taf 4q 2010 shareholder letters

8/8/2019 TAF 4Q 2010 Shareholder Letters

1/42

Thi rd Avenue Value Fund

Thi rd Avenue Sma ll -Cap Va lue Fund

Thi rd Avenue Real Estate Value Fund

Thi rd Avenue Internat ional Value Fund

Thi rd Avenue Focused Credit Fund

FOURTH QUARTER PORTFOL IO MANAGER COMMENTARY

October 31, 2010


2/42

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 individualportfolio 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, 2010 (except as otherwise stated), and are subject

to change without notice.

Third Avenue Funds are offered by prospectus only. Prospectuses contain more complete

information on advisory fees, distribution charges, and other expenses and should be read

carefully before investing or sending money. Please read the prospectus and carefully

consider investment objectives, risks, charges and expenses before you send money. Past

performance is no guarantee of future results. Investment return and principal value will

fluctuate so that an investors shares, when redeemed, may be worth more or less than

original cost.

If you should have any questions, please call 1-800-443-1021, or visit our web site at:

www.thirdave.com, for the most recent month-end performance data or a copy of the Funds

prospectus. Current performance results may be lower or higher than performance numbers

quoted in certain letters to shareholders.

M.J. Whitman LLC, Distributor. Date of first use of portfolio manager commentary

December 7, 2010.


3/42

Dear Fellow Shareholders:

November 1, 2010 marked the 20th anniversary of thelaunch of Third Avenue Managements (TAM) firstmutual fund, Third Avenue Value Fund (TAVF, Third

Avenue or the Fund). Muchhas been accomplished in the past20 years by TAM, in providingsound investment advice and goodresults for the shareholders of ourfive funds, registered under theInvestment Company Act of1940, as amended, and managed

by Third Avenue: TAVF, Third Avenue Small-Cap Value Fund,Third Avenue International ValueFund, Third Avenue Real EstateValue Fund and Third AvenueFocused Credit Fund. I amparticularly proud and pleased by what has been achieved by mypartners at Third Avenue and byall the employees of the firm. Theyreally are a remarkable bunch.

TWENTY YEARS OF VALUE INVESTING

When the Fund first reported to shareholders on October31, 1990, it had a portfolio of ten securities includingmunicipal bonds, corporate bonds, corporate preferred

stock and common stock. We suppose that many people

who read this letter will conclude that the portfolio isspeculative, we wrote. Certainly all the conventionalthinkers believe the Fund is speculative. We disagree.Unconventional, sure. But given the prices at which thevarious securities were acquired, and given the extensive, in-depth research that went into the decision-making processfor each investment, speculative versus conservative oughtnot to be measured only by what is cosmetically acceptable

and what ratings services say. Rating services andconventional thinkers pay no attention at all to price. Fromthe Third Avenue perspective, we believe that there oughtto be, at the least, a price component in measuring whetheran investment is speculative or conservative. There alsoought to be a quality of research component. Third Avenuewill try to stay conservative by these measures even thoughthe portfolio is unlikely to ever be cosmetically correct.

For two decades, a hallmark ofThird Avenues style has been thesearch for safety in places wheremost investors would never look.In a mutual fund industry that hasspawned narrower and narrowerniches in response to the teachingof Modern Capital Theory

(MCT) and the EfficientMarket Hypothesis (EMH),Third Avenue has charted aunique path. Guided by anadherence to price consciousnessand a deep understanding ofunderlying business fundamentalsand asset values, Third Avenue

managers have wide discretion toinvest where and when they deemit appropriate. The results have

been gratifying returns that beat the market most of thetime and over the long run. The experience has beenunique. TAVF and its investors are rarely, if ever, investedalongside the galloping herds.

1

MARTIN J. WHITMANCHAIRMAN OF THE BOARD

Letter from the Chairman

...given the prices at whichthe various securities were

acquired, and given theextensive in-depth researchthat went into the decision-

making process for eachinvestment, speculative versus

conservative ought not bemeasured only by what is

cosmetically acceptable...theportfolio is unlikely to ever be

cosmetically correct.


4/42

It was 1993 when the Value Fund first invested in Apple

Computer. This was back when Apples products served adecidedly niche audience and the company seemeddestined to, at best, maintain its position as a relativelysmall manufacturer of personal computers, if not to beoutright crushed by Microsoft and computermanufacturers making machines that ran its operatingsystems. When we initiated our position, we did not knowhow truly iconic and enduring a fixture Apple would

become. What we did know, from our fundamentalbottom-up analysis, was enoughto understand what the company was worth at the time and howthe market, in its momentaryignorance, had left its securitiesundervalued. Apple enjoyed asuper strong financial position.

TAVF invested in technologycompanies large and smallthroughout the 1990s. In almostevery instance, cash aloneexceeded total book liabilities.Our investments in smallersemiconductor capital equipmentstocks, brought to the firm by ourcurrent Chief Investment Officer,Curtis Jensen, led to the eventualformation of the Third AvenueSmall-Cap Value Fund. Weavoided the speculative dot comstocks of the day, (including newissues that we called schlock in 1999), but we didnteschew investing in technology. Instead we invested in well-capitalized semiconductor companies, those that built the

infrastructure of the Internet that endured, even as so manyInternet pure plays fizzled into the ether. Outsiders werequick to judge us for not joining the dot com frenzy, withsome wondering whether or not we were out of touch witha new era. We invested by the dictates of our philosophyand were ultimately vindicated. At the Value Fund we arenow looking at some larger, undervalued American

technology companies, as detailed by my co-portfolio

manager, Ian Lapey in his letter to TAVF shareholders.

In the wake 2001s shock to the U.S. economy, Third Avenue returned to its roots in distress investing. Weinvested in the high-yield debt of several troubledcompanies, seeking returns of 25% or more. We ownedunsecured debt in Kmart, which sought bankruptcyprotection in 2002. TAVF purchased common stock tohelp fund Kmarts reorganization. Michael Winer, co-

portfolio manager of the Third Avenue Real Estate Value Fund,determined that we were able topurchase Kmart common for lessthan the value of the companysreal estate. We exited our position when we believed the stock hadbecome egregiously overvalued.

In 2004 and 2005, TAVF beganmaking a number of overseasinvestments in common stocks,including companies such asSouth Korean steel producerPOSCO and also in Hong Kongreal estate and investmentcompanies. These remain in theportfolio today. At the time, wesaid that other things being equal,we would prefer to invest in thiscountry (the U.S.), but our priceconsciousness dictated that we

look abroad. Once again, price led us in the rightdirection. It now seems that any long-term investor should want to have a portion of their assets in companies

headquartered in and doing business in the Far East,including Hong Kong. TAVF became an excellent way togain that exposure through a portfolio of the strongestcompanies that are run by management teams whoseinterests are aligned with those of Outside Passive MinorityShareholders (OPMIs), even when those shareholders aresituated abroad. Third Avenue was able to make such

2

In an industry whereindependent thinking,

fundamental analysis andconviction-based investinghave been abandoned by so

many other managers, in orderto force their investment

strategies to match abenchmark or fit someone

elses mandate or style box, Iam proud to say that we have

remained true to ourinvestment philosophy for our

entire 20 years.


5/42

investments with confidence because we have a long

tradition of global value investing. Amit Wadhwaney, whowas an analyst for the firm when we first launched TAVF20 years ago and now leads a seasoned team ofinternationally focused analysts, had proven to me yearsearlier that our safe and cheap* investment philosophycould be applied to other geographic regions. We believethat our portfolio of non-U.S. securities proves that out.

A financial shock in 2008, that in retrospect made thebursting of the dotcom bubble seem quaint, led us to renewour commitment to distress investing once again. Many ofthe investments that we found and initiated during thosetroubled months are driving positive returns today. In2009, as the global credit markets began to recover, ThirdAvenue launched its only Fund dedicated solely to investingin debt securities. Managers Jeff Gary and ThomasLapointe bring Third Avenues unique, price conscious

view to those markets and have had a successful first year.

In an industry where independent thinking, fundamentalanalysis and conviction-based investing have beenabandoned by so many other managers, in order to forcetheir investment strategies to match a benchmark or fitsomeone elses mandate or style box, I am proud to say thatwe have remained true to our investment philosophy forour entire 20 years. Every step of the way we have eatenour own cooking, investing our personal money in ourfunds, alongside and on the same terms as you, our fellowshareholders. I guess that makes us biased. But we arebiased on your side.

EFFICIENT MARKET HYPOTHESIS REVISTED

While I have written about the subject many times overthe past twenty years, it seems productive to write to you

about the disparities that exist between the analyses thatgoes into the bulk of Third Avenue Managements (TAM)equity investments on the one hand, and the beliefs andanalyses that pertain to the efficient market hypothesis

(EMH) on the other hand. EMH is believed in by almost

all academics whether finance professors or economistsand probably by most mutual fund managers almost all ofwhom sign off on what is called MCT. Put simply, in theefficient market hypotheses, market prices for individualsecurities in markets populated by OMPIs almost alwaysreflect some sort of universally accepted value.

In the last quarterly letter, for the period ended July 31,2010, I discussed TAVFs investments in securities which Icalled Graham & Dodd net-nets on steroids. Thesesecurities account for about 60% of TAVFs net assets. TheGraham & Dodd net-nets on steroids virtually all have thefollowing characteristics:

The companies enjoy super strong financial positions.

The common stocks were purchased at prices thatrepresented at least a 25% discount from readily

ascertainable Net Asset Values (NAV), with theaverage discount probably closer to 35% to 40%.

The disclosures available to OPMIs were, and are,comprehensive, complete and understandable.

Past records of the companies were, and are, very goodwith most growing NAV (after adding back dividends)at compound rates during the previous five years of

better than 10% in fact closer to 15%. The prospects for growth in NAV in the next three to

seven years at rates better than 10% compoundedseem very good.

Current earnings and cash flows are strong.

There is one other very important characteristic commonto all these Graham & Dodd common stocks whose names

include: Brookfield Asset Management, CapitalSouthwest, Cheung Kong Holdings, Hang Lung Group,Henderson Land Development, Investor A/B andWheelock & Co. That other characteristic is that in eachinstance, there are little or no prospects for changes of

3

* Safe means the companies, in our judgment, have strong finances, competent management, and an understandable business. Cheapmeans that, in our judgment, we can buy the securities for less than what a private buyer might pay for control of the business.


6/42


7/42

5

to be quite profitable, unless the discount from NAV

widens very materially. So far, in the twenty year history ofTAM, the TAM analysts seem to have done a pretty goodjob of buying into the common stocks of companies withgrowing NAVs, the severe business recessions thatoccurred during this period notwithstanding.

Looked at from the bottom-up, it is hard to say that OPMImarkets reflect realistic values for going-concerns withperpetual lives from any rational point of view. Indeed, atTAM, we believe that without prospects for changes ofcontrol, market prices in Japan never have to be anything buta random walk. Thus, in recent years TAM funds havelightened up on their holdings of well-financed Japanesecompanies, because of the belief that managements andcontrol groups tend to be indifferent to the interests ofOPMIs. Therefore, Japans market prices never have to reflectany rational values because, generally, there are no prospects

for changes in control. (As an aside, it seems as if the absenceof change of control possibilities combined with theindifference toward OPMI interests have been importantcontributors to Japans twenty-year long recession).

The factors that OPMIs emphasize just do not reflectunderlying values for going concerns with perpetual lives.The factors emphasized by most OPMIs seem toencompass the following:

An extreme short run orientation. Short run marketprices are important. Try to pick price bottoms to buyand price tops to sell.

Emphasize the Primacy of the Income Account, at theexpense of paying attention to the qualitative andquantitative aspects of balance sheets.

Most market activity is undertaken by people with notraining, no talent and no time for fundamentalanalysis, e.g., high frequency traders and day traders.The underlying view is the market knows all certainly more than I do. Therefore study markets, notcompanies or the securities they issue.

Focus on the macro. It is much more important to have

views about the economy, general markets and interestrates, than it is to be bottom-up, i.e., focus on analyzingthe company and the securities the company issues.

Be outlook conscious at the expense of determiningwhether a security is priced at a discount from, or apremium above, underlying value.

Saying the above does not mean that there do not exist

OPMI markets that are highly efficient. It just means thatTAM does not, as a rule, play in those efficient markets.Efficient markets exist where short run price swings havegreat significance and where prices are determined byreference to a very few computer programmable variables.In my view, efficiency dominates in markets characterizedby the following:

Credit instruments without credit risk, e.g., U.S.

Treasuries. Derivatives, including options, warrants and

convertibles.

Risk arbitrage, with risk arbitrage being defined assituations where there will be relatively determinate workouts in relatively determinate short periods oftime, e.g., a publicly announced merger.

For an efficient market to exist, four conditions have to bemet:

1) The market participant is ignorant of, or chooses toignore, fundamental analysis for the medium to longterm.

2) The securities to be analyzed can be analyzed byreference to a few computer programmable variables.

3) Short-term price movements are of primaryimportance.

4) External forces impose a strict discipline on the marketplace. These external forces can be, among others,competition, government regulations, boards ofdirectors, labor unions, attorneys, accountants, andcommunity representatives.


8/42

6

Also, near-term price tends to become important when the

market participant finances his, her or its activities withborrowed money. No TAM entity uses borrowings. In theTAM scheme of things, we place much less weight onmarket prices than is the case in MCT.

Cash bailouts for securities holders come from three sources.

1) Payments by the company to creditors as interest,repayment of principal and premium. Equity payments

are in the form of dividends and share repurchases. If aTAM Fund owns a performing loan providing a doubledigit yield to maturity, market price is less relevant thanowning a non dividend paying common stock.

2) Sale to a market

3) Obtain elements of control. The value of control issomething almost completely ignored in MCT.

Sometimes market price even has a perverse value. Assumeone holds a portfolio of performing loans that is expandingin size and whose maturing obligations are always beingreinvested in new performing loans. Assume also that theliabilities financing the portfolio consist of non-interestbearing obligations, e.g., life insurance companies andpension plans. If the market value of this portfolioincreases, future net investment income will be less than

would otherwise be the case, because interest rates willhave come down. Concomitantly, if the market value ofthe portfolio decreases, future net investment income willbe greater than would otherwise be the case. One way oflooking at this is to state that cash return analysis issometimes quite different than total return analysis. Thereseems to be no recognition of the difference in MCT.

One of the things Fund Managements at TAM try hard to

do is to avoid permanent impairments to investments.Generally TAM seems to have done a reasonable job in thisrespect, with a very few notable exceptions, e.g., MBIACommon Stock.

The TAVF Portfolio of Graham & Dodd net-nets is quiteconservative. Certainly returns might be higher if the Fund

were willing to take more investment risk. This is not

going to be the case. TAVF is not going to be involved incertain areas:

Equities of companies that are basically in emergingmarkets.

Equities of companies which borrow heavily.

Companies that do not provide comprehensive,understandable, disclosures.

Start-ups.

Discovery companies.

MCT offers as proof of an efficient market the fact that noone outperforms relevant indices consistently. Consistentlyis a dirty word; it means all the time. TAM is happy if theFunds absolute returns are OK and if the Fundsoutperform relevant indices on average, most of the time

and over the long run. TAM will never outperform indicesconsistently.

The principles followed by TAM, as enumerated above, arenot restricted to value investing. Emphasizing underlyingcorporate values are also the tools of choice in distressinvesting, control investing and credit analysis.

My sincere thanks to my fellow shareholders who have been

invested in Third Avenue Value Fund since its inceptiontwenty years ago. I sincerely appreciate the trust you placewith me and my team; and we look forward to providingyou with superior long-term returns for many years tocome. Best wishes for a happy and healthy New Year.

Sincerely yours,

Martin J. WhitmanChairman of the Board


9/42


At October 31, 2010, the audited net asset value attributedto the 100,536,416 shares outstanding of the Third

Avenue Value Fund Institutional Class Shares (TAVF,Third Avenue, or the Fund) was $50.13 per share.This compares with an unaudited net asset value of $44.78per share at July 31, 2010; and an audited net asset valueof $43.46 per share at October 31, 2009, adjusted for asubsequent distribution to shareholders. At November 30,2010, the unaudited net asset value was $49.82 per share.

QUARTERLY ACTIVITY

Number of Shares New Position

1,000,000 shares Applied Materials, Inc. Common Stock(Applied Materials Common)

Positions Decreased

1,773,043 shares Brookfield Asset Management, Inc.Common Stock (Brookfield Common)

5,734,000 shares Cheung Kong Holdings Ltd. Common

Stock (Cheung Kong Common)

Number of Shares, Warrantsor Principal Amount Positions Decreased (continued)

2,000,000 shares Forest City Enterprises CommonStock (Forest City Common)

6,810,684 shares Henderson Land Development Co Ltd.Common Stock (HendersonCommon)

$33,370,000 MBIA Insurance Corp. 14% SurplusNotes (MBIA Surplus Notes)

2,931,700 shares Toyota Industries Corp. Common Stock(Toyota Industries Common)

6,200,000 shares Wharf Holdings Ltd. Common Stock(Wharf Common)

17,737,000 shares Wheelock & Co Ltd. Common Stock(Wheelock Common)

Positions Eliminated

496,800 shares Guoco Group Ltd.Common Stock(Guoco Common)

20,919,747 warrants Henderson Land Development Co Ltd.Warrants Exp. 6/11 (HendersonWarrants)

Portfolio activity during the quarter was focused onmaintaining a prudent cash position (approximately 5%),as the number of outstanding shares in the Fund declinedby 7%. As in prior quarters, all of the sales other than theMBIA Surplus Notes were for portfolio managementconsiderations rather than investment considerations. Thisquarter, Fund Management shifted its portfoliomanagement strategy and trimmed its largest holdings

(Cheung Kong Common, Henderson Common and

Third Avenue Value Fund

7

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Value Funds 10 largest issuers,and the percentage of the total net assets each represented, as of October 31, 2010: Cheung Kong Holdings, 14.47%;Henderson Land Development Co., Ltd., 13.73%; Toyota Industries Corp., 8.07%; Posco (ADR), 7.19%; Brookfield AssetManagement, Inc., 4.83%; Wharf Holdings, Ltd., 4.74%; Wheelock & Co., Ltd., 4.64%; Nabors Industries, Ltd., 4.58%;Investor AB, 4.14%; and Hang Lung Group, Ltd., 3.18%.

IAN LAPEYCO-PORTFOLIO MANAGER OF

THIRD AVENUE VALUE FUND


10/42

Toyota Industries Common). Previously, we had primarily

sold small, non-core positions.

Applied Materials is the worlds largest semiconductorcapital equipment supplier. The companys common stockhad been a long time Fund holding until September 2008,when it was sold along with most of the Funds other high-tech investments to meet redemptions. Since then, thecompanys business has performed well, particularly froma cash generation standpoint, and its stock price is downapproximately 20%. The company remains extremely wellfinanced with net cash of approximately $3 billion. Theshares were purchased at a modest multiple to free cashflow that appears to ascribe little or no value to itspromising solar unit. FundManagement is also evaluatingother former high tech holdingsfor possible purchase.

TAVF AND THE MACRO

Recently, I saw an article in TheWall Street Journal discussing thedifficulty most investors arehaving in a market that seems tobe dominated by macro forces.The headline and a few select

quotes are below: Macro Forces In Market

Confound Stock Pickers

The Wall Street Journal, September 24, 2010

More and more investors arent bothering to pore throughcorporate reports searching for gems and duds.

Stock picking is a dead art form. Macro themes

dominate the market now more than ever. JamesBianco

Its unbelievably frustrating. David Pedowitz

When you have securities that are all moving in thesame direction, that by its nature opens upopportunities. Cindy Sweeting

8

It was an amazing article that really highlighted how

different Third Avenue is from most investors. The focusof most investors on the macro has created greatopportunities for long-term, bottom-up value investorslike us. At Third Avenue, we use document intensiveresearch to identify common stocks of companies withextremely strong financial positions, attractive long-termbusiness outlooks and capable management teams. Wepurchase shares when they are trading at significant

discounts to readily ascertainable net asset value and thenhold for the long term (average annual turnover for TAVFwas 13% between 2000 and 2009).

According to the article, investors do not seem to bereviewing financials, which isexactly what we do at ThirdAvenue. If everyone were trying todo what we do, it would be much

harder and more competitive. Icertainly do not agree with Mr.Bianco that stock picking is a deadart form. In fact, I believe just theopposite there currently appearto be numerous opportunities forpatient bottom-up value investors.We also respectfully disagree with

Mr. Pedowitzs view that thecurrent environment is frustrating.As Ms. Sweeting indicates in the

quote above, when stocks all move together it creates greatinvesting opportunities.

Nevertheless, we certainly have been through a period when macro-economic forces have been very importantfor virtually all businesses, particularly during the Great

Recession and credit crunch of 2008 and 2009.Fortunately, our focus on only investing in common stocks with extremely strong financial positions enabled us tolargely avoid permanent impairments during this period,with the major exception being the bond insurers.

At Third Avenue, we usedocument intensive research to

identify common stocks ofcompanies with extremelystrong financial positions,

attractive long-term businessoutlooks and capablemanagement teams.


11/42

In fact, most of our holdings generated strong growth in

net asset value over the last five years, almost as if the GreatRecession and credit crunch never happened. For example,as the following graphs indicate, Posco (a Korean steelproducer), our Hong Kong-based real estate andinvestment companies, Brookfield Asset Management (aCanadian investment and asset management firm) and

Nabors Industries (a U.S. land driller) have generated

annual growth in reported book value of between 8% and19% over this period (including dividends). The commonstocks of these companies (including separately tradedoperating companies) accounted for approximately 60%of the Funds net assets as of October 31, 2010.

9

PoscoReported Book Value

1

17% CAGR2

150,000

200,000

250,000

300,000

350,000

400,000

450,000

2004 2005 2006 2007 2008 2009 6/10

1 In Korean won per share2 Including dividends3 TAM Estimate

19% CAGR2

$4

$6

$8

$10

$12

$14

2004 2005 2006 2007 2008 2009 6/103

Brookfield Asset Management

Reported Book Value

FIVE-YEAR GROWTH IN NAVS

Nabors Industries

Reported Book Value11% CAGR

$6

$8

$10

$12

$14

$16

$18

$20

2004 2005 2006 2007 2008 2009 9/10


12/42

Additionally, the following other significant holdings havereported respectable business results despite the GreatRecession and credit crunch:

Investor ABs reported net asset value has increased ata 6% annual rate over the last five years, including

dividends. Investor AB is a Sweden-based investmentcompany with holdings in European blue-chip stocksand private equity. Investor ABs common stockrepresented 4.1% of the Funds net assets, as ofOctober 31, 2010.

The Bank of New York Mellons two core businesses,asset servicing and asset management, have both

grown since the companys formation in July 2007. Asof September 30, 2010, the companys assets undercustody and assets under management had increased20% and 5% to $24.4 trillion and $1.1 trillion,respectively. Although the company incurredsignificant losses in its investment portfolio and

increased its share-count by 9%, book value per sharehas increased by 2% over the last three years. Thecompanys loan portfolio performed very well andcontinues to exhibit very attractive credit metrics andtrends. The Bank of New York Mellons common stockrepresented 3.0% of the Funds net assets, as ofOctober 31, 2010.

10

FIVE-YEAR GROWTH IN NAVS (continued)

Reported NAV

13% CAGR2

$30

$35

$40

$45

$50

$55

$60

$65

2004 2005 2006 2007 2008 2009 6/10

Henderson Land Development1

$70

$75

$80

$85

$90

$95

$100

$105

$110

2004 2005 2006 2007 2008 2009 6/10

Cheung Kong Holdings

Reported NAV

8% CAGR2

1

2

$10

$15

$20

$25

$30

$35

$40

2004 2005 2006 2007 2008 2009 6/10

Wheelock

Reported NAV

16% CAGR

1

Hang Lung Group

Reported NAV19% CAGR 2

$10

$15

$20

$25

$30

$35

$40

2004 2005 2006 2007 2008 2009 6/10

1

1 In Hong Kong dollars per share2 Including dividends


13/42

The businesses of the Funds common stock

investments in oil and gas exploration and productioncompanies (Cimarex Energy Co., Encana Corp. andCenovus Energy, Inc., whose common stocksrepresented 2.4% of the Funds assets, as of October31, 2010) have performed superbly. Each companyhas generated strong growth in production andreserves per share (proxies for net asset value). Mostimpressively, in late 2008, Cimarex used its strong

financial position to buy acreage from a distressedcompetitor in the Cana-Woodford shale play inOklahoma. This play has been an important driver ofCimarexs 29% production growth in 2010.

Toyota Industries had the worst business performanceover the last five years of the companies in whosecommon stocks the Fund has significant investments.Fund Management has been disappointed by both the

operating losses incurred by Toyota Industries andToyota Motor during fiscal 2009 and Toyota Motorsrecall issues in 2010. Nevertheless, Toyota Industriesreported net asset value has only declined at an annualrate of approximately 1% since 2005, and ToyotaIndustries and Toyota Motor continue to have strongfinancial positions. As of October 31, 2010, ToyotaIndustries Common traded at a discount of

approximately 40% to our estimate of net asset valueand represented 8.1% of the Funds net assets.

As the aforementioned article byThe Wall Street Journalnoted, 2010 has been a year in which there have beennumerous macro concerns for investors. However, FundManagement is comforted by the strong businessperformance of its holdings over the last five years andexcited by the potential for even better business

performance going forward.QE2 VS. TAVF HOLDINGS

On November 3rd, the Federal Reserve announced that itwould purchase $600 billion in Treasuries through June2011. The purchases will reportedly be of two to 10 yearTreasuries that currently yield between 0.5% and 2.9%

(the bulk of the purchases are expected to be of securities

with five- to six-year maturities, which currently yieldapproximately 1.5%).

At Third Avenue, we analyze investments from a creditorspoint of view, and, as such, I am somewhat perplexedabout the wisdom of the Federal Reserves action. Giventhe U.S. governments huge debt load and ongoing budgetdeficit, it would appear to make more sense to be issuingas much long-term debt as possible as opposed

repurchasing its low yielding debt. I am pleased that thestrongly-financed companies in whose common stocks theFund is invested seem to be following a much moresensible strategy by issuing long-term debt (and preferredstock) at very attractive rates. One of the benefits of havinga strong financial position is the ability to choose when toaccess the capital markets, and now seems to be anopportune time. Examples in our portfolio include the

following: Posco sold $700 million of 10-year notes in October at

a spread of 179 basis points to Treasuries(approximately 4.2%).

Brookfield Asset Management issued $1.4 billion ofcorporate debt and perpetual preferred stock at anaverage cost of 5% during the third quarter. The

company has also been refinancing mortgages onoffice buildings at even lower rates.

The Bank of New York Mellon issued $650 million infive-year 2.95% Senior Unsecured Notes in June.Since then, the Notes have appreciated above 104 andnow yield approximately 2%.

Nabors Industries sold $700 million in 10-year SeniorUnsecured Notes in September at a yield of 5.06%.

Henderson Land Development Co. entered into aHK$13.25 billion five-year term loan and revolvingcredit facility in June at a spread of only 78 basis pointsto the Hong Kong Interbank Offered Rate (HIBOR;approximately 0.25%).

11


14/42

Covanta Holding Corp. issued $400 million in Senior

Unsecured Notes in November at a yield of 7.25%.We believe that access to low cost long-term financing, asdemonstrated in the examples above, should enable ourportfolio holdings to accelerate net asset value growthgoing forward.

Best wishes for a happy and healthy New Year. I shall writeto you again when we publish our first quarter report

dated January 31, 2011.

Ian LapeyCo-Portfolio ManagerThird Avenue Value Fund

12


15/42

13


At October 31, 2010, the end of the Funds fiscal year, theaudited net asset value attributable to the 54,201,984

common shares outstanding of the Third Avenue Small-CapValue Fund (Small-Cap Value or the Fund) was $19.38per share, compared with the Funds audited net asset valueof $17.03 per share at October 31, 2009, adjusted for asubsequent distribution, and an unaudited net asset value atJuly 31, 2010 of $18.05 per share. At November 30, 2010,the unaudited net asset value was $19.84 per share.

QUARTERLY ACTIVITY

During the quarter, Small-Cap Value established one newposition, added to fourof its 62 existing positions, eliminated1 position and reduced its holdings in 21 companies. AtOctober 31, 2010, Small-Cap Value held positions in 53common stocks, the top 10 positions of which accounted forapproximately 32% of the Funds net assets.

Number of Shares New Position Acquired

180,000 shares Sanderson Farms, Inc.(Sanderson Common)

Number of Shares

or Face Amount Increases in Existing Positions

142,732 shares Broadridge Financial Solutions, Inc.Common Stock (Broadridge Common)

136,090 shares Ingram Micro Inc. Class A CommonStock (Ingram Common)

62,538 shares UniFirst Corp. Common Stock

(UniFirst Common)100,000 shares Wilmington Trust Corp. Common Stock

(Wilmington Common)

Positions Reduced

136,629 shares Ackermans & van Haaren N.V.Common Stock (AvH Common)

45,937 shares Alamo Group, Inc. Common Stock(Alamo Common)

367,479 shares Alexander & Baldwin, Inc. CommonStock (Alex Common)

702,216 shares Brookfield Asset Management, Inc.Common Stock (Brookfield Common)

3,650 shares E-L Financial Group, Ltd. CommonStock (E-L Financial Common)

10,630 shares Electro Scientific Industries Inc.

Common Stock (ESI Common)$5,000,000 Energy XXI Gulf Coast, Inc.

10.00% Senior Notes DueJune 15, 2013(EXXI Senior Notes)

60,762 shares Herley Industries, Inc. Common Stock(Herley Common)

57,779 shares Investment Technology Group, Inc.

(ITG Common)239,741 shares JAKKS Pacific, Inc. Common Stock

(JAKKS Common)

Third Avenue Small-Cap Value Fund

CURTIS R. JENSENCHIEF INVESTMENT OFFICER &PORTFOLIO MANAGER OF THIRD AVENUE

SMALL-CAP VALUE FUND

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Small-Cap Value Funds 10largest issuers, and the percentage of the total net assets each represented, as of October 31, 2010: Viterra, Inc., 4.99%; ParcoCo., Ltd., 3.29%; Lanxess AG, 3.28%; Tidewater, Inc., 3.18%; Kaiser Aluminum Corp., 3.14%; Bristow Group, Inc., 3.01%;

Alexander & Baldwin, Inc., 2.95%; National Western Life Insurance Co., 2.88%; Vail Resorts, Inc., 2.60%; and SapporoHoldings, Ltd., 2.59%.


16/42

Number of Shares or

Face Amount Positions Reduced (continued)50,241 shares Kaiser Aluminum Corp. Common Stock

(Kaiser Common)

236,367 shares K-Swiss, Inc. Common Stock(K-Swiss Common)

181,051 shares Lanxess AG Common Stock(Lanxess Common)

4,338 shares National Western Life Insurance Co.

Common Stock (NWLI Common)91,500 shares Parco Company Ltd., Common Stock

(Parco Common)

874,000 shares Sapporo Holdings Ltd., Common Stock(Sapporo Common)

239,663 shares Sycamore Networks, Inc. CommonStock (Sycamore Common)

674,990 shares Synopsys, Inc. Common Stock

(Synopsys Common)

276,029 shares Timberwest Forest Corp StapledUnits (Timberwest Units)

442,097 shares Wacker Neuson SE Common Stock(Wacker Common)

81,419 shares Westlake Chemical Corp. CommonStock (Westlake Common)

Position Eliminated

$9,740,000 MBIA Insurance Corp. 14%Surplus Notes (MBIA Notes)

QUARTERLY ACTIVITY

The Funds capital commitments during the quarter weremodest in scope and number, primarily reflecting FundManagements cautious stance in an environment of re-emerging risk appetite fueled, no doubt, by the Federal

Reserves reflationary exertions. Fund Management addedone new name and slightly increased its holdings in mostof the positions initiated last quarter. We also tookadvantage of the rapid and steep ascent of the equitymarkets to selectively re-size several holdings wherediscounts narrowed to less attractive levels, and to raiseslightly the Funds cash holdings.

Eliminated from the portfolio was the last of the Funds

arduous MBIA Surplus Notes investment. Despite theglobal economic turmoil of the past two years and terribledevelopments at the business level, the Funds capital waslargely protected, thanks in large part to that securityschunky 14% coupon.

When Mr. Market finds himself in one of those short-term,earnings-centric moods we, at Third Avenue, can often findinvestment opportunities in the stocks that he has knocked

aside. Sanderson Farms Common saw its share priceseverely dented by a clouded outlook for next yearsearnings. We have owned Sanderson in the Fund before; weknow the business and we know the management team.Founded in the late 1940s, Sanderson Farms is the nationsfourth largest poultry producer and is arguably the lowestcost producer in the industry. We view Sanderson as a highquality franchise within a mundane, commodity business.

Sanderson shares seem to exemplify much of ThirdAvenues investment philosophy. Both the business and thecompany boast a number of attractive attributes, including:

Generally high rates of return on assets and equity(on average and over time). Notably these enviablereturns have been achieved using little financialleverage and despite a host of volatile elementsattached to the operations;

A fortress-like balance sheet, with zero goodwill and anet cash position, in stark contrast to some of theindustrys financially constrained competitors;

High barriers to entry, via periodically significantcapital outlays and long-term customer contracts andrelationships. For example, the cost of a new plant likethe one currently under development by the company

can cost in excess of $100 million;

14


17/42

The companys capital spending appears to have been

productive and, historically, the business has requiredlittle in the way of access to external sources of capital;1

A management team that has consciously andadmirably avoided diworsification, e.g., diversifyinginto other proteins like pork or expanding throughdilutive acquisitions in other areas;

CEO Joe Sanderson and employees own more than12% of the companys stock, suggesting they thinkand act like owners, not just managers;

Efficient operations that protect the business indifficult periods and benefit from an ability to passthrough, with a lag, higher input costs. Managementseems closely attuned to its operational corecompetencies and intent on sticking to them;

Chicken appears to be a very competitive form of

protein relative to beef and pork, in particular, as itrelates to feed requirements (e.g., corn, soy and othercost components) and, over the last few decades, hasenjoyed relatively steady increases in per capitaconsumption, in contrast to other forms of protein;

The business does come with some blemishes, however,most of which are out of managements control. Forexample, China and Russia, two key export markets,periodically impose tariffs or quotas on certain types ofU.S. chicken parts2. Similarly our governments policies(e.g., in the areas of energy or U.S. dollar debasement)tend to exacerbate the spikes in corn and similarcommodity prices (which negatively impacts producersnot only of chicken but of beef and pork as well). I callSanderson a one-step back and two steps forward kind of

15

1 Sanderson opportunistically raised equity earlier this year at $53 per share, only the second time in more than twenty years forthe company to issue equity in the public markets, in order to help fund the development of two new plants.

2According to Sanderson management, the industrys shipments of broiler pounds to China and Russia in the first half of 2010declined by nearly 87% and 90%, respectively. In 2009 China and Russia accounted for more than 40% of the export marketfor U.S. producers.

3 Book value seems like a useful measure of value and potential for growth in a business where inventory and plant andproperty comprise so much of the assets. As a much more stable measure of value over time book value also tends to be asuperior measure to Sandersons highly variable earnings.

4 Many online sources attribute this quote to Churchill, but the original source of the quote has eluded me.

business. Given time, the business has developed well, but

not without temporary setbacks. Today, that backwardstep primarily relates to i) weakened demand from foodservice customers (think high unemployment levels); ii)squabbling with Russia and China (for the moment,Russian exports have resumed); and iii) upward pressureon corn and soy prices. These problems tend to come withthe territory, but the pain is usually temporary. Lookingfurther out, Sandersons large current capital spending

program will taper off and ought to increase the companysearning power in the next two to three years, suggestingfurther growth in corporate value. Stock returns will get aboost to the extent that management can continue to raisethe dividend as it has in each of the past few years. TheFunds cost basis equates to a modest premium to a rocksolid GAAP book value, a book value that, at a per sharelevel, has compounded at double digit rates during the pastfive and seven years3. As a less meaningful point ofreference, the Funds initial acquisition price translated toapproximately seven times 2010 earnings.

PERFORMANCE AND LOOKING FORWARD

Winston Churchill allegedly quipped, However beautifulthe strategy, you should occasionally look at the results4.This is the time of year when we take Churchills words toheart, both in terms of the current year and, much more

importantly, on a longer-term basis. As Fund managers wethink of performance in two general categories. In order ofimportance and weighting they include:

1. Absolute performance. How did the Fund fair againstreturns in risk free assets like Treasuries? How has theFund done against realistic measures of inflation?


18/42

16

CUMULATIVE THREE-YEAR CONTRIBUTION,

as of October 31, 2010Sapporo Holdings (2.6%)

Parco Co. Ltd (1.9%)

Cross Country Healthcare (1.5%)

Timberwest Forest Corp (2.2%)_____

Total (8.2%)

These four securities alone canaccount for morethan the currentdifferences between the Fundsreturns and those of the indices.With these sorts of headwinds, afuller recovery has been difficult.In hindsight these investmentswere mistakes at the prices paidbythe Fund. The natural question

this invokes is, So what are youdoing about it? We have torespond in two ways. First, wehave to reappraise these holdingsin the current environment and attheir current prices. For FundManagement, investors and thoseconsidering a purchase of the

Fund today, the key question ishow do these companies look objectively from this point

forward, based on the facts we know today? Second, we haveto evaluate our methods and procedures and improvethem to reduce the likelihood that such mistakes will berepeated in the future.

We believe, as we always have, that buying well financed andreasonably managed companies, with improving or

attractive long-term fundamentals, at a wide discount to

2. Relative performance. How do the Funds results

compare with alternatives to the Fund like passivelymanaged index funds and exchange traded funds?

In both categories our performance in the short tomedium-term (say one to five years) has not met ourexpectations. The Funds five-year return of 2.1%, for theperiod ended October 31, 2010, is less than the returns of16.6% and 16.3%, for the S&P600 Index5 and Russell 2000

Index6, respectively. However, on along-term basis, the Fund succeedsin achieving its investmentobjectives, while outperforming ona relative basis, as well. The Fundreturned 99.1% for the 10-yearperiod ended October 31, 2010,compared to 88.8% and 61.2%

for the S&P 600 Index and Russell2000 Index respectively.

So what happened during themedium term where the Fundsresults have lagged? The three-yearresults include one of the markets worst downturns and the Fundhas yet to fully recover. Just as a

starting point, we can look at afew holdings that have detracted the most from the Fundsperformance during this period. These include:

5 The S&P Small Cap 600 Index is a unmanaged index of common stocks which covers the small-cap segment of the U.S.equities market, covering approximately 3% of the U.S. equities market.

6 The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which representsapproximately 8% of the total market capitalization of the Russell 3000 Index.

The Indices are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. Thereturns include reinvestment of interest, capital gains and dividends.

However, on a long-termbasis, the Fund succeeds inachieving its investment

objectives, while outperforming on a relative basis,

as well. The Fund returned

99.1% for the 10-year periodended October 31, 2010,compared to 88.8% and

61.2% for the S&P 600 Indexand Russell 2000 Index

respectively.


19/42

17

intrinsic value ought to protect our downside and improve

our odds of success. Our philosophy, therefore, has notchanged but, as noted to in our January shareholder letterreferencing The Checklist Manifesto we have madeprocess and execution a focus in 2010:

Re-weighting our Criteria. When we do post-mortems on investments it is fair to say that,historically, in the majority of cases where we made amistake, we over-emphasized valuation and gave less

consideration to deteriorating business fundamentalsor bad management decisions. As a result, we haverefined the analytic weightings of our investmentcriteria and tend to reassess more rigorously beforeadding to a position;

Position Size / PortfolioMonitoring. Overweighting ofpositions, and not adjusting

them to match the Funds sizeand composition, has also beenanother important element inperformance attribution.Taking Sapporo and Parco asexamples, both of these largeholdings were added at a time,three years ago, when the Fund

was much bigger than it is today and the positions weresized accordingly (i.e., large positions in a larger fund).Ultimately, we failed to resize these positions in a timelyfashion and their large weighting in the portfolio had anoutsized negative impact on returns. We have made it aregular practice to limit and review position sizes andtheir potential impact on the portfolio.

Improved Idea Generation and Monitoring. We have

implemented, what we believe to be, a more systematicmeans of originating ideas and processing them andbrought more rigor into monitoring our inventory ofideas. Looking at the new ideas implemented in the Fundthis year, for example, it is apparent to me that our battingaverage continues to improve.

MACRO MYOPIA SPELLS OPPORTUNITY

Bernanke & Co. have just embarked on their secondversion of Quantitative Easing (QE2), the euphemisticterm that involves printing money in order to monetize ournations growing and substantial debts. The sheer size ($600billion) and target (long-dated Treasury notes and bonds) ofthe program puts our policy makers in uncharted waters.The Fed believes that its program will boost asset prices in everything from homes to stocks and bonds enhance

consumer confidence and spur greater consumption (theso-called wealth effect). As bottom-up, value-orientedinvestors, we have little ability to predict the success of suchan undertaking. But one observation seems fair: these

programs can distort the normalprice signals in the economy andencourage speculation in riskyassets. Mispriced credit in one part

of the world, for example, not onlythreatens the proper allocation ofscarce resources within that regionbut has the potential toinadvertently ricochet into othereconomies with unintendedconsequences. Coupled with thewaves of uncertainty flowing out of

Washington whether it is in the realm of health carereform, financial regulation or energy and tax policy it isnot at all clear whether the siren song of QE2 and theassociated rise in asset prices will translate into lastingbenefits in the real economy. Given this backdrop, it is notsurprising that pessimism and uncertainty have, at times,had a stranglehold on the markets. But two things reallystand out for me this year. First, I cant remember a period when I have gotten more questions from investors andclients about macro issues than we have gotten this year.Second, as alluded to in my last letter Uncertainty andFixed Income Fever, the continued stampede by retailinvestors into the Beta play of fixed income, seeminglywithout regard to credit or duration risk, looks like a herdabout to run off a cliff. Selective opportunities exist within

I dont think there has everbeen a better time to be a

stock picker, when so manyare focused on the macro

outlook, political uncertaintyand market volatility.


20/42

18

the broad fixed-income asset class, e.g., High Yield; but,

investors must be cautious. While the herd seeks shelterfrom the macro storms, successful investing is rarelyachieved by following the herd.

Investors buying long-dated Treasuries today have to beconcluding that the next five to 10 years will look a lot likethe past and that equities, generally speaking, look asunattractive as they did 10 years ago. This is a classic mistake projecting future performance based on the past. I think

the same type of mistake could be made by investors aboutthe Small-Cap Value Fund the future will not look like therecent past. We expect it to look a lot better.

With a portfolio of high quality, well financed andreasonably managed companies that currently tradesaround book value6 one of the lowest valuations in the13-year history of the Fund and a renewed focus onexecution, we have many reasons to be optimistic aboutthe future of the Fund. About 12% of the Funds assetscurrently sit in cash and short-term Treasuries. That cash,a by-product of our investment process, offers the Fund acushion against short-term downturns in the market andenables Fund Management to act quickly when it seesopportunity. I dont think there has ever been a better timeto be a stock picker, when so many are focused on themacro outlook, political uncertainty and market volatility.

On December 21, 2010 a distribution of approximately

$0.18 per Institutional share and $0.16 per Investor share(representing ordinary income) is to be made to shareholdersof record on December 20, 2010. Shareholders, as always,have the option of receiving distributions in either cash ofnewly issued shares of the Fund.

I look forward to writing you again in the New Year whenwe publish our First Quarter Report, dated January 31,2011. May you and your families enjoy a healthy and

prosperous New Year. Thank you for your continuedsupport.

Sincerely,

Curtis R. JensenChief Investment Officer and Portfolio Manager

Third Avenue Small-Cap Value Fund

6 For reference, the comparable measure for the Fund three years ago was 1.6 times.


21/42

19


We are pleased to provide you with Third Avenue RealEstate Value Funds (the Fund or TAREX) shareholder

letter for the fiscal year ended October 31, 2010. Thisreport marks the Funds twelfth full year of operationsince, its inception on September 17, 1998. It also marksthe beginning of shared portfolio managementresponsibilities, as Jason Wolf has recently been named co-portfolio manager of the Fund.

At October 31, 2010, the audited net asset valueattributable to the 72,065,051 shares outstanding of theThird Avenue Real Estate Value Fund Institutional Class was $22.93 per share. This compares with the Fundsunaudited net asset value of $21.00 per share at July 31,2010, and an audited net asset value, adjusted forsubsequent distributions to shareholders, of $19.60 pershare at October 31, 2009. At November 30, 2010, theunaudited net asset value was $22.60 per share.

QUARTERLY ACTIVITY

The following summarizes the Funds investment activityduring the quarter:

Principal Amount,Notional Amount or

Number of Shares New Positions Acquired

$100,000,000 Lehman Brothers Holdings SeniorUnsecured Notes (3 issues)(Lehman Notes)

2,634,908 shares Bellway plc Common Stock(Bellway Common)

1,850,298 shares First Industrial Realty Trust CommonStock (First Industrial Common)

104,966 shares General Growth Properties, Inc.Common Stock(General Growth Common)

5,000 contracts written Lennar Corp. December 2010 $14 Puts(Lennar Puts)

669 contracts written The Ryland Group, Inc. November 2010$15 Puts (Ryland November Puts)

Third Avenue Real Estate Value Fund

MICHAEL H. WINERCO-PORTFOLIO MANAGER OF THIRD

AVENUE REAL ESTATE VALUE FUND

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue Real Estate Value Funds 10largest issuers, and the percentage of the total net assets each represented, as of October 31, 2010: Forest City Enterprises, Inc.,7.19%; Brookfield Asset Management, 6.49%; Henderson Land Development Co., Ltd., 6.41%; Vornado Realty Trust, 4.48%;Hammerson PLC, 4.15%; Wheelock & Co., Ltd., 3.73%; Capitaland, Ltd., 3.60%; Sun Hung Kai Properties, Ltd., 3.13%;Hysan Development Co., Ltd., 3.13%; and Newhall Holding Co. LLC, 2.91%.

JASON WOLFCO-PORTFOLIO MANAGER OF THIRD

AVENUE REAL ESTATE VALUE FUND


22/42

Principal Amount,

Notional Amount orNumber of Shares New Positions Acquired (continued)

10,000 contracts written The Ryland Group, Inc. December 2010$14 Puts (Ryland December Puts)

3,000 contracts written Vornado Realty Trust November 2010$90 Calls (Vornado November Calls)

11,628,710,000 Japanese Yen / U.S. Dollar ForwardForeign Currency Contract

(JPY/USD Forward)Increases in Existing Positions

90,637 shares Henderson Land Development Co. Ltd.Common Stock (Henderson Common)

1,394,345 shares Lennar Corp. Common Stock(Lennar Common)

7,785 shares NTT Urban Development Corp. CommonStock (NTT Urban Common)

1,503,908 units Prologis European Properties CommonUnits (PEPR Common)

2,891,498 shares Songbird Estates Plc Common Stock(Songbird Common)

1,496,097 shares Weyerhaeuser Company Common Stock(Weyerhaeuser Common)

Position Reduced

26,506 shares Klepierre Common Stock(Klepierre Common)

Positions Eliminated

$20,000,000 Developers Diversified Realty 3.0%Convertible SeniorNotes due March 2012(Developers Senior Notes)

Principal Amount,

Notional Amount orNumber of Shares Positions Eliminated (continued)

$25,000,000 Macerich Company 3.25% ConvertibleSenior Notes Due March 2012(Macerich Senior Notes)

$9,929,000 Prologis 1.875% Convertible SeniorNotes Due November 2037 (PrologisSenior Notes)

7,571,000 shares Hang Lung Properties Ltd. CommonStock (Hang Lung Common)

95,600 shares Unibail-Rodamco SE Common Stock(Unibail Common)

$80,000,000 Japanese Yen Currency Put - 95strike, expires January 2011 (YenCurrency Put)

5,000 contracts exercised Lennar Corp. August 2010 $16 Puts

(Lennar August $16 Puts)5,000 contracts exercised Lennar Corp. August 2010 $17 Puts

(Lennar August $17 Puts)

14,950 contracts expired Prologis August 2010 $10 Puts(Prologis August $10 Puts)

9,967 contracts expired Prologis October 2010 $10 Puts(Prologis October $10 Puts)

2,980 contracts expired Public Storage September 2010 $75Puts (Public Storage Puts)

4,300 contracts expired Vornado Realty Trust September 2010$90 Calls (Vornado September Calls)

20


23/42

PERFORMANCE DISCUSSION

Although the Fund is not managed to an index, we areaware that many investors seek to measure Fundperformance to benchmarks. The following tablecompares the Funds returns to the commonly followedreal estate securities and general market indices, as of theFunds fiscal year ended October 31, 2010.

Since 10- 5- 3- 1-

Inception1 year year year year

TAREX 11.5% 10.3% 1.5% -8.4% 16.9%

MSCI US REIT Index2 10.4% 11.3% 3.3% -5.0% 43.5%

FTSE EPRA/NAREITGlobal Real EstateIndex3 11.1% 10.7% 4.1% -9.3% 24.8%

S&P 500 Index4 3.0% 0.0% 1.7% -6.5% 16.6%

FTSE All-World Index5 3.2% 0.7% 2.0% -6.7% 14.8%

As indicated above, the Funds long-term track recordcompares favorably to the widely followed real estatesecurities indices and general market indices. Real estatesecurities have outperformed the general markets by a widemargin over the past decade. The Funds absoluteperformance for the past twelve months (up 17.0%),under normal circumstances, seems pretty good. Thedisparity in recent performance relative to the real estate

securities indices is attributable to Fund Managementscontinued skepticism about allocating substantial capitalto U.S. REIT common stocks based on the view that,fundamentally, the stocks generally do not meet our safeand cheap* criteria. That view has not changed.

Adhering to our discipline and refusing to get caught up in

the momentum building up around U.S. REIT stocks hascost the Fund in terms of relative performance over the lastyear. This near-term underperformance has also impactedthe Funds three-year and five-year results. But over itstwelve-year history, the Fund (like most true value funds)has gone through periods (sometimes extended periods) ofunderperformance due to Fund Managementsconservative view and disciplined focus on protecting thedownside. The Fund has historically underperformed inperiods of rapidly rising REIT stock prices. But over thelong term, those periods have self corrected and the Fundhas generated above-average absolute returns with (in FundManagements opinion) significantly lower investment risk.We refer to this as the sleep at night factor.

The indexes that investors use to judge the Funds relativeperformance are heavily weighted towards U.S. REITs,

while the Funds portfolio is determined by Managementsbottom-up fundamental analysis of real estate and realestate related companies worldwide. The Funds mandateis more flexible than investors will find in most 1940Act real estate mutual funds, which are often required toinvest in REITs no matter what the fundamental picturelooks like.

The MSCI U.S. REIT Index is comprised entirely of U.S.

REIT common stocks. The FTSE EPRA/NAREIT GlobalReal Estate Index includes common stocks of North American, European and Asian real estate companies,including approximately 40% weighted to U.S. REITs.Over the past year, the Fund has had less than 6% invested

21

1 Inception date of the Fund was September 17, 1998.2 The MSCI US REIT Index is a widely followed index comprising the most actively traded U.S. REIT common stocks.3

The FTSE EPRA/NAREIT Global Real Estate Index is a composite of the European, North American and Asian indices thateach contains publicly quoted real estate companies.4 The S&P 500 Index is an unmanaged index (with no defined investment objective) of common stocks designed to measure

performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all majorindustries.

5 The FTSE All-World Index Series is the Large/Mid Cap aggregate of 2,700 stocks from the FTSE Global Equity Index Series.* Safe means the companies, in our judgment, have strong finances, competent management, and an understandable business.

Cheap means that, in our judgment, we can buy the securities for significantly less than what a private buyer might pay forcontrol of the business.


24/42

in U.S. REIT common stocks, which are currently trading

at a 22% premium to net asset value and a 19.6 multipleof AFFO6,7. As a reference, ten years ago, REIT stocks weretrading at roughly an 11% discount to net asset value anda 9.2 multiple of AFFO. Over the ensuing five years, U.S.REITs generated a total return of nearly 20% annualized.Five years ago, REIT stocks were trading at a 2% discountto net asset value and a 17.2 multiple of AFFO. Over thelast five years, U.S. REITs generated a total return of only3.3% annualized, despite the recent short-term run-up inREIT prices.

In Fund Managements opinion,the spectacular performance ofU.S. REITs over the past twelvemonths is not necessarily relatedto improvements in commercialreal estate fundamentals. In fact, it

is difficult to find statistics thatillustrate economic fundamentals(e.g., jobs growth, vacancy rates,rental rates, etc.) in the U.S. areimproving. Stock market volatilitycoupled with the prospects thatinterest rates will remainhistorically low has driven marketparticipants to seek the safety ofinvestments that offer apredictable yield. Fund Management believes that U.S.REITs (at current near-all-time-high valuations) areoverpriced and unlikely to provide investors with attractiverisk-adjusted returns over the next five years.

DISCUSSION OF SIGNIFICANT QUARTERLY ACTIVITY

The Fund had a relatively active quarter adding severalnew positions and selling a few positions at substantialprofits. Some of the sale proceeds were used to increase theFunds exposure to the ailing U.S. and U.K. housingsectors and in two special situation U.S. REIT positions.

Finally, the Fund added a new distressed debt investment.

The Funds cash balance at quarter end was approximately14%, providing ample dry powder for unforeseenopportunities.

Fund Managements attraction to the U.S. and U.K.housing sectors is no doubt contrarian and, we admit, maybe early. The consistent reporting of negative housing-related data has kept most investors out of the sector. Inthe U.S., persistently weak job creation, unpredictable

housing price trends, foreclosures issues, increasinginventory levels and challenging mortgage availability

(despite all time low rates) haveled to a very challenging operatingenvironment for industryparticipants. The near-termoutlook is, at best, uncertain andconditions may get worse. But

this typically leads to opportunity.It is difficult to foresee asustainable U.S. economicrecovery without an associatedrecovery in the U.S. housingsector. Most market participantswill not invest in this sector untilit is clear that a recovery isunderway. By that time it may betoo late. During the quarter, the

Fund increased its exposure to Lennar Common andWeyerhaeuser Common. In addition, the Fund also soldout-of-the-money put options on Lennar Common andRyland Common. The Ryland Group is another well-financed U.S. homebuilder whose common stock theFund desires to own if it can be acquired at a discount toits current price. As discussed in last quarters shareholder

letter, selling out-of-the-money put options enables theFund to take advantage of market volatility, receive putoption premiums and potentially acquire shares at adiscount to current trading prices.

22

It is difficult to foresee asustainable U.S. economic

recovery without an associatedrecovery in the U.S. housing

sector. Most marketparticipants will not invest in

this sector until it is clearthat a recovery is underway.

By that time itmay be too late.

6 Source: Green Street Advisors, Real Estate Securities Monthly, November 20107AFFO is the REIT industrys term for adjusted funds from operations.


25/42

During the last quarter, U.K. housing stocks declined

sharply on fears of domestic economic troubles and theassociated austerity measures implemented by the Britishgovernment. The U.K. housing market is fundamentallydifferent from the U.S. in that supply levels are reasonablyin balance with demand. The U.K. has not seen the samelevel of distressed home sales and foreclosures as the U.S.,thus, inventory is not as elevated and the market is likelyto recover sooner than in the U.S.

Bellway is a U.K.-based real estate operating company thatprimarily builds homes for first-time buyers throughoutEngland. Historically, the company has been among theU.K.s best-managed builders. It is not surprising thatBellway, with its very strong balance sheet (net cash), is oneof the few builders that have been able to actively addstrategic home sites over the past year. After recentpurchases, the company now controls more than 30,000

lots across England at historically low valuations, giving ita strong competitive advantage when market conditionsdo improve. The Fund acquired Bellway Common at adiscount to book value.

Notwithstanding our overall negative view of U.S. REITs,the Fund initiated special situation investments in twoU.S. REIT common stocks. Unfortunately, in each case,the Fund was only able to establish a small position before

prices rose above our comfort level. First Industrial is aU.S. REIT that owns a nationwide portfolio of industrialproperties. Unlike most U.S. REITs, First Industrialsshares have been trading at a big discount to net assetvalue, due to concerns about the companys high debtlevels and the poor operating fundamentals in theindustrial sector. The Fund established its position in FirstIndustrial Common at an attractive price and anticipated

that the company would likely need to raise more equityto solidify its balance sheet. In that event, the Fund wouldbe in a position to provide a substantial portion of thatequity and benefit from the re-rating of the companysshares based upon its shored-up financial position. Thecompany recently announced that it had amended its

credit facility (relaxed financial covenants) and was granted

more leeway to sell off non-strategic assets to pay downdebt. The shares have since risen sharply (approximately60% above the Funds cost) and it now seems less likelythat the Fund would participate in an equity raise. TheFund also invested in General Growth Common. GeneralGrowth is a U.S.-based retail mall company that wasoperating under bankruptcy protection at the time of theFunds investment. The general market setback in Augustprovided us with a brief opportunity to buy shares at anattractive price, but the Fund was unable to accumulate asubstantial position. The company emerged frombankruptcy in November, splitting into two separatelytraded companies. We hope to have more to discussregarding General Growth in the next quarterly letter.

Illustrating the synergies of Fund Managements researchteam, the Fund leveraged off of the in-depth analysis

performed by the Third Avenue credit team and initiateda position in Lehman Notes (also a holding in the ThirdAvenue Focused Credit Fund). Lehman Brothers was oneof the largest U.S. investment banks until it filed forbankruptcy protection in September 2008. The Lehmanbankruptcy is the largest and most complex corporatebankruptcy in U.S. history. Since filing bankruptcy, thedebtor entity has made significant progress in selling assets,unwinding complex derivative contracts and accumulatingnearly $20 billion of cash. It is expected that the company will exit bankruptcy in early 2011 and convert into anentity that will ultimately distribute proceeds to creditorsfrom liquidating its assets. While Lehman Brothers is nota real estate company, a substantial portion of theliquidation proceeds will come from the companysportfolio of residential and commercial whole loans,owned properties, equity interests and other real estate

investments in North America, Europe and Asia. Theinitial plan of reorganization filed by the companyconservatively estimates recovery on the notes of 17.4%.Fund Management believes that this represents areasonable worst case recovery on the senior notes since theplan excludes significant value recovery from foreign

23


26/42


27/42

when each investment ultimately matures take care of

itself.We look forward to writing to you again next quarter. Bestwishes for a healthy and prosperous 2011.

Sincerely,

Michael H. Winer Jason Wolf Co-Portfolio Manager Co-Portfolio ManagerThird Avenue Real Estate Third Avenue Real Estate

Value Fund Value Fund

25


28/42

26


At October 31, 2010, the audited net asset valueattributable to the 92,903,857 shares outstanding of the

Third Avenue International Value Fund (the Fund) was$16.33 per share, compared with the Funds unaudited netasset value at July 31, 2010 of $14.71 per share, and anaudited net asset value of $15.00 per share at October 31,2009, adjusted for the distribution of $0.18 per share. AtNovember 30, 2010, the unaudited net asset value was$15.96 per share.

QUARTERLY ACTIVITY:

In the most recent quarter, the Fund established two newpositions, added to positions in the common shares of ninecompanies, reduced holdings in common shares of fivecompanies and eliminated one position.

Number of shares

or units New Positions Acquired

556,546 shares Kinross Gold Corp. Common Stock(Kinross Common)

22,869 warrants Kinross Gold Corp. Warrants(Kinross Warrants)

Third Avenue International Value Fund

AMIT B. WADHWANEY

PORTFOLIO M ANAGER OFTHIRD

AVENUE INTERNATIONAL VALUE FUND

* Portfolio holdings are subject to change without notice. The following is a list of Third Avenue International Value Funds 10largest issuers, and the percentage of the total net assets each represented, as of October 31, 2010: WBL Corp., Ltd., 8.04%;Netia S.A., 6.32%; Viterra, 5.65%; Resolution, Ltd., 4.72%; Hutchison Whampoa, Ltd., 3.47%; Guoco Group, Ltd., 3.06%;

Allianz SE, 2.88%; Sampo Oyj, 2.82%; Compagnie Nationale A Portefeuille, 2.82%; and Dundee Precious Metals, Inc., 2.81%.

Number of shares

or units Increases in Existing Positions

2,805,874 shares Atrium European Real Estate Ltd.Common Stock (Atrium Common)

44,023 shares Compagnie Nationale a PortefeuilleCommon Stock (CNP Common)

11,906 shares GlaxoSmithKline PLC Common Stock(GSK Common)

48,675 shares L. E. Lundbergforetagen ABCommon Stock (Lundbergs Common)

111,080 shares Newmont Mining Common Stock(Newmont Common)

94,507 shares Nexans S.A. Common Stock(Nexans Common)

3,105,140 units ProLogis European Properties Units

(ProLogis European Units)16,113,300 shares Resolution Limited Common Stock

(Resolution Common)

1,019,464 shares Weyerhaeuser Company Common Stock(Weyerhaeuser Common)

Decreases in Existing Positions

509,947 shares Antarchile S.A. Common Stock(Antarchile Common)

1,084,000 shares Daibiru Corp. Common Stock(Daibiru Common)

29,277 shares Muenchener Rueckversicherungs AGCommon Stock (Munich ReCommon)

622 shares United International Enterprises Ltd.Common Stock (UIE Common)

14,139,000 shares United Microelectronics Corp.Common Stock (UMC Common)


29/42

27

Number of rights Position Eliminated

17,393,600 rights Resolution Limited Rights(Resolution Rights)

REVIEW OF QUARTERLY ACTIVITY

During the quarter, we increased existing positions asopportunities to invest at attractive prices emerged. Asmentioned in last quarters letter, Europe continues to be aregion where we have found a disproportionate amount of

compelling opportunities. One position was eliminated,but in name only, as we exercised our rights in theunderlying shares of Resolution Limited.

Also during the quarter, the Fundestablished new positions in thecommon stock and warrants ofKinross Gold Corp. (Kinross).The genesis of this position was an

investment in Red Back MiningInc. (Red Back), which wasacquired by Kinross in September2010. Kinross is a Canadian-basedgold mining company with minesand projects in Canada, the U.S.,Brazil, Chile, Ecuador, andRussia. The recent merger

between Kinross and Red Backeffectively combined two complementary asset andresource bases. Red Backs early-stage resource base, locatedin Ghana and Mauritania, boasts significant explorationand expansion potential and provides Kinross with astrong position in the fast-growing West African goldregion. These assets will complement Kinross moregeographically balanced portfolio of operating mines andgrowth projects. Additionally, Red Back Chairman LukasLundin and CEO Richard Clark, are expected to join theKinross Board of Directors; their considerable experiencein the West African region will likely benefit the newly-

combined company. Kinross is well-financed and, at

current prices, we believe it is valued attractively relative toits peers, its history, and to gold itself.

ESCHEWING CLUTTER

Our fellow investors often ask how we identify and selectinvestment opportunities. In executing our Safe andCheap1 philosophy, we spend a considerable amount oftime learning and understanding the business or businessesunderlying a potential investment, focusing on thepotential risks of permanent diminution of value, as wellas the potential opportunities to compound shareholderwealth at a satisfactory rate over the long term.

Theoretically, there are thousands offactoids a person can learn about anyone company. Typically, however,only a handful of factors are crucial

when deciding whether or not toinitiate an investment in a particularsecurity. A critical component of ourinvestment analysis is the ability torecognize and separate the factorswhich are truly relevant to the long-term economic prosperity of theunderlying business, from the noise which emanates from countless

sources within the market. This practice of de-cluttering isa key part of our investment process.

Noise or clutter is a concept familiar to most, and at therisk of oversimplification, it refers to short-term, transitoryaberrations or complexities either within a companysoperating environment, its internal structure, or themarketplace at large which distracts from the

fundamental economic merits of the underlying business.There are many different sources of noise which we attemptto look past in our efforts to assess the economics and long-term fundamentals of the businesses which we analyze.

1 Safe means the companies, in our judgment, have strong finances, competent management, and an understandable business.Cheap means that, in our judgment, we can buy the securities for significantly less than what a private buyer might pay forcontrol of the business.

Theoretically, there arethousands of factoids a person

can learn about any one

company. Typically, however,only a handful of factors are

crucial when deciding whetheror not to initiate an investment

in a particular security.


30/42

28

The most common sources of noise are usually top-down in

nature sometimes macro economic (actual or imagined) or something in the broader environment, e.g. relating topolitics, corporate governance and so on. While these clearlywill weigh upon the price of the security (and possibly thebusiness) in question, tackling these analytically is done ona company by company basis, as every business has a uniquerelationship to its larger environment. Rather than succumbto the temptation of attempting to prognosticate the exactfuture path of macro variables (an imponderable in ourview), or similarly attempt to divine unknowable changes inthe environment and their investment impact on thecompany, the focus of our analysis is on gauging the impactof possible changes (especially adverse ones) on the companyin question. The resilience of a company to significant top-down shocks is relevant to our calculation of the safetyafforded by a potential investment. Without ignoringsources of top-down uncertainty or noise, our approach

focuses solely on the set of relevant factors that couldpotentially impact the investee company and weighs theirimpact appropriately. Because the Fund has a longinvestment horizon, we can often discount the weight ofcertain macro events that will have only a transitory effect onthe company under consideration.

Another source of informational clutter comes from thecompany itself. Public companies are required to disclosevast amounts of information; however, each disclosureitem is not of equal importance and some may not be ofmuch significance to long-term investors. For example,accounting standards may, in some cases, requirecompanies to take significant deductions from reportedearnings or asset values under mark-to-market principles.These sudden, rapid declines in reported earnings typicallygarner the attention of the financial media and investors

especially those with a short-term focus with negativeimplications to the afflicted companys stock price. Inmany cases, such haircuts to reported earnings and assetvalues may very well indicate a real, perhaps irreparable,impairment to the underlying business. However, in manyother cases such accounting-related data reflect one-time

adjustments and disguise the true economics of a business.

It is in these latter cases where we strive to ignoreinformation which may be relevant to a short-term traderor speculator, but which matter little to the overall long-term health and prospects of the business.

Some companies generate clutter and noise as aconsequence of having a complex corporate organizationalstructures, which present analytical clutter. Companieswhich own disparate sets of unrelated assets in a seemingly

less than simple structure may, in some cases, inadvertentlydistract market observers from the intrinsic value whichlies within the structure itself, waiting to be unlocked.Sometimes neglected (if not outright ignored) by theprofessional analytical community because the variousunderlying businesses do not fit neatly into a single basketor industry group, these companies true value may beobscured further by a familiar distraction reported

accounting numbers due to standards such asconsolidated reporting. Reported financial statements areexcellent objective tools with which to analyze a business,but care must be taken to focus on what the numbers reallymean rather than what theyare.

The following examples illustrate the importance offocusing on fundamentals while ignoring the noise.

VITERRA

A large position in the Fund, Viterra Inc. (Viterra),demonstrates the ease with which a solid company withhigh-quality, irreplaceable assets was marred by theexternalities of its industry as well as internal (thoughtransitory) issues. Viterra, formerly known asSaskatchewan Wheat Pool, was an investment initiated inthe first quarter of 2006. Historically a co-operative of

farmers, the company listed its shares on the Toronto StockExchange. However, the listed entity had unappealingcorporate governance issues, most notably the ability offarmer shareholders to elect the majority of the Board ofDirectors. The company embarked on an aggressiveexpansion project in 1997, building a high-qualitynetwork of grain elevators. Unable to issue equity because


31/42

29

of this quirky corporate governance situation, the

expansion saddled the company with high levels of debt.This was particularly risky considering its volatileoperating environment, where operating revenues wereheld hostage to climatic conditions. A succession of threeyears of drought in the early 2000s, accompanied by lowerprofitability and a burgeoning debt load, forced acomplete restructuring of the balance sheet and a sizableraising of equity capital.

At the time of our original investment in Viterra, investorsfeared that further droughts would introduce volatility intothe business and devastate the company and itsshareholders once again. Such concerns wereunderstandable, given the volume-sensitivity of the grainhandling business. However, what was lost on many in theaftermath of the droughts and subsequent restructuring wasthe impact of the changes which had taken place during the

tumultuous period of the restructuring. More specifically: The companys highly-leveraged financial position was

greatly strengthened by a series of steps taken inconnection with the restructuring, including a rightsoffering and a debt-to-equity conversion.

The capital expenditure program which had providedthe company with the highest-quality asset base in theCanadian Prairie Provinces had largely ended,

reducing the recurrent annual committed capitalexpenditure that had previously stretched the balancesheet.

The restructuring corrected the previously-notedgovernance issues, by eliminating the different classesof shareholders and ensuring a Board better aligned with shareholder interests. This created aneconomically motivated ownership structure which was not present under the previous farmer co-operative type model. Importantly, this restored accessto capital markets and the ability to finance existingand new business.

Our investment analysis placed less emphasis on the short-

term, transitory issues and greater emphasis on the lastingchanges which made the longer-term economic potentialof the business more attractive namely, reducedgovernance risk; a reduced financial risk profile; andimproved competitive positioning, in an industry whichwas pregnant with restructuring potential. The trauma ofthe terrible results in the drought years and the horsetrading of the restructuring obscured the potentialopportunities that industry restructuring held for thecompany, given the sizable barriers to entry that theresultant networks of grain elevators presented to newindustry entrants.

Due to the droughts and restructuring, we were able toacquire the shares at a meaningful discount to our estimateof net asset value (NAV) and at a modest multiple ofoperating earnings. This was particularly attractive

considering the solid long-term demand fundamentals foragricultural commodities.

At the time that the Fund initiated its position in Viterra,one of the characteristics that led to the investment was adramatically reduced risk profile. While there was noavoiding the climatic risk inherent in the business, Viterrahad built a strong balance sheet and gained muchimproved access to capital markets, both of which would

serve the company well and help it withstand short-termchallenges in the future. Post-restructuring, Viterra waswell-positioned to not only survive, but thrive, as one ofthe more efficient operators if the industry continued torationalize, as it had over the prior five years.

Today, the improvements made to Viterras businessfundamentals during that tumultuous period have bornefruit. Viterras improved financial strength and access to

capital markets have enabled the company to consolidatethe Western Canadian grain handling market, primarilythrough its acquisition of competitor Agricore United;Viterra currently controls roughly 45% of this market, as well as about 30% of the regions agri-product retailmarket. It also has enabled Viterra to grow internationally,


32/42

30

primarily through its acquisition of ABB Grain in

Australia a transaction which meaningfully diversifiesand mitigates climatic risk.

The company is well-positioned to benefit from solidlong-term fundamentals supporting grain demand: globalpopulation growth, increasing meat production driven bya growing middle class in emerging countries, etc. As long-term shareholders, the short-term noise in the form ofrestructuring and drought-related losses provided us with

the opportunity to invest in a strong, growing leader in anindustry with compelling long-term prospects.

LEUCADIA NATIONAL CORP.

Leucadia National Corp. (Leucadia) is a NYSE-listedholding company. Run by Ian Cumming and JoeSteinberg since its founding in the late seventies, Leucadiahas compounded the NAV of its portfolio by about 18.5%

per annum, on average, over the last 30 years.Given such a long-term track record, it is hardly surprisingthat Leucadias stock has rarely been inexpensiv

taf 4q 2010 shareholder letters

Documents