mainland China,
hunch that the greatest uncertainties arising out of the
whatever they may be. While both Posco Common and
Hong Kong investments will prove to be micro, i.e.,
Hang Lung Properties Common have more than doubled
company specific, rather than macro factors affecting the
in market price since they were acquired by TAVF, neither
general market or the general economies. One of our
appears to be overvalued. All the other issues are selling at
worries revolves around management succession at
meaningful discounts from readily ascertainable net asset
Cheung Kong Holdings and Henderson Land
values (“NAV”).
Development. Together Cheung Kong Common and
Henderson Land Common accounted for 27% of Fund Third Avenue concentrates its common stock investments
assets, at October 31st. These magnificent companies into the issues of companies which combine three
were founded by, and are managed by, Li Ka-shing and Lee characteristics:

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1) Super strong financial position. We will write you again when the quarterly report for the
period to end January 31, 2010 is issued. Best wishes for a
2) Market price represents a meaningful discount from
readily ascertainable NAV. healthy and happy New Year.

3) Good prospects that over the next five to seven years, Sincerely yours,
NAV will grow at better than 10% annual rates,
compounded.
The Asian common stocks owned by the Fund seem to
meet these criteria better than any other available equity
investments. Martin J. Whitman
SHAREHOLDER DISTRIBUTION Chairman of the Board

On December 22, 2009, a distribution of approximately


$1.10 per share (representing ordinary income) is to be
made to shareholders of record on December 21, 2009.
Shareholders, as always, have the option of receiving
distributions in either cash or newly issued shares of the Ian Lapey
Fund. Co-Manager,
Third Avenue Value Fund

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Third Avenue Small-Cap Value Fund
Number of Shares Increase in Existing Position
88,500 shares Viterra, Inc. Common Stock
(“Viterra Common”)
Positions Reduced
38,397 shares Ackermans & van Haaren N.V.
(“AvH Common”)

CURTIS R. JENSEN 122,405 shares Alexander & Baldwin Inc.


(“Alex Common”)
CO-CHIEF INVESTMENT OFFICER &
PORTFOLIO MANAGER OF THIRD AVENUE 15,988 shares Bristow Group, Inc. Common Stock
(“Bristow Common”)
SMALL-CAP VALUE FUND
3,500 shares Brookfield Asset Management, Inc.
Dear Fellow Shareholders: Common Stock (“Brookfield Common”)
820,000 shares Canfor Corp. Common Stock
At October 31, 2009, the end of the Fund’s fiscal year, the (“Canfor Common”)
audited net asset value attributable to the 70,945,994
577,699 shares Cimarex Energy Co.
common shares outstanding of the Third Avenue Small-
Common Stock (“Cimarex Common”)
Cap Value Fund (“Small-Cap Value” or the “Fund”) was
$17.17 per share, compared with an unaudited net asset 8,100 shares E L Financial Corp. Common Stock
value at July 31, 2009 of $16.13 per share. The Fund’s (“E L Financial Common”)
audited net asset value was $15.80 per share at October 1,400 shares Electronics for Imaging, Inc
31, 2008, adjusted for a subsequent distribution. At Common Stock (“EFI Common”)
November 27, 2009, the unaudited net asset value was 220,494 shares Encore Wire Corp., Common Stock
$17.45 per share. (“Encore Common”)
QUARTERLY ACTIVITY 133,389 shares Genesee & Wyoming, Inc.
Common Stock (“Genesee Common”)
During the quarter, Small-Cap Value added to one of its 767,869 shares Haverty Furniture Co., Inc.
64 existing positions, eliminated one position and reduced Common Stock (“Haverty Common”)
its holdings in 22 companies. At October 31, 2009, Small-
105,800 shares Investment Technology Group, Inc.
Cap Value held positions in 53 common stocks, the top 10
(“ITG Common”)
positions of which accounted for approximately 34% of
the Fund’s net assets. 219,381 shares Lanxess AG Common Stock
(“Lanxess Common”)

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Small-Cap Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of October 31, 2009: Sapporo Holdings, Ltd., 4.16%;
Lanxess AG, 4.03%; Viterra, Inc., 3.99%; Parco Co., Ltd., 3.79%; Brookfield Asset Management, Inc., 3.32%; National Western
Life Insurance Co., 3.20%; Synopsys, Inc., 3.19%; Alexander & Baldwin, Inc., 3.09%; Ackermans & van Haaren NV, 2.91%;
and Vail Resorts, Inc., 2.78%.

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Number of Shares was alleged to have said about the irrationality of market
or Face Amount Positions Reduced (continued) behavior:
97,244 shares Lexmark International, Inc. Class A
“If farming were to be organized like the stock market, a
Common Stock (“Lexmark Common”)
farmer would sell his farm in the morning when it was
3,398 shares National Western Life Insurance, Inc. raining, only to buy it back in the afternoon when the
Common Stock (“NWLI Common”) sun came out.”
$7,000,000 Ply Gem Industries 11.75% 1st Lien
Secured Notes Due June 15, 2013 The same market that was furiously selling risk early in the
(“Ply Gem Senior Notes”) year (while it was raining) is now tripping over itself to buy
it back! Fund Management’s natural preference is to do
1,277,767 shares St. Mary Land and Exploration Co.
exactly the opposite: we like to “buy farms” during the
Common Stock (“St. Mary Common”)
proverbial downpour (like those that erupted late last year
125,000 shares Tellabs, Inc. Common Stock and early this year) and sell them while the sun shines (as
(“Tellabs Common”) it is doing today).
96,402 shares Vail Resorts, Inc.. Common Stock
(“Vail Common”) As the Fund was a net seller of its holdings in the latest
period, I have provided a couple of examples to reveal our
106,060 shares Wacker Neuson SE Common Stock
thinking around the sale process. The Fund reluctantly
(“Wacker Common”)
eliminated the last of its position in Derwent Common.
172,745 shares Westlake Chemical Corp. We continue to like the progress that Derwent’s
Common Stock (“Westlake Common”) management has made building its London real estate
$4,000,000 W&T Offshore, Inc. 8.25% Senior Notes portfolio. An increase in rental rates and lower property
Due June 15, 2014 taxes in the first half of the year helped net operating
(“WTI Senior Notes”) income to grow 12%. Additionally, management selectively
Position Eliminated sold properties this year (often to Middle Eastern buyers) at
535,830 shares Derwent London Plc Common Stock reasonable, if not attractive, valuations, leaving the
(“Derwent Common”) company’s balance sheet in good shape for future growth.
However, we felt that the combination of a reasonably full
QUARTERLY ACTIVITY valuation1 – implying a roughly 6% capitalization rate –
On balance, Fund Management activities during recent and a more challenging view of the British Pound, limited
periods have tilted more heavily towards the sale of the longer-term growth profile. Were the stars to align
investments, using the broad-based rally in risk assets to themselves a second time, both in terms of the stock and
trim or eliminate certain holdings where investment or the currency, we would consider owning Derwent
portfolio considerations warranted. Such was the case in Common again.
the Fund’s last fiscal quarter ended October 31, 2009. The disposition of nearly all the Fund’s relatively large
Why, one might ask, would you sell anything when holding in St. Mary Common reflects a complex blend of
markets are rallying so hard? Haven’t you learned not to factors and is somewhat bittersweet, as Fund Management
“fight the Fed?” My answer goes back to something Keynes remains generally positive on the oil and gas business from

1
Derwent Common has appreciated more than 100% this year in U.S. dollar terms, as of the date of this writing, having
appreciated more than 200% off its March 9, 2009 lows.

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a longer-term investment perspective. The company, an such as horizontal drilling and multistage hydraulic
independent oil and gas producer, has changed on nearly fracturing techniques - have both matured rapidly in the
every level since we first purchased the shares five years ago. last five years and potentially radically alter the natural gas
In the last few years, a new management team began supply picture within the U.S. Five years ago, the North
realigning the company’s portfolio of assets, jettisoning the American natural gas markets appeared to be supply
legacy assets upon which the company’s fortunes had been constrained; today, they look more “demand constrained.”
built. St. Mary management is now banking on growth in Based upon the prices at which the Fund sold its stake, St.
so-called “unconventional resource plays,” where it is not Mary Common i) appeared fully valued from our
clear they have any obvious drilling and operating conservative estimates of what a hypothetical acquirer
competency or advantages. Along the way, management might pay for the whole company and ii) assumed
introduced more debt onto the balance sheet in order to meaningful growth in both production and reserves and
support its ambitious growth plans and an expanded asset left little room for negative operational, political or
base whose values, coincidentally, began suffering from macro surprises. Combined with the aforementioned
sporadic but meaningful performance-related developments, these factors pointed toward a sale.
impairments. Curiously, and in contrast to the earlier part
As I wrote in my letter2 introducing the Fund’s first
of this decade when commodity prices were considerably
investments in the oil and gas business, “Conventional
lower, the company’s ability in recent years to meet its cash
wisdom in the industry is usually proven wrong, and
needs through internally generated cash flow began to
surprises are more the norm. Similar ‘left field’
falter, evidence that the business needed more externally-
developments await us in future periods.” I believe the
sourced capital just to stay in place. Without the tailwind
same potential for surprises still holds true today.
from a high commodity price environment, it appears as if
St. Mary’s management will be forced to either sell assets Many oil and gas producers have demonstrated an ability
or periodically access the capital markets in order to fund to grow per share business values over a cycle, and a
the company’s needs, a prospect that further clouds the byproduct of investing in commodity-linked equities such
potential for growth in the company’s net asset value. as oil and gas producers is some indirect form of insurance
Beyond company specific factors, the operating against currency devaluation, political upheaval and
environment for U.S.-based oil and gas companies inflation. Therefore, it is likely we will continue to look for
promises to get more challenging as well. For one, the ideas in the oil and gas arena, but we will tread carefully
Obama Administration had introduced a budget that and keep our eyes open for ‘left field’ developments from
contemplated the imposition of $31.5 billion of taxes on both the demand side (such as the inclusion of more
oil and gas producers that would, among other things, natural gas in our country’s transportation sector) and the
have stripped away the industry’s drilling incentives (and supply side (more rapid declines in production from
ultimately raised prices for consumers). While those unconventional resources). The Fund’s direct exposure to
draconian budget measures may be on hold, the both exploration and production and services related
Administration seems oblivious to the role that natural gas companies – at around 10% of assets – remains well below
could play in U.S. energy policy, including in the country’s the Fund’s peak exposure of more than 20%, attained in
energy security needs. More immediately, Liquified the 2006-2007 time period.
Natural Gas markets and new production technologies –

2
Third Avenue Funds, Letter to Shareholders, April 30, 2004.

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PERFORMANCE • The returns above do not include the insidious effects
of inflation that, when factored in, would
The table below compares the Fund’s performance over
undoubtedly create a grimmer picture across returns
several time periods to that of a number of indices through
data of many asset classes.
the period ended October 31, 2009, including two small-
cap indices and one general market index. • The data give no indication of how the Fund fared
against its numerous competitors.
COMPARATIVE RETURNS*
• The Fund’s 30% holding in non-U.S. equities, 5%
YTD 1-Year 3-Year 5-Year 10-Year holding in debt instruments and the constant presence
S&P Small- of at least some cash somewhat distort comparisons to
Cap 600 12.7% 5.6% (7.3%) 1.3% 6.5% small-cap peer or index data.
Russell
• The best performing elements within small-cap
2000 14.1% 6.5% (8.5%) 0.6% 4.1%
equities on a year-to-date basis include lower market
S&P 500 17.1% 9.8% (7.0%) 0.3% (1.0%) capitalization, low price, non-earnings companies (i.e.,
TASCX 17.4% 9.3% (7.2%) 0.9% 8.0% more speculative stocks), the kinds of lower quality
Source: Bloomberg and Third Avenue estimates. Average annual stocks the Fund has tended to avoid. For example,
returns for periods one year and greater. Bank of America/Merrill Lynch research estimates that
loss making companies in the Russell 2000 had
I have a number of cautionary observations about such
appreciated 60% year to date, while those with a PE
data, which seem to be relevant for certain of the Fund’s
ratio of 10 and below had risen only 36%.
constituents, but which do not tell the whole story.
• Some of the Fund’s most heavily weighted holdings in
• While the recent bear market caused the Fund to fall
2008 and 2009 have fared poorly from a stock
short of its goal of protecting capital and preserving
performance perspective. For example, the Fund’s
purchasing power over the medium term (e.g., 3-5
holdings in two Japanese names, Sapporo Holding and
years). Shorter-term (e.g., one year) and longer-term
Parco Co. Ltd., are down approximately 18% and 8%
results (e.g., 10 years) appear markedly better.
this year (in Yen terms), after declining 37% and 40%,
• Return data such as those above offer no indication of respectively, in 2008. Even within the context of
investment risk as defined by the chance for generally poor Japanese equity returns, this is a sorry
permanent loss of capital. My belief is that the Fund’s record. Measured against the performance of U.S.
returns have been achieved with less investment risk equities this year, such performance is positively
than that embedded within the indices. ghastly! As I have alluded to in a recent letter, Sapporo’s
and Parco’s share price performances appear wildly

* Past performance is no guarantee of future results; returns include reinvestment of all distributions.
The S&P Small Cap 600 Index is a small cap index that covers approximately 3% of the U.S. equities market and consists of
companies that meet specific inclusion criteria to ensure that they are investable and financially viable.
The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index.
The S&P 500 Index is an unmanaged index (with no defined investment objective) of common stocks. The S&P 500 Index is a
registered trademark of McGraw-Hill Co., Inc.
3
Third Avenue Funds, Letter to Shareholders, April 30, 2009.

9
unjustified based on developments at the underlying suggest, the price of the 10-year would decline
businesses.3 The Fund had positive contributions from approximately 6.3%!5
a broad-based group of holdings during the period, but
Beyond government bond investors, the U.S. Government
most were not of sufficient size to offset the drag
itself may be bordering on insanity as well. Years and years
produced by holdings like Sapporo and Parco.
of too much cheap credit – cheap credit that spawned asset
REFLECTING ON 2009 bubbles in everything from Florida condos and
collateralized debt obligations to corporate buyouts – have
“Insanity: doing the same thing over and over again and
now been followed by Government policy creating even
expecting different results.”
cheaper, albeit selectively targeted,
– Albert Einstein “Insanity among others ought credit. To date, the results of
As we get ready to close out to be good for long-term and government policy seem to be
mainly i) windfall profits for Wall
another year and ponder the year contrarian investors like Third Street trading desks; ii) wealth
ahead, I keep asking myself
whether the credit crisis has really Avenue as it tends to create transfer from taxpayers to a select
group of consumers and
changed anything in terms of market inefficiencies and industries; iii) an orderly but
human behavior. I see scant opens up opportunity. With steady decline in the value of the
evidence that it has. Today, for U.S. dollar; and iv) renewed
example, investors as diverse as cash at the ready and an
speculation in stocks and
foreign governments to individuals expanded research team, commodities. Can a system that
seem to be snatching up U.S.
Government and municipal
4 we continue to look diligently nearly collapsed from too much
mispriced credit be saved by the
bonds like there is no tomorrow, for ways to sow the seeds same, or will we wind up with an
perceiving stocks to be too risky in of future harvests.” even further misallocation of
the wake of the past year’s market societal resources and more crises?
meltdown. Whether it was index
funds and growth stocks in the late 90s or leveraged hedge Insanity among others ought to be good for long-term and
funds and speculative real estate in more recent years, contrarian investors like Third Avenue as it tends to create
investors have demonstrated an uncanny ability to buy what market inefficiencies and opens up opportunity. With cash
is most popular when it is popular – the herd mentality that at the ready and an expanded research team, we continue
is a recipe for disaster. Consider, for instance, that today a to look diligently for ways to sow the seeds of future
buyer of a U.S. Government 10-year note (“10-year”) gets harvests.
paid a shade over 3.4%. Were market forces or some event
to push that yield to say 3.95% – about the high in 2009 –
the price of that same bond would fall nearly 4.7%. Were
10-year yields to rise to their five-year average yield of
around 4.14%, as interest rate-related options currently

4
Treasuries outstanding rose to $7 trillion as of September, from $4.3 trillion in August 2007, pre-credit crisis.
5
For illustrative purposes only. Assumes duration on the 10-year is 8.5 years and, among other things, all rates move the
same amount and prices drop instantaneously.

10
SHAREHOLDER DISTRIBUTION
On December 22, 2009, a distribution of approximately
$0.12 per share (representing ordinary income) is to be
made to shareholders of record on December 21, 2009.
Shareholders, as always, have the option of receiving
distributions in either cash or newly issued shares of the
Fund.
I look forward to writing you again in the New Year when
we publish our First Quarter report dated January 31, 2010.
May you and your families enjoy a healthy and prosperous
New Year. Thank you for your continued support.
Sincerely,

Curtis R. Jensen
Co-Chief Investment Officer and Portfolio Manager,
Third Avenue Small-Cap Value Fund

11
Third Avenue Real Estate Value Fund
Principal Amount
or Number of Shares New Positions Acquired (continued)
4,966,000 shares Songbird Estates Plc Common Stock
(“Songbird Common”)
2,300,000 shares Sun Hung Kai Properties Ltd. Common
Stock (“Sun Hung Kai Common”)
Increase in Existing Position
MICHAEL H. WINER
3,748 shares Vornado Realty Trust Common Stock
PORTFOLIO MANAGER OF THIRD AVENUE (“Vornado Common”)
REAL ESTATE VALUE FUND
Decreases in Existing Positions
3,715,000 shares Hang Lung Properties Ltd. Common
Dear Fellow Shareholders: Stock (“Hang Lung Common”)
446,600 shares ProLogis Common Stock
I am pleased to provide you with Third Avenue Real Estate (“ProLogis Common”)
Value Fund’s (the “Fund” or “TAREX”) shareholder letter
Positions Eliminated
for the fiscal year ended October 31, 2009. This report
marks the Fund’s eleventh full year of operation since its $18,200,000 Forest City Enterprises, Inc. 3.625%
inception on September 17, 1998. At October 31, 2009, Convertible Notes due October 2011
the audited net asset value attributable to the 69,564,138 (“Forest City Converts”)
shares outstanding was $19.86 per share. This compares $7,000,001 LNR Property Corp. Term Loan B due
with the Fund’s unaudited net asset value of $18.03 per July 2011 (“LNR Term Loan”)
share at July 31, 2009, and an audited net asset value, $9,957,806 Macerich Partnership L.P. Term Loan
adjusted for subsequent distributions to shareholders, of due April 2010 (“Macerich Term Loan”)
$15.78 per share at October 31, 2008. At November 27, 13,900 shares Killam Properties, Inc. Common Stock
2009, the unaudited net asset value was $20.01 per share. (“Killam Common”)
QUARTERLY ACTIVITY 1,600,000 shares Kimco Realty Corp. Common Stock
(“Kimco Common”)
The following summarizes the Fund’s investment activity
394,800 shares Parco Company Ltd. Common Stock
during the quarter:
(“Parco Common”)
Number of Shares New Positions Acquired
2,758,000 shares Hysan Development Company Ltd.
Common Stock (“Hysan Common”)

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Real Estate Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of October 31, 2009: Henderson Land Development
Co., Ltd., 7.12%; Forest City Enterprises, Inc., 6.87%; Brookfield Asset Management, 6.76%; Wheelock & Co., Ltd., 6.05%;
Hammerson PLC, 4.99%; Newhall Holding Co. LLC, 3.94%; CapitaLand, Ltd., 3.81%; Vornado Realty Trust, 3.70%; Hang
Lung Properties, Ltd., 3.55%; and British Land Co., plc, 3.09%.

12
PERFORMANCE DISCUSSION ten years. It should be noted that a ten-year comparison of
real estate indices to the S&P 500 Index might be
For the ten-years ended October 31, 2009, the Fund has
somewhat misleading because ten years ago the general
generated an annualized return to shareholders of 11.14%.
markets were in the midst of the technology bubble that
While Fund Management focuses on absolute
peaked in March 2000. However, a fifteen-year
performance and does not manage to a benchmark or
comparison (October 1994 to October 2009) reveals that
index, the following table illustrates the comparison to the
the Global Real Estate Index has outperformed the S&P
various real estate securities and general market indices*.
500 Index for this period as well (7.64% annualized versus
10-year
______ 5-year
_____ 3-year
_____ 1-year
_____ 7.32% annualized).
TAREX 11.14% 1.53% -10.86% 26.16%
DISCUSSION OF SIGNIFICANT QUARTERLY ACTIVITY
MSCI US REIT Index 9.12% -0.68% -15.82% 0.47%
FTSE EPRA/NAREIT
The Fund acquired Songbird Common in anticipation of
Global Real Estate Index 9.43% 3.38% -11.74% 22.79% participating in the company’s recapitalization efforts.
Songbird Estates is a U.K.-listed holding company whose
S&P 500 Index -0.95% 0.33% -7.02% 9.80%
sole asset is a 69.3% ownership stake in the privately-held
FTSE All-World Index -0.34% 2.16% -3.85% 24.50% Canary Wharf Group plc (“Canary Wharf”), a well-
The MSCI U.S. REIT Index is a widely followed index financed real estate operating company that owns 8
comprising the most actively traded U.S. REIT common million square feet of prime office and retail properties on
stocks. While the Fund has always had some exposure to the Canary Wharf Estate in East London (The “Estate”).
U.S. REIT common stocks (though never higher than The Estate also includes substantial land for future
50%), that exposure has been substantially reduced over developments. Songbird, itself, was not well-financed since
the last few years (5% at quarter-end). The FTSE its ownership stake in Canary Wharf was secured by a $1.5
EPRA/NAREIT Global Real Estate Index is a composite billion holding company loan that matured in 2010.
of the European, North American and Asian indices that Due to the decline in commercial real estate values in the
each contains publicly quoted real estate companies. The U.K., Songbird’s stake in Canary Wharf, prior to its
majority of the Fund’s common stock holdings are recapitalization, was determined to be worth only slightly
included in this index. The S&P 500 Index and the FTSE more than the total amount outstanding on the company’s
All-World Index are broad market indices that only have loan. Songbird negotiated a discounted payoff (95% of face
limited inclusion of real estate common stocks. Based on amount) with the lender and then raised $1.8 billion of
the comparison of real estate indices to general market fresh capital by issuing common and preferred stock. The
indices, it is clear that real estate common stocks have common stock was issued to existing shareholders through
significantly outperformed the general market over the last a highly-dilutive rights offering, and the preferred stock was

* Past performance is no guarantee of future results; returns include reinvestment of all distributions.
The MSCI US REIT Index is tracks the most actively traded US REITs and is designed to measure real estate equity
performance.
The FTSE EPRA/NAREIT Global Real Estate Index is designed to represent general trends in eligible real estate equities
worldwide.
The S&P 500 Index is an unmanaged index (with no defined investment objective) of common stocks. The S&P 500 Index is a
registered trademark of McGraw-Hill Co., Inc.
The FTSE All-World Index Series is the Large/Mid Cap aggregate of 2,700 stocks from the FTSE Global Equity Index Series.

13
taken up by China Investment Corporation. Songbird, the market. In addition, Sun Hung Kai has a growing
post-recapitalization, is now positioned as a conservatively presence in mainland China.
financed holding company. The company has also taken
Hysan is almost exclusively focused on Hong Kong. The
steps to simplify its ownership structure by converting all of
majority of the company’s value is in its 4 million square
its common shares into one unified share class.
foot portfolio of office, retail and serviced apartment
The Fund fully subscribed to the rights offering, which properties in the Causeway Bay sub-market in Hong
allowed it to increase its investment in Songbird Common Kong. Hysan controls the majority of the prime properties
at a discount to Fund Management’s estimate of net asset within this sub-market, which offers competitive rents for
value. Songbird – through its ownership stake in Canary office space and a centralized and accessible location for
Wharf – has decent prospects to increase its net asset value shoppers. Hysan is also actively redeveloping properties in
as Canary Wharf redeploys its $1.9 billion cash position by Causeway Bay and plans to open the Hennessy Centre in
undertaking development on the Estate and potentially 2011. This 710,000 square foot mixed-use property will
expanding its investment portfolio and development be financed from internal sources and should increase
activity into other London sub-markets at bottom-of-the- Hysan’s recurring cash flow by nearly 20% once the
cycle prices. development is completed.
The Fund also acquired Sun Hung Kai Common and The Fund eliminated several debt holdings during the
Hysan Common during the quarter. Similar to the Fund’s quarter, including Forest City Converts and Macerich
existing Hong Kong investments (e.g., Henderson Land, Term Loan. The Fund acquired Forest City Converts in
Wheelock & Co., Hang Lung Properties and Hong Kong October 2008 at an average price of 56.7% of par. In
Land), Sun Hung Kai and Hysan are both extremely well- September 2009, Forest City conducted an exchange offer
capitalized real estate operating companies that trade at with the largest holders of the notes who agreed to
discounts to net asset value (“NAV”), with strong exchange their notes for newly-issued convertible notes
prospects to increase NAV. with a longer maturity date and reduced conversion price.
The Fund agreed to exchange its notes and then sold the
Sun Hung Kai owns the most valuable portfolio of
new notes in a pre-arranged sale at 95% of par. The
commercial properties in Hong Kong and is recognized to
Macerich Term Loan was acquired in April 2009 at a price
be one of the premier developers of luxury residential and
of 72.9% of par. The loan was paid off at par between July
commercial real estate throughout Asia. The company’s
and September 2009.
portfolio is comprised of 26 million square feet of retail,
office and serviced apartment properties and includes In April 2009, the Fund sold $12.50 covered calls against
some of the most iconic properties in major international its position in Kimco Common. The calls expired in June
cities, with ownership stakes in the International Financial without the shares being called. The Fund again sold
Centre (“IFC”) and International Commerce Centre $12.50 covered calls that were “in the money” when they
(“ICC”) in Hong Kong and the Ion Orchard Mall in expired in October, resulting in the shares being called at
Singapore. Sun Hung Kai also controls a 24 million square $12.50. The Fund’s return on its investment in Kimco
foot agricultural land bank in the New Territories region of Common (after considering dividends received and
Hong Kong that should be a meaningful source of future premiums earned by selling calls) was more than 100% in
residential developments, given the supply constraints in approximately six months.

14
PORTFOLIO BREAKDOWN Portfolio holdings are subject to change without notice.
At October 31, 2009, the Fund’s investment portfolio, AVOIDING SHORT TERMISM
broken down by category, is as follows:
As highlighted above, at quarter-end, the Fund held cash
Percent and equivalents equal to 15.7% of Fund assets. In
Non-US: of Fund
addition, the Fund held 9.8% in performing debt
Real Estate Consulting/Management 1.3%
securities that have all appreciated substantially. Fund
Real Estate Investment Trusts 10.5%
Management considers these performing loans to be
Real Estate Operating Companies 41.5%
______ money-good and readily convertible into cash. Thus, the
53.3%
Fund is currently holding over 25% of its assets in reserve
United States: for future investment opportunities that may or may not
Real Estate Investment Trusts 5.1% present themselves. The obvious risk in holding substantial
Real Estate Operating Companies 16.1%
______ cash is that securities prices may continue to appreciate
21.2% while a large percentage of the Fund’s assets earn a very low
Debt Securities 9.8% yield (cash return is close to zero). This would result in
Cash and Equivalents 15.7%
______ meaningful short-term underperformance compared to
25.5% peers and industry benchmarks. Fund Management is
Total Portfolio 100.0%
cognizant of this “risk” and its potential impact on the
______
______ portfolio (Fund shareholders) as well as Fund
GEOGRAPHICAL DISTRIBUTION OF INVESTMENTS management’s business. The clear distinction between risk
to the “portfolio” and risk to the “business” is one that is
The Fund’s performance may be influenced by a foreign rarely highlighted by investment management firms.
country’s political, social and economic situation. Other risks
include currency fluctuations, political uncertainty, less Indeed, what is good for Fund Management’s business
liquidity, lack of efficient trading markets, and different may not necessarily be good for the portfolio. From a
auditing and legal standards. One or more of these factors “business” standpoint, holding excess cash in the portfolio
may result in more volatility for the Fund. could be interpreted by investors as a signal that (a) the
manager is lazy or (b) the manager has less conviction
At October 31, 2009, the Fund’s investment portfolio, about portfolio prospects (especially in a sector fund).
broken down by country, is as follows: These signals could lead to redemptions which directly
Percent impact the manager’s investment business. In the mutual
of Fund
______ fund business, managers are generally compensated based
Canada (Equity Securities) 5.6% on assets under management as opposed to performance
Canada (Debt Securities) 1.2% even though, ultimately, performance will dictate how
Hong Kong 22.9% much capital investors entrust with the manager.
Japan 7.3%
Singapore 3.8% From a “portfolio” standpoint, holding excess cash might
United Kingdom 13.8% lead to short-term underperformance, especially if the
United States (Equity Securities) 21.2% manager believes that the universe of cheap securities is
United States (Debt Securities) 8.6%
scarce despite being in the midst of a bull market rally. On
Cash and Equivalents 15.7%
____ the flipside, holding excess cash while securities are getting
100.0%
____
____ cheaper should clearly lead to short-term outperformance.

15
The manager who holds cash and waits patiently for to the more commonly known, “yield-to-maturity”. It’s
securities prices to get cheap (if they ever do) will be able hard to imagine that the bankers, analysts and mortgage
to put that excess cash to work and lay the foundation for underwriters at Lehman Brothers and other Wall Street
future long-term outperformance. banks were thinking about long-term returns during the
mortgage/housing boom that blew up in 2008. Does
All investment management businesses, including the Fund
anyone really believe that those Wall Street “stars” were
Manager’s, are unmistakably in business to make a profit.
thinking beyond their year-end bonuses?
As assets under management increase, generally, so does the
manager’s bottom line. The greed factor often can and does Not only are the portfolio managers at Third Avenue
create conflicts between the investment management Management owners of the business, but each has a very
profession (investment analysis and securities selection to substantial portion of his/her net worth invested in Third
generate returns for shareholders) and the investment Avenue’s mutual funds. Additionally, our portfolio managers
management business (gathering are not compensated based on
assets and generating fees). When “What drives our thought short-term performance or
a manager makes portfolio comparisons to peers or
investment decisions that impact
process is fear of losing benchmarks. The culture of being
the short-term performance of money…permanently. If our focused on long-term returns has
his/her business, those decisions time-consuming, skeptical served us very well for many years.
are more likely to have negative Our founder and chairman, Marty
long-term consequences for the analysis tells us that securities Whitman, has harped on us for
portfolio. are not safe enough and cheap years that if we stick to making
Here’s an example of what a short- enough, then we don’t invest. portfolio investment decisions that
are long-term focused, then our
term-focused manager might be We are not interested in making
business plan and ultimate growth
thinking: My portfolio cash
balances have been increasing lately speculative bets and we don’t of assets under management will
take care of itself over time – even if
because we sold some winners. In worry about missing out on we appear to be out of sync with
addition, our performance has
recently been above average and
opportunities in a hot market.” the general markets for extended
periods of time.
now investors are giving us more
capital to invest. In order to ride the wave of good fortune, we Fund Management may ultimately be wrong about its
need to get our portfolio fully invested (regardless of prices), concerns that U.S. commercial real estate is still facing
send out our army of sales and marketing people to tell strong headwinds and REIT common stocks are too
everyone how smart we are and encourage investors to put in expensive and too risky to warrant significant exposure in
more money while the market is hot. Our assets under the Fund. We may also be wrong about holding cash
management will grow and we will all get fat bonuses at the reserves in anticipation of finding bargains in the future –
end of the year. they may never materialize. What drives our thought process
is fear of losing money…permanently. If our time-
If the above dialogue sounds familiar, it’s because similar
consuming, skeptical analysis tells us that securities are not
dialogues have been going on for years on Wall Street –
safe enough and cheap enough, then we don’t invest. We are
short-term agendas based on “YTM”. In this case, the
not interested in making speculative bets and we don’t worry
acronym “YTM” refers to “yield-to-manager”, as opposed
about missing out on opportunities in a hot market. In

16
simple terms, our value investment strategy is based on a
thorough analysis of safety and price, comparing it to value,
and then investing with conviction. Speculation, on the
other hand, is based on “hope” that the price will rise without
any conviction that the price paid is lower than value.
Being conservative and missing out on a few percentage
points of market appreciation due to “cash drag” seems
much more palatable to Fund Management than the
opposite outcome (e.g., going along with the flow, being
fully invested without regard to price and safety, and then
getting punished along with everyone else). The latter
increases the risk that Fund shareholders will lose money
(permanently) and may have a dramatic long-term
impact on the manager’s business – neither of which is
acceptable.
SHAREHOLDER DISTRIBUTION
On December 22, 2009, a distribution of approximately
$0.27 per share (representing ordinary income) is to be
made to shareholders of record on December 21, 2009.
Shareholders, as always, have the option of receiving
distributions in either cash or newly issued shares of the
Fund.
I look forward to writing to you again, when we publish our
Shareholder Letter for the quarter ending January 31, 2009.
Best wishes for a healthy and prosperous 2010.
Sincerely,

Michael H. Winer
Portfolio Manager,
Third Avenue Real Estate Value Fund

17
Third Avenue International Value Fund
Principal Amount or
Number of Shares Increases in Existing Positions
175,338 shares Andritz AG Common Stock
(“Andritz Common”)
77,897 shares Rubicon Limited Common Stock
(“Rubicon Common”)
4,043,850 shares Viterra, Inc. Common Stock
(“Viterra Common”)
AMIT B. WADHWANEY 7,641,369 shares WBL Corporation Limited Common
PORTFOLIO MANAGER OF THIRD Stock (“WBL Common”)
AVENUE INTERNATIONAL VALUE FUND
Decreases in Existing Positions
Dear Fellow Shareholders: 1,036,132 shares Dundee Precious Metals, Inc.
Common Stock (“Dundee Common”)
At October 31, 2009, the audited net asset value 136,915 shares LG Corp. Common Stock
attributable to the 87,775,482 common shares outstanding (“LG Corp. Common”)
of the Third Avenue International Value Fund (the “Fund”)
Positions Eliminated
was $15.18 per share. This compares with an unaudited net
asset value of $14.27 at July 31, 2009, and an audited net 10,303,872 shares ABB Grain Limited Common Stock
asset value, adjusted for a subsequent distribution, of (“ABB Grain Common”)
$11.34 at October 31, 2008. At November 27, 2009, the $16,439,475 WBL Corporation Limited 2.5%
unaudited net asset value was $15.35 per share. Convertible Bonds due June 2014
(“WBL Converts”)
QUARTERLY ACTIVITY:
REVIEW OF QUARTERLY ACTIVITY
In the most recent quarter of operations, the Fund
established a new position in the common stock of one The new investment purchased in the Fund during the
company and added to positions in the common stocks of quarter was a position in the common stock of Resolution
four companies, while reducing positions in the common Limited (“Resolution Ltd.”). Both Resolution Ltd. and its
stocks of two companies and eliminating two other predecessor company, Resolution plc, were founded by
positions. insurance entrepreneur, Clive Cowdery, and his team.
Number of Shares New Position Acquired Resolution Ltd. aims to replicate the success enjoyed by
Resolution plc, which was active between 2003 and 2007.
4,836,223 shares Resolution Limited Common Stock
Resolution plc acted as an acquisition vehicle, buying life
(“Resolution Common”)
insurance companies and life insurance divisions of
financial conglomerates in the United Kingdom, before
* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue International Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of October 31, 2009: WBL Corp., Ltd., 7.28%;
Viterra, 7.24%; Netia S.A., 5.41%; Brit Insurance Holdings PLC, 3.39%; Yuanta Financial Holding Co., Ltd., 3.36%; Guoco
Group, Ltd., 3.21%; GuocoLeisure Ltd., 3.17%; United Microelectronics Corp., 3.06%; Compagnie Nationale A Portefeuille,
2.99%; and Seino Holdings Co., Ltd., 2.91%.

18
subsequently restructuring their costs and capital usage to SELL “DISCIPLINE” REVISITED
extract value. Resolution plc delivered outstanding
We previously discussed our sell discipline over five years
shareholder returns (net IRR of 28%) before eventually
ago, in the Shareholder Letter for the quarter ending July
being acquired by a competitor in 2007.
31, 2004. We believe it is worthwhile to revisit the topic
After the acquisition, Clive Cowdery and his team within the context of the current environment, for several
reassembled again in 2008 under the name Resolution reasons. For one, there seems to be renewed interest in the
Ltd. They raised money in an IPO in December 2008 (at subject of late among our shareholders. Also, given the
a time when capital markets were closed to almost all abnormally turbulent times recently experienced, we
companies) and are now in the process of completing their believe that it is beneficial to examine the implications of
first acquisition, of life insurance company Friends our approach for the execution of our investment strategy
Provident Group plc. Friends Provident is a subscale, not within such a backdrop.
particularly profitable, but overcapitalized life insurer.
Perhaps the most sensible way to begin our discussion of
Resolution Ltd. plans to acquire additional insurance
sell discipline is to revisit net asset value (“NAV”), and
companies in the United Kingdom, reduce their cost base
explain why we do not employ it mechanically as a “price
by combining operations, achieve scale, and release excess
target” at which to sell a security. Reasons why we do not
capital. Their track record demonstrates that the strategy
use NAV as a cut and dried signal to sell include the
can be carried out with positive results.
following:
Common shares of Resolution Ltd. are trading at a 30% • Our NAV estimates, while balanced in their
discount to pro forma embedded value1 after the merger assessment of the various factors that contribute to the
with Friends Provident. If for any reason the merger fails value of the underlying business, tend to veer toward
to close, the current price of Resolution Ltd. presents a 9% the conservative end of the spectrum, and often reflect
discount to the net cash on its balance sheet. The company the occurrence of “reasonable worst-case” estimates of
is extremely well financed and will remain so even after the valuation, while generally avoiding any blue sky
Friends Provident acquisition. Furthermore, cornerstone scenarios. We take comfort in investing in high-
investors committed to providing further equity financing quality, well-financed businesses at meaningful
intended to support future acquisitions and to protect the discounts to our very conservative estimates of NAV.
integrity of the company’s balance sheet. Our strict price consciousness can be characterized by
The two securities eliminated from the portfolio, ABB our willingness to invest only in those securities which
Grain Common and WBL Converts, have departed the we believe are attractively valued based on the here and
portfolio in name only, returning in a different guise. The now, rather than optimistic future forecasts which can
former was tendered to the takeover bid by Viterra Inc. – and often do – ultimately prove inaccurate. We do
with Viterra Common (and cash) being received as not “pay up” for the potential “optionality” of an
consideration; while the latter were converted into investment, in the event that the business environment
common shares which continue to be held by the Fund. or other factors might ultimately prove to be more

1
Embedded value is the present value of future profits on existing insurance policies plus adjusted net asset value (after deducting
goodwill). In other words, embedded value approximates a life insurer’s value if it were to stop writing new policies and simply
allow its existing policies to “run off.”

19
forgiving than our conservatism would suggest. potential hurdles to realizing these results. These are
Therefore, to sell prematurely at our estimated NAV circumstances which usually are supportive of securities
would be to lose the upside which might stem, for prices at egregious premiums to NAV, and have historically
example, from an abatement of the factors depressing the led us to a sale of the security. Examples of such sales
security price. Conversely, should such positive would include:
developments and future prospects for the company be •
Shortly after our purchase of its shares, Orient Overseas
more than amply reflected in an excessive valuation International Ltd. sold its port terminal assets at an
(usually far above our NAV estimate, which reflects an unusually elevated price, which greatly exceeded our
absence of euphoria), we will consider selling the security.estimate of the assets’ value. This transaction in turn led
• A second factor in our reluctance to employ NAV to the company’s stock price soaring to levels which
estimates as mechanical sell targets revolves around the valued the remaining container shipping business
observation that the NAV of a company is dynamic, and (which was facing a period of tremendous overcapacity)
a business run by a reasonably and real estate at levels that were
competent management team unambiguously expensive by most
should be able to increase its “An integral element of our yardsticks. Despite our relatively
NAV over a period of time. In short holding period (of less than a
addition to management’s investment approach is our year), the improbable scenario
efforts and competence, other continuous monitoring and re- being incorporated into the
elements, including changes in
the regulatory environment,
evaluation of the safety of our security’s sell it.
valuation prompted us to

industry developments, and a various investments against the • Another such sale was that of
variety of other exogenous likelihood of permanent shares of Smedvig ASA
factors, can affect the growth
of a company’s NAV over time. diminution in value stemming received a tender offer for the
(“Smedvig”) Common, which
Accordingly, the purchase of a from factors either internal or outstanding Common at a
security well below its assessed external to the company.” valuation above the de novo
NAV, followed by a holding replacement value of its assets. The
period over which the NAV argument being made to justify
increases (usually accompanied this unusual valuation was that the lack of shipyard
by appreciation in the price of the security), provides the capacity to supply rigs to a market which was short of
potential for the compounding of value while limiting drilling rigs, meant that a company owning such rigs
the impact of either transaction costs or taxation which would be valued at a premium to replacement value,
would accompany the increased turnover were sales reflecting its ability to garner premium day rates. This
made each time a stock price reached Fund was, in the case of Smedvig, a somewhat meaningless
Management’s conservative estimate of NAV. argument, given that a number of its rigs were on
That said, what then would be the factors which would long-term charter with fixed rates at the time, and the
result in the sale of a security? As noted above in the company would therefore not experience a meaningful
discussion about NAV, there are times when a stock price uplift in revenues during this somewhat finite window
incorporates what we believe are unrealistically optimistic of market tightness. The stock price, which was above
projections, typically while at the same time ignoring any the tender price, itself at a premium to replacement

20
cost for specious reasons, presented us with the Blue Ocean Re and Norton Re, which were both
opportunity for sale of this holding. Bermuda-based underwriters of reinsurance and
retrocessional insurance. When pricing weakened in mid-
An integral element of our investment approach is our
2007, both companies sensibly stopped writing new
continuous monitoring and re-evaluation of the safety of
business and returned the capital to the Fund, largely
our various investments against the likelihood of
within the previously contractually determined terms.
permanent diminution in value stemming from factors
either internal or external to the company. An example of Broadly speaking, the Fund is a long-term holder of
such a company was CSR Limited, where we became securities, and under normal circumstances there is
increasingly puzzled by the management’s inability to reluctance to sell except in the aforementioned
generate returns and realize value from its high-quality, circumstances; however, there are periodically non-
separable assets. The company’s management added to this investment factors which might dominate the sale
concern by choosing to address debt maturities looming decision, e.g., redemptions which might require the raising
15-18 months into the future via a rights issue, rather than of cash.
curbing capital expenditures (or extending their profile), or
We operate with a modicum of cash, though not merely
by modifying its dividend policy, which was unusually
with the view of being able to meet redemptions without
generous for the cyclical businesses in which it operated.
security sales. Cash holdings have also provided Fund
Signs of such inattention to (or apparent lack of
Management with the ability to invest as opportunities
comprehension of ) the business and the attendant
arise without having to fund these investments by sales of
missteps have typically led us to the sale of a security, as
other holdings. As a result, we are able to be as selective on
they did in the case of CSR Limited.
the sell-side as we are on the buy-side, and have been able
Resource conversion is another situation in which we part hold out for the appropriate valuations before effecting a
with a security or value is realized by means other than a sale. An example of this was our refusal to tender to an
market sale. The portfolio has had a long history of offer for our shareholding in Toll New Zealand (previously
holdings being taken over, which we have discussed in known as Tranz Rail Holdings), a company whose value
earlier letters. That said, we tend to be conscious of the (based on our estimate) was well above the NZ$1.10 per
underlying business or asset value underlying our securities share which was being offered in late 2003. Having a cash
holdings and are not always rapid to tender merely because cushion not only eliminated the need to sell, but it allowed
the bid is at a “premium to market.” We prefer to seek a us instead to increase our holding and hold out for a price
price which is reflective of the value that we, as which reflected the value of the business. We were thus
shareholders, would give up in an exchange. An example able to ultimately realize a more reasonable price of NZ$3
of a protracted tender offer related to our holding in per share in 2007.
Skandia AB (“Skandia”) Common, where we rejected the
The recent turbulent markets have not prompted any
bid as initially tabled, and the consideration ultimately
change in our modus operandi of buying, holding or selling
received after some iterations, while below our expected
as outlined above. Our focus has continued to be upon the
longer-term valuation, was much closer to it than what
identification of and investment in securities which are
had been initially tabled.
attractively valued and where there is low likelihood of
Another variation of the resource conversion approach to permanent capital impairment, with little or no attention
realizing value is the contractual liquidation and return of paid to general market fluctuations, other than to respond
capital to shareholders. This was the path followed by both

21
to opportunities to buy or sell which are sporadically Note that the table above should be viewed as an ex-post
provided when prices move to either extreme. listing of where our investments reside, period. As we
noted in our last letter, there is no attempt to allocate the
GEOGRAPHICAL DISTRIBUTION OF INVESTMENTS
portfolio assets between countries (or sectors) based upon
The Fund’s performance may be influenced by a foreign an overarching macroeconomic view or index-related
country’s political, social and economic situation. Other risks considerations.
include currency fluctuations, political uncertainty, less
SHAREHOLDER DISTRIBUTION
liquidity, lack of efficient trading markets, and different
auditing and legal standards. One or more of these factors On December 22, 2009, a distribution of approximately
may result in more volatility for the Fund. $0.22 per share (representing ordinary income) is to be
made to shareholders of record on December 21, 2009.
At the end of October 2009, the geographical distribution
Shareholders, as always, have the option of receiving
of securities held by the Fund was as follows:
distributions in either cash or newly issued shares of the
Percent Fund.
of Fund
_______
Canada 11.57% I will write you again when the report for the period to end
Singapore 11.11% January 31, 2010 is issued. Best wishes for a happy and
Japan 9.99% prosperous New Year.
Taiwan 6.42%
Hong Kong 6.04% Sincerely,
United Kingdom 5.48%
Germany 5.45%
Poland 5.41%
United States 4.95%
Belgium 2.99% Amit Wadhwaney
France 2.83% Portfolio Manager,
New Zealand 2.82% Third Avenue International Value Fund
Finland 2.61%
South Korea 2.31%
Chile 2.12%
Austria 1.56%
Bermuda 1.41%
Sweden 1.20%
Denmark 0.84%
______
Equities-total 87.09%
Cash & Other 12.91%
______
Total 100.00%
______
Portfolio holdings are subject to change without notice.

22
Third Avenue Focused Credit Fund

3) Reasons we believe our strategy is differentiated


and can take advantage of the inefficiencies in the
credit markets.
We will also provide a discussion of how the portfolio is
currently positioned, and where we see additional
opportunities going forward.
JEFF GARY Many clients have asked us why we launched this fund
PORTFOLIO MANAGER OF THIRD AVENUE now. Of course, we would have loved to have launched the
FOCUSED CREDIT FUND Fund on March 9th, which marked the low point in the
credit markets in 2009. However, Third Avenue has never
attempted to time the market; we are always focused on
Dear Fellow Shareholders: the long term. Third Avenue Focused Credit Fund is the
first new fund we have launched in almost a decade, as we
We want to thank each and every investor that has invested
do not establish new funds unless we know that we have a
in the Third Avenue Focused Credit Fund (the “Fund”,
unique investment strategy and expertise that can truly
“Focused Credit”). We view this as the beginning of what
create value for investors over the long term. Unlike other
will, hopefully, be a long partnership with you. We are
asset managers, who create new products to keep up with
pleased with the positive response the Fund has received
every new investment trend, Third Avenue does not move
since its launch on August 31st. As of October 31, 2009,
forward until it is certain that we have the talent,
the Fund had approximately $280 million in assets under
bandwidth, infrastructure and opportunity set to
management and 27,576,967 shares outstanding. Each
successfully support such an endeavor. So, although we are
and every member of the Fund management team is
disappointed to have missed some terrific investment
personally invested alongside you. We want to assure you
opportunities this spring, we are confident that we have the
that we are working diligently to identify solid investment
right team, structure, and investment approach to create
opportunities, with compelling risk-adjusted return
value for our fellow shareholders for many years to come.
potential, for the capital you have entrusted with us.
INVESTMENT OBJECTIVE AND FUND STRATEGY
Since this is the Fund’s initial Shareholders’ Letter, we want
to provide you with the following: The genesis for the Fund was driven by a market
opportunity in credit that Third Avenue had not seen since
1) An overview of the Fund’s Investment Strategy;
the early 1990s. As our colleagues have written about in
2) A description of our Investment Categories and the other Third Avenue Funds Shareholder Letters, debt
specific examples of securities in which we have became a bigger focus in 2008 and early 2009. Indeed, due
invested; and to our history and credit heritage, Third Avenue has always
had a proclivity to invest in credit and special situations.
However, what was occurring in the credit markets were,
* Portfolio holdings are subject to change without notice. As a new fund, listing all portfolio transactions would be quite
voluminous. Third Avenue Focused Credit Fund’s holdings, and the percentage of the total net assets each represented, as of
October 31, 2009, are included in our Annual Report.
23
as Marty Whitman so aptly put it, “investments of a 2) We focus our capital on our highest conviction ideas
lifetime.” Similarly, it was clear that you, our shareholders, based upon our fundamental credit research – the
were making inquiries about a credit only product. We Fund will normally have 50-70 investments;
believed that a differentiated credit fund with daily 3) The Fund has an opportunistic mandate that can
liquidity where the Fund Manager would pick the best invest in any part of the credit spectrum;
investments across the bank loan, high-yield bond and
busted convertible bond universe was the best structure. a. Bank loans, high-yield bonds, busted converts or
Clients also wanted some exposure to distressed distressed securities;
investments, given the higher default rates and Third b. Invest in the security with the best upside
Avenue’s twenty-three year track record of distressed potential versus downside risk;
investing. 4) The investment team must identify an event or
We designed the Fund to be differentiated from other catalyst to drive value and the security price higher.
credit and high-yield mutual funds in the following ways: The investment objective of the Fund is to generate total
1) The Fund utilizes a value-oriented investment return from a combination of capital appreciation and
process that relies on extremely thorough and interest income with a goal to achieve top quartile ranking
intensive fundamental research; within the universe of high-yield/credit managers..

INVESTMENT CATEGORIES AND EXAMPLES


There are five different types of investments that we analyze and invest in for the Fund. The following is a brief summary
of the five categories and an example of each one.
Core Opportunistic
Holdings Investments

Performing Stressed Capital Distressed Debt-for-Equity


Bonds and Loans Performing Credits Infusions Performing Credits Restructurings
Company with low Company with higher levels Investments include Market price implies a Company expected to
probability of default of uncertainty We normally Rescue, DIP “Debtor-in- higher probability of def ault restructure, in court or out-
purchase bank loans which Possesion” and Exit than TAM’s analysis would of -court
are over-secured, or Financing indicate
unsecured bonds that have
a maturity date within the
next two years

Performing Bond and Loan Example $33 billion ($5 billion of equity was used). The Fund owns
Hospital Corporation of America (“HCA”) – 9.625% Second-Lien Notes the 9.625% second-lien notes due 2016. While the 9%
HCA is America’s largest private healthcare system with yield to maturity at the time of purchase may not appear
166 hospitals and 105 surgery centers in 20 states. It overly attractive, there are several reasons to be positive on
provides approximately 5% of all hospital services in the the return potential for this bond. The bonds are secured
U.S. and have 183,000 employees and 35,000 affiliated by the assets of the company and offer significant
physicians. HCA was purchased in a leveraged buyout downside protection in the event of continued economic
(“LBO”) by KKR, Bain, and Merrill Lynch in 2006 for downturn. The securities we own have a ratio of less than

24
4.0 times debt to cash flow in an industry that values the company increased the interest rate on our Loan
companies at more than 7.0 times cash flow. HCA will from LIBOR + 325 basis points (approximately
likely also generate over $1 billion of free cash flow in the 3.65%) to a minimum of 8.25% plus we received a
coming year after paying interest expense and capital modest fee. This was a catalyst to drive the price
expenditures. This excess cash can be used to pay down higher.
debt or purchase assets to grow the company. The
Capital Infusion Example
company has limited maturities until 2012 and has over
Aleris International DIP Loan
$2 billion of cash and availability. HCA has recently filed
for a possible equity initial public offering that could Aleris is a global leader in aluminum rolled and extruded
further strengthen the balance sheet. In conclusion, HCA products, aluminum recycling and specification alloy
is a stable company with hard assets and low leverage production. Aleris is also a recycler of zinc and a leading
relative to total assets. U.S. manufacturer of zinc metal and value-added zinc
products that include zinc oxide and zinc dust. Aleris has
Stressed Performing Credit Example
a leading market share position. It is the number one
Swift Transportation – First-Lien Secured Term Loan
manufacturer of recycled zinc in the U.S., the number two
Swift is the largest truckload (“TL”) carrier in the United manufacturer of extruded products in Europe, the number
States, operating almost 17,000 tractors and 50,000 three manufacturer of aerospace plate and sheet globally,
trailers. The company boasts an impressive coast-to-coast the number four manufacturer of aluminum rolled
footprint, with 35 terminals in 26 states and Mexico. This products globally, and the #1 supplier of specification alloy
security appeals to us because: in the U.S.
• The TL industry is currently plagued by a Aleris filed for Chapter 11 bankruptcy protection in 2009
supply/demand imbalance. Carriers accelerated tractor and is expected to emerge from bankruptcy in the first half
purchases ahead of 2007 EPA emissions regulations, of 2010. We invested in the Aleris Debtor-in-Possession
even as demand fundamentals softened and remain (“DIP”) loan, which has a super-priority lien, ahead of the
weak today. This uncertainty enabled the Fund to pre-petition term loans, on all of its assets. The loan has an
purchase the loan at a significant discount to par; interest rate equal to LIBOR plus 10% with a maturity of
• The company’s $2 billion credit facility (inclusive of a less than one year and fees that are payable to the investor.
$300 million revolver, $1.5 billion term loan, and Aleris was taken private in an LBO transaction with a total
$175 million letter of credit) has first-lien security on value in excess of $3 billion. The maximum amount of the
substantially all of the firm’s assets, including tractors, DIP loan is approximately $500 million. Thus, we believe
trailers and terminals, which minimizes our potential we have limited downside risk with good total return
downside; potential.

• At the time of purchase, we believed that Swift could Distressed Performing Credit Example
be in technical violation of its bank covenants by Marsico Capital – First-Lien Secured Term Loan
September 30, 2009, which could mean an upward Marsico Capital Management is a top-notch investment
rate-adjustment to the loan. In late September, the advisor to various mutual funds, separate accounts and wrap
company negotiated an amendment with the lenders accounts under the Marsico, Columbia and other brand
to avoid a violation. This provided a catalyst to names. Through a LBO buyout, management of the
negotiate an increase in the interest rate. The result was company bought it for more than $2 billion from Bank of

25
America in the second half of 2007. The assets under Hopefully these examples have provided you with insight
management and cash flow at Marsico, like most asset into the rationale for our investments and the various types
management companies, fell in 2008 and early 2009 due to of securities in which we invest. It should also provide you
the decline in the equity markets and resultant redemptions. with additional knowledge to better understand why we
The underwriters of this LBO were unable to sell all of the believe our investment strategy is differentiated from that
debt in 2007 that they had agreed to provide on a bridge basis of other credit funds. We believe our strategy is well
to close the LBO deal. As the credit markets began to reopen positioned to add value through individual credit selection
in 2009, certain holders of the term loan tried to reduce their and to take advantage of the increased inefficiencies in the
balance sheet exposure to this and other loans. We purchased credit markets which we discuss below.
the first-lien bank loan at a very significant discount to par. It
INDIVIDUAL CREDIT SELECTION KEY TO FUTURE PERFORMANCE
was also at a meaningful discount to our estimate of intrinsic
value of this business and to the valuation of other comparable You may have heard the phrase, “This is a stock picker’s
companies. As a result of continued efforts by financial market”. Well, we believe that this is a “credit picker’s
institutions to sell down their credit exposures, we were able market”. We also believe there will be plenty of
to purchase the first-lien security in a very strong company at opportunities for good “credit pickers”, like the Fund,
prices that provided, in our opinion, very attractive upside which does not have any legacy or troubled portfolios, to
and minimal downside risk. add value and outperform the credit markets. This view is
Debt-for-Equity Restructuring Example based on the following:
CIT Group – Senior Unsecured Bonds due in 2010 • The “Beta” play in the credit markets has happened
this year. This means that it really didn’t matter which
CIT is a specialty finance company with businesses in
credit fund you invested in for 2009, you are probably
corporate finance, trade finance, vendor finance, and
pleased with the return;
Transportation Leasing of aircraft and rail cars. The business
came under pressure in 2008 and 2009 because of the • The riskiest securities with the highest probability of
closing of the capital markets, the ceasing of securitization default have performed the best, as evidenced by a
activity, and the lack of sufficient government support with nearly 100% return year to date in CCC-rated bonds
regard to liquidity and capital initiatives. (the riskiest category);
At the time of our investment, we believed there was a high • This means there is a smaller difference in general
probability the company would be forced to restructure its between the prices of securities with a lower
balance sheet, and our purchase price was a significant probability of default and those with a higher
discount to the net recoveries that would be realized to probability of default;
creditors pursuant to an orderly run-off of the book and/or • The credit markets have become meaningfully more
competitive sale process for certain business lines. inefficient in the past couple of years, as described in
You may have noticed that Marty Whitman and Ian Lapey more detail below.
also wrote about CIT in the Third Avenue Value Fund INCREASED INEFFICIENCIES IN THE CREDIT MARKET
Shareholder Letter. It is not uncommon for two or more
Third Avenue Funds to have overlapping investments, The credit markets have become increasingly more
evidence of the synergistic benefits of sharing resources and inefficient over the past several years for several reasons: a)
institutional knowledge among our 27 investment a significant increase in the size of the opportunity set to
professionals. choose from; b) a meaningful decrease in the number of

26
credit research professionals; and c) an increase in the PORTFOLIO POSITIONING AND STRATEGY
amount of time and expertise required to research The credit markets have obviously enjoyed a very strong
companies. rebound in 2009, after posting one of its worst return years
There are now over 3,000 companies in the bank loan, ever in 2008. There are reasons to be cautious as well as
high-yield and convertible universe from which to choose. optimistic about the outlook for the credit markets.
In addition, the bank loan market, which almost did not On the cautious side, the reasons include: 1) significant
exist when defaults last peaked in 2002, has boomed in size tightening and reductions in lending by many financial
to more than $750 billion. institutions, including the securitization markets, which
should last for several more years; 2) nearly $2 trillion in
Industrywide, there has been a dramatic decrease in the
debt maturities between 2010 and 2014 for high-yield
number of dedicated credit analysts. Almost every asset
bonds and bank loans, as well as commercial real estate
manager and sell side research department has cut staff by
loans which are held on banks’ balance sheets; 3) the over-
10-15%. In addition, three investment banks no longer leveraged consumer and a secular headwind that the peak
exist and many credit hedge funds have closed. spending years are now behind the Baby Boomers; 4)
The amount of time required and the complexity to municipalities across the country are running deficits and
research companies has increased substantially because: have to cut expenses; and 5) the 10+% unemployment rate.

• The economic downturn and 10+% default rates in The reasons to be positive include: 1) yields and spreads
2009 have substantially increased the number of are still wider than the long-term averages and not that far
defaulted issuers. Many other credit funds are having inside their previous two peaks of approximately 1,050
to spend substantial amounts of time to workout these basis points in 1990 and 2002; 2) returns for high yield
investments. and credit have historically been attractive from the time
that default rates peak until they meaningfully increase
• Many companies were taken private through LBOs. from the trough (we believe default rates are near the peak
Companies, such as TXU, Harrah’s, First Data and for this cycle); and 3) the credit markets have reopened to
Clear Channel, were researched by numerous sell-side allow companies to refinance some of their debt.
equity analysts and written research was readily
We believe the portfolio has an appropriate mix of offense and
available. Since this equity research is no longer defense. On the side of defense, we have investments in
available, it takes more time to perform independent performing secured bank loans, first-lien senior secured
research. bonds (equivalent to first-lien bank loans) and short-dated
• Analyzing and working out companies with complex unsecured bonds. We also have investments in industries
capital and corporate structures requires significant that are more defensive, such as telecommunications and
amounts of time and expertise. healthcare, as well as a low level of exposure to consumer-
oriented companies, especially retailers, restaurants and
The Fund has no legacy positions or troubled portfolios lodging, due to our concerns with the over indebted
that need to be worked out. We can focus all our efforts on consumer.
proactively identifying attractive investment opportunities
On the side of offense, we can summarize our investments
and managing our portfolio investments. Additionally, the
into several categories:
fact that we are limiting the focus of our research efforts
allows us to be more nimble. • Capital infusion deals;

27
• Investments in the energy and metals sectors, PORTFOLIO SORTED BY BOND VERSUS LOAN
including companies that could appeal to China as Percent
part of its continued quest to purchase natural resource of AUM
deposits to meet its future growth. First-Lien Secured Bonds 11%
• Certain companies that we believe will benefit from Second-Lien Secured Bonds 6%
the earlier stages of economic recovery, such as Unsecured High-Yield Bonds 32%
trucking, business travel and chemicals;
Total First-Lien Secured Terms Loan 23%
___
• Distressed and stressed investments.
Total Invested 72%
The following is a summary of how the portfolio was Cash 28%
___
positioned as of October 31, 2009.
Total Portfolio 100%
___
___
TOP 10 LARGEST INVESTMENTS BY COMPANY
Percent
Percent
of AUM
Name of Fund
PORTFOLIO SORTED BY PERFORMING/STRESSED/
Intelsat Jackson Holdings 3.4%
DISTRESSED, ETC.
TXU Corp 3.4%
Performing High-Yield Bonds 32%
Fortescue 3.1%
Performing Bank Loans 4%
Murray Energy Corp 2.8%
Stressed/Distressed Performing/
Nielsen 2.7% Capital Infusions and Debt-for-Equity 36%
___
HCA Inc. 2.7% Total Invested 72%
Digicel Group Ltd. 2.7% Cash 28%
___
Compton Petroleum 2.6%
Total Portfolio 100%
___
___
Hertz Corp. 2.6%
World Color Press Inc. 2.6%
____ The cash balance was 28% at October 31, 2009. This was
Top 10 Holdings 28.6%
higher than we had planned for when we launched the
____
____ Fund on August 31, 2009. The high-yield and credit
TOP 5 LARGEST SECTORS markets posted strong returns over the past two months.
The majority of the price increase came in the first two
Percent
Name of Fund weeks of September. As a result, the market prices of
several securities we wanted to buy quickly moved above
Energy 10.4%
our target price. We remained patient and disciplined,
Financials 8.6% sticking to our buy price rather than chasing the market.
Telecommunications 7.9% In some cases, the market price came back down to our
Metals & Mining 7.5% target price. In others, we have been able to identify
alternative attractive investment opportunities. Over the
Transportation 6.2%
____ next three months, we anticipate increasing our
Top 5 Industries 40.6%
____
____ investments in several of the areas we identified as

28
“offense”, including energy, metals, distressed and early $121 billion of high-yield debt has been issued. This has
stage cyclical companies. predominately been used to repay existing shorter-dated
bank and bond debt. As a result, the near-term maturities
FUTURE OPPORTUNITIES
of some companies have been pushed out. Nonetheless, we
As previously discussed, we believe there are plenty of note that the net debt position has not improved and, in
opportunities in both the near term and longer term for fact, free cash flow has deteriorated due to the relatively
the Fund to invest in and add value to the portfolio. higher interest rates associated with the new issuances. For
some companies, this will provide enough time for their
Good Opportunities Exist for Distressed Investments
businesses to grow into their overleveraged capital
Over the Next Several Years
structures. However, for others it will simply delay the
Notwithstanding that the high-yield market returned 49% liquidity event and need to restructure.
and the lowest-rated CCC debt issuances returned more
The following chart highlights that high-yield defaults
than 90% in 2009, we believe there are significant
occur on average 3.8 years following the issuance of lower-
investment opportunities for the Fund on the horizon. In
rated debt. Although the leveraged loan market was in its
particular, we believe we are still in the early-to-middle
infancy during the last distressed cycle, Fund Management
innings for distressed investment opportunities.
believes similar trends will exist. In fact, given the average
The strong high-yield markets have certainly enabled some LBO multiple of 6.7 times during 2007, it seems very
larger companies to temporarily delay the inevitable difficult for many of these companies to “grow” out of
default, while giving others a chance to grow into their what can only be described as materially overpaying for
capital structure. During the first nine months of 2009, businesses during the recent LBO boom.

29
Rising Defaults Typically Lag Increases in Higher Risk New Issuance

Lower Rated New-Issue Volume vs. High Yield Defaulted Debt


80
Lower Rated New Issuance
70 Defaulted Debt
60
50
$ Billion

40
30
20
10
0
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 YTD09

Avg. HYLBO
4.9x 5.0x 5.3x 6.5x 5.8x 5.5x 4.7x 4.8x 4.7x 5.2x 5.3x 5.8x 6.7x 6.5x --
Leverage
Source: JPMorgan; S&P/LCD, as of October 31, 2009
Note: Lower rated issuance includes bonds rated Split B or lower
Through mid-September, the market had experienced over several years, for both the high-yield and leveraged loan
$140 billion of defaulted debt between the high-yield and markets. While this default rate in percentage terms is
leveraged loan markets and we believe we are on track for lower than those of 2009 and the last distressed cycle, the
2009 to experience closer to $200 billion of defaulted high-yield and leveraged loan universe is far larger than
debt. Based on new, more optimistic projections for 2010, before, resulting in more defaulted debt than in all recent
JPMorgan projects the default rate will be 4% – or as years, as shown below.
much as $80 billion – and that it will remain elevated for
Default Universe Still Significantly Above Historical Levels Presenting Ample Opportunity

Default Volumes
193
200

180 Leveraged Loans


160 High Yield
142
140

120

100
82
80
64 63
60
49
40 35
26 28 29
20 10
9 9 4
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2009E 2010E
YTD
Source: JPMorgan, as of September 18, 2009.
Note: 2009E and 2010E default volume estimates based on median of JP Morgan, S&P/LCD, Credit Suisse and Moody’s forecasts

30
There is nearly $2 trillion in debt that matures over the estate loans, these loans will compete for capital in the
next five years as can be seen in the chart below. This market. Since many financial institutions are still trying to
includes commercial real estate loans held on banks’ deleverage their balance sheets, these loan maturities could
balance sheets, as well as high-yield bonds and leveraged swamp the amount of capital available.
loans. While we do not plan to purchase commercial real
Near-Term Maturities May Extend Default Cycle

Maturity Schedule
600
551 Commercial Mortgages
Owned by Banks/ Thrifts
500 Leveraged Loans

395 265 High Yield


400 379
326
$Billion

300
236
230 270
182 211
200 205 163
188 45 122
100 168 95 21 79
4 52
14 109 118 101
10 63 64 81 77
0 27

2009 2010 2011 2012 2013 2014 2015 2016 2017


Source: JPMorgan; S&P/LCD

Lastly, we note that our target universe for distressed and many of these companies; Third Avenue Management has
debt-for-equity investments can be best described as upper the resources and expertise to perform the in-depth
middle and middle market companies. This size is too analysis required to identify attractive investments in this
small for many large distressed funds, providing us with universe.
ample opportunities. Sell-side research is not available on

31
We See Significant Opportunity Sets

Breakdown by Issuer Size Breakdown of Loan Issuer Only


600 Leveraged Loans 180
169
$ Billion

$ Billion
High-Yield Bonds
502 160 150
500
140
425
394
400 120
231

182 100
88
300 197
78
80

200 243 173 60


159
271 61 40
91
100
197
112 20
68
0
0 0
< .3 .3 - 1 1-3 3 - 10 > 10 < .3 .3 - 1 1-3 3 - 10 > 10
$ B i ll io n $ B il li o n
Source: CreditSuisse, as of October 31, 2009

SHAREHOLDER DISTRIBUTION Best wishes for a happy and healthy New Year.
On December 22, 2009, a distribution of approximately Sincerely,
$0.14 per share (of this amount, approximately $0.13
represents ordinary income and approximately $0.01
represents short-term capital gains) is to be made to
shareholders of record on December 21, 2009. As always,
shareholders have the option of receiving distributions in Jeff Gary
either cash or newly issued shares of the Fund. Portfolio Manager,
Third Avenue Focused Credit Fund
Once again, we thank you for your confidence in the Fund
and for your time in reading our letter. We look forward to
communicating with you after the end of the next quarter.

32

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