Third Avenue Management, an investment management company, published a letter from the investor “Real Estate Value Fund” in the second quarter of 2021, a copy of which can be downloaded here… The portfolio return in the second half of 2021 was + 17.71%, which is below the FTSE EPRA NAREIT Developed Index, which showed an increase of 16.11% over the same period. You can browse the top 5 of the fund’s contributions to get an idea of their maximum rates for 2021.
In the second quarter of 2021, in a letter to an investor from Third Avenue Management, the fund referred to the Federal National Mortgage Association (NYSE: FNMA) and discussed his position in relation to the firm. The Federal National Mortgage Association is a Washington, DC-based mortgage lending company with a current market capitalization of $ 1.5 billion. The FNMA posted a -45.61% yield YTD, while its 12-month yield declined 35.00%. The stock closed at $ 1.30 per share on July 22, 2021.
Here’s what Third Avenue Management reports on the FNM in its letter to an investor for the second quarter of 2021:
“The fund also adjusted its share in Federal national Mortgage Association (“Fannie Mae”) during the period. As noted in previous letters to shareholders, the Fund established a position in Fannie Mae preferred and common shares in 2020. Fund management believes the venture (along with the Federal Home Loan Mortgage Corporation or Freddie Mac and collectively government-sponsored organizations or GSEs) has been (i) an important source of funding for sustainable home ownership and affordable rental housing in the United States, (ii) among the world’s most profitable real estate firms in terms of operating profit, and (iii) trading in securities was a fraction of their base value due to GSEs operating under trusteeship since 2008.
In addition, the fund management believes that GSEs will eventually exit this structure with further capital recovery, as outlined in the Federal Housing Finance Agency’s (FHFA) Strategic Plan – a process that can be accelerated once legal decisions address controversial changes in attitude of his senior management. Agreement on the purchase of preferred shares (ie, “Clean Cleaning”). However, given the significant “technology risk” associated with such a significant repositioning, the Fund will limit the amount of capital invested in businesses despite its unrivaled value for money.
During the quarter, the United States Supreme Court (“SCOTUS”) issued judgments addressing two outstanding legal issues. In Collins v Yellen, SCOTUS upheld the plaintiffs’ claims of an unconstitutional governance structure, remanded the case to the Fifth Court of Appeal for potential “redress”, but refused to invalidate the entire net cleansing through this particular constitutional law. require. While there was no direct adjudication in this ruling, other issues related to the Implied Fair and Fair Business Agreement and the Ransom, Foreclosure and Infringement of Implied Contract claims continue to be addressed by the District Court and the Federal Claims court accordingly. These cases have led to an important discovery and will continue through the end of 2021.
Despite the longer time frame, the fund’s management still believes that administrative action would be the smartest way forward. In other words, recapitalizing enterprises and releasing them as quasi-utilities with improved capital ratios achieves key objectives. This primarily includes (i) removing the US taxpayer from the “first losing position” on $ 6.5 trillion mortgages that guarantee organizations, (ii) providing more stability and capital for businesses to fulfill their mission of promoting affordable housing and (iii) respecting property rights while maintaining value for GSE stakeholders (including the US Treasury).
Such a plan was recently reflected in the Brookings Institution report: “Government Sponsored Businesses at a Crossroads.” It has also been scrutinized by the Congressional Budget Office (CBO) for its impact on recapitalizing Fannie Mae and Freddie Mac through administrative action. As noted in this analysis, “the CBO model includes the judgment that in scenarios in which the sale of GSE common stock did not raise enough funds to repurchase the full par value of both senior preferred and junior preferred shares, the Treasury would accept a decrease in the value of its senior preferred stock. shares before requiring the younger preferred shareholders to do so. “
Taking into account all these items, as well as the pricing anomalies in all capital structures, the Fund’s remaining investments in GSE are now focused exclusively on preferred capital. At the end of the quarter, these assets accounted for approximately 2.0% of the Fund’s capital, and the securities were trading at prices less than 10% of their liquidation preference (eg “par value”). Meanwhile, the companies remain quite profitable and are recovering significant capital while the issues are resolved. “
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Based on our calculations, the Federal National Mortgage Association (NYSE: FNMA) was unable to gain a foothold on our list 30 most popular stocks among hedge funds… FNMA was in 4 hedge fund portfolios at the end of the first quarter of 2021. The Federal National Mortgage Association (NYSE: FNMA) has generated -46.50% yield over the past 3 months.
The reputation of hedge funds as discerning investors has been tarnished over the past decade as their hedged returns have been unable to keep up with the unhedged returns of market indices. Our research found that small-cap hedge fund companies managed to outperform the market by double digits annually between 1999 and 2016, but that outperforming margins have been declining in recent years. However, we were still able to pre-identify a select group of hedge fund holdings that have outperformed the S&P 500 index funds by 115 percentage points since March 2017 (details here). We were also able to pre-identify a selected group of hedge fund holdings that were 10 percentage points behind the market annually between 2006 and 2017. Interestingly, the margin of these stocks lagging behind has been increasing in recent years. Investors who are long in the market and sell these shares could return more than 27% per annum between 2015 and 2017. We have been tracking and publishing a list of these stocks since February 2017 in our quarterly newsletter.
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