This post has been excerpted from a letter by Chip Rewey, Lead Portfolio Manager of the Third Avenue Small-Cap Value Fund.
Finisar is a well-financed provider of optical subsystems and components, which are used in data communications and telecommunications. It was the market share leader in 2016, according to Ovum (market-leading research and consulting firm focused on digital service providers), and has held that honor since 2008. Demand for optical is being driven by additional network bandwidth needs due to increasing data and video traffic. Video downloads and streaming, social networking, on-line gaming, enterprise IP/Internet traffic, cloud computing, and data center virtualization – these are all putting additional demands on the network for increased bandwidth. In response, the telecom industry is ramping up metro (city-level) deployments in North America and Europe; China is increasing its buildouts supported by government initiatives to complete broadband coverage in rural and urban areas. On the data communications side, there is an increase in hyperscale data centers (think Amazon Web Services, Microsoft’s Azure, Google and the like) and deployments of technology to upgrade existing connections to increase speed and efficiency in the networks.
Finisar also provides potential exposure to the growing 3D sensing industry. 3D sensing allows for augmented camera capabilities which enable object recognition, depth data, greater precision and object placement that can be used for virtual and augmented reality. Finisar provides VCSELs (vertical-cavity surface emitting laser) which can be used as part of the 3D sensors. VCSELs have advantages of optical efficiency, low cost and small size. Finisar is expanding its manufacturing capacity of VCSELs at its Allen, Texas facility, which management believes will then allow it to pursue new 3D sensing opportunities in consumer applications.
Finisar common stock declined recently due to near term concerns over slowing demand from China and from a product specific issue, which appears now to be resolved. This provided the Fund an opportunity to acquire shares in this well-financed company at a discount around 25% to our estimated mid-case NAV, for which we attribute no value to the potential opportunity in 3D sensing.
IMPORTANT INFORMATION
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 this portfolio manager letter represents the opinions of the portfolio manager(s) 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(s) and may differ from those of other portfolio managers or of the firm as a whole. Also, please note that any discussion of the Fund’s holdings, the Fund’s performance, and the portfolio manager(s) views are as of June 30, 2017 (except as otherwise stated), and are subject to change without notice. Certain information contained in this letter constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe,” or the negatives thereof (such as “may not,” “should not,” “are not expected to,” etc.) or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any fund may differ materially from those reflected or contemplated in any such forward-looking statement. Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
Date of first use of portfolio manager commentary: July 17, 2017.
Past performance is no guarantee of future results; returns include reinvestment of all distributions. The above represents past performance and current performance may be lower or higher than performance quoted above. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For the most recent month-end performance, please visit the Fund’s website at www.thirdave.com. The gross expense ratio for the fund’s institutional and investor share classes is 1.40% and 1.65%, respectively, as of March 1, 2017. Please be aware that foreign securities from a particular country may be subject to currency fluctuations and controls, or adverse political, social, economic or other developments that are unique to that particular country or region. Therefore, the prices of foreign securities in particular countries or regions may, at times, move in a different direction than those of U.S. securities. Prospectuses contain more complete information on management fees, distribution charges, and other expenses.
Third Avenue Funds are offered by prospectus only. The prospectus contains important information, including investment objectives, risks, advisory fees and expenses. Please read the prospectus carefully before investing in the Funds. Investment return and principal value fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. For updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdave.com. Distributor of Third Avenue Funds: Foreside Fund Services, LLC.
Current performance results may be lower or higher than performance numbers quoted in certain letters to shareholders.
About The Author: Chip Rewey
Mr. Rewey is the leader of Third Avenue’s Value and Small-Cap Teams, serving as the Lead Portfolio Manager for the Third Avenue Value and Small-Cap Funds. Mr. Rewey joined Third Avenue Management in 2014.
Before he joined Third Avenue, Mr. Rewey spent more than ten years at Cramer Rosenthal McGlynn, LLC as a Senior Vice President and Senior Portfolio Manager where he oversaw the firm’s smid, mid, large and all cap investment strategies. Prior to Cramer Rosenthal McGlynn, Mr. Rewey was a Senior Portfolio Manager at Sloate Weissman Murray & Company, where he worked directly with the Founder on research and portfolio construction. Mr. Rewey began his career as an Acquisitions Analyst for Associates Corporation of North America before moving on to roles at Oak Value Capital Management and Smith Barney, Inc.
Mr. Rewey earned an M.B.A. in Finance from Duke University Fuqua School of Business and holds a B.S. in Finance from Boston College, graduating Magna Cum Laude. He is a member of the New York Society of Security Analysts.
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