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Unlocking Value: Navigating Market Transitions with Strategic Small-Cap Investments

Fund Performance Overview: A Mixed Quarter for Small-Cap Value

During the third quarter of 2025, the Third Avenue Small-Cap Value Fund generated a return of 7.18%. This performance was set against the backdrop of the MSCI USA Small Cap Value Index, which posted an 8.97% return, and the Russell 2000 Value Index, which achieved a 12.60% return. Despite trailing these benchmarks for the quarter, the fund maintained robust annualized returns of 15.11% over the past three years and 16.09% over the past five years, demonstrating consistent long-term growth.

Key Drivers and Detractors: A Look at Portfolio Contributions

The quarter's positive performance was primarily fueled by strong contributions from a diverse array of businesses. Supernus Pharmaceuticals notably led the gains, benefiting from a solid financial standing, expanding neurology product offerings, and a strategic acquisition. Other significant contributors included Investors Title Company, which saw increased activity due to a surge in real estate refinancing, and UMB Financial Corporation, praised for its successful integration of a recent acquisition and operational excellence. Conversely, investments in Atlanta Braves Holdings, UniFirst Corporation, and FRP Holdings experienced negative pressure during the quarter. Despite short-term setbacks, the fund maintains confidence in the underlying value of these holdings and their potential for future recovery and resource conversion.

The \"Chrysalis\" Investment Philosophy: Identifying Transformative Opportunities

The fund's core investment philosophy centers on acquiring companies that are in a transitional state or undergoing a positive metamorphosis. This approach targets businesses whose current valuations do not fully reflect their promising future prospects, often due to an underperforming past. The strategy emphasizes investing in companies with specific characteristics: robust financial health to facilitate corporate change and strategic acquisitions, shares trading below their intrinsic value, and entrepreneurial management teams capable of leveraging various opportunities to enhance shareholder wealth, irrespective of broader market movements.

Strategic Opportunities: Three Pillars of Investment Activity

The fund's investment activities are broadly categorized into three types of opportunities. Firstly, it targets companies facing temporary industry challenges, where operational pressures drive management to implement cost-cutting measures, strengthen balance sheets, or divest underperforming assets. Such scenarios often enable financially strong companies to make counter-cyclical investments or acquisitions, positioning them for enhanced profitability when market conditions improve. Secondly, the fund invests in businesses generating adequate economic returns in their current state but possess overlooked opportunities for internal improvements, such as optimizing resource distribution, monetizing latent assets, or enhancing operational efficiencies. Lastly, the strategy includes event-driven or catalyst-oriented special situations that offer unique return profiles and opportunities to participate in significant corporate transformations, including divestitures, transformative acquisitions, or becoming a takeover target in consolidating industries.

Long-Term Vision: Patience and Balance Sheet Strength

Investing in companies undergoing substantial change requires a long-term perspective, often extending beyond typical quarterly or annual horizons. The fund's average holding period of about five years, compared to an industry average of one year, underscores its commitment to allowing these transformations to unfold. This patient approach is supported by a strong emphasis on balance sheet strength, which provides both the necessary time and resources to enact and execute significant corporate changes effectively. The fund deliberately avoids "cigar butt" investing, instead focusing on businesses with sustainable growth prospects, even if their initial public perception is not stellar. The goal is for these companies to improve their market standing over time, leading to a re-evaluation of their true worth.

Ambac Financial: A Metamorphosis in Progress

Ambac Financial exemplifies the fund's investment in companies undergoing significant transition. The recent regulatory approval for the sale of its legacy financial guarantee business to Oaktree Capital Management, followed by the acquisition of ArmadaCare, has dramatically accelerated Ambac's transformation. The company is now repositioning itself to focus on specialized excess and surplus insurance lines through a portfolio of managing general agents (MGAs) and managing general underwriters (MGUs). This strategic shift is expected to lead to a business model characterized by fast growth, high margins, recurring revenue, and minimal on-balance sheet risk, alongside the efficient utilization of tax-loss carryforwards.

Recent Portfolio Adjustments: New Positions and Additions

During the quarter, the fund initiated new positions in Boise Cascade, a leading building materials distributor and manufacturer, and Rogers Corporation, a provider of electronic and materials technology solutions. Boise Cascade, despite facing near-term headwinds in the housing market, is seen as an undervalued asset with a strong financial position and potential for significant recovery and consolidation activity. Rogers Corporation, identified as having valuable intellectual property and serving attractive end markets, is undergoing strategic improvements driven by activist investors and new leadership, promising cost savings and margin enhancements. The fund also increased its stake in UniFirst Corporation and fully exited its position in Hamilton Beach Brands, concluding the period with a cash allocation of 4.5%.