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Mutual fund honcho ornery despite gains

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After a couple of miserable years relative to the overall stock market, Martin Whitman's Third Avenue Value fund is looking good again — up 15.5 percent this year (to July 27).

Given this happy news, you'd think a kinder and gentler Marty Whitman would be on display. But no, the 75-year-old value maven and vulture investor is as ornery as ever. A few choice Whitmanisms from a recent interview:

Most of the fund's gains this year are due to a handful of semiconductor-equipment stocks bought at much lower prices in 1997 and 1998, "but 60 percent of the portfolio still stinks."

Technology stocks, despite last spring's plunge in the Nasdaq, remain "fantastically overpriced — I've lived through a lot of speculative bubbles, but never one this big."

"All this . . . hot money drives you up a wall," referring to investors who are investing in his fund again now that its results have improved. "The one thing I hate about the mutual fund business is that you don't control the cash flows."

Whitman's comments about fickle fund investors should come as no surprise. When we last spoke with him two years ago, he was fulminating about customers who were pulling assets out of Third Avenue Value at a rate of $55 million per month, presumably to invest in the racy growth funds that were dominating the performance charts.

Now that Third Avenue's relative standing has improved (Standard & Poor's 500-stock index was down 1 percent year-to-date), investors are coming back. So instead of being forced to sell undervalued stocks to meet redemptions, Whitman can use the cash coming in to scoop up bargains.

Whitman pores over financial documents looking for stocks cheap enough to meet his standards. Recently, he has been buying shares in so-called contract research organizations, or CROs — companies that help drug manufacturers test new products.

Among the CROs he has added are Kendle International, Parexel International and PPD Inc. "In some cases you can buy these things for under book value and less than 10 times depressed earnings," says Whitman.

Other recent buys include Enhance Financial Services Group, a bond insurance company; Forest City Enterprises, a developer and manager of commercial and residential real estate; and Toyoda Automatic Loom Works, which Whitman describes as a way of buying Japan's Toyota Motors at a 50-percent-to-60-percent discount.