N-CSR 1 c45266_ncsr.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-08039 --------- Third Avenue Trust ------------------ (Exact name of registrant as specified in charter) 622 Third Avenue, 32nd Floor, New York, NY 10017 ------------------------------------------------------------------- (Address of principal executive offices) (Zip code) W. James Hall III, General Counsel, 622 Third Avenue, New York, NY 10017 ------------------------------------------------------------------------ (Name and address of agent for service) Registrant's telephone number, including area code: 800-443-1021 ------------ Date of fiscal year end: October 31, 2006 ---------------- Date of reporting period: October 31, 2006 ---------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Trust's annual report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the "1940 Act") is as follows: ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE VALUE FUND THIRD AVENUE SMALL-CAP VALUE FUND THIRD AVENUE REAL ESTATE VALUE FUND THIRD AVENUE INTERNATIONAL VALUE FUND ANNUAL REPORT ------------- October 31, 2006 ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE FUNDS PRIVACY POLICY Third Avenue Funds respects your right to privacy. We also know that you expect us to conduct and process your business in an accurate and efficient manner. To do so, we must collect and maintain certain personal information about you. This is the information we collect from you on applications or other forms and from the transactions you make with us, our affiliates, or third parties. We do not disclose any information about you or any of our former customers to anyone, except to our affiliates (which may include the Funds' distributor and the Funds' affiliated money management entities) and service providers, or as otherwise permitted by law. To protect your personal information, we permit access only by authorized employees. Be assured that we maintain physical, electronic and procedural safeguards that comply with federal standards to guard your personal information. PROXY VOTING POLICIES AND PROCEDURES The Funds have delegated the voting of proxies relating to their voting securities to the Adviser pursuant to the Adviser's proxy voting guidelines. A description of these proxy voting guidelines and procedures, as well as information relating to how a Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, is available (i) without charge, upon request, by calling (800) 443-1021, (ii) on the website of the Securities and Exchange Commission http://www.sec.gov., and (iii) the Funds' website www.thirdavenuefunds.com. SCHEDULE OF PORTFOLIO HOLDINGS--FORM N-Q Beginning on the fiscal quarter ended July 31, 2004, the Third Avenue Funds have begun to file their complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Third Avenue Funds Form N-Q will be available on the Commission's website at http://www.sec.gov, and may be reviewed and copied at the Commission's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION - OCTOBER 31, 2006 (UNAUDITED) At October 31, 2006, the audited net asset value attributable to each of the 153,848,187 common shares outstanding of the Third Avenue Value Fund ("TAVFX," or the "Fund") was $60.29 per share. This compares with an audited net asset value at October 31, 2005 of $53.13 per share, adjusted for a subsequent distribution to shareholders.
AVERAGE ANNUAL RETURNS FOR THE PERIODS ENDED OCTOBER 31, 2006 ------------------------------------------------------------- ONE YEAR ENDED THREE FIVE TEN SINCE INCEPTION 10/31/06 YEAR YEAR YEAR (11/1/90) -------- ---------- ----------- ---------- ------------------ Third Avenue Value Fund 13.08% 18.62% 15.30% 14.06% 16.68% S&P 500 Index 16.34% 11.44% 7.26% 8.64% 12.19% Russell 2500 Index 17.68% 14.96% 14.36% 11.53% 15.33% Russell 2000 Index 19.98% 14.53% 13.76% 9.84% 13.96% Russell 2000 Value Index 22.90% 17.91% 17.52% 13.81% 17.08%
The Third Avenue Value Fund (the "Fund") seeks to achieve long-term capital appreciation and does not attempt to track any benchmark. Various comparative indices are included above for illustrative purposes both for the most recent year and over longer periods. The Fund is managed for the long term and does not seek to maximize short-term performance. During the twelve-month period ended October 31, 2006, the Fund returned 13.08%. The Fund under-performed the various comparative indices over the same time period; however, we believe the Fund's performance should be judged over the long term and in absolute terms, rather than against any of these indices, none of which are strictly comparable to the Fund. Based on such criteria, we remain happy with Fund performance over the long term. Fund performance lagged this year, due in part to the Fund's position as a principal creditor of Collins and Aikman, which is operating in Chapter 11. Collins and Aikman results from operations have been extremely poor. Another large detractor to Fund performance this year was The St. Joe Company ("St. Joe"), which is one of the Fund's largest holdings. St. Joe is a diversified real estate operating company that is the largest private landowner in Florida. During the year, St. Joe was impacted by slowing growth in its markets. The near-term outlook for these markets, as well as for the U.S. housing market in general, is uncertain, and this outlook appears to have influenced the performance of St. Joe common stock during the year. Fund management continues to focus on the long-term fundamentals of St. Joe and all of the Fund's investments. Other detractors to performance during the year included Legg Mason, Inc., Nabors Industries, Ltd., and RHJ International. Much of the positive absolute performance during the year is attributable to securities from companies based outside the United States, such as Toyota Industries Corporation (based in Japan), Brookfield Asset Management, Inc. (Canada), Investor AB (Sweden), and POSCO (South Korea). The Fund also benefited from strong performance in select real estate-related holdings, with large positive contributions from Forest City Enterprises, Inc. and Trammell Crow Company ("Trammell Crow"). At the end of the year, CB Richard Ellis Group, Inc. announced its intention to acquire Trammell Crow; this announced resource conversion (e.g., mergers and acquisitions) contributed to Trammell Crow's performance. -------------------------------------------------------------------------------- 1 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION (CONTINUED) (UNAUDITED) The Fund continues to look for investment opportunities that meet our strict investment criteria within the United States, but the Fund expects to continue to invest in foreign markets as well, at least for the foreseeable near-term future. THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND'S PERFORMANCE 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 INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO'S HOLDINGS, THE PORTFOLIO'S PERFORMANCE, AND THE INVESTMENT TEAM'S VIEWS ARE AS OF OCTOBER 31, 2006, AND ARE SUBJECT TO CHANGE. Third Avenue Value Fund IS 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 carefully before you send money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The Fund's returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. M.J. Whitman LLC Distributor. 12/21/06 If you should have any questions, or for updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdavenuefunds.com. Current performance may be lower or higher than performance quoted. The S&P 500 Index is an unmanaged index (with no defined investment objective) of common stocks. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Index measures the performance of small companies and the Russell 2500 of small to mid-sized companies. The S&P 500 Index, Russell 2000 Value Index, Russell 2000 Index, and the Russell 2500 Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends. -------------------------------------------------------------------------------- 2 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] PERFORMANCE INFORMATION (UNAUDITED) PERFORMANCE ILLUSTRATION COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE VALUE FUND, THE STANDARD & POOR'S 500 INDEX (S&P 500), THE RUSSELL 2000 INDEX, THE RUSSELL 2000 VALUE INDEX AND THE RUSSELL 2500 INDEX FOR THE TEN YEARS ENDED OCTOBER 31, 2006 Average Annual Total Return 1 Year 3 Years 5 Years 10 Years 13.08% 18.62% 15.30% 14.06% [LINE GRAPH]
TAVF* S&P 500 Index* Russell 2000 Index* Russell 2000 Value Index* Russell 2500 Index* 10/31/1996 10000 10000 10000 10000 10000 13531 13211 12933 13718 12912 10/31/1998 13008.7 16116.1 11401.7 12663.1 11917.8 15205.9 20252.6 13097.2 12754.3 14063 10/31/2000 18865.9 21486.2 15377.4 14960.8 17336.8 18298.1 16135.2 13424.5 16269.8 15226.9 10/31/2002 16212.1 13697.2 11871.2 15858.2 13836.7 22333.8 16546.2 17019.8 22247.4 19605.2 10/31/2004 26684.4 18104.9 19016.2 26249.8 22024.5 32968.6 19683.6 21313.4 29672.7 25306.2 10/31/2006 37280.8 22899.9 25571.8 36467.8 29780.3
* All returns include reinvestment of all distributions. As with all mutual funds, past performance does not indicate future results. The returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. -------------------------------------------------------------------------------- 3 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 2006
PRINCIPAL VALUE AMOUNT ($) ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- CORPORATE DEBT INSTRUMENTS - 1.65% Auto Parts - 0.09% Collins & Aikman Products Co.: 250,750,000 10.750%, due 12/31/11 (a) * $ 8,776,250 2,000,000 12.875%, due 08/15/12 (a) (d) * 12,500 ---------------- 8,788,750 ---------------- Automotive - 0.01% 2,005,000 General Motors Corp., step bond, 0.000% until 03/15/16 (7.750% thereafter), due 03/15/36 681,700 ---------------- Consumer Products - 0.45% 64,300,000 Home Products International, Inc., 9.625%, due 05/15/08 42,277,250 ---------------- Energy & Utilities - 0.11% 10,000,000 Mirant Americas Generation LLC, 8.500%, due 10/01/21 9,900,000 ---------------- Hard Goods Retail - 0.01% Hechinger Co.: 18,648,000 6.950%, due 10/15/03 (a) (b) * 433,817 14,752,000 9.450%, due 11/15/12 (a) (b) * 343,183 ---------------- 777,000 ---------------- Industrial - 0.79% USG Corp. Muni East Chicago Solid Waste Disposal: 555,000 5.500%, due 09/01/28 589,282 3,755,000 6.375%, due 08/01/29 4,000,051 USG Corp. Muni Ohio Solid Waste Disposal: 26,040,000 5.600%, due 08/01/32 26,591,267 18,930,000 5.650%, due 03/01/33 19,369,176 4,210,000 6.050%, due 08/01/34 4,376,253 17,460,000 USG Corp. Muni Pennsylvania Economic Dev., 6.000%, due 06/01/31 18,115,099 ---------------- 73,041,128 ---------------- Real Estate Operating 9,492,739 FNC Realty Corp., 7.000% PIK, due 07/27/08 (b) 9,492,739 Companies - 0.10% ---------------- Retail - 0.09% 86,205,118 Sears Holding Corp. Trade Claims (a) (b) 8,011,800 ---------------- TOTAL CORPORATE DEBT INSTRUMENTS (Cost $296,209,850) 152,970,367 ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 4 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 0.34% Auto Supply - 0.03% 759,866 ISE Corp. Series B (b) $ 2,499,959 ---------------- Financial Insurance/Credit Enhancement - 0.31% 259 ACA Capital Holdings, Inc. Convertible (a) (b) (c) 14,715,824 123 ACA Capital Holdings, Inc. Senior Convertible (a) (b) (c) 5,881,448 133,783 ACA Capital Holdings, Inc. Series B Convertible (a) (b) (c) 8,333,333 6,045,667 CGA Group, Ltd. Series C (a) (b) (Bermuda) -- ---------------- 28,930,605 ---------------- Insurance & Reinsurance - 0.00%# 4,775 Ecclesiastical Insurance, 8.625% (United Kingdom) 12,752 1,022,245 RS Holdings Convertible, Class A (a) (b) -- ---------------- 12,752 ---------------- TOTAL PREFERRED STOCKS (Cost $41,814,417) 31,443,316 ---------------- ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS - 71.23% Annuities & Mutual Fund 1,451,598 Legg Mason, Inc. 130,672,852 Management & Sales - 3.52% 4,350,000 Mellon Financial Corp. 168,780,000 489,900 Nuveen Investments, Class A 24,152,070 139,212 Westwood Holdings Group, Inc. 2,780,064 ---------------- 326,384,986 ---------------- Business Services - 0.13% 337,082 Fair Isaac Corp. 12,347,314 ---------------- Computerized Securities 132,800 Investment Technology Group, Inc. (a) 6,201,760 Trading - 0.07% ---------------- Consumer Products - 0.01% 47,250 JAKKS Pacific, Inc. (a) 1,024,853 ---------------- Depository Institutions - 0.92% 390,800 Berkshire Hills Bancorp, Inc. 14,131,328 529,600 Brookline Bancorp, Inc. 7,059,568 218,500 Carver Bancorp, Inc. (c) 3,659,875 26,127,450 Liu Chong Hing Bank, Ltd. (c) (Hong Kong) 55,834,776 34,087 TD Banknorth, Inc. 1,008,293
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 5 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Depository Institutions (continued) 54,704 Tompkins Trustco, Inc. $ 2,688,702 16,354 Toronto-Dominion Bank (The) (Canada) 947,387 ---------------- 85,329,929 ---------------- Electronics Components - 3.16% 2,496,500 American Power Conversion Corp. 75,469,195 9,046,200 AVX Corp. (c) 142,568,112 3,500,000 Intel Corp. 74,690,000 ---------------- 292,727,307 ---------------- Financial Insurance/Credit 118,812 ACA Capital Holdings, Inc. (a) (b) (c) 4,879,015 Enhancement - 3.55% 300,000 Ambac Financial Group, Inc. 25,047,000 3,477,409 MBIA, Inc. 215,668,906 1,576,580 Radian Group, Inc. 84,031,714 ---------------- 329,626,635 ---------------- Financial Services - 0.14% 250,000 CIT Group, Inc. 13,012,500 ---------------- Holding Companies - 23.46% 6,560,550 Brookfield Asset Management, Inc., Class A (Canada) 292,206,897 83,370 Capital Southwest Corp. 9,991,895 51,713,000 Cheung Kong Holdings, Ltd. (Hong Kong) 562,531,477 3,951,800 Guoco Group, Ltd. (Hong Kong) (1) 47,738,468 12,713,000 Hutchison Whampoa, Ltd. (Hong Kong) 112,790,850 10,665,000 Investor AB, Class A (Sweden) 237,003,281 2,200,000 Jardine Matheson Holdings, Ltd. (Hong Kong) (1) 44,000,000 359,250 Pargesa Holding SA (Switzerland) 34,450,806 4,505,945 RHJ International (a) (c) (Belgium) 84,826,854 14,372,600 Toyota Industries Corp. (Japan) 626,739,002 2,453,000 Wharf (Holdings), Ltd. (The) (Hong Kong) 8,326,801 63,599,500 Wheelock & Co., Ltd. (Hong Kong) 115,141,820 ---------------- 2,175,748,151 ---------------- Housing Development - 0.03% 208,750 Levitt Corp., Class A 2,686,612 ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 6 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Industrial & Agricultural 594,300 Alamo Group, Inc. (c) $ 13,787,760 Equipment - 0.55% 299,300 Lindsay Manufacturing Co. 9,843,977 360,100 Mestek, Inc. (a) 5,086,412 360,100 Omega Flex, Inc. (a) 7,886,190 480,500 Standex International Corp. 13,992,160 ---------------- 50,596,499 ---------------- Insurance & Reinsurance - 0.89% 87,035 ACE, Ltd. (Cayman Islands) 4,982,754 432,300 Arch Capital Group, Ltd. (a) (Bermuda) 27,792,567 15,675 ESG Re, Ltd. Warrants, expires 12/07 (a) (b) (Bermuda) -- 65,000 Helicon RE Holdings, Ltd. (a) (b) (Bermuda) 7,313,150 480,000 Montpelier RE Holdings, Ltd. (Bermuda) 8,520,000 127,500 Olympus RE Holdings, Ltd. (a) (b) (Bermuda) 640,050 32,089 RS Holdings, Class A (a) (b) -- 58,300 White Mountains Insurance Group, Ltd. (Bermuda) 33,099,825 ---------------- 82,348,346 ---------------- Insurance Services 940,131 Safelite Glass Corp. (a) (b) 3,760,524 Companies - 0.05% 63,460 Safelite Realty Corp. (b) 538,141 ---------------- 4,298,665 ---------------- Life Insurance - 0.34% 2,009,900 Phoenix Cos., Inc. (The) 31,836,816 ---------------- Medical Supplies 342,300 Datascope Corp. 12,278,301 & Services - 0.89% 598,000 PAREXEL International Corp. (a) 17,700,800 1,275,000 Pharmaceutical Product Development, Inc. 40,353,750 363,000 St. Jude Medical, Inc. (a) 12,469,050 ---------------- 82,801,901 ---------------- Mutual Holding Companies - 0.16% 637,122 Brooklyn Federal Bancorp, Inc. (a) 8,199,760 16,226 Colonial Bankshares, Inc. (a) 210,938 169,104 FedFirst Financial Corp. (a) 1,775,592
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 7 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Mutual Holding Companies 142,200 Gouverneur Bancorp, Inc. (c) $ 1,720,620 (continued) 115,300 Home Federal Bancorp, Inc. 1,173,178 197,800 SFSB, Inc. (a) (c) 1,911,737 9,200 Westborough Financial Services, Inc. 273,700 ---------------- 15,265,525 ---------------- Non-Life 9,159,100 Aioi Insurance Co., Ltd. (Japan) 63,041,986 Insurance-Japan - 4.90% 5,290,500 Millea Holdings, Inc., ADR (Japan) 197,758,890 10,857,140 Mitsui Sumitomo Insurance Co., Ltd. (Japan) 135,070,230 4,420,560 Sompo Japan Insurance, Inc. (Japan) 58,812,290 ---------------- 454,683,396 ---------------- Oil & Gas 626,800 EnCana Corp. (Canada) 29,766,732 Production & Services - 4.17% 9,090,000 Nabors Industries, Ltd. (a) (Bermuda) 280,699,200 1,000,000 Suncor Energy, Inc. (Canada) 76,650,000 ---------------- 387,115,932 ---------------- Pharmaceuticals - 0.89% 1,000,000 Daiichi Sankyo Co., Ltd. (Japan) 29,755,034 2,000,000 Pfizer, Inc. 53,300,000 ---------------- 83,055,034 ---------------- Real Estate - 14.50% 1,387,200 Alexander & Baldwin, Inc. 63,852,816 139,000 Alico, Inc. 8,618,000 31,000 Consolidated-Tomoka Land Co. 2,005,700 3,830,526 Forest City Enterprises, Inc., Class A (c) 210,295,877 1,017,031 Forest City Enterprises, Inc., Class A (c) (d) 55,835,002 22,500 Forest City Enterprises, Inc., Class B 1,232,100 30,534,000 Hang Lung Properties, Ltd. (Hong Kong) 66,586,514 53,328,000 Henderson Land Development Co., Ltd. (Hong Kong) 293,478,167 47,348 Homefed Corp. 3,243,338 676,607 ProLogis 42,808,925 846 Public Storage, Inc. 75,895 6,072,168 St. Joe Co. (The) (c) 326,561,195
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 8 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Real Estate (continued) 3,420,106 Tejon Ranch Co. (a) (c) $ 165,875,141 2,150,000 Trammell Crow Co. (a) (c) 104,812,500 ---------------- 1,345,281,170 ---------------- Real Estate 5,881,577 FNC Realty Corp. (a) (b) 4,411,183 Operating Companies - 0.05% ---------------- Retail - 0.31% 165,912 Sears Holding Corp. (a) 28,946,667 ---------------- Security Brokers, Dealers 894,400 Jefferies Group, Inc. 25,696,112 & Flotation Companies - 1.12% 2,444,062 Raymond James Financial, Inc. 77,867,815 ---------------- 103,563,927 ---------------- Semiconductor 700,000 Applied Materials, Inc. 12,173,000 Equipment Manufacturers - 0.13% ---------------- Software - 0.62% 2,000,000 Microsoft Corp. 57,420,000 ---------------- Steel & Specialty Steel - 2.73% 445,714 Haynes International, Inc. (a) 16,602,847 3,350,000 POSCO, ADR (South Korea) 236,242,000 ---------------- 252,844,847 ---------------- Telecommunications - 0.52% 1,250,000 Comverse Technology, Inc. (a) 27,212,500 2,008,200 Tellabs, Inc. (a) 21,166,428 ---------------- 48,378,928 ---------------- Title Insurance - 0.63% 1,000,000 First American Corp. 40,830,000 479,800 Stewart Information Services Corp. 17,781,388 ---------------- 58,611,388 ---------------- Transportation - 0.04% 55,032 Florida East Coast Industries, Inc. 3,288,162 ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 9 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Utilities, Utility Service 8,816,889 Covanta Holding Corp. (a) (c) (g) $ 179,247,353 Companies & Waste 861,208 Mirant Corp. (a) 25,465,921 Management - 2.75% 800,000 TXU Corp. 50,504,000 ---------------- 255,217,274 ---------------- TOTAL COMMON STOCKS AND WARRANTS (Cost $3,940,802,791) 6,607,228,707 ---------------- INVESTMENT AMOUNT ($) ----------------------------------------------------------------------------------------------------------------------------------- LIMITED PARTNERSHIPS - 0.01% Insurance & Reinsurance - 0.01% 1,805,000 Insurance Partners II Equity Fund, LP (a) (b) 1,290,297 ---------------- TOTAL LIMITED PARTNERSHIPS (Cost $1,028,831) 1,290,297 ---------------- PRINCIPAL AMOUNT (+) ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 27.65% Foreign Government 241,000,000 United Kingdom Treasury Bills, 4.61%-4.98%++, due 11/20/06-03/12/07 455,422,667 Obligations - 11.06% 298,435,000 United Kingdom Treasury Bonds, 4.50%-8.50%, due (Great Britain Pounds) 03/07/07-07/16/07 570,653,771 ---------------- 1,026,076,438 ---------------- Repurchase Agreement - 4.86% 450,399,699 Bear Stearns, 5.27%, dated 10/31/06, due 11/01/06 (e) 450,399,699 ---------------- U.S. Government Agency Note - 1.07% 100,000,000 Fannie Mae Discount Note, 5.28%++, due 12/13/06 99,427,120 ---------------- U.S. Government 25,000,000 U.S. Treasury Bills, 5.12%++, due 12/14/06 (f) 24,852,071 Obligations - 10.66% 975,000,000 U.S. Treasury Bills, 4.98%-5.38%++, due 11/02/06-04/26/07 964,027,055 ---------------- 988,879,126 ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 10 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE (NOTE 1) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT TERM INVESTMENTS (Cost $2,547,007,058) $ 2,564,782,383 ---------------- TOTAL INVESTMENT PORTFOLIO - 100.88% (Cost $6,826,862,947) 9,357,715,070 ---------------- LIABILITIES IN EXCESS OF OTHER ASSETS - (0.88%) (82,141,066) ---------------- NET ASSETS - 100.00% (Applicable to 153,848,187 shares outstanding) $ 9,275,574,004 ================
Notes: ADR: American Depository Receipt. PIK: Payment-in kind. (a) Non-income producing securities. (b) Fair-valued securities:
Carrying Value Security Per Unit Acquisition Date Acquisition Cost -------- -------------- ---------------------- ---------------- ACA Capital Holdings, Inc. Senior Convertible Pfd. $ 47,742.32 2/28/2001 $ 5,881,446 ACA Capital Holdings, Inc. Series B Convertible Pfd. 62.29 9/30/2004 8,333,333 ACA Capital Holdings, Inc. Convertible Pfd. 56,891.00 5/19/2000 to 8/28/2002 14,559,277 ACA Capital Holdings, Inc. Common Stock 41.07 9/24/1997 15,000,000 CGA Group, Ltd., Series C Pfd. -- 3/2/1999 7,039,179 ESG Re, Ltd. Warrants, expires 12/07 -- 1/28/1997 to 12/3/1997 -- FNC Realty Corp. 0.75 7/27/2005 11,163,732 FNC Realty Corp., 7.000%, due 7/27/08 Convertible Notes 100.00 7/27/2005 & 7/27/2006 9,492,739 Hechinger Co. 6.950%, due 10/15/03 2.33 7/9/2003 -- Hechinger Co. 9.450%, due 11/15/12 2.33 7/9/2003 -- Helicon RE Holdings, Ltd. 112.51 1/4/2006 & 1/6/2006 6,500,000 Insurance Partners II Equity Fund, LP 0.71 12/15/1998 to 7/26/2004 1,028,831 ISE Corp. Series B Pfd. 3.29 3/8/2006 4,999,994 Olympus RE Holdings, Ltd. 5.02 12/20/2001 12,750,008 RS Holdings, Class A -- 5/9/2003 to 4/20/2004 30,853 RS Holdings Convertible, Class A Pfd. -- 3/18/2002 to 4/20/2004 991,392 Safelite Glass Corp. 4.00 10/4/2000 to 2/26/2001 1,265,883 Safelite Realty Corp. 8.48 10/4/2000 to 2/26/2001 73,352 Sears Holding Corp. Trade Claims 0.09 1/22/2002 to 4/30/2003 5,442,521
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 11 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 (c) Affiliated issuers -- as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. (e) Repurchase agreement collateralized by: U.S. Treasury Bonds, par value $76,140,000, due 11/15/21-5/15/14, value $101,218,197. U.S. Treasury Notes, par value $116,598,000, due 1/15/09-1/15/14, value $126,406,627. U.S. Treasury Strips, par value $662,258,000, due 5/15/19-8/15/29, value $235,836,891. (f) Security is segregated for future fund commitments. (g) Restricted. * Issuer in default. # Amount represents less than 0.01% of total net assets. + Denominated in U.S. Dollars unless otherwise noted. ++ Annualized yield at date of purchase. (1) Incorporated in Bermuda. The aggregate cost for federal income tax purposes is $7,277,178,836. The aggregate gross unrealized appreciation is $2,293,258,564. The aggregate gross unrealized depreciation is ($212,722,330). Country Concentration % of Net Assets ---------- United States 49.15% Hong Kong 14.08 Japan 11.98 United Kingdom 11.06 Canada 4.31 Bermuda 3.86 Sweden 2.56 South Korea 2.55 Belgium 0.91 Switzerland 0.37 Cayman Islands 0.05 ------ Total 100.88% ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 12 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 THE SUMMARY OF THE FUND'S INVESTMENTS AS OF OCTOBER 31, 2006 IS AS FOLLOWS: (UNAUDITED) [BAR CHART] SECTOR % OF NET ASSETS Holding Companies 23.37 Real Estate 14.5 Non-Life Insurance-Japan 4.9 Oil & Gas Production & Services 4.17 Financial Insurance/Credit Enhancement 3.86 Annuities & Mutual Fund Management & Sales 3.52 Electronics Components 3.16 Utilities, Utility Service Companies & Waste Management 2.75 Steel & Specialty Steel 2.73 Security Brokers, Dealers & Flotation Companies 1.12 Depository Institutions 0.92 Insurance & Reinsurance 0.9 Medical Supplies & Services 0.89 Pharmaceuticals 0.89 Industrial 0.79 Title Insurance 0.63 Software 0.62 Other 3.51 Cash and Equivalents (Net) 26.77 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 13 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 ASSETS: Investments at value (Notes 1 and 4): Unaffiliated issuers (cost of $6,080,926,338) $ 7,976,968,648 Affiliated issuers (cost of $745,936,609) 1,380,746,422 --------------- Total investments (cost of $6,826,862,947) 9,357,715,070 Foreign currency at value (cost of $753,784) 748,194 Receivable for fund shares sold 26,196,215 Dividends and interest receivable 17,364,085 Other assets 178,017 Other receivables 104,346 --------------- Total assets 9,402,305,927 --------------- LIABILITIES: Payable for securities purchased 108,219,483 Payable for fund shares redeemed 9,226,839 Payable to investment adviser 7,033,855 Accounts payable and accrued expenses 1,521,025 Payable for other shareholder servicing fees (Note 3) 709,272 Payable to Trustees 21,449 Commitments (Note 6) -- --------------- Total liabilities 126,731,923 --------------- Net assets $ 9,275,574,004 =============== SUMMARY OF NET ASSETS: Capital stock, unlimited shares authorized, $0.001 par value, 153,848,187 shares outstanding $ 6,695,145,483 Accumulated undistributed net investment income 34,123,465 Accumulated undistributed net realized gains from investments and foreign currency transactions 15,680,333 Net unrealized appreciation of investments and translation of foreign currency denominated assets and liabilities 2,530,624,723 --------------- Net assets applicable to capital shares outstanding $ 9,275,574,004 =============== Net asset value, offering and redemption price per share $ 60.29 =============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 14 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006 INVESTMENT INCOME: Interest $ 240,234,632 Dividends - unaffiliated issuers (net of foreign withholding tax of $3,079,746) 63,751,280 Dividends - affiliated issuers (Note 4) 7,866,778 Other income 80,022 --------------- Total investment income 311,932,712 --------------- EXPENSES: Investment advisory fees (Note 3) 71,839,021 Other shareholder servicing fees (Note 3) 7,723,622 Transfer agent fees 1,763,000 Custodian fees 1,412,436 Reports to shareholders 1,216,500 Administration fees (Note 3) 470,108 Accounting services 398,276 Registration and filing fees 389,718 Trustees' and officers' fees and expenses 341,226 Auditing and tax consulting fees 164,210 Legal fees 128,000 Insurance expenses 66,195 Miscellaneous expenses 120,662 --------------- Total operating expenses 86,032,974 --------------- Net investment income 225,899,738 --------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments - unaffiliated issuers 49,968,282 Net realized gain on investments - affiliated issuers 2,318,979 Net realized gain on foreign currency transactions 17,934,232 Net change in unrealized appreciation on investments 643,785,382 Net change in unrealized depreciation on translation of other assets and liabilities denominated in foreign currency (147,307) --------------- Net realized and unrealized gain (loss) on investments and foreign currency transactions 713,859,568 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 939,759,306 ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 15 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- OPERATIONS: Net investment income $ 225,899,738 $ 39,299,143 Net realized gain on investments - unaffiliated issuers 49,968,282 456,915,782 Net realized gain on investments - affiliated issuers 2,318,979 13,615,472 Net realized gain (loss) on foreign currency transactions 17,934,232 (23,377,483) Net change in unrealized appreciation on investments 643,785,382 524,487,047 Net change in unrealized depreciation on translation of other assets and liabilities denominated in foreign currency (147,307) (133,229) ---------------- ---------------- Net increase in net assets resulting from operations 939,759,306 1,010,806,732 ---------------- ---------------- DISTRIBUTIONS: Dividends to shareholders from net investment income (184,620,893) (63,790,923) Distributions to shareholders from net realized gains (444,291,930) -- ---------------- ---------------- Decrease in net assets from distributions (628,912,823) (63,790,923) ---------------- ---------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares 3,398,645,067 2,381,396,785 Net asset value of shares issued in reinvestment of dividends and distributions 596,947,045 61,001,917 Redemption fees 354,473 318,400 Cost of shares redeemed (1,400,455,286) (818,461,138) ---------------- ---------------- Net increase in net assets resulting from capital share transactions 2,595,491,299 1,624,255,964 ---------------- ---------------- Net increase in net assets 2,906,337,782 2,571,271,773 Net assets at beginning of year 6,369,236,222 3,797,964,449 ---------------- ---------------- Net assets at end of year (including undistributed net investment income of $34,123,465 and $0, respectively) $ 9,275,574,004 $ 6,369,236,222 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 16 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE VALUE FUND FINANCIAL HIGHLIGHTS SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS FOLLOWS:
YEARS ENDED OCTOBER 31, ------------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- ----------- ----------- Net asset value, beginning of period $ 58.62 $ 48.16 $ 40.62 $ 29.90 $ 34.50 ----------- ----------- ----------- ----------- ----------- Income (loss) from investment operations: Net investment income 2.40 0.60 0.16 0.40 0.31 Net gain (loss) on securities (both realized and unrealized) 4.76(1) 10.64(1) 7.70(1) 10.75 (4.11) ----------- ----------- ----------- ----------- ----------- Total from investment operations 7.16 11.24 7.86 11.15 (3.80) ----------- ----------- ----------- ----------- ----------- Less distributions: Dividends from net investment income (1.61) (0.78) (0.32) (0.39) (0.61) Distributions from realized gains (3.88) -- -- (0.04) (0.19) ----------- ----------- ----------- ----------- ----------- Total distributions (5.49) (0.78) (0.32) (0.43) (0.80) ----------- ----------- ----------- ----------- ----------- Net asset value, end of period $ 60.29 $ 58.62 $ 48.16 $ 40.62 $ 29.90 =========== =========== =========== =========== =========== Total return 13.08% 23.55% 19.48% 37.76% (11.40%) Ratios/Supplemental Data: Net assets, end of period (in thousands) $ 9,275,574 $ 6,369,236 $ 3,797,964 $ 3,018,013 $ 2,198,110 Ratio of expenses to average net assets 1.08% 1.10% 1.12% 1.11% 1.07% Ratio of net investment income to average net assets 2.83% 0.77% 0.34% 1.23% 0.90% Portfolio turnover rate 7% 16% 8% 11% 19%
(1) Includes redemption fees of less than $0.01 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 17 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION - OCTOBER 31, 2006 (UNAUDITED) At October 31, 2006, the audited net asset value attributable to each of the 90,805,077 common shares outstanding of the Third Avenue Small-Cap Value Fund ("TASCX," or the "Fund") was $26.54 per share. This compares with an audited net asset value at October 31, 2005 of $23.60 per share, adjusted for a subsequent distribution to shareholders.
AVERAGE ANNUAL RETURNS FOR THE PERIODS ENDED OCTOBER 31, 2006 -------------------------------------- ONE YEAR ENDED THREE FIVE SINCE INCEPTION 10/31/06 YEAR YEAR (4/1/97) -------------- ------ ------ --------------- Third Avenue Small-Cap Value Fund 12.33% 15.24% 14.65% 12.53% Russell 2000 Value Index 22.90% 17.91% 17.52% 13.48% Russell 2000 Index 19.98% 14.53% 13.76% 10.14% S&P Small-Cap 600 Index 16.10% 16.05% 14.97% 12.46%
The Third Avenue Small-Cap Value Fund (the "Fund") seeks to achieve long-term capital appreciation and does not attempt to track any benchmark. Various comparative indices are included above for illustrative purposes both for the most recent year and over longer periods. Although the Fund is managed for the long term and does not seek to maximize short-term performance, during this year, the Fund underperformed these indices. Due to Fund management's long-term focus, we believe that the Fund's performance should be judged over the long term and in absolute terms, rather than against any of these indices, none of which are strictly comparable to the Fund. Based on such criteria, we remain happy with Fund performance over the long term. During the twelve-month period ended October 31, 2006, the Fund returned 12.33%. Contributors to this absolute performance include the meaningful appreciation of several securities, including Maverick Tube Corporation ("Maverick"), CommScope, Inc., and Sears Holding Corporation. Maverick was acquired by Tenaris SA for a cash price that represented a significant premium to the Fund's cost basis. Announced and/or completed resource conversions (e.g., mergers and acquisitions) involving several holdings, including Maverick, Advanced Power Technology, Inc., American Power Conversion, Scientific-Atlanta, Inc., and Trammell Crow Company ("Trammell Crow") positively contributed to performance during the year. Fund performance was also positively affected by strong performance by some of the Fund's holdings in the real estate sector (such as Brookfield Asset Management, Forest City Enterprises, and Trammell Crow). Significant detractors to performance during the year include LeapFrog Enterprises, Inc., Credence Systems Corporation, and Fording Canadian Coal Trust. Some of the Fund's holdings that are related to Oil and Gas, such as Cimarex Energy Company, Comstock Resources, Inc., and Pogo Producing Company, negatively affected the Fund's performance, perhaps due in part to cost inflation and to volatile oil and natural gas commodity prices. Conditions in the auto industry, which continued to be difficult this year, negatively affected Fund holdings in the auto part sector, such as Superior Industries International, Inc. and American Axle and Manufacturing Holdings, Inc. The St. Joe Company ("St. Joe") also negatively affected performance. During the year, St. Joe, a real estate operating company focused on Florida, was impacted by slowing growth in its markets. -------------------------------------------------------------------------------- 18 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION (CONTINUED) (UNAUDITED) The near-term outlook for these markets, as well as for the U.S. housing market in general, is uncertain, and this outlook appears to have influenced the performance of St. Joe common stock during the year. Fund management, however, continues to focus on the excellent long-term fundamentals of St. Joe. The Fund continues to look for suitable investment opportunities that meet our strict investment criteria, primarily in the United States. Due to the Fund's significant cash position and inflows from net new subscriptions the Fund closed to new investors on March 1, 2006. This step was necessary in order to slow cash inflows, however, the high cash position was likely a drag on performance during recent periods when stocks were generally appreciating. The Fund continues to invest where appropriate for the Fund's objectives and its strict value methodology. THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND'S PERFORMANCE 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 INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO'S HOLDINGS, THE PORTFOLIO'S PERFORMANCE, AND THE INVESTMENT TEAM'S VIEWS ARE AS OF OCTOBER 31, 2006, AND ARE SUBJECT TO CHANGE. Small-cap companies carry additional risks because their share prices may be more volatile, and their securities less liquid than larger, more established companies. Such investments may increase the risk of greater price fluctuations. These and other risks are described more fully in the Fund's prospectus. Third Avenue Small-Cap Value Fund IS 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 carefully before you send money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The Fund's returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. M.J. Whitman LLC Distributor. 12/21/06 If you should have any questions, or for updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdavenuefunds.com. Current performance may be lower or higher than performance quoted. The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Index measures the performance of small companies. The S&P Small-Cap 600 is a small cap index that covers approximately 3% of the U.S. equities market and is designed to be an efficient portfolio of companies that meet specific inclusion criteria to ensure that they are investable and financially viable. The Russell 2000 Value Index, Russell 2000 Index, and the S&P Small-Cap 600 Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends. -------------------------------------------------------------------------------- 19 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] PERFORMANCE INFORMATION (UNAUDITED) PERFORMANCE ILLUSTRATION COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE SMALL-CAP VALUE FUND, THE RUSSELL 2000 INDEX, THE RUSSELL 2000 VALUE INDEX AND THE S&P SMALL-CAP 600 INDEX FROM INCEPTION OF THE FUND (4/1/97) THROUGH OCTOBER 31, 2006 Average Annual Total Return Since Inception 1 Year 3 Years 5 Years (4/1/97) 12.33% 15.24% 14.65% 12.53% [LINE GRAPH]
TASCX* Russell 2000 Value Index* Russell 2000 Index* S&P SM-CAP 600 Index* 4/1/1997 10000 10000 10000 10000 10/31/1997 12370 12764 12640 13129 10/31/1998 10717.4 11252.7 11668 11676.9 10/31/1999 11480.4 12926 11752 13082.8 10/31/2000 14155.4 15176.5 13785.1 16388.9 10/31/2001 15647.4 13249 14991.3 15335.1 10/31/2002 14376.8 11716.1 14612 14755.4 10/31/2003 20254 16797.4 20499.2 19710.3 10/31/2004 23719.5 18767.7 24187 23017.6 10/31/2005 27600 21034.9 27341 26532.4 10/31/2006 31003.1 25237.7 33602.1 30804.2
* All returns include reinvestment of all distributions. As with all mutual funds, past performance does not indicate future results. The returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. -------------------------------------------------------------------------------- 20 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 2006
PRINCIPAL VALUE AMOUNT ($) ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ BANK DEBT - 0.00%# Technology - 0.00%# 4,942,604 Insilco Technologies Bank Debt (a) (b) (d) $ 66,489 ----------------- TOTAL BANK DEBT (Cost $0) 66,489 ----------------- SHARES ------------------------------------------------------------------------------------------------------------------------------------ PREFERRED STOCKS - 0.35% Financial Insurance/Credit 133,783 ACA Capital Holdings, Inc. Series B Convertible (a) (b) 8,333,333 Enhancement - 0.35% ----------------- TOTAL PREFERRED STOCKS (Cost $8,333,333) 8,333,333 ----------------- ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS - 73.16% Aerospace & Defense - 0.67% 1,088,351 Herley Industries, Inc. (a) (c) 16,064,061 ----------------- Agriculture Chemicals - 1.37% 1,176,700 Agrium, Inc. (Canada) 32,971,134 ----------------- Annuities & Mutual Fund 134,170 Westwood Holdings Group, Inc. 2,679,375 Management & Sales - 0.11% ----------------- Auto Parts - 1.02% 730,400 American Axle & Manufacturing Holdings, Inc. 13,695,000 642,200 Superior Industries International, Inc. 10,853,180 ----------------- 24,548,180 ----------------- Banking - 1.73% 370,945 Investors Bancorp, Inc. (a) 5,519,662 474,613 Kearny Financial Corp. 7,593,808 1,259,961 NewAlliance Bancshares, Inc. 19,504,196 290,110 Rockville Financial, Inc. 4,279,123 275,636 Wauwatosa Holdings, Inc. (a) 4,884,270 ----------------- 41,781,059 ----------------- Cable Television 1,416,700 CommScope, Inc. (a) 45,206,897 ----------------- Equipment - 1.88% ------------------------------------------------------------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 21 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) Computer Peripherals - 0.87% 327,900 Lexmark International, Inc., Class A (a) $ 20,851,161 ----------------- Consumer Products - 4.30% 1,325,055 JAKKS Pacific, Inc. (a) 28,740,443 1,259,648 K-Swiss, Inc., Class A 44,490,767 1,746,850 Leapfrog Enterprises, Inc. (a) 16,839,634 901,300 Russ Berrie & Co., Inc. (a) 13,663,708 ----------------- 103,734,552 ----------------- Diversified Media - 0.74% 1,515,751 Journal Communications, Inc., Class A 17,734,287 ----------------- Electronics Components - 4.41% 892,520 American Power Conversion Corp. 26,980,880 690,643 Bel Fuse, Inc., Class B (c) 24,600,704 649,239 Electronics for Imaging, Inc. (a) 15,348,010 1,064,650 Ingram Micro, Inc., Class A (a) 21,942,437 568,100 Park Electrochemical Corp. 17,452,032 ----------------- 106,324,063 ----------------- Energy/Coal - 1.07% 1,018,600 Fording Canadian Coal Trust (Canada) 25,892,812 ----------------- Energy/Services - 2.36% 487,400 Precision Drilling Trust (Canada) 13,968,884 539,600 Tidewater, Inc. 26,834,308 203,636 Weatherford International, Ltd. (a) (Bermuda) 8,365,367 502,200 Willbros Group, Inc. (a) (Panama) 7,708,770 ----------------- 56,877,329 ----------------- Forest Products & Paper - 5.75% 3,156,000 Canfor Corp. (a) (Canada) 33,247,678 264,100 Canfor Pulp Income Fund (Canada) 2,986,838 12,107,879 Catalyst Paper Corp. (a) (b) (c) (g) (Canada) 33,085,201 750,875 Deltic Timber Corp. (c) 38,227,046 2,612,600 TimberWest Forest Corp. (Canada) 31,036,185 ----------------- 138,582,948 -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 22 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) Healthcare Services - 1.81% 525,804 Andrx Corp. (a) $ 12,929,520 678,431 Cross Country Healthcare, Inc. (a) 13,134,424 246,834 PAREXEL International Corp. (a) 7,306,286 323,230 Pharmaceutical Product Development, Inc. 10,230,229 ----------------- 43,600,459 ----------------- Holding Companies - 4.87% 1,401,525 Brookfield Asset Management, Inc., Class A (Canada) 62,423,924 449,743 IDT Corp. (a) 5,801,685 1,706,400 IDT Corp., Class B (a) 22,166,136 3,111,000 JZ Equity Partners PLC (United Kingdom) 9,940,150 645,300 Leucadia National Corp. 17,016,561 ----------------- 117,348,456 ----------------- Home Furnishings - 0.69% 748,046 Stanley Furniture Co., Inc. (c) 16,539,297 ----------------- Industrial Equipment - 3.48% 416,300 Alamo Group, Inc. 9,658,160 1,126,284 Bandag, Inc. (c) 49,432,605 688,800 Trinity Industries, Inc. 24,838,128 ----------------- 83,928,893 ----------------- Insurance & Reinsurance - 2.76% 322,900 Arch Capital Group, Ltd. (a) (Bermuda) 20,759,241 59,974 E-L Financial Corp., Ltd. (Canada) 30,762,745 65,000 Helicon RE Holdings, Ltd. (a) (b) (Bermuda) 7,313,150 135,000 Montpelier RE Holdings, Ltd. (Bermuda) 2,396,250 400,000 Sompo Japan Insurance, Inc. (Japan) 5,321,705 ----------------- 66,553,091 ----------------- Life Insurance - 2.13% 179,000 FBL Financial Group, Inc., Class A 6,327,650 148,742 National Western Life Insurance Co., Class A 35,675,769 589,400 Phoenix Cos., Inc. (The) 9,336,096 ----------------- 51,339,515 -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 23 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) Manufactured Housing - 0.54% 327,339 Skyline Corp. $ 12,926,617 ----------------- Oil & Gas - 12.35% 1,721,622 Cimarex Energy Co. 62,012,824 535,800 CNX Gas Corp. (a) 14,011,170 1,579,397 Comstock Resources, Inc. (a) 44,065,176 1,464,105 Pogo Producing Co. 65,518,699 800,000 Rosetta Resources, Inc. (a) 14,464,000 1,165,900 St. Mary Land & Exploration Co. 43,476,411 1,211,577 Whiting Petroleum Corp. (a) 54,048,450 ----------------- 297,596,730 ----------------- Real Estate - 8.31% 630,446 Alexander & Baldwin, Inc. 29,019,429 279,531 Alico, Inc. 17,330,922 139,000 Avatar Holdings, Inc. (a) 9,036,390 749,200 Forest City Enterprises, Inc., Class A 41,131,080 977,700 St. Joe Co. (The) 52,580,706 322,646 Tejon Ranch Co. (a) 15,648,331 211,300 Trammell Crow Co. (a) 10,300,875 650,549 Vail Resorts, Inc. (a) 25,143,719 ----------------- 200,191,452 ----------------- Retail - 2.54% 225,000 Buckle, Inc. (The) 8,905,500 1,617,166 Haverty Furniture Cos., Inc. (c) 25,551,223 153,770 Sears Holding Corp. (a) 26,828,252 ----------------- 61,284,975 ----------------- Semiconductor 280,700 Coherent, Inc. (a) 9,046,961 Equipment Manufacturers 1,237,051 Electro Scientific Industries, Inc. (a) 24,679,167 & Related - 1.93% 1,400,182 GSI Group, Inc. (a) (Canada) 12,811,665 ----------------- 46,537,793 -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 24 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCKS (CONTINUED) Software - 3.44% 3,939,252 Borland Software Corp. (a) (c) $ 21,744,671 2,386,734 Magma Design Automation, Inc. (a) (c) 22,220,494 379,700 Sybase, Inc. (a) 9,245,695 1,317,736 Synopsys, Inc. (a) 29,662,237 ----------------- 82,873,097 ----------------- Telecommunications 471,000 Comverse Technology, Inc. (a) 10,253,670 Equipment - 1.60% 3,858,740 Sycamore Networks, Inc. (a) 14,470,275 1,314,396 Tellabs, Inc. (a) 13,853,734 ----------------- 38,577,679 ----------------- Travel & Recreation - 0.43% 409,434 Sabre Holdings Corp., Class A 10,407,812 ----------------- TOTAL COMMON STOCKS (Cost $1,267,477,013) 1,762,953,724 ----------------- INVESTMENT AMOUNT ($) ------------------------------------------------------------------------------------------------------------------------------------ LIMITED PARTNERSHIPS - 0.75% Holding Companies - 0.75% 1,000,000 AP Alternative Assets LP (a) (b) (Gurnsey) 18,050,000 ----------------- TOTAL LIMITED PARTNERSHIPS (Cost $20,000,000) 18,050,000 ----------------- CONTRACTS ------------------------------------------------------------------------------------------------------------------------------------ PURCHASED OPTIONS - 0.00%# Retail - 0.00%# 1,467 Sears Holding Corp., Put Strike $120, expires 01/20/07 45,477 ----------------- TOTAL PURCHASED OPTIONS (Cost $2,501,873) 45,477 -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 25 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
PRINCIPAL VALUE AMOUNT ($) ISSUES (NOTE 1) ------------------------------------------------------------------------------------------------------------------------------------ SHORT TERM INVESTMENTS - 25.91% Repurchase Agreement - 4.06% 97,812,482 Bear Stearns, 5.27%, dated 10/31/06, due 11/01/06 (f) $ 97,812,482 ----------------- U.S. Government Agency 30,000,000 Fannie Mae Discount Note, 5.28%+, due 12/13/06 29,820,147 Note - 1.24% ----------------- U.S. Government 505,000,000 U.S. Treasury Bills, 4.97%-5.28%+, due 11/24/06-4/19/07 496,674,748 Obligations - 20.61% ----------------- TOTAL SHORT TERM INVESTMENTS (Cost $624,322,029) 624,307,377 ----------------- TOTAL INVESTMENT PORTFOLIO - 100.17% (Cost $1,922,634,248) 2,413,756,400 ----------------- CONTRACTS ------------------------------------------------------------------------------------------------------------------------------------ WRITTEN OPTIONS - (0.14%) Retail - (0.14%) 1,467 Sears Holding Corp., Call Strike $155, expires 01/20/07 (e) (3,520,800) ----------------- TOTAL WRITTEN OPTIONS (Premiums received $2,514,738) (3,520,800) ----------------- LIABILITIES IN EXCESS OF OTHER ASSETS - (0.03%) (611,512) ----------------- NET ASSETS - 100.00% (Applicable to 90,805,077 shares outstanding) $ 2,409,624,088 =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 26 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 2006 Notes: (a) Non-income producing securities. (b) Fair-valued securities:
Carrying Value Security Per Unit Acquisition Date Acquisition Cost ----------------------------------- -------------- ------------------- ---------------- ACA Capital Holdings, Inc. Series B Convertible Pfd. $ 62.29 9/30/2004 $ 8,333,333 AP Alternative Assets LP 18.05 6/08/2006 20,000,000 Catalyst Paper Corp.^^ 2.73 10/23/2006 36,007,695 Helicon RE Holdings, Ltd. 112.51 1/4/2006 & 1/6/2006 6,500,000 Insilco Technologies Bank Debt 1.35 9/18/2002 --^
^ Acquisition Cost has been adjusted for return of capital. ^^ Restricted (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of these issuers). (d) Cost has been reduced to $0 due to distributions received. (e) Collateralized by Sears Holding Corp. common stock. (f) Repurchase agreements collateralized by U.S. Treasury Strips, par value $217,024,000, due 8/15/21-8/15/23, value $100,651,441. (g) Security subject to restrictions on resale. # Amount represents less than 0.01% of total net assets. + Annualized yield at date of purchase. The aggregate cost for federal income tax purposes is $1,926,992,735. The aggregate gross unrealized appreciation is $515,809,588. The aggregate gross unrealized depreciation is ($29,045,923). Country Concentration % of Net Assets ---------- United States 85.13% Canada 11.59 Bermuda 1.61 Guernsey 0.75 United Kingdom 0.41 Panama 0.32 Japan 0.22 ------ Total 100.03% ====== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 27 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 THE SUMMARY OF THE FUND'S INVESTMENTS AS OF OCTOBER 31, 2006 IS AS FOLLOWS: (UNAUDITED) [BAR CHART] SECTOR % OF NET ASSETS Oil & Gas 12.35 Real Estate 8.31 Forest Products & Paper 5.75 Holding Companies 4.87 Electronics Components 4.41 Consumer Products 4.3 Industrial Equipment 3.48 Software 3.44 Insurance & Reinsurance 2.76 Retail 2.4 Energy Services 2.36 Life Insurance 2.13 Semiconductor Equipment Manufacturers & Related 1.93 Cable Television Equipment 1.88 Healthcare Services 1.81 Banking 1.73 Telecommunications Equipment 1.6 Other 8.61 Cash & Equivalents (Net) 25.88 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 28 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 ASSETS: Investments at value (Notes 1 and 4): Unaffiliated issuers (cost of $1,696,430,938) $2,166,291,098 Affiliated issuers (cost of $226,203,310) 247,465,302 -------------- Total investments (cost of $1,922,634,248) 2,413,756,400 Receivable for securities sold 4,099,676 Receivable for fund shares sold 943,763 Dividends and interest receivable 900,320 Other assets 35,973 -------------- Total assets 2,419,736,132 -------------- LIABILITIES: Payable for fund shares redeemed 3,824,665 Written options, at value (premiums received $2,514,738) 3,520,800 Payable to investment adviser 1,825,773 Accounts payable and accrued expenses 433,337 Payable for securities purchased 268,746 Payable for other shareholder servicing fees (Note 3) 233,004 Payable to Trustees 5,719 Commitments (Note 6) -- -------------- Total liabilities 10,112,044 -------------- Net assets $2,409,624,088 ============== SUMMARY OF NET ASSETS: Capital stock, unlimited shares authorized, $0.001 par value, 90,805,077 shares outstanding $1,809,352,206 Accumulated undistributed net investment income 21,853,203 Accumulated undistributed net realized gains from investments and foreign currency transactions 88,300,749 Net unrealized appreciation of investments and translation of foreign currency denominated assets and liabilities 490,117,930 -------------- Net assets applicable to capital shares outstanding $2,409,624,088 ============== Net asset value, offering and redemption price per share $ 26.54 ============== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 29 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006 INVESTMENT INCOME: Interest $ 34,987,190 Dividends - unaffiliated issuers (net of foreign withholding tax of $997,515) 25,784,068 Dividends - affiliated issuers (Note 4) 1,927,067 Securities lending income (Note 1) 843,833 Other income 4,439 ------------- Total investment income 63,546,597 ------------- EXPENSES: Investment advisory fees (Note 3) 20,717,653 Other shareholder servicing fees (Note 3) 2,276,923 Transfer agent fees 627,500 Reports to shareholders 386,422 Custodian fees 373,218 Registration and filing fees 188,474 Accounting services 141,736 Administration fees (Note 3) 136,525 Trustees' and officers' fees and expenses 114,567 Auditing and tax consulting fees 78,626 Insurance expenses 19,235 Legal fees 1,200 Miscellaneous expenses 6,438 ------------- Total operating expenses 25,068,517 ------------- Net investment income 38,478,080 ------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments - unaffiliated issuers 88,998,021 Net realized loss on foreign currency transactions (34,051) Net change in unrealized appreciation on investments 125,017,576 Net change in unrealized depreciation on written options (1,349,640) Net change in unrealized appreciation on translation of other assets and liabilities denominated in foreign currency 1,840 ------------- Net realized and unrealized gain (loss) on investments, written options and foreign currency transactions 212,633,746 ------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 251,111,826 =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 30 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- OPERATIONS: Net investment income $ 38,478,080 $ 11,302,278 Net realized gains on investments - unaffiliated issuers 88,998,021 27,463,959 Net realized loss on investments - affiliated issuers -- (932,459) Net realized loss on foreign currency transactions (34,051) (5,817) Net change in unrealized appreciation on investments 125,017,576 153,225,860 Net change in unrealized appreciation (depreciation) on written options (1,349,640) 343,578 Net change in unrealized appreciation on translation of other assets and liabilities denominated in foreign currency 1,840 -- --------------- --------------- Net increase in net assets resulting from operations 251,111,826 191,397,399 --------------- --------------- DISTRIBUTIONS: Dividends to shareholders from net investment income (24,795,444) (4,593,461) Distributions to shareholders from net realized gains (26,684,469) (3,770,892) --------------- --------------- Decrease in net assets from distributions (51,479,913) (8,364,353) --------------- --------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares 701,999,810 950,587,414 Net asset value of shares issued in reinvestment of dividends and distributions 48,852,018 8,019,912 Redemption fees 758,307 683,104 Cost of shares redeemed (415,133,712) (225,752,748) --------------- --------------- Net increase in net assets resulting from capital share transactions 336,476,423 733,537,682 --------------- --------------- Net increase in net assets 536,108,336 916,570,728 Net assets at beginning of year 1,873,515,752 956,945,024 --------------- --------------- Net assets at end of year (including undistributed net investment income of $21,853,203 and $8,004,007, respectively) $ 2,409,624,088 $ 1,873,515,752 =============== ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 31 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE SMALL-CAP VALUE FUND FINANCIAL HIGHLIGHTS SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS FOLLOWS:
YEARS ENDED OCTOBER 31, -------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ---------- --------- --------- Net asset value, beginning of period $ 24.23 $ 20.98 $ 18.02 $ 12.92 $ 14.33 ----------- ----------- ---------- --------- --------- Income (loss) from investment operations: Net investment income 0.44 0.17 0.05 0.03 0.14 Net gain (loss) on securities (both realized and unrealized) 2.50(1) 3.25(2) 3.02(2) 5.21(1) (1.26)(2) ----------- ----------- ---------- --------- --------- Total from investment operations 2.94 3.42 3.07 5.24 (1.12) ----------- ----------- ---------- --------- --------- Less distributions: Dividends from net investment income (0.30) (0.09) (0.03) (0.14) (0.12) Distributions from realized gains (0.33) (0.08) (0.08) -- (0.17) ----------- ----------- ---------- --------- --------- Total distributions (0.63) (0.17) (0.11) (0.14) (0.29) ----------- ----------- ---------- --------- --------- Net asset value, end of period $ 26.54 $ 24.23 $ 20.98 $ 18.02 $ 12.92 =========== =========== ========== ========= ========= Total return 12.33% 16.36% 17.11% 40.88% (8.12%) Ratios/Supplemental Data: Net assets, end of period (in thousands) $ 2,409,624 $ 1,873,516 $ 956,945 $ 541,832 $ 369,346 Ratio of expenses to average net assets 1.09% 1.13% 1.14% 1.17% 1.17% Ratio of net investment income to average net assets 1.67% 0.80% 0.28% 0.21% 1.03% Portfolio turnover rate 15% 11% 10% 22% 19%
(1) Includes redemption fees of less than $0.01 per share. (2) Includes redemption fees of $0.01 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 32 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION - OCTOBER 31, 2006 (UNAUDITED) At October 31, 2006, the audited net asset value attributable to each of the 86,401,434 common shares outstanding of the Third Avenue Real Estate Value Fund ("TAREX," or the "Fund") was $36.34 per share. This compares with an audited net asset value at October 31, 2005 of $27.94 per share, adjusted for a subsequent distribution to shareholders.
AVERAGE ANNUAL RETURNS FOR THE PERIODS ENDED OCTOBER 31, 2006 -------------------------------------- ONE YEAR ENDED THREE FIVE SINCE INCEPTION 10/31/06 YEAR YEAR (9/17/98) -------------- -------- -------- ---------------- Third Avenue Real Estate Value Fund 29.78% 25.40% 22.80% 20.49% Morgan Stanley REIT Index 37.77% 28.03% 24.57% 18.51% Bloomberg Real Estate Operating Companies Index 7.17% 26.11% 23.41% 17.66% DJ Wilshire Real Estate Securities Index 39.03% 29.92% 25.72% 19.50%
The Third Avenue Real Estate Value Fund (the "Fund") seeks to achieve long-term capital appreciation and does not attempt to track any benchmark. Various comparative indices are included above for illustrative purposes both for the most recent year and over longer periods. The Fund is managed for the long term and does not seek to maximize short-term performance. The Fund somewhat underperformed the indices above over the last year. Due to the nature of the Fund's long-term deep value investment philosophy that focuses on capital appreciation and not income, there are few widely recognized real estate benchmarks against which to compare performance. This limited availability of benchmarks forces us to compare the Fund's performance to indices that have significantly different investment characteristics than the Fund. Both the Morgan Stanley REIT Index and the DJ Wilshire Real Estate Securities Index are comprised almost entirely of Real Estate Investment Trust ("REIT") stocks. As the Fund is not managed to create income and thus has a strong emphasis on real estate operating companies ("REOCs"), neither of these indices provides a particularly useful comparison to the Fund. We believe that the Fund's performance should be judged over the long term and in absolute terms, rather than against any of these indices, none of which are strictly comparable to the Fund. Based on such criteria, we remain happy with Fund performance over the long term. During the twelve-month period ended October 31, 2006, the Fund returned 29.78%. Interest rates have remained relatively low in a historical sense. The share prices of homebuilding companies, in general, have suffered during the latter portion of the year, due primarily to the short-term uncertainty surrounding U.S. residential construction. However, the Fund's limited exposure to homebuilders has helped enable satisfactory absolute performance. Significant investments in the common stocks of Forest City Enterprises, ProLogis, and Brookfield Asset Management were among the greatest contributors to the Fund's absolute performance. The Fund also benefited from announced and/or completed resource conversions (e.g., mergers and acquisitions) involving holdings including Bedford Property Trust, Inc., Criimi Mae, Inc., Fairmont Hotels and Resorts, Inc., and Trammell Crow Company. Also during the year, the Fund continued to make significant new investments in real estate companies outside of the United States. Some of these companies were significant contributors to performance, including British Land Co. PLC, Unite Group PLC, Liberty International PLC, and Derwent Valley Holdings PLC, which are all U.K.-based REOCs. -------------------------------------------------------------------------------- 33 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION (CONTINUED) (UNAUDITED) The most significant detractor to Fund performance during the year was The St. Joe Company ("St. Joe"), which is also one of the Fund's largest holdings. St. Joe is a diversified real estate operating company that is the largest private landowner in Florida. During the year, slowing growth in its markets impacted St. Joe. The near-term outlook for these markets, as well as for the U.S. housing market in general, is uncertain, and this outlook appears to have influenced the performance of St. Joe common stock during the year. Fund management continues to focus on the long-term fundamentals of St. Joe and all of the Fund's investments. The Fund had cash balances averaging 11% of the portfolio during the year. Cash balances earned an average yield of 4.7%, compared with much higher returns for the real estate indices. This lower yield on cash balances also detracted from Fund performance. The fund reopened to new investors on July 1, 2006, after being closed for one year. During the period the Fund was closed, cash balances were substantially reduced as the result of new investments (primarily in securities outside of the United States) and net redemptions. THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND'S PERFORMANCE 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 INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO'S HOLDINGS, THE PORTFOLIO'S PERFORMANCE, AND THE INVESTMENT TEAM'S VIEWS ARE AS OF OCTOBER 31, 2006, AND ARE SUBJECT TO CHANGE. Real estate investments may be subject to special risks, including risks related to general and local economic conditions, and changes in real estate values that may have negative effects on issuers related to the real estate industry. The Fund's investments in small and medium capitalizations stocks may experience more volatility than larger capitalization stocks. These and other risks are described more fully in the Fund's prospectus. Third Avenue Real Estate Value Fund IS 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 carefully before you send money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The Fund's returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. M.J. Whitman LLC Distributor. 12/21/06 If you should have any questions, or for updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdavenuefunds.com. Current performance may be lower or higher than performance quoted. -------------------------------------------------------------------------------- 34 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION (CONTINUED) (UNAUDITED) The Morgan Stanley REIT Index is a total-return index comprised of the most actively traded real estate investment trusts and is designed to be a measure of real estate equity performance. The Bloomberg Real Estate Operating Companies Index is a capitalization-weighted index of Real Estate Operating Companies having a market capitalization of $15 million or greater. The DJ Wilshire Real Estate Securities Index is a broad measure of the performance of publicly traded real estate securities, such as Real Estate Investment Trusts (REITs) and Real Estate Operating Companies (REOCs) and is capitalization weighted. The Morgan Stanley REIT Index, Bloomberg Real Estate Operating Companies Index and DJ Wilshire Real Estate Securities Index are not securities that can be purchased or sold, and their total returns are reflective of unmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends. -------------------------------------------------------------------------------- 35 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] PERFORMANCE INFORMATION (UNAUDITED) PERFORMANCE ILLUSTRATION COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE REAL ESTATE VALUE FUND, THE MORGAN STANLEY REIT INDEX, THE BLOOMBERG REAL ESTATE OPERATING COMPANY INDEX AND THE DJ WILSHIRE REAL ESTATE SECURITIES INDEX FROM INCEPTION OF THE FUND (9/17/98) THROUGH OCTOBER 31, 2006 Average Annual Total Return Since Inception 1 Year 3 Years 5 Years (9/17/98) 29.78% 25.40% 22.80% 20.49% [LINE GRAPH]
Bloomberg Real Estate DJ Wilshire Real TAREX* Morgan Stanley REIT Index* Operating Co. Index* Estate Securities Index* 9/17/1998 10000 10000 10000 10000 10/31/1998 10280 10534 10471.4 10567 10/31/1999 11190.8 9874.57 10428.4 10060.5 10/31/2000 14157.5 11671.7 11990.9 12280.8 10/31/2001 16268.4 13219.4 13087.8 13538 10/31/2002 17434.8 14103.8 12892 14300.2 10/31/2003 23040.1 18890.6 18678.3 19389.7 10/31/2004 29830 24459.6 26336.9 25466.4 10/31/2005 35008.5 28774.2 34975.4 30582.6 10/31/2006 45434.1 39642.3 37483.1 42519
* All returns include reinvestment of all distributions. As with all mutual funds, past performance does not indicate future results. The returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. -------------------------------------------------------------------------------- 36 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 2006
PRINCIPAL VALUE AMOUNT(+)/UNITS ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- CORPORATE DEBT INSTRUMENTS - 0.83% Real Estate Operating 6,491,201 FNC Realty Corp., 7.000% PIK, due 07/27/08 (b) $ 6,491,201 Companies - 0.70% 400,000 Forest City Enterprises, Inc., $25 par, 7.375%, due 02/01/34 10,236,000 (Canadian Dollars) 6,666,600 Sterling Centrecorp Inc., 8.500%, due 12/31/09 (b) (Canada) 5,391,697 --------------- 22,118,898 --------------- Retail - 0.13% 4,000,000 Pathmark Stores, Inc., 8.750%, due 02/01/12 3,920,000 --------------- TOTAL CORPORATE DEBT INSTRUMENTS (Cost $25,015,359) 26,038,898 --------------- SHARES ---------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS - 0.31% Real Estate Investment 125,000 RAIT Investment Trust, 7.750% Series A 3,112,500 Trusts - 0.31% 250,000 RAIT Investment Trust, 8.375% Series B 6,562,500 --------------- 9,675,000 --------------- TOTAL PREFERRED STOCKS (Cost $9,375,000) 9,675,000 --------------- ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS - 91.00% Diversified Financial 774,000 Guoco Group, Ltd. (Hong Kong) (1) 9,350,062 Services - 0.30% --------------- Homebuilders - 1.15% 434,690 Avatar Holdings, Inc. (a) (c) 28,259,197 239,783 Brookfield Homes Corp. 7,780,958 --------------- 36,040,155 --------------- Hotels - 1.28% 1,038,383 Vail Resorts, Inc. (a) 40,133,503 --------------- Natural Resources - 0.14% 85,200 Deltic Timber Corp. 4,337,532 --------------- Real Estate Investment 2,293,800 Acadia Realty Trust (c) 58,606,590 Trusts - 26.48% 3,935,998 American Financial Realty Trust 45,933,096 642,148 American Land Lease, Inc. (c) 16,631,633 1,190,100 Anthracite Capital, Inc. 17,042,232
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 37 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Real Estate 1,348,100 Associated Estates Realty Corp. (c) $ 22,176,245 Investment Trusts 1,640,450 Capital Lease Funding, Inc. 19,324,501 (continued) 1,000,000 Columbia Equity Trust, Inc. (c) 17,160,000 1,000,000 Crystal River Capital, Inc. (d) 22,030,000 100,000 Crystal River Capital, Inc. 2,203,000 563,400 First Potomac Realty Trust 17,431,596 2,251,800 JER Investors Trust, Inc. (c) 40,442,328 938,200 One Liberty Properties, Inc. (c) 22,413,598 4,341,792 ProLogis 274,705,180 1,150,400 PS Business Parks, Inc. (c) 75,753,840 1,026,100 RAIT Investment Trust 30,844,566 1,248,200 Vornado Realty Trust 148,847,850 --------------- 831,546,255 --------------- Real Estate 49,926,000 Midland Realty Holdings, Ltd. (c) (Hong Kong) (1) 24,779,401 Management/Brokerage - 3.24% 1,579,950 Trammell Crow Co. (a) 77,022,562 --------------- 101,801,963 --------------- Real Estate Operating 5,000 Atlantic American Realty Capital Advisors, Inc. (a) (b) -- Companies - 56.89% 4,051,653 British Land Co. PLC (United Kingdom) 115,545,109 5,496,084 Brookfield Asset Management, Inc., Class A (Canada) 244,795,581 2,143,900 Brookfield Properties Corp. (Canada) 81,232,371 6,676,000 Chinese Estates Holdings, Ltd. (Hong Kong) (1) 8,008,934 510,000 Consolidated-Tomoka Land Co. (c) 32,997,000 1,856,219 Derwent Valley Holdings PLC (United Kingdom) 70,250,434 1,070,300 First Capital Realty, Inc. (Canada) 24,399,733 4,028,393 FNC Realty Corp. (a) (b) 3,021,295 6,012,900 Forest City Enterprises, Inc., Class A (c) 330,108,210 1,017,031 Forest City Enterprises, Inc., Class A (c) (d) 55,835,002 21,631,000 Hang Lung Properties, Ltd. (Hong Kong) 47,171,445 15,640,000 Henderson Land Development Co., Ltd. (Hong Kong) 86,071,080 6,558,000 Hongkong Land Holdings, Ltd. (Hong Kong) (1) 24,658,080 7,380,400 Killam Properties, Inc. (a) (c) (Canada) 16,956,616
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 38 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND WARRANTS (CONTINUED) Real Estate 3,283,066 Liberty International PLC (United Kingdom) $ 84,169,939 Operating Companies 4,042,175 Quintain Estates & Development PLC (United Kingdom) 58,061,495 (continued) 5,070,861 St. Joe Co. (The) (c) 272,710,905 108,000 Sterling Centrecorp, Inc. (a) (Canada) 105,793 108,000 Sterling Centrecorp, Inc. Warrants, expires 3/09 (a) (b) (Canada) 15,677 13,220,000 Tai Cheung Holdings, Ltd. (Hong Kong) (1) 6,527,388 446,093 Tejon Ranch Co. (a) 21,635,510 2,000,000 Thomas Properties Group, Inc. (c) 27,060,000 7,757,487 Unite Group PLC (c) (United Kingdom) 73,582,405 17,807,800 Wharf (Holdings), Ltd. (The) (Hong Kong) 60,449,252 20,498,500 Wheelock & Co., Ltd. (Hong Kong) 37,110,898 4,240,000 Wheelock Properties, Ltd. (Hong Kong) 3,816,283 --------------- 1,786,296,435 --------------- Retail - 1.52% 272,951 Sears Holding Corp. (a) 47,621,761 --------------- TOTAL COMMON STOCKS AND WARRANTS (Cost $1,760,322,581) 2,857,127,666 --------------- CONTRACTS ---------------------------------------------------------------------------------------------------------------------------------- PURCHASED OPTIONS - 0.00%# Retail - 0.00%# 2,443 Sears Holding Corp., Put Strike $120, expires 01/20/07 75,733 --------------- TOTAL PURCHASED OPTIONS (Cost $4,166,382) 75,733 --------------- PRINCIPAL AMOUNT ($) ---------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS - 7.62% Repurchase Agreement - 4.45% 139,784,409 Bear Stearns, 5.27%, dated 10/31/06, due 11/01/06 (f) 139,784,409 --------------- U.S. Government 50,000,000 U.S. Treasury Bill, 5.01%++, due 11/24/06 49,838,843 Obligations - 3.17% 50,000,000 U.S. Treasury Bill, 5.14%++, due 12/14/06 (g) 49,707,182 --------------- 99,546,025 --------------- TOTAL SHORT TERM INVESTMENTS (Cost $239,330,434) 239,330,434 --------------- TOTAL INVESTMENT PORTFOLIO - 99.76% (Cost $2,038,209,756) 3,132,247,731 ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 39 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE CONTRACTS ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- WRITTEN OPTIONS - (0.19%) Retail - (0.19%) 2,443 Sears Holding Corp., Call Strike $155, expires 01/20/07 (e) $ (5,863,200) --------------- TOTAL WRITTEN OPTIONS (Premiums received $4,187,812) (5,863,200) --------------- OTHER ASSETS LESS LIABILITIES - 0.43% 13,399,754 --------------- NET ASSETS - 100.00% $ 3,139,784,285 =============== (Applicable to 86,401,434 shares outstanding)
Notes: PIK: Payment-in kind. (a) Non-income producing securities. (b) Fair-valued securities:
Carrying Value Security Per Unit Acquisition Date Acquisition Cost -------- -------------- ---------------------- ---------------- Atlantic American Realty Capital Advisors, Inc. $ -- 10/22/2004 $ 500,000 FNC Realty Corp. 0.75 5/22/2002 to 7/27/2005 4,003,247 FNC Realty Corp., 7.000%, due 07/27/08 Convertible Notes 100.00 7/27/2005 6,491,201 Sterling Centrecorp, Inc., 8.500% due 12/31/09 80.88 5/11/2004 & 12/16/2004 4,610,226 Sterling Centrecorp, Inc. Warrants, expires 3/09 0.15 3/26/2004 --
(c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of those issuers). (d) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. (e) Collateralized by Sears Holding Corp. common stock. (f) Repurchase agreements collateralized by: U.S. Treasury Bill, par value $3,965,000, due 1/11/07, value $3,926,460. U.S. Treasury Note, par value $129,425,000, due 7/15/13, value $139,833,114. (g) Security is segregated for future fund commitments. # Amount represents less than 0.01% of total net assets. + Denominated in U.S. Dollars unless otherwise noted. ++ Annualized yield at date of purchase. (1) Incorporated in Bermuda. The aggregate cost for federal income tax purposes is $2,093,091,582. The aggregate gross unrealized appreciation is $1,059,696,552. The aggregate gross unrealized depreciation is ($20,540,403). Country Concentration % of Net Assets ---------- United States 65.10% United Kingdom 12.79 Canada 11.87 Hong Kong 9.81 ------- Total 99.57% ======= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 40 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 THE SUMMARY OF THE FUND'S INVESTMENTS AS OF OCTOBER 31, 2006 IS AS FOLLOWS: (UNAUDITED) [BAR CHART] SECTOR % OF NET ASSETS Real Estate Operating Companies 57.59 Real Estate Investment Trusts 26.79 Real Estate Management/Brokerage 3.24 Retail 1.46 Hotels 1.28 Homebuilders 1.15 Diversified Financial Services 0.3 Natural Resources 0.14 Cash & Equivalents (Net) 8.05 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 41 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 ASSETS: Investments at value (Notes 1 and 4): Unaffiliated issuers (cost of $1,327,630,553) $ 2,016,774,761 Affiliated issuers (cost of $710,579,203) 1,115,472,970 --------------- Total investments (cost of $2,038,209,756) 3,132,247,731 Receivable for securities sold 11,846,893 Receivable for fund shares sold 5,314,197 Dividends and interest receivable 3,381,281 Other receivable 1,034,632 Other assets 53,247 --------------- Total assets 3,153,877,981 --------------- LIABILITIES: Written options, at value (premiums received $4,187,812) 5,863,200 Payable for fund shares redeemed 4,328,442 Payable to investment adviser 2,349,240 Payable for securities purchased 617,487 Accounts payable and accrued expenses 597,347 Payable for other shareholder servicing fees (Note 3) 330,755 Payable to Trustees 7,225 Commitments (Note 6) -- --------------- Total liabilities 14,093,696 --------------- Net assets $ 3,139,784,285 =============== SUMMARY OF NET ASSETS: Capital stock, unlimited shares authorized, $0.001 par value, 86,401,434 shares outstanding $ 1,814,074,027 Accumulated undistributed net investment income 4,442,770 Accumulated undistributed net realized gains from investments and foreign currency transactions 228,897,480 Net unrealized appreciation of investments and translation of foreign currency denominated assets and liabilities 1,092,370,008 --------------- Net assets applicable to capital shares outstanding $ 3,139,784,285 =============== Net asset value, offering and redemption price per share $ 36.34 ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 42 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006 INVESTMENT INCOME: Interest $ 15,424,733 Dividends - unaffiliated issuers (net of foreign withholding tax of $1,611,099) 24,883,332 Dividends - affiliated issuers (Note 4) 16,843,631 Other income 4,305 ------------ Total investment income 57,156,001 ------------ EXPENSES: Investment advisory fees (Note 3) 26,920,787 Other shareholder servicing fees (Note 3) 3,231,188 Transfer agent fees 1,157,392 Custodian fees 610,635 Reports to shareholders 511,864 Administration fees (Note 3) 176,243 Accounting fees 163,948 Trustees' and officers' fees and expenses 133,276 Legal fees 101,787 Auditing and tax consulting fees 87,377 Registration and filing fees 70,253 Insurance expenses 30,146 Miscellaneous expenses 3,159 ------------ Total operating expenses 33,198,055 ------------ Net investment income 23,957,946 ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments - unaffiliated issuers 203,598,721 Net realized gain on investments - affiliated issuers 29,850,357 Net realized gain on foreign currency transactions 63,357 Net change in unrealized appreciation on investments 519,758,298 Net change in unrealized depreciation on written options (2,247,560) Net change in unrealized appreciation on translation of other assets and liabilities denominated in foreign currency 2,620 ------------ Net realized and unrealized gain (loss) on investments, written options and foreign currency transactions 751,025,793 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $774,983,739 ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 43 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- OPERATIONS: Net investment income $ 23,957,946 $ 28,497,596 Net realized gain (loss) on investments - unaffiliated issuers 203,598,721 (8,833,291) Net realized gain on investments - affiliated issuers 29,850,357 109,313,060 Net realized gain (loss) on foreign currency transactions 63,357 (183,545) Net change in unrealized appreciation on investments 519,758,298 225,762,412 Net change in unrealized appreciation (depreciation) on written options (2,247,560) 572,172 Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currency 2,620 (391) ---------------- ---------------- Net increase in net assets resulting from operations 774,983,739 355,128,013 ---------------- ---------------- DISTRIBUTIONS: Dividends to shareholders from net investment income (42,842,566) (13,294,170) Distributions to shareholders from net realized gains (99,226,293) (19,008,238) ---------------- ---------------- Decrease in net assets from distributions (142,068,859) (32,302,408) ---------------- ---------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares 489,149,784 1,319,818,604 Net asset value of shares issued in reinvestment of dividends and distributions 135,438,214 30,790,893 Redemption fees 946,937 1,579,792 Cost of shares redeemed (992,434,879) (494,539,350) ---------------- ---------------- Net increase (decrease) in net assets resulting from capital share transactions (366,899,944) 857,649,939 ---------------- ---------------- Net increase in net assets 266,014,936 1,180,475,544 Net assets at beginning of year 2,873,769,349 1,693,293,805 ---------------- ---------------- Net assets at end of year (including undistributed net investment income of $4,442,770 and $16,952,989, respectively) $ 3,139,784,285 $ 2,873,769,349 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 44 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE REAL ESTATE VALUE FUND FINANCIAL HIGHLIGHTS SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS FOLLOWS:
YEARS ENDED OCTOBER 31, ------------------------------------------------------------------- 2006 2005 2004 2003 2002 ----------- ----------- ----------- --------- --------- Net asset value, beginning of period $ 29.41 $ 25.47 $ 20.17 $ 15.73 $ 15.04 ----------- ----------- ----------- --------- --------- Income from investment operations: Net investment income 0.32 0.33 0.06 0.46 0.06 Net gain on securities (both realized and unrealized) 8.08(1) 4.05(2) 5.77(2) 4.46(2) 1.02(3) ----------- ----------- ----------- --------- --------- Total from investment operations 8.40 4.38 5.83 4.92 1.08 ----------- ----------- ----------- --------- --------- Less distributions: Dividends from net investment income (0.44) (0.18) (0.45) (0.18) (0.19) Distributions from realized gains (1.03) (0.26) (0.08) (0.30) (0.20) ----------- ----------- ----------- --------- --------- Total distributions (1.47) (0.44) (0.53) (0.48) (0.39) ----------- ----------- ----------- --------- --------- Net asset value, end of period $ 36.34 $ 29.41 $ 25.47 $ 20.17 $ 15.73 =========== =========== =========== ========= ========= Total return 29.78% 17.36% 29.47% 32.15% 7.17% Ratios/Supplemental Data: Net assets, end of period (in thousands) $ 3,139,784 $ 2,873,769 $ 1,693,294 $ 646,979 $ 331,997 Ratio of expenses to average net assets Before expense reimbursement / recovery 1.11% 1.14% 1.15% 1.19% 1.22% After expense reimbursement / recovery N/A N/A N/A N/A 1.41% Ratio of net investment income to average net assets Before expense reimbursement / recovery 0.80% 1.15% 0.47% 3.27% 0.92% After expense reimbursement / recovery N/A N/A N/A N/A 0.73% Portfolio turnover rate 10% 13% 8% 11% 21%
(1) Includes redemption fees of $0.01 per share. (2) Includes redemption fees of $0.02 per share. (3) Includes redemption fees of $0.03 per share. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 45 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION - OCTOBER 31, 2006 (UNAUDITED) At October 31, 2006, the audited net asset value attributable to each of the 99,168,233 common shares outstanding of the Third Avenue International Value Fund ("TAVIX," or the "Fund") was $23.77 per share. This compares with an audited net asset value at October 31, 2005 of $19.84 per share, adjusted for a subsequent distribution to shareholders.
AVERAGE ANNUAL RETURNS FOR THE PERIODS ENDED OCTOBER 31, 2006 -------------------------------------- ONE YEAR ENDED THREE SINCE INCEPTION 10/31/06 YEAR (12/31/01) -------------- ---------- --------------- Third Avenue International Value Fund 19.63% 23.18% 21.31% Morgan Stanley All Country World Free ex-USA Index 28.91% 22.98% 15.90%
The Third Avenue International Value Fund (the "Fund") seeks to achieve long-term capital appreciation and does not attempt to track any benchmark. A comparative index is included above for illustrative purposes both for the most recent year and over longer periods. The Fund is managed for the long term and does not seek to maximize short-term performance. During the twelve-month period ended October 31, 2006, the Fund returned 19.63%. The Fund under-performed relative to the Morgan Stanley All Country World Free ex-USA Index over the same time frame, although longer-term performance for the Fund is significantly better than this index over comparable periods. We believe that the Fund's performance should be judged over the long term and in absolute terms, rather than against any of these indices, none of which are strictly comparable to the Fund. Based on such criteria, we remain happy with Fund performance over the long term. Although the Fund does not attempt to predict macro changes in the markets or the world economy, macro-economic conditions affect short-term performance. For the second year in a row, Subsea 7, Inc. and Aker Kvaerner ASA, both of which are involved in the oil services sector in the North Sea and in other areas, were two of the largest contributors to performance, as energy prices remained relatively high on a historical basis. The Fund's largest positive contributor to performance was Zinifex, Ltd. Zinifex, as one of the world's leading zinc mining companies, continued to benefit from increasing zinc prices. Resource conversion activity (e.g., mergers and acquisitions) was a positive contributor to Fund performance during the year, involving Fund holdings (which were eliminated as a result) such as Skandia Forsakrings AB, Overseas Union Enterprise, Ltd., and Del Monte Pacific, Ltd. Two of the largest detractors to performance during the year were New Zealand-based companies: Toll NZ, Ltd., and Telecom Corporation of New Zealand, Ltd. ("Telecom"). Telecom, the incumbent telecom company in New Zealand, was negatively affected during the year by the possibility of changes in the regulatory environment, which would encourage the entrance of new competition. Other holdings that negatively affected performance included Chudenko Corporation, ABB Grain, Ltd., Canfor Corporation and Catalyst Paper Corporation. -------------------------------------------------------------------------------- 46 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO MANAGEMENT DISCUSSION (CONTINUED) (UNAUDITED) The Fund remains closed to new investors. However additional cash inflows came from resource conversion activity (e.g., mergers and acquisitions) and subscriptions from existing investors. Therefore the cash position remained rather large and can exert a drag on performance during the year. During the year, the Fund made investments primarily in companies based in Asia, Europe and Canada. The Fund also holds investments in Oceania (Australia and New Zealand) and South America. THE INFORMATION IN THE PORTFOLIO MANAGEMENT DISCUSSION REPRESENTS A FACTUAL OVERVIEW OF THE FUND'S PERFORMANCE 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 INVESTMENT TEAM AND MAY DIFFER FROM THOSE OF OTHER INVESTMENT TEAMS OR THE FIRM AS A WHOLE. ALSO, PLEASE NOTE THAT ANY DISCUSSION OF THE PORTFOLIO'S HOLDINGS, THE PORTFOLIO'S PERFORMANCE, AND THE INVESTMENT TEAM'S VIEWS ARE AS OF OCTOBER 31, 2006, AND ARE SUBJECT TO CHANGE. The Fund's performance may be influenced by a foreign country's political, social and economic situation. Other risks include currency fluctuations, political uncertainty, less liquidity, lack of efficient trading markets, and different auditing and legal standards. These risks may result in more volatility for the Fund. These and other risks are described more fully in the Fund's prospectus. Third Avenue International Value Fund IS 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 carefully before you send money. Past performance is no guarantee of future results. Investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than original cost. The Fund's returns should be viewed in light of its investment policy and objectives and quality of its portfolio securities and the periods selected. M.J. Whitman LLC Distributor. 12/21/06. If you should have any questions, or for updated information or a copy of our prospectus, please call 1-800-443-1021 or go to our web site at www.thirdavenuefunds.com. Current performance may be lower or higher than performance quoted. The Morgan Stanley All Country World Free ex-USA Index is an unmanaged index of common stocks and includes securities representative of the market structure of over 50 developed and emerging market countries (other than the United States) in North America, Europe, Latin America and the Asian Pacific Region. This index is not a security that can be purchased or sold, and its total returns are reflective of unmanaged portfolios. The returns include reinvestment of interest, capital gains and dividends. -------------------------------------------------------------------------------- 47 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] PERFORMANCE INFORMATION (UNAUDITED) PERFORMANCE ILLUSTRATION COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD AVENUE INTERNATIONAL VALUE FUND AND MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY WORLD FREE EX USA INDEX FROM INCEPTION OF THE FUND (12/31/01) THROUGH OCTOBER 31, 2006 Average Annual Total Return Since Inception 1 Year 3 Years (12/31/01) 19.63% 23.18% 21.31% [LINE GRAPH] Morgan Stanley Capital International TAVIX* All Country World Free Ex USA Index* 12/31/2001 10000 10000 10/31/2002 9730 8413 10/31/2003 13606.4 10970.5 10/31/2004 17681.6 13128.5 10/31/2005 21260.3 15829 10/31/2006 25433.7 20405.1 * Includes reinvestment of all distributions. As with all mutual funds, past performance does not indicate future results. The returns shown in the graph and table do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. -------------------------------------------------------------------------------- 48 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS - 73.51% Advertising - 1.25% 1,001,500 Asatsu-DK, Inc. (Japan) $ 29,371,510 --------------- Agriculture - 5.96% 6,096,663 ABB Grain, Ltd. (Australia) 28,703,271 300,400 Agrium, Inc. (Canada) 8,417,208 226,952 Cresud SA, ADR (Argentina) 3,322,577 10,559,300 Saskatchewan Wheat Pool (a) (c) (Canada) 67,608,858 444,406 United International Enterprises, Ltd. (c) (Denmark) (1) 32,340,913 --------------- 140,392,827 --------------- Building & Construction 147,342 Imerys SA (France) 12,731,239 Products/Services - 3.15% 13,696,300 Nippon Sheet Glass Co., Ltd. (Japan) 61,481,403 --------------- 74,212,642 --------------- Computer Software - 0.41% 599,800 Fujitsu Business Systems, Ltd. (Japan) 9,595,364 --------------- Corporate Services - 0.30% 22,522,784 Boardroom, Ltd. (c) (Singapore) 7,089,006 --------------- Diversified Operations - 3.79% 729,730 Antarchile S.A. (Chile) 10,146,127 211,824 HAL Trust (Netherlands) (2) 16,356,335 6,648,200 Hutchison Whampoa, Ltd. (Hong Kong) 58,983,413 175,000 Investor AB, Class A (Sweden) 3,888,943 --------------- 89,374,818 --------------- Electronics - 5.09% 1,332,300 Futaba Corp. (Japan) 34,972,092 2,615,800 Nichicon Corp. (Japan) 33,682,996 16,216,000 WBL Corp., Ltd. (c) (Singapore) 51,456,218 --------------- 120,111,306 --------------- Energy/Coal - 0.45% 1,102,700 Westshore Terminals Income Fund (Canada) 10,693,622 ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 49 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) Energy/Services - 2.13% 943,200 Farstad Shipping A/S (Norway) $ 19,623,397 180,356 Compagnie Generale de Geophyisque SA (a) (France) 30,500,147 --------------- 50,123,544 --------------- Engineering/Construction - 5.59% 574,800 Aker Kvaerner ASA (Norway) 59,793,937 1,789,700 Chudenko Corp. (Japan) 26,702,805 1,986,600 Subsea 7, Inc. (a) (Norway) 36,013,080 1,165,000 Tokyo Energy & Systems, Inc. (Japan) 9,253,858 --------------- 131,763,680 --------------- Food & Beverage - 0.81% 48,728,000 Vitasoy International Holdings, Ltd. (Hong Kong) 19,172,412 --------------- Forest Products & Paper - 8.47% 4,920,700 Canfor Corp. (a) (Canada) 51,838,355 683,620 Canfor Pulp Income Fund (Canada) 7,731,399 23,376,200 Catalyst Paper Corp. (a) (b) (c) (Canada) 65,893,427 16,704,045 Catalyst Paper Corp. (a) (b) (c) (e) (Canada) 45,644,385 44,893,185 Rubicon, Ltd. (a) (c) (New Zealand) 28,568,158 --------------- 199,675,724 --------------- Holding Companies - 5.21% 150,452 Compagnie Nationale a Portefeuille (Belgium) 55,014,611 5,041,400 Guoco Group, Ltd. (Hong Kong) (2) 60,901,035 49,301 JZ Equity Partners PLC (United Kingdom) 157,525 71,000 Pargesa Holding S.A. (Switzerland) 6,808,649 --------------- 122,881,820 --------------- IT Services - 0.29% 121,590 Cap Gemini S.A. (France) 6,905,789 --------------- Insurance - 3.50% 124,876 Blue Ocean Reinsurance, Ltd. (a) (b) (Bermuda) 13,717,587 9,731,415 BRIT Insurance Holdings PLC (United Kingdom) 60,144,947 4,291 E-L Financial Corp., Ltd. (Canada) 2,201,003 70,000 Millea Holdings, Inc. (Japan) 2,645,462
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 50 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) Insurance (continued) 285,000 Sompo Japan Insurance, Inc. (Japan) $ 3,791,715 --------------- 82,500,714 --------------- Metals & Mining - 4.11% 3,792,832 Dundee Precious Metals, Inc. (a) (c) (Canada) 41,881,755 4,675,864 Zinifex, Ltd. (Australia) 54,926,645 --------------- 96,808,400 --------------- Other Financial - 2.62% 892,100 Aiful Corp. (Japan) 30,815,989 250,000 Banco Latinoamericano de Exportaciones, S.A. (Panama) 4,085,000 351,700 Oslo Bors Holding ASA (c) (Norway) 26,766,830 --------------- 61,667,819 --------------- Real Estate - 5.25% 103,667,023 BIL International, Ltd. (c) (Singapore) (2) 99,218,823 21,374,000 Liu Chong Hing Investment, Ltd. (c) (Hong Kong) 24,624,677 --------------- 123,843,500 --------------- Securities Brokerage - 2.88% 97,017,800 Asia Plus Securities Public Co., Ltd. (Thailand) 10,789,305 3,002,900 Capital Nomura Securities Public Co., Ltd. (Thailand) 3,253,568 31,146,434 Capital Securities Corp. (Taiwan) 11,892,062 38,126,960 Hotung Investment Holdings, Ltd. (a) (Taiwan) (2) 4,956,505 652,300 Ichiyoshi Securities Co., Ltd. (Japan) 8,923,774 82,857,200 KGI Securities Public Co., Ltd. (a) (Thailand) 4,652,425 27,791,000 President Securities Corp. (Taiwan) 12,532,582 12,860,000 UOB-Kay Hian Holdings, Ltd. (Singapore) 10,986,511 --------------- 67,986,732 --------------- Technology - Hardware - 0.96% 31,351,000 Gigabyte Technology Co., Ltd. (Taiwan) 22,715,042 --------------- Telecommunications - 5.71% 29,703,256 Netia S.A. (c) (Poland) 50,964,952 26,765,591 Telecom Corp. of New Zealand, Ltd. (New Zealand) 83,728,233 --------------- 134,693,185 ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 51 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006
VALUE SHARES ISSUES (NOTE 1) ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONTINUED) Transportation - 5.58% 1,616,900 Bergesen Worldwide Gas ASA (Norway) $ 21,766,937 8,894,950 Chuan Hup Holdings, Ltd. (Singapore) 1,714,083 1,938,700 Golar LNG, Ltd. (a) (Norway) (2) 24,912,733 4,423,000 Seino Holdings Co., Ltd. (Japan) 48,180,086 18,671,113 Toll NZ, Ltd. (a) (c) (New Zealand) 35,019,218 --------------- 131,593,057 --------------- TOTAL COMMON STOCKS (Cost $1,381,475,224) 1,733,172,513 --------------- NOTIONAL AMOUNT ($) ---------------------------------------------------------------------------------------------------------------------------------- PURCHASED OPTIONS - 0.12% Foreign Currency 100,000,000 New Zealand Dollar, strike 0.64 NZD, expires 10/24/07 2,800,000 Put Options - 0.12% --------------- TOTAL PURCHASED OPTIONS (Cost $3,600,000) 2,800,000 --------------- PRINCIPAL AMOUNT (+) ---------------------------------------------------------------------------------------------------------------------------------- SHORT TERM INVESTMENTS - 26.10% Foreign Government Obligations - 4.45% (Canadian Dollar) 59,000,000 Canadian Treasury Bill, 4.11%++, due 11/30/06 52,363,124 (Singapore Dollar) 82,000,000 Singapore Government Bond, 1.75%++, due 02/01/07 52,514,658 --------------- 104,877,782 --------------- Repurchase Agreement - 0.36% 8,517,155 Bear Stearns, 5.27%, dated 10/31/06, due 11/01/06 (d) 8,517,155 --------------- U.S. Government 507,000,000 U.S. Treasury Bills, 4.93%-5.38%++, due 11/24/06-04/19/07 501,889,285 Obligations - 21.29% --------------- TOTAL SHORT TERM INVESTMENTS (Cost $614,414,767) 615,284,222 --------------- TOTAL INVESTMENT PORTFOLIO - 99.73% (Cost $1,999,489,991) 2,351,256,735 --------------- OTHER ASSETS LESS LIABILITIES - 0.27% 6,387,591 --------------- NET ASSETS - 100.00% (Applicable to 99,168,233 shares outstanding) $ 2,357,644,326 ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 52 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 Notes: ADR: American Depository Receipt. NZD: New Zealand Dollar. (a) Non-income producing securities. (b) Fair-valued securities:
Carrying Value Security Per Unit Acquisition Date Acquisition Cost -------- -------------- ---------------------- ---------------- Blue Ocean Reinsurance, Ltd. $ 109.85 12/30/2005 to 2/9/2006 $12,500,000 Catalyst Paper Corp. 2.82 1/03/2006 to 3/28/2006 64,485,595 Catalyst Paper Corp.^ 2.73 10/23/2006 49,676,262
^ Restricted. (c) Affiliated issuers - as defined under the Investment Company Act of 1940 (ownership of 5% or more of the outstanding voting securities of those issuers). (d) Repurchase agreement collateralized by U.S. Treasury Strips, par value $15,940,000, due 5/15/09, value $8,765,087. (e) Security subject to restrictions on resale. + Denominated in U.S. dollars unless otherwise noted. ++ Annualized yield at date of purchase. (1) Incorporated in Bahamas. (2) Incorporated in Bermuda. The aggregate cost for federal income tax purposes is $2,048,280,224. The aggregate gross unrealized appreciation is $335,997,691. The aggregate gross unrealized depreciation is ($33,021,180). Country Concentration % of Net Assets ---------- United States # 21.65% Canada 15.03 Japan 12.70 Singapore 9.46 Norway 8.01 Hong Kong 6.94 New Zealand 6.37 Australia 3.55 United Kingdom 2.56 Belgium 2.33 Taiwan 2.21 Poland 2.16 France 2.13 Denmark 1.37 Thailand 0.79 Netherlands 0.69 Bermuda 0.58 Chile 0.43 Switzerland 0.29 Panama 0.17 Sweden 0.17 Argentina 0.14 ----- Total 99.73% ===== # Comprised of cash equivalents. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 53 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND PORTFOLIO OF INVESTMENTS (CONTINUED) AT OCTOBER 31, 2006 THE SUMMARY OF THE FUND'S INVESTMENTS AS OF OCTOBER 31, 2006 IS AS FOLLOWS: (UNAUDITED) [BAR CHART] SECTOR % OF NET ASSETS Forest Products & Paper 8.47 Agriculture 5.96 Telecommunications 5.71 Engineering/Construction 5.59 Transportation 5.58 Real Estate 5.25 Holding Company 5.21 Electronics 5.09 Metals & Mining 4.11 Diversified Operations 3.79 Insurance 3.5 Building & Construction Products/Services 3.15 Securities Brokerage 2.88 Other Financial 2.62 Energy/Services 2.13 Advertising 1.25 Other 3.22 Cash & Equivalents (Net) 26.49 THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 54 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 2006 ASSETS: Investments at value (Notes 1 and 4): Unaffiliated issuers (cost of $1,527,264,650) $ 1,774,179,515 Affiliated issuers (cost of $472,225,341) 577,077,220 ----------------- Total investments (cost of $1,999,489,991) 2,351,256,735 Foreign currency at value (cost of $5,172,239) 5,171,544 Dividends and interest receivable 8,595,623 Receivable for fund shares sold 3,247,643 Receivable for fund securities sold 1,083,336 Other assets 32,194 ----------------- Total assets 2,369,387,075 ----------------- LIABILITIES: Payable for securities purchased 5,359,289 Payable for fund shares redeemed 3,266,764 Payable to investment adviser 2,477,638 Accounts payable and accrued expenses 380,931 Payable for other shareholder servicing fees (Note 3) 252,530 Payable to Trustees 5,597 Commitments (Note 6) -- ----------------- Total liabilities 11,742,749 ----------------- Net assets $ 2,357,644,326 ================= SUMMARY OF NET ASSETS: Capital stock, unlimited shares authorized, $0.001 par value, 99,168,233 shares outstanding $ 1,789,011,920 Accumulated undistributed net investment income 46,755,252 Accumulated undistributed net realized gains from investments and foreign currency transactions 170,030,970 Net unrealized appreciation of investments and translation of foreign currency denominated assets and liabilities 351,846,184 ----------------- Net assets applicable to capital shares outstanding $ 2,357,644,326 ================= Net asset value, offering and redemption price per share $ 23.77 =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 55 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED OCTOBER 31, 2006 INVESTMENT INCOME: Interest $ 32,035,401 Dividends - unaffiliated issuers (net of foreign withholding tax of $2,058,556) 42,523,241 Dividends - affiliated issuers (net of foreign withholding tax of $238,062) (Note 4) 31,392,098 ----------------- Total investment income 105,950,740 ----------------- EXPENSES: Investment advisory fees (Note 3) 28,176,007 Other shareholder servicing fees (Note 3) 2,178,483 Custodian fees 915,125 Transfer agent fees 550,644 Reports to shareholders 318,150 Accounting fees 166,054 Administration fees (Note 3) 135,199 Registration fees 119,028 Trustees' and officers' fees and expenses 96,844 Auditing and tax consulting fees 71,948 Insurance expense 39,294 Legal fees 22,207 Miscellaneous expenses 4,338 ----------------- Total operating expenses 32,793,321 ----------------- Net investment income 73,157,419 ----------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain on investments - unaffiliated issuers 172,462,933 Net realized gain on investments - affiliated issuers 7,704,137 Net realized gain on foreign currency transactions 458,938 Net change in unrealized appreciation on investments 130,565,434 Net change in unrealized appreciation on translation of other assets and liabilities denominated in foreign currency 95,988 ----------------- Net realized and unrealized gain (loss) on investments and foreign currency transactions 311,287,430 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 384,444,849 =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 56 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR FOR THE YEAR ENDED ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- OPERATIONS: Net investment income $ 73,157,419 $ 14,824,605 Net realized gain on investments - unaffiliated issuers 172,462,933 10,045,456 Net realized gain (loss) on investments - affiliated issuers 7,704,137 (67,979) Net realized gain (loss) on foreign currency transactions 458,938 (96,671) Net change in unrealized appreciation on investments 130,565,434 149,415,276 Net change in unrealized appreciation (depreciation) on translation of other assets and liabilities denominated in foreign currency 95,988 (22,262) ---------------- ---------------- Net increase in net assets resulting from operations 384,444,849 174,098,425 ---------------- ---------------- DISTRIBUTIONS: Dividends to shareholders from net investment income (43,828,096) (7,718,158) Distributions to shareholders from net realized gains (9,495,160) -- ---------------- ---------------- Decrease in net assets from distributions (53,323,256) (7,718,158) ---------------- ---------------- CAPITAL SHARE TRANSACTIONS: Proceeds from sale of shares 400,071,663 1,447,524,618 Net asset value of shares issued in reinvestment of dividends and distributions 48,449,070 7,143,225 Redemption fees 1,691,983 1,253,134 Cost of shares redeemed (358,649,442) (124,702,347) ---------------- ---------------- Net increase in net assets resulting from capital share transactions 91,563,274 1,331,218,630 ---------------- ---------------- Net increase in net assets 422,684,867 1,497,598,897 Net assets at beginning of year 1,934,959,459 437,360,562 ---------------- ---------------- Net assets at end of year (including undistributed net investment income of $46,755,252 and $6,837,060, respectively) $ 2,357,644,326 $ 1,934,959,459 ================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 57 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST THIRD AVENUE INTERNATIONAL VALUE FUND FINANCIAL HIGHLIGHTS SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD) AND RATIOS ARE AS FOLLOWS:
YEARS ENDED OCTOBER 31, FOR THE ---------------------------------------------------- PERIOD ENDED 2006 2005 2004 2003 OCTOBER 31, 2002* ----------- ----------- --------- -------- ----------------- Net asset value, beginning of period $ 20.40 $ 17.17 $ 13.49 $ 9.73 $ 10.00 ----------- ----------- --------- -------- ----------------- Income (loss) from Investment Operations: Net investment income 0.86+ 0.30 0.25 0.08 0.02 Net gain (loss) on securities (both realized and unrealized) 3.07(1) 3.15(1) 3.73(1) 3.76(1) (0.29(2) ----------- ----------- --------- -------- ----------------- Total from investment operations 3.93 3.45 3.98 3.84 (0.27) ----------- ----------- --------- -------- ----------------- Less distributions: Dividends from net investment income (0.46) (0.22) (0.30) (0.08) -- Distributions from realized gains (0.10) -- -- -- -- ----------- ----------- --------- -------- ----------------- Total distributions (0.56) (0.22) (0.30) (0.08) -- ----------- ----------- --------- -------- ----------------- Net asset value, end of period $ 23.77 $ 20.40 $ 17.17 $ 13.49 $ 9.73 =========== =========== ========= ======== ================= Total return 19.63% 20.24% 29.95% 39.84% (2.70%)(3) Ratios/Supplemental Data: Net assets, end of period (in thousands) $ 2,357,644 $ 1,934,959 $ 437,361 $ 97,285 $ 23,036 Ratio of expenses to average net assets Before expense reimbursement/recovery 1.45% 1.52% 1.58% 2.21% 4.30%(4) After expense reimbursement/recovery N/A 1.53% 1.75% 1.75% 1.75%(4) Ratio of net investment income (loss) to average net assets Before expense reimbursement/recovery 3.25%+ 1.19% 0.75% 0.06% (2.20%)(4) After expense reimbursement/recovery N/A 1.18% 0.58% 0.52% 0.34%(4) Portfolio turnover rate 34% 3% 11% 4% 0%(3)
(1) Includes redemption fees of $0.02 per share. (2) Includes redemption fees of $0.01 per share. (3) Not annualized. (4) Annualized. * The Fund commenced investment December operations on 31, 2001. + Investment income per share which to $0.22 per share. Excluding ratio of net income to average net reflects a special dividend amounted this special dividend, the investment assets would have been 2.25%. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -------------------------------------------------------------------------------- 58 ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 2006 1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION: Third Avenue Trust (the "Trust") is an open-end, non-diversified management investment company organized as a Delaware business trust pursuant to a Trust Instrument dated October 31, 1996. The Trust currently consists of four, non-diversified (within the meaning of Section 5(b)(2) of the Investment Company Act), separate investment series: Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund and Third Avenue International Value Fund (each a "Fund" and, collectively, the "Funds"). Third Avenue Management LLC (the "Adviser") provides investment advisory services to each of the Funds in the Trust. The Funds seek to achieve their investment objectives of long-term capital appreciation by adhering to a strict value discipline when selecting securities. While the Funds pursue a capital appreciation objective, each Fund has a distinct investment approach. Third Avenue Value Fund seeks to achieve its objective mainly by acquiring common stocks of well-financed companies (meaning companies without significant liabilities in comparison to their liquid resources) at a discount to what the Adviser believes is their intrinsic value. The Fund also seeks to acquire senior securities, such as preferred stocks, and debt instruments (including high-yield securities) that the Adviser believes are undervalued. Third Avenue Small-Cap Value Fund seeks to achieve its objective by acquiring equity securities, including common stocks and convertible securities, of well-financed small companies at a discount to what the Adviser believes is their intrinsic value. Under normal circumstances, the Fund expects to invest at least 80% of its assets in equity securities (which may include both common and preferred stocks, and convertible securities) of companies that are considered small. The Fund considers a "small company" to be one whose market capitalization is no greater than nor less than the range of capitalizations of companies in the Russell 2000 Index or the S&P Small Cap 600 Index at the time of investment. Third Avenue Real Estate Value Fund, under normal circumstances, seeks to achieve its objective by investing at least 80% of its assets in a securities of real estate and real estate-related companies, or in companies which own significant real estate at the time of investment ("real estate companies"). These securities will primarily be equity securities (which may include both common and preferred stocks, and convertible securities) of well-financed real estate companies. The Fund seeks to acquire these securities at a discount to what the Adviser believes is their intrinsic value. The Fund may also invest a portion of its assets in debt securities (which may include high-yield and mortgage-backed securities) in real estate companies or loans secured by real estate that the Adviser believes have above average yield potential. Third Avenue International Value Fund seeks to achieve its objective by primarily acquiring equity securities, including common stocks and convertible securities, of well-financed companies located outside of the United States. While the Fund may invest in companies located anywhere in the world, it currently expects that most of its assets will be invested in the more developed countries, and under normal circumstances, at least 80% of its assets will be invested in securities of issuers located outside of the United States at the time of investment. -------------------------------------------------------------------------------- 59 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2004 Because of the Funds' disciplined and deliberate investing approach, there may be times when the Funds will have significant cash positions. A substantial cash position can impact Fund performance in certain market conditions, and may make it more difficult for a Fund to achieve its investment objective. ACCOUNTING POLICIES: The policies described below are followed consistently by the Funds in the preparation of their financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. SECURITY VALUATION: Generally, the Funds' investments are valued at market value. Securities traded on a principal stock exchange or the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") are valued at the last quoted sales price, the NASDAQ official close price or, in the absence of closing sales prices on that day, securities are valued at the mean between the closing bid and asked price. In accordance with procedures approved by the Trust's Board of Trustees, the Funds may adjust the prices of securities traded in foreign markets, as appropriate, to reflect the fair value as of the time the Funds' net asset values are calculated. Temporary cash investments are valued at cost, plus accrued interest, which approximates market. Short-term debt securities with original or remaining maturities in excess of 60 days are valued at the mean of their quoted bid and asked prices. Short-term debt securities with 60 days or less to maturity are amortized to maturity based on their cost. The Funds may invest up to 15% of their total net assets in securities which are not readily marketable, including those which are restricted as to disposition under applicable securities laws ("restricted securities"). Restricted securities and other securities and assets for which market quotations are not readily available are valued at "fair value", as determined in good faith by the Funds' Valuation Committee as authorized by the Board of Trustees of the Funds, under procedures established by the Board of Trustees. At October 31, 2006, such securities had a total fair value of $72,544,463 or 0.78% of net assets of Third Avenue Value Fund, $66,848,173 or 2.77% of net assets of Third Avenue Small-Cap Value Fund, $14,919,870 or 0.48% of net assets of Third Avenue Real Estate Value Fund and $125,255,399 or 5.31% of net assets of Third Avenue International Value Fund. Among the factors considered by the Valuation Committee in determining fair value are the type of security, trading in unrestricted securities of the same issuer, the financial condition of the issuer, the Fund's cost at the date of purchase, the percentage of the Fund's beneficial ownership of the issuer's common stock and debt securities, the operating results of the issuer, the discount from market value of any similar unrestricted securities of the issuer at the time of purchase and liquidation values of the issuer. The fair values determined in accordance with these procedures may differ significantly from the amounts which would be realized -------------------------------------------------------------------------------- 60 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 upon disposition of the securities. Restricted securities often have costs associated with subsequent registration. The restricted securities currently held by the Funds are not expected to incur any material future registration costs. SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are accounted for on a trade date basis. Dividend income is recorded on the ex-dividend date and interest income, including, where applicable, amortization of premium and accretion of discount on investments, is accrued daily, except when collection is not expected. Payments received from certain investments held by the Funds may be comprised of dividends, capital gains and return of capital. The Funds originally estimate the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of information from the issuer. Realized gains and losses from securities transactions are reported on an identified cost basis. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and records of the Funds are maintained in U.S. dollars. Foreign currency amounts are translated into U.S. dollars as follows: o INVESTMENTS AND ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES: At the prevailing rates of exchange on the valuation date. o INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: At the prevailing rates of exchange on the date of such transactions. The net assets of the Funds are presented at the foreign exchange rates and market values at the close of the period. The Funds do not isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of the securities held. Similarly, the Funds do not isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of equity securities sold during the period. Accordingly, realized and unrealized foreign currency gains (losses) are included in the reported net realized and unrealized gains (losses) on investments. Net realized gains (losses) on foreign currency transactions represent net foreign exchange gains (losses) from foreign currency exchange contracts, disposition of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amount of investment income and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent amounts actually received or paid. Net unrealized currency gains (losses) from valuing foreign currency denominated assets and liabilities at period end exchange rates are reflected as a component of unrealized appreciation (depreciation) on the Statement of Assets and Liabilities. The change in net unrealized currency gains (losses) for the period is reflected on the Statement of Operations. -------------------------------------------------------------------------------- 61 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 Pursuant to U.S. Federal income tax regulations, gains and losses from certain foreign currency transactions and the foreign currency portion of gains and losses realized on sales and maturities of foreign denominated debt securities are treated as ordinary income for U.S. Federal income tax purposes. OPTION CONTRACTS: An option contact gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying item at a fixed exercise price on a certain date or during a specified period. The cost of securities acquired through the exercise of call options is increased by the premiums paid. The proceeds from securities sold through the exercise of purchased put options are decreased by the premiums paid. Investments in options contracts require the Funds to fair value or mark-to market option contracts on a daily basis, which reflects the change in the market value of the contracts at the close of each day's trading. The cost of options that expire unexercised are treated by the Funds, on expiration date, as realized losses on investments. When the Funds write an option, an amount equal to the premium received by the Funds is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Funds, on the expiration date, as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Funds have a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Funds. The Funds as writer of an option bear the market risk of an unfavorable change in the price of the security underlying the written option. LOANS OF PORTFOLIO SECURITIES: The Funds may loan securities to certain brokers, with the Funds' custodian acting as lending agent. Upon such loans, the Funds receive collateral which is maintained by the custodian. The Funds earn interest on such collateral and earn income in the form of negotiated lenders' fees, both of which are included in securities lending income in the Statement of Operations. Securities loaned are required to be secured at all times by collateral at least equal to the market value of the securities loaned. Risks may arise upon entering into securities lending to the extent that the value of the collateral is less than the value of the securities loaned due to changes in the value of collateral or the loaned securities. Dividends or other distributions on loaned securities may also receive different tax treatments than would otherwise be the case. The Funds may receive collateral in the form of cash or other eligible securities, such as a letter of credit issued by a U.S. bank, or securities issued or guaranteed by the U.S. government having a value at all times not less than 100% of the value of securities loaned. -------------------------------------------------------------------------------- 62 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 At October 31, 2006, there were no securities on loan. During the year ended October 31, 2006, Third Avenue Small-Cap Value Fund had various securities on loan at various times, resulting in securities lending income of $843,833, which is included in the Statement of Operations. REPURCHASE AGREEMENTS: The Funds may invest excess cash in repurchase agreements whereby the Funds purchase securities, which serve as collateral, with an agreement to resell such collateral at the maturity date of the repurchase agreement. Securities pledged as collateral for repurchase agreements are held by the Funds' custodian bank until maturity of the repurchase agreement. Provisions in the agreements require that the market value of the collateral is at least equal to the repurchase value in the event of default. In the event of default, the Funds have the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral may be subject to legal proceedings. DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income paid to shareholders and distributions from realized gains on sales of securities paid to shareholders are recorded on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with Federal income tax law and regulations which may differ from accounting principles generally accepted in the United States of America. These "book/tax" differences are either temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their tax-basis treatment. Temporary differences do not require reclassification. For the year ended October 31, 2006, permanent differences were reclassified as shown below:
DECREASE TO INCREASE ACCUMULATED UNDISTRIBUTED TO ACCUMULATED NET REALIZED GAIN/(LOSS) UNDISTRIBUTED NET ON INVESTMENTS AND INVESTMENT INCOME/(LOSS) FOREIGN CURRENCY ------------------------ ------------------------- Third Avenue Value Fund $ 54,477,155 $ (54,477,155) Third Avenue Small-Cap Value Fund 166,560 (166,560) Third Avenue Real Estate Value Fund 6,374,401 (6,374,401) Third Avenue International Value Fund 10,588,869 (10,588,869)
The primary reasons for such reclassifications are foreign currency gain (loss), market discount and premium and Real Estate Investment Trust ("REIT") distributions. -------------------------------------------------------------------------------- 63 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 FEDERAL INCOME TAXES: The Funds have complied and intend to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies. Therefore, no Federal income tax provision is required. EXPENSE ALLOCATION: Expenses attributable to a specific Fund are charged to that Fund. Expenses attributable to the Trust are generally allocated using the ratio of each Fund's net assets relative to the total net assets of the Trust. Certain expenses are shared with Third Avenue Variable Series Trust, an affiliated fund group. Such costs are allocated using the ratio of the Funds' net assets relative to the total net assets of Third Avenue Variable Series Trust. TRUSTEES' AND OFFICERS' FEES: The Trust does not pay any fees to its officers for their services as such, except for the Chief Compliance Officer, to whom the Trust paid $110,397 for the year ended October 31, 2006. The Trust does pay, together with its affiliate Third Avenue Variable Series Trust, Trustees who are not affiliated with the Investment Adviser a fee of $4,000 for each meeting of the Board of Trustees that they attend, in addition to reimbursing all Trustees for travel and incidental expenses incurred by them in connection with their attendance at meetings. If a special meeting is required, Trustees will each receive $2,000. The Trust, together with Third Avenue Variable Series Trust, also pays non-interested Trustees an annual stipend of $50,000, effective July 1, 2006. Prior to July 1, 2006, the annual stipend was $44,000 for each trustee. The Trustees on the Audit Committee each receive $1,500 for each audit committee meeting and the audit committee chairman receives an annual retainer of $2,000. NEW ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109" (the "Interpretation"). The Interpretation establishes for all entities, including pass-through entities such as the Funds, a minimum threshold for financial statement recognition of the benefit of positions taken in filing tax returns (including whether an entity is taxable in a particular jurisdiction), and requires certain expanded tax disclosures. The Interpretation is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open tax years as of the date of effectiveness. The Adviser has recently begun to evaluate the application of the Interpretation to the Funds, and is not in a position at this time to estimate the significance of its impact, if any, on the Funds' financial statements. In addition, in September 2006, the FASB issued Statement on Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements." This standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements already required or permitted by existing standards. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The changes to -------------------------------------------------------------------------------- 64 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 current generally accepted accounting principles from the application of this Statement relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. The Adviser has recently begun to evaluate the application of the Fair Value Measurements to the Funds, and is not in position at this time to estimate the significance of its impact, if any, on the Funds' financial statements. 2. SECURITIES TRANSACTIONS PURCHASES AND SALES/CONVERSIONS: The aggregate cost of purchases and aggregate proceeds from sales and conversions of investments, excluding short-term investments, from unaffiliated and affiliated issuers (as defined in the Investment Company Act of 1940, as amended, as ownership of 5% or more of the outstanding common stock of the issuer) for the year ended October 31, 2006 were as follows: PURCHASES SALES --------------- ------------- Third Avenue Value Fund: Affiliated $ 185,309,689 $ 4,414,916 Unaffiliated 1,641,087,412 385,127,305 Third Avenue Small-Cap Value Fund: Affiliated 130,877,334 -- Unaffiliated 474,697,755 221,720,543 Third Avenue Real Estate Value Fund: Affiliated 49,659,300 120,194,964 Unaffiliated 222,523,877 416,092,157 Third Avenue International Value Fund: Affiliated 287,937,244 84,749,810 Unaffiliated 503,267,751 437,030,866 -------------------------------------------------------------------------------- 65 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 Written options transactions during the period are summarized as follows: THIRD AVENUE SMALL-CAP VALUE FUND NUMBER OF PREMIUMS CONTRACTS RECEIVED --------------------------------------------------------------------- Options outstanding at October 31, 2005 1,467 $2,514,738 --------------------------------------------------------------------- Options written Options terminated in closing purchase transactions -- -- Options exercised -- -- --------------------------------------------------------------------- Options outstanding at October 31, 2006 1,467 $2,514,738 --------------------------------------------------------------------- THIRD AVENUE REAL ESTATE VALUE FUND NUMBER OF PREMIUMS CONTRACTS RECEIVED --------------------------------------------------------------------- Options outstanding at October 31, 2005 2,443 $4,187,812 --------------------------------------------------------------------- Options written -- -- Options terminated in closing purchase transactions -- -- Options exercised -- -- --------------------------------------------------------------------- Options outstanding at October 31, 2006 2,443 $4,187,812 --------------------------------------------------------------------- 3. INVESTMENT ADVISORY SERVICES, ADMINISTRATION AND SERVICE FEE AGREEMENTS Each Fund has an Investment Advisory Agreement with the Adviser for investment advice and certain management functions. The terms of the Investment Advisory Agreement provide for a monthly fee of 1/12 of 0.90% (an annual fee of 0.90%) of the total average daily net assets of Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund, and 1/12 of 1.25% (an annual fee of 1.25%) of the total average daily net assets of Third Avenue International Value Fund. Additionally, under the terms of the Investment Advisory Agreements, the Adviser pays certain expenses on behalf of the Funds which are partially reimbursed by the Funds, including service fees due to third parties, the compensation expense for the Funds' Chief Compliance Officer and -------------------------------------------------------------------------------- 66 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 other miscellaneous expenses. At October 31, 2006, Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund and Third Avenue International Value Fund had amounts payable to the Adviser of $930,524, $340,695, $405,682 and $260,806, respectively, for reimbursement of expenses paid by the Adviser. Under current arrangements for Third Avenue Value Fund and Third Avenue Small-Cap Value Fund, whenever, in any fiscal year, the Fund's normal operating expenses, including the investment advisory fee, but excluding brokerage commissions and interest and taxes, exceeds 1.90% of the first $100 million of the Funds average daily net assets, and 1.50% of average daily net assets in excess of $100 million, the Adviser is obligated to reimburse the Fund in an amount equal to that excess. Whenever, in any fiscal year, Third Avenue Real Estate Value Fund's normal operating expenses, including the investment advisory fee, but excluding brokerage commissions and taxes, exceeds 1.50% of the Fund's average daily net assets, the Adviser is obligated to reimburse the Fund in an amount equal to that excess. Under current arrangements for Third Avenue International Value Fund, whenever, in any fiscal year, the Fund's normal operating expenses including the investment advisory fee, but excluding brokerage commissions and taxes exceed 1.75% of the Fund's average daily net assets, the Adviser is obligated to reimburse Third Avenue International Value Fund in an amount equal to the excess. Such waived and reimbursed expenses may be paid to the Adviser during the following three-year period to the extent that the payment of such expenses would not cause the Funds to exceed the preceding limitations. No expense reimbursement was required for the year ended October 31, 2006. The Trust has entered into an Administration Agreement with the Adviser pursuant to which the Adviser, as administrator, is responsible for providing various administrative services to the Trust. The Adviser has in turn entered into a Sub-Administration Agreement with PFPC Inc. pursuant to which PFPC Inc. provides certain of these administrative services on behalf of the Adviser. The Adviser earns a fee from the Trust equal to $174,590 plus 50% of the difference between (i) $191,022 plus .01% of the Trust's average net assets in excess of $1 billion and (ii) $174,590. The Adviser pays PFPC Inc. a sub-administration fee for sub-administration services provided to the Trust equal to $180,775. Both the Trust and the Adviser have entered into agreements with financial intermediaries to provide recordkeeping, processing, shareholder communications and other services to customers of the intermediaries and have agreed to compensate the intermediaries for providing those services. Certain of those services would be provided by the Funds if the shares of each customer were registered directly with the Funds' transfer agent. Accordingly, the Adviser has agreed to pay and the Funds to reimburse a portion of the intermediary fees pursuant to provisions adopted by the Board of Trustees. Each Fund pays a portion of the intermediary fees attributable to shares of the Fund not exceeding the estimated expense the Fund would have paid its transfer agent had each customer's shares been registered directly with the transfer agent instead of held through the intermediary accounts. The Adviser pays the remainder of the fees. The fees incurred by the Funds are reflected as other shareholder servicing fees in the Statements of Operations. For the year ended October 31, 2006, such fees amounted to $7,723,622 for Third Avenue Value Fund, $2,276,923 for Third Avenue Small-Cap Value Fund, $3,231,188 for Third Avenue Real Estate Value Fund and $2,178,483 for Third Avenue International Value Fund. -------------------------------------------------------------------------------- 67 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 4. RELATED PARTY TRANSACTIONS BROKERAGE COMMISSIONS: M.J. Whitman, LLC, a registered broker-dealer, and Private Debt LLC, a dealer in the trading of bank debt and other private claims, operate under common control with the Adviser. For the year ended October 31, 2006, the Funds incurred brokerage commissions, paid to related parties as follows: FUND M.J. WHITMAN LLC PRIVATE DEBT LLC ---- ---------------- ---------------- Third Avenue Value Fund $2,401,211 -- Third Avenue Small Cap Value Fund 1,074,329 -- Third Avenue Real Estate Value Fund 404,725 -- Third Avenue International Value Fund 1,181,008 -- INVESTMENTS IN AFFILIATES: A summary of the Funds' transactions in securities of affiliated issuers for the year ended October 31, 2006 is set forth below: THIRD AVENUE VALUE FUND
SHARES SHARES DIVIDEND INCOME HELD AT OCT. 31, SHARES SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 2005 - NAME OF ISSUER: 2005 PURCHASED SOLD 2006 OCT. 31, 2006 OCT. 31, 2006 --------------- ---------------- --------- ------- ---------------- -------------- --------------- ACA Capital Holdings, Inc. 118,812 -- -- 118,812 $ 4,879,015 $ -- ACA Capital Holdings, Inc. Convertible Pfd. 259 -- -- 259 14,715,824 -- ACA Capital Holdings, Inc. Senior Convertible Pfd. 103 20(1) -- 123 5,881,448 -- ACA Capital Holdings, Inc. Series B Senior Convertible Pfd. 133,783 -- -- 133,783 8,333,333 -- ACMAT Corp., Class A * 200,678 -- 200,678 -- -- -- Alamo Group, Inc. 594,300 -- -- 594,300 13,787,760 142,632 AVX Corp. 9,046,200 -- -- 9,046,200 142,568,112 1,356,930 Carver Bancorp, Inc. 218,500 -- -- 218,500 3,659,875 72,105 CGA Group, Ltd. Series C* 6,045,667 -- -- 6,045,667 -- -- Covanta Holding Corp. 8,816,889 -- -- 8,816,889 179,247,353 -- Forest City Enterprises, Inc., Class A 4,550,059 297,498 -- 4,847,557 266,130,879 1,159,534 Gouverneur Bancorp, Inc. -- 142,200 -- 142,200 1,720,620 42,660 Liu Chong Hing Bank, Ltd. 25,257,600 869,850 -- 26,127,450 55,834,776 2,052,703 RHJ International 2,693,826 1,812,119 -- 4,505,945 84,826,854 -- SFSB, Inc. -- 197,800 -- 197,800 1,911,737 -- St. Joe Co. (The) 3,428,500 2,643,668 -- 6,072,168 326,561,195 3,040,214 Tejon Ranch Co. 3,420,106 -- -- 3,420,106 165,875,141 -- Trammell Crow Co. 2,150,000 -- -- 2,150,000 104,812,500 -- -------------- --------------- Total Affiliates $1,380,746,422 $ 7,866,778 ============== ===============
-------------------------------------------------------------------------------- 68 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 THIRD AVENUE SMALL-CAP VALUE FUND
SHARES SHARES DIVIDEND INCOME HELD AT OCT. 31, SHARES SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 2005 - NAME OF ISSUER: 2005 PURCHASED SOLD 2006 OCT. 31, 2006 OCT. 31, 2006 --------------- ---------------- ---------- -------- ---------------- ------------- --------------- Bandag, Inc. 527,300 598,984 -- 1,126,284 $ 49,432,605 $ 1,150,150 Bel Fuse, Inc., Class B 505,701 184,942 -- 690,643 24,600,704 121,712 Borland Software Corp. 2,456,898 1,482,354 -- 3,939,252 21,744,671 -- Catalyst Paper Corp. -- 12,107,879 -- 12,107,879 33,085,201 -- Deltic Timber Corp. 370,600 380,275 -- 750,875 38,227,046 155,233 Haverty Furniture Cos., Inc. 1,058,780 558,386 -- 1,617,166 25,551,223 379,759 Herley Industries, Inc. 539,359 548,992 -- 1,088,351 16,064,061 -- Magma Design Automation, Inc. 1,121,223 1,265,511 -- 2,386,734 22,220,494 -- Stanley Furniture Co., Inc. 239,135 508,911 -- 748,046 16,539,297 120,213 ------------- --------------- Total Affiliates $ 247,465,302 $ 1,927,067 ============= ===============
THIRD AVENUE REAL ESTATE VALUE FUND
SHARES SHARES DIVIDEND INCOME HELD AT OCT. 31, SHARES SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 2005 - NAME OF ISSUER: 2005 PURCHASED SOLD 2006 OCT. 31, 2006 OCT. 31, 2006 --------------- ---------------- ---------- --------- ---------------- -------------- --------------- Acadia Realty Trust 2,293,800 -- -- 2,293,800 $ 58,606,590 $ 1,697,412 Affordable Residential Communities, Inc. * 2,636,600 -- 2,636,600 -- -- -- American Land Lease, Inc. 642,148 -- -- 642,148 16,631,633 642,148 Associated Estates Realty Corp. 1,400,000 -- 51,900 1,348,100 22,176,245 1,163,531 Avatar Holdings, Inc. 434,690 -- -- 434,690 28,259,197 -- Capital Lease Funding, Inc. * 1,640,450 -- -- 1,640,450 19,324,501 1,312,360 Columbia Equity Trust, Inc. 1,000,000 -- -- 1,000,000 17,160,000 590,000 Consolidated-Tomoka Land Co. 510,000 -- -- 510,000 32,997,000 168,300 CRIIMI Mae Inc. * 1,415,719 -- 1,415,719 -- -- -- Forest City Enterprises, Inc., Class A 7,029,931 -- -- 7,029,931 385,943,212 1,757,483 JER Investors Trust, Inc. 1,444,800 807,000 -- 2,251,800 40,442,328 2,702,556 Killam Properties, Inc. 7,380,400 -- -- 7,380,400 16,956,616 -- Midland Realty (Holdings), Ltd. 49,926,000 -- -- 49,926,000 24,779,401 282,384 One Liberty Properties, Inc. 938,200 -- -- 938,200 22,413,598 1,238,424 PS Business Parks, Inc. 2,000,400 -- 850,000 1,150,400 75,753,840 2,123,660 St. Joe Co. (The) 4,386,361 684,500 -- 5,070,861 272,710,905 3,066,311 Thomas Properties Group, Inc. 2,000,000 -- -- 2,000,000 27,060,000 480,000 Trammell Crow Co. * 2,079,950 -- 500,000 1,579,950 77,022,563 -- Unite Group PLC 7,757,487 -- -- 7,757,487 73,582,405 346,375 -------------- --------------- Total Affiliates $1,211,820,034 $ 17,570,944 ============== ===============
-------------------------------------------------------------------------------- 69 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 THIRD AVENUE INTERNATIONAL VALUE FUND
SHARES SHARES DIVIDEND INCOME HELD AT OCT. 31, SHARES SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 2005 - NAME OF ISSUER: 2005 PURCHASED SOLD 2006 OCT. 31, 2006 OCT. 31, 2006 --------------- ---------------- ---------- ---------- ---------------- ------------- --------------- BIL International, Ltd. 103,120,903 546,120 -- 103,667,023 $ 99,218,823 $ 4,448,884 Boardroom, Ltd. 21,416,784 1,106,000 -- 22,522,784 7,089,006 399,011 Catalyst Paper Corp. -- 40,080,245 -- 40,080,245 111,537,812 -- Dundee Precious Metals, Inc., Class A 2,003,032 1,789,800 -- 3,792,832 41,881,755 -- Liu Chong Hing Investment, Ltd. 20,290,000 1,084,000 -- 21,374,000 24,624,677 605,393 Netia S.A. -- 29,703,256 -- 29,703,256 50,964,952 92,062 Oslo Bors Holding ASA 351,700 -- -- 351,700 26,766,830 1,495,018 Overseas Union Enterprise * 8,247,000 4,851,000 13,098,000(2) -- -- 22,414,359 Rubicon, Ltd. 44,893,185 -- -- 44,893,185 28,568,158 -- Saskatchewan Wheat Pool -- 10,559,300 -- 10,559,300 67,608,858 -- Toll NZ, Ltd. 18,671,113 -- -- 18,671,113 35,019,218 -- United International Enterprises, Ltd. 398,506 45,900 -- 444,406 32,340,913 310,924 WBL Corp., Ltd. 12,506,000 3,710,000 -- 16,216,000 51,456,218 1,626,447 ------------- --------------- Total Affiliates $ 577,077,220 $ 31,392,098 ============= ===============
* As of October 31, 2006, no longer an affiliate. (1) Increase due to PIK dividend. (2) Decrease due to tender offer. 5. CAPITAL SHARE TRANSACTIONS Each Fund is authorized to issue an unlimited number of shares of beneficial interest with $0.001 par value. Transactions in capital stock were as follows:
THIRD AVENUE THIRD AVENUE VALUE FUND SMALL-CAP VALUE FUND ----------------------------------- ----------------------------------- FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- ---------------- ---------------- Increase in Fund shares: Shares outstanding at beginning of year 108,658,702 78,864,234 77,319,265 45,620,087 ---------------- ---------------- ---------------- ---------------- Shares sold 58,685,754 43,546,667 27,806,946 41,086,641 Shares reinvested from dividends and distributions 10,828,087 1,181,564 1,984,280 355,335 Shares redeemed (24,324,356) (14,933,763) (16,305,414) (9,742,798) ---------------- ---------------- ---------------- ---------------- Net increase in Fund shares 45,189,485 29,794,468 13,485,812 31,699,178 ---------------- ---------------- ---------------- ---------------- Shares outstanding at end of year 153,848,187 108,658,702 90,805,077 77,319,265 ================ ================ ================ ================
-------------------------------------------------------------------------------- 70 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006
THIRD AVENUE THIRD AVENUE REAL ESTATE VALUE FUND INTERNATIONAL VALUE FUND ----------------------------------- ----------------------------------- FOR THE FOR THE FOR THE FOR THE YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, 2006 OCTOBER 31, 2005 OCTOBER 31, 2006 OCTOBER 31, 2005 ---------------- ---------------- ---------------- ---------------- Increase (decrease) in Fund shares: Shares outstanding at beginning of year 97,702,927 66,482,129 94,865,602 25,477,108 ---------------- ---------------- ---------------- ---------------- Shares sold 15,254,843 47,530,658 17,893,198 75,348,006 Shares reinvested from dividends and distributions 4,617,657 1,144,864 2,312,692 391,438 Shares redeemed (31,173,993) (17,454,724) (15,903,259) (6,350,950) ---------------- ---------------- ---------------- ---------------- Net increase (decrease) in Fund shares (11,301,493) 31,220,798 4,302,631 69,388,494 ---------------- ---------------- ---------------- ---------------- Shares outstanding at end of year 86,401,434 97,702,927 99,168,233 94,865,602 ================ ================ ================ ================
Third Avenue Value Fund charges a redemption fee of 1% for shares held 60 days or less. Third Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund charge a redemption fee of 1% for shares held one year or less. Third Avenue International Value Fund charges a redemption fee of 2% for shares held one year or less. 6. COMMITMENTS AND CONTINGENCIES Third Avenue Value Fund has committed a $1,755,000 capital investment to RS Holdings of which $1,022,245 has been funded as of October 31, 2006. Under certain circumstances this commitment may be payable to RS Holdings, although the Adviser believes that this commitment is no longer enforceable. Third Avenue Real Estate Value Fund has committed up to $10,500,000 to Atlantic American Realty Capital Advisors, Inc., of which $500,000 has been funded as of October 31, 2006. Under certain circumstances this commitment may be payable to Atlantic American Realty Capital Advisors, Inc. Accordingly, Third Avenue Value Fund and Third Avenue Real Estate Value Fund have segregated securities valued at $24,852,071 and $49,707,182 respectively, to meet each of these contingencies. In the normal course of business, the Funds enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. The Funds' maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. -------------------------------------------------------------------------------- 71 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 7. RISKS RELATING TO CERTAIN INVESTMENTS FOREIGN SECURITIES: Investments in the securities of foreign issuers may involve investment risks different from those of U.S. issuers including possible political or economic instability of the country of the issuer, the difficulty of predicting international trade patterns, the possibility of currency exchange controls, the possible imposition of foreign taxes on income from and transactions in such instruments, the possible establishment of foreign controls, the possible seizure or nationalization of foreign deposits or assets, or the adoption of other foreign government restrictions that might adversely affect the foreign securities held by the Funds. Foreign securities may also be subject to greater fluctuations in price than securities of domestic corporations or the U.S. Government. HIGH YIELD DEBT: The Funds may invest in high yield, lower grade debt. The market values of these higher yielding debt securities tend to be more sensitive to economic conditions and individual corporate developments than those of higher rated securities. In addition, the secondary market for these bonds is generally less liquid. LOANS AND OTHER DIRECT DEBT INSTRUMENTS: The Funds may invest in loans and other direct debt instruments issued by corporate borrowers. These loans represent amounts owed to lenders or lending syndicates (loans and loan participations) or to other parties. Direct debt instruments may involve a risk of loss in case of default or insolvency of the borrower and may offer less legal protection to the Fund in the event of fraud or misrepresentation. In addition, loan participations involve a risk of insolvency of the lending bank or other financial intermediary. The markets in loans are not regulated by federal securities laws or the Securities and Exchange Commission ("SEC"). TRADE CLAIMS: An investment in trade claims is very speculative and carries a high degree of risk. Trade claims are illiquid instruments which generally do not pay interest and there can be no guarantee that the debtor will ever be able to satisfy the obligation on the trade claim. The markets in trade claims are not regulated by federal securities laws or the SEC. Because trade claims are unsecured, holders of trade claims may have a lower priority in terms of payment than certain other creditors in a bankruptcy proceeding. -------------------------------------------------------------------------------- 72 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST NOTES TO FINANCIAL STATEMENTS (CONTINUED) OCTOBER 31, 2006 8. FEDERAL INCOME TAXES The tax character of distributions paid during the fiscal year ended October 31, 2006 was as follows: ORDINARY NET LONG-TERM INCOME CAPITAL GAINS ------------- ------------- Third Avenue Value Fund $ 184,620,893 $ 444,291,930 Third Avenue Small-Cap Value Fund 32,394,132 19,085,781 Third Avenue Real Estate Value Fund 64,992,122 77,076,737 Third Avenue International Value Fund 43,828,096 9,495,160 The tax character of distributions paid during the fiscal year ended October 31, 2005 was as follows: ORDINARY NET LONG-TERM INCOME CAPITAL GAINS ------------- ------------- Third Avenue Value Fund $ 63,790,923 $ -- Third Avenue Small-Cap Value Fund 4,737,161 3,627,192 Third Avenue Real Estate Value Fund 16,621,138 15,681,270 Third Avenue International Value Fund 7,718,158 -- At October 31, 2006, the tax basis components of distributable earnings were:
UNDISTRIBUTED ACCUMULATED UNREALIZED ORDINARY INCOME CAPITAL GAINS APPRECIATION --------------- ------------- --------------- Third Avenue Value Fund $ 485,510,509 $ 14,609,177 $ 2,080,308,834 Third Avenue Small-Cap Value Fund 36,767,207 77,745,232 485,759,443 Third Avenue Real Estate Value Fund 64,026,772 224,195,295 1,037,488,182 Third Avenue International Value Fund 111,559,572 154,018,923 303,055,951
The difference between book basis and tax basis unrealized appreciation is due to differences in the timing of recognition of gains and losses on investments for tax and book purposes. The Fund's unrealized appreciation difference is attributable primarily to mark-to market treatment of certain passive foreign investment companies, differences in the treatment of amortization of bond discount and premium, REIT and partnership adjustments and other timing differences. Actual distributions to shareholders may differ from the amounts above. -------------------------------------------------------------------------------- 73 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE TRUSTEES AND SHAREHOLDERS OF THIRD AVENUE TRUST In our opinion, the accompanying statements of assets and liabilities, including the portfolios of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Third Avenue Value Fund, Third Avenue Small-Cap Value Fund, Third Avenue Real Estate Value Fund and Third Avenue International Value Fund (constituting Third Avenue Trust, hereafter referred to as the "Fund") at October 31, 2006, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2006 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP 300 Madison Avenue New York, New York December 22, 2006 -------------------------------------------------------------------------------- 74 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] ANNUAL RENEWAL OF INVESTMENT ADVISORY AGREEMENTS (UNAUDITED) At a meeting of the Board of Trustees of the Trust held on June 1, 2006, the Trustees, by a unanimous vote (including a separate vote of those Trustees who are not "interested persons" (as the term is defined in the 1940 Act) (the "Independent Trustees")), approved the renewal of each Fund's Investment Advisory Agreement (collectively, the "Agreements"). In advance of the meeting, the Independent Trustees, through their independent legal counsel, requested extensive materials, and the Adviser provided them, to assist the Board in considering the renewal of the Agreements. The Board engaged in a detailed discussion of the materials with the Adviser. The Independent Trustees then met separately with their independent legal counsel for a discussion of the Adviser's presentation and materials. In considering the Agreements, the Trustees did not identify any single overriding factor and instead considered all factors collectively. As a part of their decision-making process, the Trustees noted that the Adviser has managed each Fund since its inception, and that the Trustees believe that a long-term relationship with a capable, conscientious adviser is in the best interest of the Funds. Following this session, the full Board reconvened and approved the continuation of each Agreement as being in the best interests of the relevant Fund and its shareholders. The following is a summary of the discussions and conclusions regarding the material factors that formed the basis for the Board's approval. FACTORS CONSIDERED A. FINANCIAL CONDITION OF THE ADVISER; ADVISORY FEES: PROFITABILITY. The Trustees received a presentation from representatives of the Adviser, including a report prepared by Lipper Inc., and reviewed and considered: 1. the financial condition of the Adviser to determine that the Adviser is solvent and sufficiently well capitalized to perform its ongoing responsibilities to the Funds; 2. the information sources and methodology used in the selection of funds to be included in the comparison universe and the competitive fund group used in comparative analyses of each Fund's advisory fees and expense ratio and in analyzing the Fund's performance; 3. each Fund's advisory fee and total expenses versus those of the comparison universe and competitive fund group, noting, for each Fund, the Fund's generally competitive ranking within the universe and that its fees and expenses generally were well within the range of those of the funds in its competitive group; 4. performance/expense analysis of each Fund and funds in its competitive fund group; 5. a comparison of fees paid to the Adviser versus fees paid by similar funds advised and sub-advised by the Adviser; 6. advisory fee breakpoints of funds in the competitive groups; 7. information presented in respect of economies of scale, noting the competitive expense ratios, the extensive resources that the Adviser dedicates to its investment advisory process to the benefit of the Funds and the trend of declining or generally stable gross expense ratios of each Fund since inception; -------------------------------------------------------------------------------- 75 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] ANNUAL RENEWAL OF INVESTMENT ADVISORY AGREEMENTS (CONTINUED) (UNAUDITED) 8. the profitability to the Adviser resulting from each Agreement, reviewing the dollar amount of expenses allocated and revenue received by the Adviser and the method used to determine such expenses and corresponding profit; and 9. brokerage commission revenue to the Adviser's affiliated broker-dealer from transactions executed for the Funds, including the quarterly brokerage analysis performed by a third party service and provided to the Trustees analyzing, among other things, the affiliated broker-dealer's per share commission and execution costs. B. DESCRIPTION OF PERSONNEL AND SERVICE PROVIDED BY THE ADVISER. The Trustees reviewed with representatives of the Adviser, and considered: 1. the nature, extent and quality of services rendered to the Funds, including the Adviser's investment, senior management and operational personnel and the oversight of day-to-day operations of the Funds provided by the Adviser; 2. the Adviser's research and portfolio management capabilities, particularly the intensive research undertaken in connection with the Adviser's deep value philosophy; and 3. the value added through the Adviser's active management style that includes participation in corporate restructurings. C. COMPLIANCE MATTERS 1. The Trustees met in private session with the Trust's Chief Compliance Officer and reviewed the operation of the Trust's and the Adviser's compliance programs. D. INVESTMENT PERFORMANCE OF THE FUNDS AND ADVISER. 1. The Trustees reviewed total return information for each Fund versus the comparison universe and competitive funds group and compared to the Fund's benchmark index for various periods and since inception. 2. It was noted that each Fund's performance was favorable both on an absolute basis and, since inception, relative to that of funds in the comparison universe and competitive group and the Fund's benchmark. -------------------------------------------------------------------------------- 76 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] ANNUAL RENEWAL OF INVESTMENT ADVISORY AGREEMENTS (CONTINUED) (UNAUDITED) CONCLUSIONS The Trustees concluded that the nature, extent and quality of the services provided by the Adviser are adequate and appropriate. The Trustees considered, evaluated and were satisfied with each Fund's historical performance. They also considered the advisory fee and expense ratio of each Fund and evaluated the comparisons to those of funds in the comparable universe and competitive group and the performance/expense analysis, as discussed in the Adviser's presentation. The Trustees discussed the Adviser's profitability, and it was noted that the profitability percentage for each Fund was within ranges in relevant court cases upholding board approval of particular advisory agreements. The Trustees concluded that each Fund's fee paid to the Adviser was reasonable in light of comparative performance and advisory fee and expense information, costs of the services provided and profits and other benefits derived by the Adviser and its affiliates from their relationship with the Fund. The Trustees also considered the advisory fees charged for similar funds advised and sub-advised by the Adviser and reviewed the nature of the services provided and differences, from the Adviser's perspective, in management of the Funds as compared to advisory services provided to other advised and sub-advised funds. The Trustees recognized that any differences in fees paid were consistent with the differences in services provided by the Adviser. The Trustees considered whether economies of scale are shared with the Funds and considered each Fund's competitive fee structure, the extensive resources that the Adviser dedicates to its investment advisory process to the benefit of the Fund, and the size of the Fund. The Trustees concluded that operational economies of scale had benefited the Funds and that there were no other material economies of scale in which the Funds should share. -------------------------------------------------------------------------------- 77 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] MANAGEMENT OF THE TRUST Information pertaining to the Trustees and officers of the Trust is set forth below. The fund complex includes four portfolios in the Third Avenue Trust and one portfolio in the Third Avenue Variable Series Trust. The Statement of Additional Information (SAI) includes additional information about the Trustees and is available without charge upon request, by calling (800) 443-1021. INTERESTED TRUSTEES
TERM OF OFFICE POSITION(S) AND LENGTH OF HELD WITH PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS NAME, AGE & ADDRESS TIME SERVED* REGISTRANT DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------- -------------- ------------- ----------------------------------------- -------------------------- MARTIN J. WHITMAN** (82) Trustee since Chairman and Chairman (3/90 to Present) Chief Director (8/90 to 10/04) 622 Third Avenue 7/99 Trustee Executive Officer (CEO) (3/90 to 9/03), of Danielson Holding New York, NY President (1/91 to 5/98) of Third Avenue Corporation; Director 10017 Trust; Chairman (7/99 to Present) CEO (3/91 to Present) of (7/99 to 9/03) of Third Avenue Variable Nabors Industries, Ltd., Series Trust; Co-Chief Investment Officer (international oil (2/03 to Present), Chief Investment drilling services); Officer (CIO) (1/91 to 2/03), Chairman Director (5/00 to 12/01) and CEO (3/90 to 8/02), President (1/91 of Stewart Information to 2/98), of EQSF Advisers, Inc. and its Services Corp. (title successor, Third Avenue Management LLC; insurance and real CEO, President and Director (10/74 to estate); Director (8/97 to Present) of Martin J. Whitman & Co., Inc. 5/01) of Tejon Ranch Co. (private investment company); CEO (7/96 (land development and to 6/02) and Chairman (8/90 to 8/99) of agribusiness). Danielson Holding Corporation; Chairman (1/95 to 8/02) and CIO (10/92 to 8/02) of M.J. Whitman Advisers, Inc.(reg. investment adviser); Distinguished Management Fellow (1972 to Present) and Member of the Advisory Board (10/94 to 6/95) of the Yale School of Management at Yale University; Adjunct Professor (1/01 to 12/01) of the Columbia University Graduate School of Business; Chartered Financial Analyst.
-------------------------------------------------------------------------------- 78 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] INTERESTED TRUSTEES
TERM OF OFFICE POSITION(S) AND LENGTH OF HELD WITH PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS NAME, AGE & ADDRESS TIME SERVED* REGISTRANT DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------- -------------- ------------- ----------------------------------------- -------------------------- DAVID M. BARSE** (44) Trustee since President, President (5/98 to Present), Trustee Director (7/96 to Present) 622 Third Avenue 9/01 CEO and (9/01 to Present), CEO (9/03 to Present) of Covanta Holding New York, NY Trustee and Executive Vice President (4/95 to Corporation, formerly 10017 5/98) of Third Avenue Trust; President Danielson Holding (7/99 to Present), Trustee (9/01 to Corporation; Director Present) and CEO (9/03 to Present) of (3/01 to Present) of ACA Third Avenue Variable Series Trust; CEO Capital Holdings, Inc. (4/03 to Present), President (2/98 to (credit enhancement). Present), Director (4/95 to 12/02) and Executive Vice President (4/95 to 2/98) of EQSF Advisers, Inc. and its successor, Third Avenue Management LLC and sub- sidiaries; CEO (7/99 to Present), President (6/95 to Present), Director (1/95 to Present) of M.J. Whitman, Inc. and its successor, M.J. Whitman LLC (registered broker-dealer) and subsidiaries; President (7/96 to 6/02) of Danielson Holding Corp.; CEO (7/99 to 8/02), President (6/95 to 8/02), Director (1/95 to 8/02) of M.J. Whitman Advisers, Inc. (registered investment advisor). INDEPENDENT TRUSTEES JACK W. ABER (69) Trustee since Trustee Professor of Finance (1972 to Present) of Trustee, The Managers Funds 51 Columbia Street 8/02 Boston University School of Management, (1999 to Present) Brookline, MA 02446 Trustee of Third Avenue Variable Series (9 portfolios); Trustee of Trust (8/02 to Present); Trustee of Third Managers AMG Funds (1999 to Avenue Trust (8/02 to Present). Present) (6 portfolios), Managers Trust I (2000 to Present) (11 portfolios) and Managers Trust II (2000 to Present) (7 portfolios); Trustee of Appleton Growth Fund.
-------------------------------------------------------------------------------- 79 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] INDEPENDENT TRUSTEES
TERM OF OFFICE POSITION(S) AND LENGTH OF HELD WITH PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS NAME, AGE & ADDRESS TIME SERVED* REGISTRANT DURING PAST 5 YEARS HELD BY TRUSTEE --------------------------- -------------- ------------- ----------------------------------------- -------------------------- WILLIAM E. CHAPMAN, II (65) Trustee since Trustee Trustee; President and Owner (1998 to Trustee, The Managers Funds 380 Gulf of Mexico Drive, 8/02 Present) of Longboat Retirement Planning (1999 to Present) (9 #531 Solutions (consulting firm); part-time portfolios); Trustee of Longboat Key, FL 34228 employee delivering retirement and Managers AMG Funds (1999 to investment education seminars (1/00 to Present) (6 portfolios), Present) for Hewitt Associates, LLC Managers Trust I (2000 to (consulting firm); Trustee (5/02 to Present) (11 portfolios) Present) of Bowdoin College; various and Managers Trust II (2000 roles, the last of which was President of to Present) (7 portfolios). the Retirement Plans Group (1990 to 1998) with Kemper Funds (mutual funds group); investment sales, marketing and general management roles (1966 to 1990) with CIGNA (insurance group). Trustee of Third Avenue Variable Series Trust (8/02 to Present); Trustee of Third Avenue Trust (8/02 to Present). LUCINDA FRANKS (60) Trustee since Trustee Journalist (1969 to Present); Special N/A 64 East 86th Street 7/99 Correspondent, Talk Magazine (1999- New York, NY 2000); Trustee of Third Avenue Variable 10028 Series Trust (7/99 to Present); Trustee of Third Avenue Trust (2/98 to Present). EDWARD J. KAIER (61) Trustee since Trustee Partner (1977 to Present) at Hepburn Trustee, The Managers 111 N. Lowry's Lane 8/02 Willcox Hamilton & Putnam (law firm); Funds (1999 to Present) Rosemont, PA 19010 Trustee of Third Avenue Variable Series (9 portfolios), Trustee of Trust (8/02 to Present); Trustee of Third Managers AMG Funds (1999 to Avenue Trust (8/02 to Present). Present) (6 portfolios), Managers Trust I (2000 to Present) (11 portfolios) and Managers Trust II (2000 to Present) (7 portfolios).
-------------------------------------------------------------------------------- 80 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] INDEPENDENT TRUSTEES
TERM OF OFFICE POSITION(S) AND LENGTH OF HELD WITH PRINCIPAL OCCUPATION(S) OTHER DIRECTORSHIPS NAME, AGE & ADDRESS TIME SERVED* REGISTRANT DURING PAST 5 YEARS HELD BY TRUSTEE ------------------------- -------------- ------------- ----------------------------------------- -------------------------- MARVIN MOSER, M.D. (82) Trustee since Trustee Clinical Professor of Medicine (1984 to Director (1997 to Present) 13 Murray Hill Road 7/99 Present) at Yale University School of of Nutrition 21 Co. Scarsdale, NY Medicine; Trustee (1992 to 2002) of the (marketing); Director 10583 Trudeau Institute (medical research (2002 to Present) of institute); Senior Medical Consultant Comprehensive Neuroscience (1974 to 2002) for the National High (research and phar Blood Pressure Education Program of the maceutical site management National Heart, Lung and Blood Institute; company). Trustee of Third Avenue Variable Series Trust (7/99 to Present); Trustee or Director of Third Avenue Trust or its predecessor (11/94 to Present). ERIC RAKOWSKI (48) Trustee since Trustee Professor (1990 to Present) at University Trustee, The Managers Funds 571 Woodmont Avenue 8/02 of California at Berkeley School of Law; (1999 to Present) Berkeley, CA 94708 Visiting Professor (1998-1999) at Harvard (9 portfolios), Trustee of Law School. Trustee of Third Avenue Managers AMG Funds (1999 to Variable Series Trust (8/02 to Present); Present) (6 portfolios), Trustee of Third Avenue Trust (8/02 to Managers Trust I (2000 to Present). Present) (11 portfolios) and Managers Trust II (2000 to Present) (7 portfolios). MARTIN SHUBIK (80) Trustee since Trustee Seymour H. Knox Professor (1975 to N/A Yale University 7/99 Present) of Mathematical and Dept. of Economics Institutional Economics, Yale University Box 2125, Yale Station Trustee of Third Avenue Variable Series New Haven, CT Trust (7/99 to Present); Trustee or 06520 Director of Third Avenue Trust or its predecessor (11/90 to Present). CHARLES C. WALDEN (62) Trustee since Trustee Executive Vice-President of Investments N/A 11 Williamsburg Circle, 7/99 and Chief Investment Officer (1973 to Madison, CT Present) Knights of Columbus (fraternal 06443 benefit society selling life insurance and annuities); Trustee of Third Avenue Variable Series Trust (7/99 to Present); Trustee or Director of Third Avenue Trust or its predecessor (5/96 to Present); Chartered Financial Analyst.
---------- * Each trustee serves until his successor is duly elected and qualified. ** Messrs. Whitman and Barse are "interested trustees" of the Trust and the Adviser, Third Avenue Management LLC, due to their employment with and indirect ownership interests in the Adviser. -------------------------------------------------------------------------------- 81 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] PRINCIPAL TRUST OFFICERS WHO ARE NOT TRUSTEES
POSITION(S) HELD WITH OTHER DIRECTORSHIPS NAME, AGE & ADDRESS REGISTRANT PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS HELD BY OFFICER ------------------------- -------------- --------------------------------------------------------- -------------------------- VINCENT J. DUGAN (41) Treasurer and Treasurer and Chief Financial Officer (CFO) (9/04 to N/A 622 Third Avenue CFO Present) of Third Avenue Trust; Treasurer and CFO (9/04 New York, NY 10017 to Present) of Third Avenue Variable Series Trust; Chief Operating Officer (COO) and CFO (8/04 to Present) of Third Avenue Management LLC and subsidiaries; COO and CFO (8/04 to Present) of Third Avenue Holdings Delaware LLC; COO and CFO (8/04 to Present) of MJ Whitman LLC and subsidiaries; Partner Ernst & Young LLP (6/02 to 8/04); Partner Arthur Andersen LLP (9/98 to 6/02). MICHAEL A. BUONO (39) Controller Controller (5/06 to Present) of Third Avenue Trust; N/A 622 Third Avenue Controller (5/06 to Present) of Third Avenue Variable New York, NY 10017 Series Trust; Vice President and Assistant Controller (12/05 to 5/06) of Legg Mason Partners Funds; Vice President and Assistant Controller (12/98 to 12/05) Citigroup Asset Management. W. JAMES HALL III (42) General Counsel General Counsel and Secretary (6/00 to Present) of Third N/A 622 Third Avenue and Secretary Avenue Trust; General Counsel and Secretary (9/00 to New York, NY 10017 Present) of Third Avenue Variable Series Trust; General Counsel and Secretary (9/00 to Present) of EQSF Advisers, Inc., and its successor, Third Avenue Management LLC and subsidiaries; General Counsel and Secretary (12/00 to 7/02) of Danielson Holding Corporation; General Counsel and Secretary (5/00 to Present) of M.J. Whitman, Inc. and its successor, M.J. Whitman LLC and subsidiaries; General Counsel and Secretary (5/00 to 8/02) of M.J. Whitman Advisers, Inc.; Associate (2/00 to 6/00) at Paul, Weiss, Rifkind, Wharton & Garrison LLP; Associate (11/96 to 1/00) at Morgan, Lewis & Bockius LLP (law firms). JOSEPH J. REARDON (46) Chief Chief Compliance Officer (CCO) (4/05 to Present) of Third N/A 622 Third Avenue Compliance Avenue Trust; CCO (4/05 to Present) Third Avenue Variable New York, NY 10017 Officer Series Trust; CCO Third Avenue Management LLC and subsidiaries (4/05 to Present); CCO (10/04 - 3/05) Weiss, Peck & Greer Funds Trust; CCO (10/94 - 3/05) Weiss, Peck & Greer Tudor Fund; Principal (10/94 - 10/04) Weiss, Peck & Greer; Vice President and Secretary (10/94 - 10/04) Weiss, Peck & Greer Funds Trust, Weiss, Peck & Greer Tudor Fund, Weiss, Peck & Greer International Fund, Weiss, Peck & Greer International Fund.
-------------------------------------------------------------------------------- 82 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE FUNDS SCHEDULE OF SHAREHOLDER EXPENSES (UNAUDITED) As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, such as redemption fees; and (2) ongoing costs, including management fees; other shareholder servicing fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period, May 1, 2006 and held for the entire reporting period ended October 31, 2006. ACTUAL EXPENSES The first line of the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the table below provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second line of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Expenses Paid Beginning Ending During the Period Account Value Account Value May 1, 2006 to Annualized May 1, 2006 October 31, 2006 October 31, 2006* Expense Ratio ------------- ---------------- ----------------- ------------- Third Avenue Value Fund Actual $1,000 $1,008 $5.46 1.08% Hypothetical $1,000 $1,020 $5.50 1.08% Third Avenue Small Cap Value Fund Actual $1,000 $1,015 $5.53 1.09% Hypothetical $1,000 $1,020 $5.55 1.09% Third Avenue Real Estate Value Fund Actual $1,000 $1,130 $6.01 1.12% Hypothetical $1,000 $1,020 $5.70 1.12% Third Avenue International Value Fund Actual $1,000 $ 992 $7.23 1.44% Hypothetical $1,000 $1,018 $7.32 1.44%
* Expenses are equal to the Fund's annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year (184) divided by 365. -------------------------------------------------------------------------------- 83 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST FEDERAL TAX STATUS OF DIVIDENDS (UNAUDITED) The following information represents the tax status of dividends and distributions paid by the Funds during the fiscal year ended October 31, 2006. This information is presented to meet regulatory requirements and no current action on your part is required. The information and distributions reported below will differ from the information and distributions taxable to shareholders for the calendar year ending December 31, 2006. Information necessary to complete your income tax returns for the calendar year ending December 31, 2006 will be issued by the Funds in the early part of 2007. THIRD AVENUE VALUE FUND Of the $5.485 per share paid to you in cash or reinvested into your account during the fiscal year ended October 31, 2006, $1.610 was derived from net investment income and $3.875 from long-term capital gains. Of the total ordinary income distributed, 17.19%, or the maximum amount allowable, is qualified dividend income for purposes of Internal Revenue Code Section 1(h)(11). 10.72% of the ordinary income distributed qualifies for the Corporate Dividends Received Deduction. THIRD AVENUE SMALL-CAP VALUE FUND Of the $0.628 per share paid to you in cash or reinvested into your account during the fiscal year ended October 31, 2006, $0.302 was derived from net investment income, $0.093 from short-term capital gains, which are taxed as ordinary income and $0.233 from long-term capital gains. Of the total ordinary income (including short-term capital gains) distributed, 56.80%, or the maximum amount allowable, is qualified dividend income for purposes of Internal Revenue Code Section 1(h)(11). 17.79% of the ordinary income distributed qualifies for the Corporate Dividends Received Deduction. THIRD AVENUE REAL ESTATE VALUE FUND Of the $1.475 per share paid to you in cash or reinvested into your account during the fiscal year ended October 31, 2006, $0.404 was derived from net investment income, $0.271 from short-term capital gains, which are taxed as ordinary income and $0.800 from long-term capital gains. Of the total ordinary income (including short-term capital gains) distributed, 18.23%, or the maximum amount allowable, is qualified dividend income for purposes of Internal Revenue Code Section 1(h)(11). 6.98% of the ordinary income distributed qualifies for the Corporate Dividends Received Deduction. THIRD AVENUE INTERNATIONAL VALUE FUND Of the $0.559 per share paid to you in cash or reinvested into your account during the fiscal year ended October 31, 2006, $0.459 was derived from net investment income and $0.100 from long-term capital gains. Of the total ordinary income distributed, 25.48%, or the maximum amount allowable, is qualified dividend income for purposes of Internal Revenue Code Section 1(h)(11). None of the ordinary income distributed qualifies for the Corporate Dividends Received Deduction. -------------------------------------------------------------------------------- 84 ================================================================================ ================================================================================ [THIRD AVENUE FUNDS LOGO] THIRD AVENUE TRUST FEDERAL TAX STATUS OF DIVIDENDS (CONTINUED) (UNAUDITED) For the fiscal year ended October 31, 2006, the Third Avenue Value Fund intends to elect to pass through to shareholders the income tax credit for taxes paid to foreign countries. Gross income and foreign tax expenses by country for the year ended October 31, 2006 are as follows: FOREIGN TAX COUNTRY GROSS INCOME PASS THROUGH -------------- ------------ ------------ Bermuda $ 4,236,920 $ 0 Canada 4,296,256 644,944 Hong Kong 18,130,575 0 Japan 10,191,219 713,386 Korea 6,912,022 1,140,484 Sweden 3,239,390 485,908 Switzerland 633,494 95,024 United Kingdom 27,120,700 0 ------------ ------------ Totals $ 74,760,576 $ 3,079,746 ============ ============ For the fiscal year ended October 31, 2006, the Third Avenue International Value Fund intends to elect to pass through to shareholders the income tax credit for taxes paid to foreign countries. Gross income and foreign tax expenses by country for the year ended October 31, 2006 are as follows: FOREIGN TAX COUNTRY GROSS INCOME PASS THROUGH -------------- ------------ ------------ Argentina $ 44,249 $ 0 Australia 3,578,264 0 Bahamas 310,924 0 Belgium 720,678 108,102 Bermuda 7,687,517 0 Canada 8,737,750 141,547 France 251,837 29,641 Hong Kong 3,061,516 0 Japan 3,709,218 259,645 Netherlands 798,788 0 New Zealand 6,326,481 0 Norway 2,623,455 393,518 Panama 428,125 0 Poland 92,062 13,809 Singapore 37,775,873 0 Sweden 79,014 11,852 Switzerland 125,200 18,780 Taiwan 899,327 203,947 United Kingdom 3,882,718 0 ------------ ------------ Totals $ 81,132,996 $ 1,180,841 ============ ============ -------------------------------------------------------------------------------- 85 ================================================================================ BOARD OF TRUSTEES Jack W. Aber David M. Barse William E. Chapman II Lucinda Franks Edward J. Kaier Marvin Moser Eric Rakowski Martin Shubik Charles C. Walden Martin J. Whitman OFFICERS Martin J. Whitman Chairman of the Board David M. Barse President, Chief Executive Officer Vincent J. Dugan Chief Financial Officer, Treasurer Michael A. Buono Controller W. James Hall General Counsel, Secretary Joseph J. Reardon Chief Compliance Officer TRANSFER AGENT PFPC Inc. P.O. Box 9802 Providence, RI 02940-8002 (610) 239-4600 (800) 443-1021 (toll-free) INVESTMENT ADVISER Third Avenue Management LLC 622 Third Avenue New York, NY 10017 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP 300 Madison Avenue New York, NY 10017 CUSTODIAN Custodial Trust Company 101 Carnegie Center Princeton, NJ 08540 [THIRD AVENUE FUNDS LOGO] THIRD AVENUE FUNDS 622 THIRD AVENUE NEW YORK, NY 10017 PHONE (212) 888-5222 TOLL FREE (800) 443-1021 FAX (212) 888-6757 WWW.THIRDAVENUEFUNDS.COM ITEM 2. CODE OF ETHICS. At October 31, 2006, the Trust had a code of ethics (the "Code of Ethics") that applies to its principal executive officer and principal financial officer. This Code of Ethics is attached as Exhibit (a) (1) hereto. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Trust's Board of Trustees has determined that Messrs. Jack Aber, Martin Shubik and Charles Walden, members of the Audit Committee of the Board, are "audit committee financial experts" ("ACFE") as defined by the Securities and Exchange Commission ("SEC") and has designated Mr. Aber as the Committee's ACFE. Each of the Messrs. Aber, Shubik and Walden are "independent" as defined by the SEC for purposes of ACFE determinations. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) AUDIT FEES. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the Trust's principal accountant for the audit of the Trust's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $224,500, including out of pocket expenses of approximately $12,000, for the fiscal year ended October 31, 2006 and $202,000, including out of pocket expenses of approximately $12,000, for the fiscal year ended October 31, 2005. (b) AUDIT-RELATED FEES. The aggregate fees billed in each of the last two fiscal years for assurance and related services by the Trust's principal accountant that are reasonably related to the performance of the audit of the Trust's financial statements and are not reported above in Item 4(a) were $0 for the fiscal year ended October 31, 2006 and $0 the fiscal year ended October 31, 2005. 1 (c) TAX FEES. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the Trust's principal accountant for tax compliance, tax advice and tax planning were $142,600 for the fiscal year ended October 31, 2006 and $106,700 for the fiscal year ended October 31, 2005. These services related to the preparation of tax returns and the review of tax-related issues. (d) ALL OTHER FEES. The aggregate fees billed in each of the last two fiscal years for products and services provided by the Trust's principal accountant, other than the services reported above in Items 4(a) through (c) were $0 for the fiscal year ended October 31, 2006 and $0 for the fiscal year ended October 31, 2005. (e) AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES. (i) The Audit Committee's pre-approval policies and procedures are addressed in the Audit Committee's Charter, attached as Exhibit C hereto and incorporated by reference. (ii) The percentage of services described in each of Items 4(b) through (d) that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X was 100% for the fiscal years ended October 31, 2006 and October 31, 2005. (f) Not Applicable. (g) The aggregate non-audit fees billed by the Trust's accountant for services rendered to the Trust, the Advisor or any entity controlling, controlled by, or under common control with the Advisor that provides ongoing services to the registrant (except for any sub-advisor whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor) for each of the last two fiscal years were $65,000 for the fiscal year ending October 31, 2006 and $40,500 for the fiscal year ending October 31, 2005. (h) Not Applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. The Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. 2 Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 11. CONTROLS AND PROCEDURES. (a) The Trust's principal executive officer and principal financial officer have evaluated the Trust's disclosure controls and procedures within 90 days of this filing and have concluded that the Trust's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The Trust's principal executive officer and principal financial officer are aware of no changes in the Trust's internal control over financial reporting that occurred during the most recent fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Trust's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of Ethics (a)(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. (c) Audit Committee Charter 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Third Avenue Trust ------------------ By: /s/ David M. Barse Name: David M. Barse Title: Principal Executive Officer Date: December 22, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ David M. Barse Name: David M. Barse Title: Principal Executive Officer Date: December 22, 2006 By: /s/ Vincent J. Dugan Name: Vincent J. Dugan Title: Principal Financial Officer Date: December 22, 2006 4