This Statement of Additional Information (SAI) is not a Prospectus
and should be read together with the Funds’ Prospectus dated February 28, 2014. The Funds’ Annual Report to Shareholders
is incorporated by reference in this SAI (is legally considered part of this SAI). A copy of the Prospectus and the Funds’
reports to shareholders may be obtained without charge by writing to the Funds at 622 Third Avenue, New York, NY 10017, or by calling
the Funds at (800) 443-1021 (toll free) or (212) 888-5222.
This SAI is in addition to and serves to expand and supplement
the current Prospectus of Third Avenue Trust (the “Trust”). The Trust is an open-end management investment company
which currently consists of five separate non-diversified investment series: THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE
FUND, THIRD AVENUE REAL ESTATE VALUE FUND, THIRD AVENUE INTERNATIONAL VALUE FUND and THIRD AVENUE FOCUSED CREDIT FUND (each a “Fund”
and collectively, the “Funds”).
The Trust was organized as a statutory trust under the laws
of the state of Delaware pursuant to a Trust Instrument dated October 31, 1996. At the close of business on March 31, 1997, shareholders
of Third Avenue Value Fund, Inc. (“Third Avenue Maryland”), a Maryland corporation which was incorporated on November
27, 1989 and began operations on October 9, 1990, became shareholders of THIRD AVENUE VALUE FUND, a series of the Trust, pursuant
to a merger agreement which was approved by a majority of Third Avenue Maryland’s shareholders on December 13, 1996. Upon
this merger, all assets, privileges, powers, franchises, liabilities and obligations of Third Avenue Maryland were assumed by the
Trust. Except as noted herein, all information about THIRD AVENUE VALUE FUND or the Trust, as applicable, includes information
about its predecessor, Third Avenue Maryland.
INVESTMENT POLICIES
The Prospectus discusses the investment objectives of the Funds
and the principal investment strategies to be employed to achieve those objectives. This section contains supplemental information
concerning certain types of securities and other instruments in which the Funds may invest, additional strategies that the Funds
may utilize, and certain risks associated with such investments and strategies.
The Funds expect to invest in a broad range of securities and
other instruments subject to each Fund’s principal investment strategy. The particular types of investments and the percentage
of a Fund’s assets invested in each type will vary depending on where the Adviser, Third Avenue Management LLC (the “Adviser”),
sees the most value at the time of investment. The following is a description of the different types of investments in which the
Funds may invest and certain of the risks relating to those investments.
EQUITY SECURITIES
The Funds may invest in equity securities. In selecting equity
securities, the Adviser generally seeks issuing companies that exhibit the following characteristics:
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A strong financial position, as measured not only by balance sheet data but also by off-balance sheet assets, liabilities and contingencies (as disclosed in footnotes to financial statements and as determined through research of public information);
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Responsible management and control groups, as gauged by managerial competence as operators and investors as well as by an apparent absence of intent to profit at the expense of stockholders;
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Availability of comprehensive and meaningful financial and related information. A key disclosure is audited financial statements and information which the Adviser believes are reliable benchmarks to aid in understanding the business, its values and its dynamics; and
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Availability of the security at a market price which the Adviser believes is at a substantial discount to the Adviser’s estimate of what the issuer would be worth as a private company or as a takeover or merger and acquisition candidate.
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Investing in equity securities has certain risks, including
the risk that the financial condition of the issuer may become impaired or that the general condition of the stock market may worsen
(both of which may contribute directly to a decrease in the value of the securities and thus in the value of a Fund’s shares).
Equity securities are especially susceptible to general stock market movements and to increases and decreases in value as market
confidence in and perceptions of the issuers change. These perceptions are based on unpredictable factors including expectations
regarding government, economic, monetary and fiscal policies, inflation and interest rates, economic expansion or contraction,
and global or regional political, economic or banking crises. The value of the common stocks owned by a Fund thus may be expected
to fluctuate.
In selecting preferred stocks, the Adviser will use its selection
criteria for either equity securities or debt securities, depending on the Adviser’s determination as to how the particular
issue should be viewed, based, among other things, upon the terms of the preferred stock and where it fits in the issuer’s
capital structure. Preferred stocks are usually entitled to rights on liquidation which are senior to those of common stocks. For
these reasons, preferred stocks generally entail less risk than common stocks of the same issuer. Such securities may pay cumulative
dividends. Because the dividend rate is pre-established, and as these securities are senior to common stocks, they tend to have
less possibility of capital appreciation.
Although the Adviser does not emphasize on market factors in
making investment decisions, the Funds are, of course, subject to the vagaries of the markets.
The Funds may invest from time to time, and the THIRD AVENUE
SMALL-CAP VALUE FUND focuses its investments, in smaller companies whose securities tend to be more volatile and less liquid than
securities of larger companies.
CONVERTIBLE SECURITIES
The Funds may invest in convertible securities, which are bonds,
debentures, notes, preferred stocks or other securities that may be converted into or exchanged for a prescribed amount of equity
securities (generally common stock) of the same or a different issuer within a particular period of time at a specified price or
formula. Convertible securities have general characteristics similar to both fixed-income and equity securities. Yields for convertible
securities tend to be lower than for non-convertible debt securities but higher than for common stocks. Although to a lesser extent
than with fixed-income securities generally, the market value of convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In addition, because of the conversion feature, the market value
of convertible securities tends to vary with fluctuations in the market value of the underlying security and therefore also will
react to variations in the general market for equity securities and the operations of the issuer. While no securities investments
are without risk, investments in convertible securities generally entail less risk than investments in common stock of the same
issuer. Convertible securities generally are subordinated to other similar but non-convertible securities of the same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and convertible
preferred stock is senior to common stock of the same issuer. However, because of the subordination feature, convertible bonds
and convertible preferred stock typically have lower ratings than similar non-convertible securities.
DEBT SECURITIES
Each of the Funds intends its investment in debt securities
to be, for the most part, in securities which the Adviser believes will provide above-average total returns, which can be generated
from a combination of sources, including capital appreciation, fees and interest income. In selecting debt instruments for the
Funds, the Adviser seeks the following characteristics:
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Reasonable covenant protection, price considered; and
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Total return potential substantially above that of a comparable credit.
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In acquiring debt securities for the Funds, the Adviser generally
will look for reasonable covenants which protect holders of the debt issue from possible adverse future events such as, for example,
the addition of new debt senior to the issue under consideration. Also, the Adviser will seek to analyze the potential impacts
of possible extraordinary events such as corporate restructurings, refinancings, or acquisitions. The Adviser will also use its
best judgment as to the most favorable range of maturities. The Funds may invest in “mezzanine” issues such as non-convertible
subordinated debentures.
The market value of debt securities is affected by changes in
prevailing interest rates and the perceived credit quality of the issuer. When prevailing interest rates fall or perceived credit
quality is increased, the market values of debt securities generally rise. Conversely, when interest rates rise or perceived credit
quality is lowered, the market values of debt securities generally decline. The magnitude of these fluctuations will be greater
for securities with longer maturities.
MORTGAGE-BACKED SECURITIES
The Funds may invest in mortgage-backed securities and derivative
mortgage-backed securities, but do not intend to invest in “principal only” and “interest only” components.
Mortgage-backed securities are securities that directly or indirectly represent a participation in, or are secured by and payable
from, mortgage loans on real property. The Adviser believes that, under certain circumstances, many mortgage-backed securities
may trade at prices below their inherent value on a risk-adjusted basis and believes that selective purchases by a Fund may provide
high yield and total return in relation to risk levels. The Funds intend to invest in these securities only when the Adviser believes,
after analysis, that there is unlikely to be permanent impairment of capital as measured by whether there will be a money default
by either the issuer or the guarantor of these securities.
As with other debt securities, mortgage-backed securities are
subject to credit risk and interest rate risk. See “Debt Securities.” However, the yield and maturity characteristics
of mortgage-backed securities differ from traditional debt securities. A major difference is that the principal amount of the obligations
may normally be prepaid at any time because the underlying assets (i.e., loans) generally may be prepaid at any time. The relationship
between prepayments and interest rates may give some mortgage-backed securities less potential for growth in value than conventional
fixed-income securities with comparable maturities. In addition, in periods of falling interest rates, the rate of prepayments
tends to increase. During such periods, the reinvestment of prepayment proceeds by a Fund will generally be at lower rates than
the rates that were carried by the obligations that have been prepaid. If interest rates rise, borrowers may prepay mortgages more
slowly than originally expected. This may further reduce the market value of mortgage-backed securities and lengthen their durations.
Because of these and other reasons, a mortgage-backed security’s total return, maturity and duration may be difficult to
predict precisely.
Mortgage-backed securities come in different classes that have
different risks. Junior classes of mortgage-backed securities protect the senior class investors against losses on the underlying
mortgage loans by taking the first loss if there are liquidations among the underlying loans. Junior classes generally receive
principal and interest payments only after all required payments have been made to more senior classes. If a Fund invests in junior
classes of mortgage-related securities, it may not be able to recover all of its investment in the securities it purchases. In
addition, if the underlying mortgage portfolio has been overvalued, or if mortgage values subsequently decline, a Fund that invests
in such securities may suffer significant losses.
Investments in mortgage-backed securities involve the risks
of interruptions in the payment of interest and principal (delinquency) and the potential for loss of principal if the property
underlying the security is sold as a result of foreclosure on the mortgage (default). These risks include the risks associated
with direct ownership of real estate, such as the effects of general and local economic conditions on real estate values, the conditions
of specific industry segments, the ability of tenants to make lease payments and the ability of a property to attract and retain
tenants, which in turn may be affected by local market conditions such as oversupply of space or a reduction of available space,
the ability of the owner to provide adequate maintenance and insurance, energy costs, government regulations with respect to environmental,
zoning, rent control and other matters, and real estate and other taxes. The risks associated with the real estate industry will
be more significant for a Fund to the extent that it invests in mortgage-backed (and other real estate-related) securities. These
risks are heightened in the case of mortgage-backed securities related to a relatively small pool of mortgage loans. If the underlying
borrowers cannot pay their mortgage loans, they may default and the lenders may foreclose on the property. Finally, the ability
of borrowers to repay mortgage loans underlying mortgage-backed securities will typically depend upon the future availability of
financing and the stability of real estate values.
Mortgage-backed securities may be issued or guaranteed by the
Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”)
or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) but also may be issued or guaranteed by other issuers,
including private companies.
Mortgage-backed securities issued
by GNMA include Ginnie Maes which are guaranteed as to the timely payment of principal and interest by GNMA and such guarantee
is backed by the full faith and credit of the U.S. Government. Ginnie Maes are created by an “issuer,” which is a Federal
Housing Administration (“FHA”) approved mortgagee that also meets criteria imposed by GNMA. The issuer assembles a
pool of FHA, Farmers’ Home Administration or Veterans’ Administration (“VA”) insured or guaranteed mortgages
which are homogeneous as to interest rate,
maturity and type of dwelling. Upon
application by the issuer, and after approval by GNMA of the pool, GNMA provides its commitment to guarantee timely payment of
principal and interest on the Ginnie Maes backed by the mortgages included in the pool. The Ginnie Maes, endorsed by GNMA, then
are sold by the issuer through securities dealers. Ginnie Maes bear a stated “coupon rate” which represents the effective
FHA-VA mortgage rate at the time of issuance, less GNMA’s and the issuer’s fees. GNMA is authorized under the National
Housing Act to guarantee timely payment of principal and interest on Ginnie Maes. This guarantee is backed by the full faith and
credit of the U.S. Government. GNMA may borrow Treasury funds to the extent needed to make payments under its guarantee. When mortgages
in the pool underlying a Ginnie Mae are prepaid by mortgagors or by result of foreclosure, such principal payments are passed through
to the certificate holders. Accordingly, the life of the Ginnie Mae is likely to be substantially shorter than the stated maturity
of the mortgages in the underlying pool. Because of such variation in prepayment rates, it is not possible to predict the life
of a particular Ginnie Mae. Payments to holders of Ginnie Maes consist of the monthly distributions of interest and principal less
GNMA’s and the issuer’s fees. The actual yield to be earned by a holder of a Ginnie Mae is calculated by dividing interest
payments by the purchase price paid for the Ginnie Mae (which may be at a premium or a discount from the face value of the certificate).
Monthly distributions of interest, as contrasted to semi-annual distributions which are common for other fixed interest investments,
have the effect of compounding and thereby raising the effective annual yield earned on Ginnie Maes.
Mortgage-backed securities issued
by FNMA, including FNMA Guaranteed Mortgage Pass-Through Certificates (also known as “Fannie Maes”), are solely the
obligations of FNMA and are not backed by or entitled to the full faith and credit of the U.S. Government. Fannie Maes are guaranteed
as to timely payment of principal and interest by FNMA. Mortgage-backed securities issued by FHLMC include FHLMC Mortgage Participation
Certificates (also known as “Freddie Macs” or “PCs”). Freddie Macs are not guaranteed by the U.S. Government
or by any Federal Home Loan Bank and do not constitute a debt or obligation of the U.S. Government or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is guaranteed by FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying mortgage loans. When FHLMC does not guarantee timely payment
of principal, FHLMC may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default
on an underlying mortgage, but in no event later than one year after it becomes payable.
In September 2008, the Treasury and the Federal Housing Finance
Agency (“FHFA”) announced that FNMA and FHLMC had been placed in conservatorship. Since that time, FNMA and FHLMC have
received significant capital support through Treasury preferred stock purchases, as well as Treasury and Federal Reserve purchases
of their mortgage backed securities. The FHFA and the U.S. Treasury (through its agreement to purchase FNMA and FHLMC preferred
stock) have imposed strict limits on the size of their mortgage portfolios. While the mortgage-backed securities purchase programs
ended in 2010, the Treasury continued its support for the entities’ capital as necessary to prevent a negative net worth
through at least 2012. When a credit rating agency downgraded long-term U.S. Government debt in August 2011, the agency also downgraded
FNMA and FHLMC’s bond ratings, from AAA to AA+, based on their direct reliance on the U.S. Government (although that rating
did not directly relate to their mortgage-backed securities). From the end of 2007 through the third quarter of 2012, FNMA and
FHLMC required Treasury support of approximately $187.5 billion through draws under the preferred stock purchase agreements. However,
they have repaid approximately $131.5 billion in dividends. FNMA and FHLMC ended the second quarter of 2013 with positive net worth
and, as a result, neither required a draw from the Treasury. While the Treasury committed to offset negative equity at FNMA and
FHLMC through its preferred stock purchases through 2012, FHFA has made projections for those purchases through 2015, predicting
that cumulative Treasury draws (including dividends) at the end of 2015 could range from $191 billion to $209 billion. Nonetheless,
no assurance can be given that the Federal Reserve or the Treasury will ensure that FNMA and FHLMC remain successful in meeting
their obligations with respect to the debt and mortgage-backed securities that they issue.
In addition, the problems faced by FNMA and FHLMC, resulting
in their being placed into federal conservatorship and receiving significant U.S. Government support, have sparked serious debate
among federal policymakers regarding the continued role of the U.S. Government in providing liquidity for mortgage loans. The Obama
Administration produced a report to Congress on February 11, 2011, outlining a proposal to wind down FNMA and
FHLMC by increasing their guaranty fees, reducing their conforming
loan limits (the maximum amount of each loan they are authorized to purchase), and continuing progressive limits on the size of
their investment portfolio. In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act of 2011 which, among
other provisions, requires that FNMA and FHLMC increase their single-family guaranty fees by at least 10 basis points and remit
this increase to the Treasury with respect to all loans acquired by FNMA or FHLMC on or after April 1, 2012 and before January
1, 2022. Serious discussions among policymakers continue, however, as to whether FNMA and FHLMC should be nationalized, privatized,
restructured or eliminated altogether. In July 2013, the House Financial Services Committee approved the Protect American Taxpayers
and Homeowners Act of 2013. The bill, if enacted, would require FHFA to place FNMA and FHLMC into receivership within five years
and repeal their corporate charters at that time, which would effectively strip them of the authority to conduct any new business.
The bill would also place restrictions on FNMA’s and FHLMC’s activities prior to being placed into receivership and
may result in FNMA and FHLMC further increasing their guaranty fees. FNMA and FHLMC also are the subject of several continuing
legal actions and investigations over certain accounting, disclosure or corporate governance matters, which (along with any resulting
financial restatements) may continue to have an adverse effect on the guaranteeing entities. Importantly, the future of FNMA and
FHLMC is in serious question as the U.S. Government considers multiple options.
The Funds’ investments in mortgage-based securities may
include those that are issued by private issuers, and, therefore, may have some exposure to subprime loans as well as to the mortgage
and credit markets generally. For mortgage loans not guaranteed by a government agency or other party, the only remedy of the lender
in the event of a default is to foreclose upon the property. If borrowers are not able or willing to pay the principal balance
on the loans, there is a good chance that payments on the related mortgage-related securities will not be made. Certain borrowers
on underlying mortgages may become subject to bankruptcy proceedings, in which case the value of the mortgage-backed securities
may decline. Private issuers include commercial banks, savings associations, mortgage companies, investment banking firms, finance
companies and special purpose finance entities (called special purpose vehicles) and other entities that acquire and package mortgage
loans for resale as mortgage-backed securities. Unlike mortgage-based securities issued or guaranteed by the U.S. Government or
one of its sponsored entities, mortgage-backed securities issued by private issuers do not have a government or government-sponsored
entity guarantee, but may have credit enhancement provided by external entities such as banks or financial institutions or achieved
through the structuring of the transaction itself. However, there can be no guarantee that credit enhancements, if any, will be
sufficient to prevent losses in the event of defaults on the underlying mortgage loans.
In addition, mortgage-backed securities that are issued by private
issuers are not subject to the underwriting requirements for the underlying mortgages that are applicable to those mortgage-backed
securities that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying private
mortgage-backed securities may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics
than government or government-sponsored mortgage-backed securities and have wider variances in a number of terms including interest
rate, term, size, purpose and borrower characteristics. Privately issued pools more frequently include second mortgages, high loan-to-value
mortgages and manufactured housing loans. The coupon rates and maturities of the underlying mortgage loans in a private-label mortgage-backed
securities pool may vary to a greater extent than those included in a government guaranteed pool, and the pool may include subprime
mortgage loans. Subprime loans refer to loans made to borrowers with weakened credit histories or with a lower capacity to make
timely payments on their loans. For these reasons, the loans underlying these securities have had in many cases higher default
rates than those loans that meet government underwriting requirements. The risk of non-payment is greater for mortgage-backed securities
that are backed by mortgage pools that contain subprime loans, but a level of risk exists for all loans. Market factors adversely
affecting mortgage loan repayments may include a general economic downturn, high unemployment, a general slowdown in the real estate
market, a drop in the market prices of real estate, or an increase in interest rates resulting in higher mortgage payments by holders
of adjustable rate mortgages. Privately issued mortgage-backed securities are not traded on an exchange and there may be a limited
market for the securities, especially when there is a perceived weakness in the mortgage and real estate market sectors. Without
an active trading market, mortgage-backed securities held in a Fund’s portfolio may be particularly difficult to value because
of the complexities involved in assessing the value of the underlying mortgage loans.
ASSET-BACKED SECURITIES
The Funds may invest in asset-backed securities that, through
the use of trusts and special purpose vehicles, are securitized with various types of assets, such as automobile receivables, credit
card receivables and home-equity loans in pass-through structures similar to, and having many of the same risks as, the mortgage-related
securities described above, as well as risks that are not presented by mortgage-backed securities. Primarily, these securities
may provide a less effective security interest in the related collateral than do mortgage-backed securities. Therefore, there is
the possibility that recoveries on the underlying collateral may not, in some cases, be available to support payments on these
securities. In general, the collateral supporting asset-backed securities is of shorter maturity than the collateral supporting
mortgage loans and is less likely to experience substantial prepayments. However, asset-backed securities are not backed by any
governmental agency.
COLLATERALIZED DEBT OBLIGATIONS
Each Fund may invest in collateralized debt obligations (“CDOs”),
which are securitized interests in pools of assets. Assets called collateral usually comprise loans or debt instruments. A CDO
may be called a collateralized loan obligation (“CLO”) or collateralized bond obligation (“CBO”) if it
holds only loans or bonds, respectively. Investors bear the credit risk of the collateral. Multiple tranches of securities are
issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine,
and subordinated/equity, according to their degree of credit risk. If there are defaults or the CDO’s collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to
mezzanine tranches take precedence over those to subordinated/equity tranches. Senior and mezzanine tranches are typically rated,
with the former receiving ratings of A to AAA/Aaa and the latter receiving ratings of B to BBB/Baa. The ratings reflect both the
credit quality of underlying collateral as well as how much protection a given tranche is afforded by tranches that are subordinate
to it.
FLOATING RATE, INVERSE FLOATING RATE AND INDEX OBLIGATIONS
The Funds may invest in debt securities with interest payments
or maturity values that are not fixed, but float in conjunction with (or inversely to) an underlying index or price. These securities
may be backed by the U.S. Government or corporate issuers, or by collateral such as mortgages. The indices and prices upon which
such securities can be based include interest rates, currency rates and commodities prices. However, the Funds will not invest
in any instrument whose value is computed based on a multiple of the change in price or value of an asset or an index of or relating
to assets in which these Funds cannot or will not invest.
Floating rate securities pay interest according to a coupon
which is reset periodically. The reset mechanism may be a formula based on, or reflect the passing through of, floating interest
payments on an underlying collateral pool. Inverse floating rate securities are similar to floating rate securities except that
their coupon payments vary inversely with an underlying index by use of a formula. Inverse floating rate securities tend to exhibit
greater price volatility than other floating rate securities. None of the Funds intend to invest more than 5% of each of its total
assets in inverse floating rate securities. Floating rate obligations generally exhibit a low price volatility for a given stated
maturity or average life because their coupons adjust with changes in interest rates. Interest rate risk and price volatility on
inverse floating rate obligations can be high, especially if leverage is used in the formula. Index securities pay a fixed rate
of interest, but have a maturity value that varies by formula, so that when the obligation matures a gain or loss may be realized.
The risk of index obligations depends on the volatility of the underlying index, the coupon payment and the maturity of the obligation.
HIGH-YIELD DEBT SECURITIES
The Funds may invest in high-yield debt, which are securities
rated below investment grade by some or all relevant independent rating agencies (Baa by Moody’s Investors Service, Inc.
(“Moody’s”); below BBB by Standard & Poor’s Ratings Group (“Standard & Poor’s”)
or Fitch Ratings (“Fitch”)) and unrated debt securities of similar credit quality, commonly referred to as “junk
bonds.” See also “Debt Securities” and “Restricted and Illiquid Securities.” Such securities are
predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal in accordance with the
terms of the obligation, and may in fact be in default. The Funds also invest in distressed securities, which the Adviser considers
to be issued by companies that are, or might be, involved in reorganizations or financial restructurings, either out of court or
in bankruptcy. The Funds’ investments in distressed securities typically involve the purchase of high-yield bonds, bank debt
or other indebtedness of such companies. THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE REAL ESTATE VALUE
FUND and THIRD AVENUE INTERNATIONAL VALUE FUND do not intend to invest more than 35% of their total assets in high-yield debt securities.
THIRD AVENUE FOCUSED CREDIT FUND invests a substantial amount of its assets in high-yield debt securities. The ratings of Moody’s,
Standard & Poor’s and Fitch represent their opinions as to the credit quality of the securities they undertake to rate
(see Appendix A for a description of those ratings). It should be emphasized, however, that ratings are relative and subjective
and, although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market
price risk of these securities. In seeking to achieve its investment objective, each such Fund depends on the Adviser’s credit
analysis to identify investment opportunities. For the Funds, credit analysis is not a process of merely measuring the probability
of whether a money default will occur, but also measuring how the creditor would fare in a reorganization or liquidation in the
event of a money default.
The market price and yield of bonds rated below investment grade
are more volatile than those of higher rated bonds due to such factors as interest rate sensitivity, market perception of the creditworthiness
of the issuer, general market liquidity, and the risk of an issuer’s inability to meet principal and interest payments. In
addition, the secondary market for these bonds is generally less liquid than that for higher rated bonds.
Lower rated or unrated debt obligations also present reinvestment
risks based on payment expectations. If an issuer calls the obligation for redemption, a Fund may have to replace the security
with a lower yielding security, resulting in a decreased return for investors.
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. Companies
that issue such bonds often are highly leveraged and may not have available to them more traditional methods of financing. Under
adverse economic conditions, there is a risk that highly-leveraged issuers may be unable to service their debt obligations or to
repay their obligations upon maturity. Under deteriorating economic conditions or rising interest rates, the capacity of issuers
of lower-rated securities to pay interest and repay principal is more likely to weaken significantly than that of issuers of higher-rated
securities. The Funds may also purchase or retain debt obligations of issuers not currently paying interest or in default (i.e.,
with a rating from Moody’s of C or lower, Standard & Poor’s of C1 or lower or Fitch of B to C). In addition, these
Funds may purchase securities of companies that have filed for protection under Chapter 11 of the United States Bankruptcy Code
or the equivalent in countries outside the U.S.
DISTRESSED AND DEFAULTED SECURITIES
The Funds also invest in distressed securities, which the Adviser
considers to be issued by companies that are, or might be, involved in reorganizations or financial restructurings, either out
of court or in bankruptcy proceedings. The Funds’ investments in distressed securities typically involve the purchase of
high-yield bonds, bank debt or other indebtedness of such companies. THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND,
THIRD AVENUE REAL ESTATE VALUE FUND and THIRD AVENUE INTERNATIONAL VALUE FUND do not intend to invest more than 35% of their total
assets in distressed securities. THIRD AVENUE FOCUSED CREDIT FUND invests a substantial amount of its assets in distressed securities.
Such investments involve a substantial degree of risk. In any reorganization or liquidation proceeding
relating to a company in which a Fund invests, a Fund may lose its entire investment, may be required to accept cash or securities with a value less than the Fund's
original investment, and/or may be required to accept payment over an extended period of time. Under such circumstances, the returns generated may not compensate the Funds
adequately for the risks assumed.
A wide variety of considerations render the outcome of any investment
in a financially distressed company uncertain, and the level of analytical sophistication, both financial and legal, necessary
for successful investment in companies experiencing significant business and financial difficulties, is unusually high. There is
no assurance that the Adviser will correctly evaluate the intrinsic values of the distressed companies in which the Funds may invest.
There is also no assurance that the Adviser will correctly evaluate how such value will be distributed among the different classes
of creditors, or that the Adviser will have properly assessed the steps and timing thereof in the bankruptcy or liquidation process.
Any one or all of such companies may be unsuccessful in their reorganization and their ability to improve their operating performance.
Also, such companies’ securities may be considered speculative, and the ability of such companies to pay their debts on schedule
could be affected by adverse interest rate movements, changes in the general economic climate, economic factors affecting a particular
industry, or specific developments within such companies.
The Funds may invest in the securities of companies involved
in bankruptcy proceedings, reorganizations and financial restructurings and may have a more active participation in the affairs
of the issuer than is generally assumed by an investor. This may subject the Funds to litigation risks or prevent the Funds from
disposing of securities. In a bankruptcy or other proceeding, a Fund as a creditor may be unable to enforce its rights in any collateral
or may have its security interest in any collateral challenged, disallowed or subordinated to the claims of other creditors. While
the Funds will attempt to avoid taking the types of actions that would lead to equitable subordination or creditor liability, there
can be no assurance that such claims will not be asserted or that the Funds will be able to successfully defend against them.
Defaulted securities will be purchased or retained if, in the
opinion of the Adviser, they may present an opportunity for subsequent price recovery, the issuer may resume payments, or other
advantageous developments appear likely.
ZERO-COUPON AND PAY-IN-KIND SECURITIES
The Funds may invest in zero coupon and pay-in-kind (“PIK”)
securities. Zero coupon securities are debt securities that pay no cash income but are sold at substantial discounts from their
value at maturity. PIK securities pay all or a portion of their interest in the form of additional debt or equity securities. Because
such securities do not pay current cash income, the price of these securities can be volatile when interest rates fluctuate. While
these securities do not pay current cash income, federal income tax law requires the holders of zero coupon and PIK securities
to include in income each year the portion of the original issue discount (or deemed discount) and other non-cash income on such
securities accrued during that year. In order to continue to qualify for treatment as a “regulated investment company”
under the Internal Revenue Code of 1986, as amended (the “Code”), and avoid a certain excise tax, each Fund may be
required to distribute a portion of such discount and non-cash income and may be required to dispose of other portfolio securities,
which may occur in periods of adverse market prices, in order to generate cash to meet these distribution requirements.
LOANS, DIRECT DEBT AND RELATED INSTRUMENTS
The Funds may invest in loans and other direct debt instruments
owed by a borrower to another party. The Funds may also from time to time make loans. These instruments represent amounts owed
to lenders or lending syndicates (loans and loan participations) or to other parties. THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP
VALUE FUND, THIRD AVENUE REAL ESTATE VALUE FUND and THIRD AVENUE INTERNATIONAL VALUE FUND do not intend to invest more than 35%
of their total assets in loans, direct debt and related instruments. THIRD AVENUE FOCUSED CREDIT FUND may invest a substantial
amount of its assets in loans, direct debt and related instruments. 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 a Fund in the event of fraud or misrepresentation.
The markets in loans are not regulated by federal securities laws or the Securities and Exchange Commission (“SEC”).
No Fund will make loans, including loans of portfolio securities, in an amount exceeding 33 1/3% of its total assets (including
such loans), except that direct investments in debt instruments (including, without limitation, high-yield bonds (commonly known
as “junk bonds” or “junk debt”)), bank debt, convertible bonds or preferred stock, loans made to bankrupt
companies (including debtor-in-possession loans), loans made to refinance distressed companies and other types of debt instruments
shall not be deemed loans for the purpose of this limitation.
Senior Loans
The Funds may invest in senior secured floating rate loans (“Senior
Loans”). Senior Loans generally are made to corporations, partnerships and other business entities (“Borrowers”)
which operate in various industries and geographical regions. Senior Loans, which typically hold the most senior position in a
Borrower’s capital structure, pay interest at rates that are determined periodically on the basis of a floating base lending
rate, such as the London Inter-bank Offered Rate (LIBOR), plus a premium. This floating rate feature should help to minimize changes
in the principal value of the Senior Loans resulting from interest rate changes. The Borrowers generally will use proceeds from
Senior Loans to finance leveraged buyouts, recapitalizations, mergers, acquisitions and stock repurchases and, to a lesser extent,
to finance internal growth and for other corporate purposes. The Funds invest primarily in Senior Loans that are below investment
grade quality and are speculative investments that are subject to credit risk. The Funds will attempt to manage these risks through
ongoing analysis and monitoring of Borrowers. Senior Loans in which the Funds invest may not be rated by a rating agency, will
not be registered with the SEC or any state securities commission and generally will not be listed on any national securities exchange.
Therefore, the amount of public information available about Senior Loans will be limited, and the performance of the Funds’
investments in Senior Loans will be more dependent on the analytical abilities of the Adviser than would be the case for investments
in more widely rated, registered or exchange-listed securities. In evaluating the creditworthiness of Borrowers, the Adviser will
consider, and may rely in part, on analyses performed by others. Moreover, certain Senior Loans will be subject to significant
contractual restrictions on resale and, therefore, will be illiquid.
Loan Participations and Assignments
The Funds may invest in short-term corporate obligations denominated
in U.S. and foreign currencies that are originated, negotiated and structured by a syndicate of lenders (“Co-Lenders”),
consisting of commercial banks, thrift institutions, insurance companies, financial companies or other financial institutions one
or more of which administers the security on behalf of the syndicate (the “Agent Bank”). Co-Lenders may sell such securities
to third parties called “Participants.” The Funds may invest in such securities either by participating as a Co-Lender
at origination or by acquiring an interest in the security from a Co-Lender or a Participant (collectively, “participation
interests”). Co-Lenders and Participants interposed between a Fund and the Borrower, together with Agent Banks, are referred
herein as “Intermediate Participants.” A participation interest gives the relevant Fund an undivided interest in the
security in the proportion that the relevant Fund’s participation interest bears to the total principal amount of the security.
These instruments may have fixed, floating or variable rates of interest.
The Funds also may purchase a participation interest in a portion
of the rights of an Intermediate Participant, which would not establish any direct relationship between a Fund and the Borrower.
The Fund would be required to rely on the Intermediate Participant that sold the participation interest not only for the enforcement
of the Fund’s rights against the Borrower, but also for the receipt and processing of payments due to the Fund under the
security. Because it may be necessary to assert through an Intermediate Participant such rights as may exist against the Borrower,
in the event the Borrower fails to pay principal and interest when due, the relevant Fund may be subject to delays, expenses and
risks that are greater than those that would be involved if the relevant Fund would enforce its rights directly against the Borrower.
Moreover, under the terms of a participation interest, the relevant Fund may be regarded as a creditor of the Intermediate Participant
(rather than of the Borrower), so that the Fund may also be subject to the risk that the Intermediate Participant may become insolvent.
Similar risks may arise with respect to the Agent Bank if, for example, assets held by the Agent Bank for the benefit of the Fund
were determined by the appropriate regulatory authority or court to be subject to the claims of the Agent Bank’s creditors.
In such case, the Fund might incur certain costs and delays in realizing payment in connection with the participation interest
or suffer a loss of principal and/or interest. Further, in the event of the bankruptcy or insolvency of the Borrower, the obligation
of the Borrower to repay the loan may be subject to certain defenses that can be asserted by such Borrower as a result of improper
conduct by the Agent Bank or Intermediate Participant.
The Funds also may invest in the underlying loan to the Borrower
through an assignment of all or a portion of such loan (“Assignments”) from a third party. When a Fund purchases Assignments
from Co-Lenders it will acquire direct rights against the Borrower on the loan. Because Assignments are arranged through private
negotiations between potential assignees and potential assignors, however, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Co-Lender. The Funds may have
difficulty disposing of Assignments because to do so it will have to assign such securities to a third party. Because there is
no established secondary market for such securities, it is anticipated that such securities could
be sold only to a limited number of institutional investors.
The lack of an established secondary market may have an adverse impact on the value of such securities and the Funds’ ability
to dispose of particular Assignments when necessary to meet the Fund’s liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the Borrower. The lack of an established secondary market for Assignments
also may make it more difficult for the Fund to assign a value to these securities for purposes of valuing the Fund’s portfolio
and calculating its net asset value.
TRADE CLAIMS
The Funds may invest in trade claims. Trade claims are interests
in amounts owed to suppliers of goods or services and are purchased from creditors of companies in financial difficulty and often
involved in bankruptcy proceedings. For purchasers such as these Funds, trade claims offer the potential for profits since they
are often purchased at a significant discount from face value and, consequently, may generate capital appreciation in the event
that the market value of the claim increases as the debtor’s financial position improves or the claim is paid.
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.
FOREIGN SECURITIES
THIRD AVENUE INTERNATIONAL VALUE FUND will, under normal market
conditions, invest at least 80% of its assets (plus the amount of any borrowing for investment purposes) in securities of issuers
located outside of the United States. This Fund intends to invest primarily in securities of companies based in developed countries.
THIRD AVENUE VALUE FUND, THIRD AVENUE SMALL-CAP VALUE FUND,
THIRD AVENUE REAL ESTATE VALUE FUND and THIRD AVENUE FOCUSED CREDIT FUND may invest in foreign securities investments which will
have characteristics similar to those of domestic securities selected for each of these Funds. All of the Funds seek to avoid investing
in securities in countries where there is no requirement to provide public financial information, or where the Adviser deems such
information to be unreliable as a basis for analysis.
The value of a Fund’s investments may be adversely affected
by changes in political or social conditions, diplomatic relations, confiscatory taxation, expropriation, nationalization, limitation
on the removal of funds or assets, or imposition of (or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary policies in the United States or abroad could result
in appreciation or depreciation of a Fund’s securities and could favorably or unfavorably affect such Fund’s operations.
Furthermore, the economies of individual foreign nations may differ from the U.S. economy, whether favorably or unfavorably, in
areas such as growth of gross national product, rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payments position; it may also be more difficult to obtain and enforce a judgment against a foreign issuer. In general, less
information is publicly available with respect to foreign issuers than is available with respect to U.S. companies. Most foreign
companies are subject to accounting and reporting requirements that differ from those applicable to United States companies and
that may be less informative. Any foreign investments made by a Fund must be made in compliance with U.S. and foreign currency
and other restrictions and tax laws restricting the amounts and types of foreign investments.
Because foreign securities generally are denominated and pay
dividends or interest in foreign currencies, and the Funds may determine not to hedge or to hedge only partially their currency
exchange rate exposure, the value of the net assets of the Funds as measured in U.S. dollars will be affected favorably or unfavorably
by changes in exchange rates. Generally, a Fund’s currency exchange transactions will be conducted on a spot (i.e., cash)
basis at the spot rate prevailing in the currency exchange market. The cost of a Fund’s currency exchange transactions will
generally be the difference between the bid and offer spot rate of the currency being purchased or sold. In order to protect against
uncertainty in the level of future foreign currency exchange, each Fund is authorized to enter into certain foreign currency exchange
transactions.
In addition, while the volume of transactions effected on foreign
stock exchanges has increased in recent years, in most cases it remains appreciably below that of U.S. exchanges or markets. Accordingly,
each Fund’s foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities
of U.S. companies. In buying and selling securities on foreign exchanges, the Funds may pay fixed commissions that may differ from
the commissions charged in the United States. In addition, there may be less government supervision and regulation of securities
exchanges, brokers and issuers in foreign countries than in the United States.
DEVELOPED AND EMERGING MARKETS
The Funds
may invest in issuers located in both developed and emerging markets. The world’s
industrialized markets generally include but are not limited to the following:
Australia, Austria, Belgium, Bermuda, Canada, Denmark, Finland, France, Germany,
, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, Netherlands, New Zealand,
Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom,
and the United States; the world’s
emerging markets generally include but are not limited to the following: Brazil,
Chile, China, Colombia, the Czech Republic, Egypt, Greece, Hungary, India,
Indonesia, South Korea, Malaysia, Mexico, Peru, Philippines, Poland, Russia,
South Africa, Taiwan, Thailand and Turkey.
Investment in securities of issuers based in emerging markets
entails all of the risks of investing in securities of foreign issuers outlined in the above section to a heightened degree. These
heightened risks include: (i) greater risks of expropriation, confiscatory taxation, nationalization, and less social, political
and economic stability; (ii) the smaller size of the market for such securities and a low or nonexistent volume of trading, resulting
in lack of liquidity and in price volatility; and (iii) certain national policies which may restrict the Funds’ investment
opportunities including restrictions on investing in issuers or industries deemed sensitive to relevant national interests.
Custodial services and other costs relating to investment in
emerging markets are more expensive than in the United States in certain instances. Some markets have been unable to keep pace
with the volume of securities transactions, making it difficult to conduct such transactions. The inability of a Fund to make intended
securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to
dispose of a security due to settlement problems could result either in losses to a Fund due to subsequent declines in the value
of the security or, if the Fund has entered into a contract to sell the security, could result in possible liability to the purchaser.
DEPOSITARY RECEIPTS
The Funds may invest in American Depositary Receipts (“ADRs”),
Global Depositary Receipts (“GDRs”) and European Depositary Receipts (“EDRs”) (collectively known as “Depositary
Receipts”). Depositary Receipts are certificates evidencing ownership of shares of a foreign-based issuer held in trust by
a bank or similar financial institution. Designed for use in the U.S., international and European securities markets, respectively,
ADRs, GDRs and EDRs are alternatives to the purchase of the underlying securities in their original markets and currencies. ADRs,
GDRs and EDRs are subject to many of the same risks as the foreign securities to which they relate, and are considered by THIRD
AVENUE INTERNATIONAL VALUE FUND to be foreign securities for the purposes of its policy of investing 80% of its assets in foreign
securities.
RESTRICTED AND ILLIQUID SECURITIES
None of the Funds will purchase or otherwise acquire any investment
if, as a result, more than 15% of its net assets (taken at current market value) would be invested in securities that are illiquid.
Generally speaking, an illiquid security is any asset or investment of which a Fund cannot sell a normal trading unit in the ordinary
course of business within seven days at approximately the value at which a Fund has valued the asset or investment, including securities
that cannot be sold publicly due to legal or contractual restrictions. The sale of illiquid securities often requires more time
and results in higher brokerage charges or dealer discounts and other selling expenses than does the sale of securities eligible
for trading on national securities exchanges or in the over-the-counter markets. Restricted securities may sell at a price lower
than similar securities that are not subject to restrictions on resale.
Over the past several years, strong institutional markets have
developed for various types of restricted securities, including repurchase agreements, some types of commercial paper, and some
corporate bonds and notes (commonly
known as “Rule 144A Securities”). Securities freely
salable among qualified institutional investors under special rules adopted by the SEC, or otherwise determined to be liquid, may
be treated as liquid if they satisfy liquidity standards established by the Board of Trustees (the “Board”). The continued
liquidity of such securities is not as well assured as that of publicly traded securities, and accordingly, the Board will monitor
their liquidity. The Board will review pertinent factors such as trading activity, reliability of price information and trading
patterns of comparable securities in determining whether to treat any such security as liquid for purposes of the foregoing 15%
test. To the extent the Board treats such securities as liquid, temporary impairments to trading patterns of such securities may
adversely affect a Fund’s liquidity.
The Funds may, from time to time, participate in private investment
vehicles and/or in equity or debt instruments that do not trade publicly and may never trade publicly. These types of investments
carry a number of special risks in addition to the normal risks associated with equity and debt investments. In particular, private
investments are likely to be illiquid, and it may be difficult or impossible to sell these investments under many conditions. A
Fund may from time to time establish one or more wholly-owned special purpose subsidiaries in order to facilitate the Fund’s
investment program which may reduce certain of the costs (e.g., tax consequences) to the Fund.
RELATIVELY NEW ISSUERS
The Funds may invest occasionally in the securities of selected
relatively new issuers. Investments in relatively new issuers, i.e., those having continuous operating histories of less than three
years, may carry special risks and may be more speculative because such companies are relatively unseasoned. Such companies may
also lack sufficient resources, may be unable to generate internally the funds necessary for growth and may find external financing
to be unavailable on favorable terms or even totally unavailable. Those companies will often be involved in the development or
marketing of a new product with no established market, which could lead to significant losses. The securities of such issuers may
have a limited trading market which may adversely affect their disposition and can result in their being priced lower than might
otherwise be the case. If other investors who invest in such issuers seek to sell the same securities when a Fund attempts to dispose
of its holdings, the Fund may receive lower prices than might otherwise be the case.
TEMPORARY DEFENSIVE INVESTMENTS
When, in the judgment of the Adviser, a temporary defensive
posture is appropriate, a Fund may hold all or a portion of its assets in short-term U.S. Government obligations, cash or cash
equivalents. The adoption of a temporary defensive posture does not constitute a change in such Fund’s investment objective,
and might impact the Fund’s performance. When a Fund invests for temporary defensive purposes, it may not achieve its investment
objective.
DEMAND DEPOSIT ACCOUNTS
The Funds may hold a significant portion of their cash assets
in demand deposit accounts (“DDAs”) at the Funds’ custodian or another depository institutional insured by the
Federal Deposit Insurance Corporation (the “FDIC”). DDAs are insured by the FDIC up to $250,000. The FDIC is an independent
agency of the U.S. Government, and FDIC deposit insurance is backed by the full faith and credit of the U.S. Government.
BORROWING
Each Fund may also make use of bank borrowing as a temporary
measure for extraordinary or emergency purposes, such as for liquidity necessitated by shareholder redemptions, and may use securities
as collateral for such borrowing. Such temporary borrowing may not exceed 5% of the value of the applicable Fund’s total
assets at the time of borrowing.
OTHER INVESTMENT COMPANIES
The Funds may invest in securities of other investment companies
to the extent permitted under the Investment Company Act of 1940, as amended (the “1940 Act”), The 1940 Act generally
requires that after a Fund’s purchase of securities of another investment company, such Fund does not: (i) own more than
3% of such investment company’s outstanding voting stock; (2) invest more than 5% of such fund’s total assets in any
individual investment company; or (iii) invest more than 10% of such fund’s total assets in all investment company holdings.
The Adviser may charge an advisory fee on the portion of a Fund’s
assets that are invested in securities of other investment companies. Thus, shareholders may be responsible for a “double
fee” on such assets, since both investment companies will be charging fees on such assets.
SIMULTANEOUS INVESTMENTS
Investment decisions for each Fund are made independently from
those of the other Funds and accounts advised by the Adviser and its affiliates. If, however, such other accounts wish to invest
in, or dispose of, the same securities as one of the Funds, available investments will be allocated equitably to each Fund and
other accounts. This procedure may adversely affect the size of the position obtained for or disposed of by a Fund or the price
paid or received by a Fund.
SECURITIES LENDING
The Funds may, but currently do not intend to, lend their portfolio
securities to qualified institutions. By lending its portfolio securities, a Fund attempts to increase its income through the receipt
of interest on the loan. Any gain or loss in the market price of the securities loaned that may occur during the term of the loan
will be for the account of the Fund. A Fund may lend its portfolio securities so long as the terms and the structure of such loans
are not inconsistent with the requirements of the 1940 Act, which currently provide that (a) the borrower pledges and maintains
with the Fund collateral consisting of cash, a letter of credit issued by a domestic 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 the securities loaned, (b) the borrower adds
to such collateral whenever the price of the securities loaned rises (i.e., the value of the loan is “marked to the market”
on a daily basis), (c) the loan be made subject to termination by the Fund at any time and the loaned securities be subject to
recall within the normal and customary settlement time for securities transactions and (d) the Fund receives reasonable interest
on the loan (which may include the Fund’s investing any cash collateral in interest bearing short-term investments), any
distributions on the loaned securities and any increase in their market value. If the borrower fails to maintain the requisite
amount of collateral, the loan automatically terminates and the Fund could use the collateral to replace the securities while holding
the borrower liable for any excess of replacement cost over the value of the collateral. As with any extension of credit, there
are risks of delay in recovery and in some cases even loss of rights in collateral should the borrower of the securities fail financially.
A Fund will not lend portfolio securities if, as a result, the
aggregate of such loans exceeds 33 1/3% of the value of its total assets (including the value of all assets received as collateral
for the loan). Loan arrangements made by a Fund will comply with all other applicable regulatory requirements. All relevant facts
and circumstances, including the creditworthiness of the qualified institution, will be monitored by the Adviser, and will be considered
in making decisions with respect to lending of securities, subject to review by the Trust’s Board.
A Fund may pay reasonable negotiated fees in connection with
loaned securities, so long as such fees are set forth in a written contract and approved by the Board. In addition, a Fund shall,
through the ability to recall securities prior to any required vote, retain voting rights over the loaned securities.
On behalf of the Funds, the Trust has entered into a master
lending arrangement with JPMorgan Chase & Co. in compliance with the foregoing requirements.
RISK OF MINORITY POSITIONS AND CONTROL POSITIONS
The Funds, individually or together with other funds and accounts
managed by the Adviser, may obtain a controlling or other substantial position in a public or private company, which may impose
additional risks. For example, should the Funds or other funds and accounts managed by the Adviser obtain such a position, the
Adviser may be required to make filings with the SEC, or foreign regulatory agencies, concerning its holdings and it may become
subject to other regulatory restrictions that could limit the ability of the Funds to dispose of their holdings at the times and
in the manner the Funds would prefer. In addition, it is possible, although unlikely, that the Funds might be deemed, in such circumstances,
liable for environmental damage, product defects, failure to supervise, and other types of liability in which the limited liability
characteristic of the business structure may be ignored.
Further, the Adviser may designate directors to serve on the
boards of directors of Fund portfolio companies. The designation of representatives and other measures contemplated could create
exposure to claims by a portfolio company, its security holders and its creditors, including claims that a Fund or the Adviser
is a controlling person and thus is liable for securities law violations of a portfolio company. These control positions could
also result in certain liabilities in the event of bankruptcy (e.g., extension to one year of the 90-day bankruptcy preference
period) or reorganization of a portfolio company; could result in claims that the designated directors violated their fiduciary
or other duties to a portfolio company or failed to exercise appropriate levels of care under applicable corporate or securities
laws, environmental laws or other legal principles; and could create exposure to claims that they have interfered in management
to the detriment of a portfolio company. Notwithstanding the foregoing, neither the Funds nor the Adviser will have unilateral
control of any portfolio company and, accordingly, may be unable to control the timing or occurrence of an exit strategy for any
portfolio company.
In addition, the Funds may incur large expenses when taking
control positions and there is no guarantee that such expenses can be recouped. Also, there is no guarantee that the Funds will
succeed in obtaining control positions. This could result in the Funds’ investments being frozen in minority positions and
could incur substantial losses.
SHORT SALES
The Funds may, occasionally, engage in short sales. In a short
sale transaction, a Fund sells a security it does not own in anticipation of a decline in the market value of the security. To
complete a short sale transaction, a Fund must borrow the security to make delivery to the buyer. The Fund is obligated to replace
the security borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may
be more or less than the price at which the security was sold by the Fund, which would result in a loss or gain, respectively.
In certain cases, purchasing a security to cover a short position can itself cause the price of the security to rise, thereby exacerbating
any loss, especially in an environment where others are taking the same actions.
COMMODITIES
The Funds may, but currently do not intend to, invest in commodities
or commodity contracts and futures contracts, except in connection with derivatives transactions.
DERIVATIVES
The Funds may invest in various instruments that are commonly
known as “derivatives.” The Funds may invest in derivatives for various hedging and non-hedging purposes, including
to hedge against foreign currency risk, market volatility and concentration risk. Generally, a derivative is a financial arrangement,
the value of which is based on, or “derived” from, a traditional security, asset or market index. Some derivatives
such as mortgage-related and other asset-backed securities are in many respects like any other investments, although they may be
more volatile or less liquid than more traditional debt securities. There are, in fact, many different types of derivatives and
many different ways to use them. There is also a range of risks associated with those uses. Futures are commonly used for traditional
hedging purposes to attempt to protect a Fund from exposure to changing interest rates, securities prices or currency exchange
rates and for cash management purposes as a low cost method of gaining exposure to a particular securities market without investing
directly in those securities. However, some derivatives are used for leverage, which tends to magnify the effects of an instrument’s
price changes as market conditions change. Leverage involves the use of a small amount of money to obtain exposure to a potentially
large amount of financial assets and can, in some circumstances, lead to significant losses. The Adviser will use derivatives only
in circumstances where it believes they offer the most economic means of improving the risk/reward profile of a Fund. In most circumstances,
derivatives will not be used to increase fund risk above the level that could be achieved using only traditional investment securities
or to acquire exposure to changes in the value of assets or indices that by themselves would not be purchased for a Fund. However,
derivatives transactions typically involve greater risks than if a Fund had invested in the reference asset or obligation directly,
since, in addition to general market risks, they may be subject to valuation risk, illiquidity risk, counterparty risk, credit
risk and/or correlation risk. The use of derivatives for non-hedging purposes may be considered speculative.
The Funds have claimed exclusions from the definition of the
term “commodity pool operator” (“CPO”) under the Commodities Exchange Act (the “CEA”) and,
therefore, are not subject to registration or regulation as a CPO under the CEA.
As a result of recent amendments by the Commodities Futures
Trading Commission (the “CFTC”) to its rules, certain Funds may be limited in their ability to use commodity futures
or options thereon, engage in certain swap transactions or make certain other investments (collectively, “commodity interests”)
if the Funds continue to claim the exclusion from the definition of CPO. Under the amendments, in order to be eligible to continue
to claim this exclusion, if a Fund uses commodity interests other than for bona fide hedging purposes (as defined by the CFTC)
the aggregate initial margin and premiums required to establish these positions (after taking into account unrealized profits and
unrealized losses on any such positions and excluding the amount by which options are “in-the-money” at the time of
purchase) may not exceed 5% of the Fund’s NAV, or, alternatively, the aggregate net notional value of those positions, as
determined at the time the most recent position was established, may not exceed 100% of the Fund’s net asset value (“NAV”)
(after taking into account unrealized profits and unrealized losses on any such positions). In addition to meeting one of the foregoing
trading limitations, a Fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures,
commodity options or swaps markets.
If a Fund were to invest in commodity interests in excess of
the trading limitations discussed above and/or market itself as a vehicle for trading in the commodity futures, commodity options
or swaps markets, the Fund would withdraw its exclusion from the definition of CPO and the Adviser would become subject to regulation
as a CPO with respect to that Fund. In addition, the Fund’s disclosure documents and operations would need to comply with
all applicable CFTC regulations, in addition to all applicable SEC regulations. Compliance with these additional regulatory requirements
may increase Fund expenses.
Options on Securities
The Funds may write (sell) covered call and put options to a
limited extent on their portfolio securities (covered options) in an attempt to increase income. However, in so doing the Funds
may forgo the benefits of appreciation on securities sold pursuant to the call options or may pay more than the market price on
securities acquired pursuant to put options.
When a Fund writes a covered call option, it gives the purchaser
of the option the right to buy the security at the price specified in the option (the “exercise price”) by exercising
the option at any time during the option period. If the option expires unexercised, the Fund will realize income in an amount equal
to the premium received for writing the option. If the option is exercised, the Fund must sell the security to the option holder
at the exercise price. By writing a covered call option, the Fund forgoes, in exchange for the premium less the commission (net
premium), the opportunity to profit during the option period from an increase in the market value of the underlying security above
the exercise price. In addition, the Fund may continue to hold a stock which might otherwise have been sold to protect against
depreciation in the market price of the stock.
A put option sold by a Fund is covered when, among other things,
cash or securities acceptable to the broker are placed in a segregated account to fulfill the Fund’s obligations. When a
Fund writes a covered put option, it gives the purchaser of the option the right to sell the underlying security to the Fund at
the specified exercise price at any time during the option period. If the option expires unexercised, the Fund realizes income
in the amount of the premium received for writing the option. If the put option is exercised, the Fund must purchase the underlying
security from the option holder at the exercise price. By writing a covered put option, the Fund, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying security below the exercise price. A Fund will only
write put options involving securities for which a determination is made at the time the option is written that the Fund wishes
to acquire the securities at the exercise price.
A Fund may terminate or cover its obligation as the writer of
a call or put option by purchasing an option with the same exercise price and expiration date as the option previously written.
This transaction is called a “closing purchase transaction.” The Fund realizes a profit or loss from a closing purchase
transaction if the amount paid to purchase an option is less or more, respectively, than the amount received from the sale thereof.
To close out a position as a purchaser of an option, the Fund may make a “closing sale transaction” which involves
liquidating the Fund’s position by selling the option previously purchased. Where the Fund cannot effect a closing purchase
transaction for an option it has written, it may be forced to incur brokerage commissions or dealer spreads in selling securities
it receives or it may be forced to hold underlying securities until an option is exercised or expires.
When a Fund writes an option, an amount equal to the net premium
received by the Fund is included in the liability section of the Fund’s Statement of Assets and Liabilities as a deferred
credit. The amount of the deferred credit will
be subsequently marked to market to reflect the current market
value of the option written. The current market value of a traded option is the last sale price or, in the absence of a sale, the
mean between the closing bid and asked prices. If an option expires on its stipulated expiration date or if the Fund enters into
a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium
received when the option was sold) and the deferred credit related to such option is eliminated. If a call option is exercised,
the Fund realizes a gain or loss from the sale of the underlying security and the proceeds of the sale are increased by the premium
originally received. The writing of covered call options may be deemed to involve the pledge of the securities against which the
option is being written. Securities against which call options are written are segregated on the books of the Fund’s custodian.
A Fund may purchase call and put options on any securities in
which it may invest. A Fund would normally purchase a call option in anticipation of an increase in the market value of such securities.
The purchase of a call option entitles the Fund, in exchange for the premium paid, to purchase a security at a specified price
during the option period. The Fund would ordinarily have a gain if the value of the securities increases above the exercise price
sufficiently to cover the premium and would have a loss if the value of the securities remains at or below the exercise price during
the option period.
A Fund normally purchases put options in anticipation of a decline
in the market value of securities in the Fund (“protective puts”) or securities of the type in which it is permitted
to invest. The purchase of a put option entitles the Fund, in exchange for the premium paid, to sell a security, which may or may
not be held in the Fund’s holdings, at a specified price during the option period. The purchase of protective puts is designed
merely to offset or hedge against a decline in the market value of the Fund’s holdings. Put options also may be purchased
by a Fund for the purpose of benefiting from a decline in the price of securities which a Fund does not own. A Fund ordinarily
recognizes a gain if the value of the securities decreases below the exercise price sufficiently to cover the premium and recognizes
a loss if the value of the securities does not sufficiently decline. Gains and losses on the purchase of protective put options
tend to be offset by countervailing changes in the value of any underlying Fund securities.
The hours of trading for options on securities may not conform
to the hours during which the underlying securities are traded. To the extent that the options markets close before the markets
for the underlying securities, significant price and rate movements can take place in the underlying securities markets that cannot
be reflected in the options markets. It is impossible to predict the volume of trading that may exist in such options, and there
can be no assurance that viable exchange markets will develop or continue.
A Fund may engage in over-the-counter options (“OTC Options”)
transactions with broker-dealers who make markets in these options. The ability to terminate OTC Options positions is more limited
than with exchange-traded option positions because the predominant market is the issuing broker rather than an exchange, and may
involve the risk that broker-dealers participating in such transactions will not fulfill their obligations. To reduce this risk,
the Fund will purchase such options only from broker-dealers who are primary government securities dealers recognized by the Federal
Reserve Bank of New York and who agree to (and are expected to be capable of) entering into closing transactions, although there
can be no guarantee that any such option will be liquidated at a favorable price prior to expiration. The Adviser will monitor
the creditworthiness of dealers with which the Fund enters into such options transactions under the general supervision of the
Fund’s Trustees. Unless the Trustees conclude otherwise, the Fund intends to treat OTC Options and the assets used to “cover”
OTC Options as not readily marketable and therefore subject to the Fund’s 15% limitation on investment in illiquid securities.
Options on Securities Indices
In addition to options on securities, the Funds may purchase
and write (sell) call and put options on securities indices. Such options will be used for the purposes described above under “Options
on Securities.”
Options on stock indices are generally similar to options on
securities except that the delivery requirements are different. Instead of giving the right to take or make delivery of stock at
a specified price, an option on a stock index gives the holder the right to receive a cash “exercise settlement amount”
equal to (a) the amount, if any, by which the fixed exercise price of the option exceeds (in the case of a put) or is less than
(in the case of a call) the closing value of the underlying index on the date of exercise, multiplied by (b) a fixed “index
multiplier.” Receipt of this cash amount depends upon the closing level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in the case of a put, the exercise price of the option. The amount of
cash received is
equal to such difference between the closing price of the index
and the exercise price of the option expressed in dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to make delivery of this amount. The writer may offset
its position in stock index options prior to expiration by entering into a closing transaction on an exchange or the option may
expire unexercised.
Because the value of an index option depends upon movements
in the level of the index rather than the price of a particular stock, whether a Fund realizes a gain or loss from the purchase
or writing of options on an index depends upon movements in the level of stock prices in the stock market generally or, in the
case of certain indices, in an industry or market segment, rather than movements in the price of a particular stock. Accordingly,
successful use by a Fund of options on stock indices is subject to the Adviser’s ability to predict correctly movements in
the direction of the stock market generally or of a particular industry or market segment. This requires different skills and techniques
than predicting changes in the price of individual stocks.
A Fund may, to the extent allowed by federal securities laws,
invest in securities indices instead of investing directly in individual foreign securities. A stock index fluctuates with changes
in the market values of the stocks included in the index.
Options on securities indices entail risks in addition to the
risks of options on securities. The absence of a liquid secondary market to close out options positions on securities indices is
more likely to occur, although a Fund generally will only purchase or write such an option if the Adviser believes the option can
be closed out.
Use of options on securities indices also entails the risk that
trading in such options may be interrupted if trading in certain securities included in the index is interrupted. A Fund will not
purchase such options unless the Adviser believes the market is sufficiently developed such that the risk of trading in such options
is no greater than the risk of trading in options on securities.
Price movements in a Fund’s holdings may not correlate
precisely with movements in the level of an index and, therefore, the use of options on indices cannot serve as a complete hedge.
Because options on securities indices require settlement in cash, the Adviser may be forced to liquidate Fund securities to meet
settlement obligations.
Options on Foreign Securities Indices
The Funds may
purchase and write put and call options on foreign stock indices listed on domestic and foreign stock exchanges. The Funds may
also purchase and write OTC Options on foreign stock indices. These OTC Options would be subject to the same liquidity and credit
risks noted above with respect to OTC Options.
To the extent permitted by U.S. federal securities laws, a Fund
may invest in options on foreign stock indices in lieu of direct investment in foreign securities. A Fund may also use foreign
stock index options for hedging purposes.
Futures Contracts and Options on Futures Contracts
The successful use of futures contracts and options thereon
draws upon the Adviser’s skill and experience with respect to such instruments and usually depends on the Adviser’s
ability to forecast interest rate and currency exchange rate movements correctly. Should interest or exchange rates move in an
unexpected manner, a Fund may not achieve the anticipated benefits of futures contracts or options on futures contracts or may
realize losses and thus will be in a worse position than if such strategies had not been used. In addition, the correlation between
movements in the price of futures contracts or options on futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated losses.
Futures Contracts
Futures contracts are contracts to
purchase or sell a fixed amount of an underlying instrument, commodity or index at a fixed time and place in the future. U.S. futures
contracts have been designed by exchanges which have been designated contracts markets by the CFTC, and must be executed through
a futures commission merchant, or brokerage firm, which is a member of the relevant contract market. Futures contracts trade on
a number of exchanges, and clear through their clearing corporations.
The Funds may enter into contracts for the purchase or sale
for future delivery of fixed-income securities, foreign currencies, or financial indices including any index of U.S. Government
securities, foreign government securities or
corporate debt securities. A Fund may enter into futures contracts
which are based on debt securities that are backed by the full faith and credit of the U.S. Government, such as long-term U.S.
Treasury Bonds, Treasury Notes, Government National Mortgage Association modified pass-through mortgage-backed securities and three-month
U.S. Treasury Bills. A Fund may also enter into futures contracts which are based on bonds issued by governments other than the
U.S. Government. Futures contracts on foreign currencies may be used to hedge against securities that are denominated in foreign
currencies.
At the same time a futures contract is entered into, a Fund
must allocate cash or securities as a deposit payment (initial margin). The initial margin deposits are set by exchanges and may
range between 1% and 10% of a contract’s face value. Daily thereafter, the futures contract is valued and the payment of
“variation margin” may be required, since each day the Fund provides or receives cash that reflects any decline or
increase in the contract’s value.
Although futures contracts (other than those that settle in
cash such as index futures) by their terms call for the actual delivery or acquisition of the instrument underlying the contract,
in most cases the contractual obligation is fulfilled by offset before the date of the contract without having to make or take
delivery of the instrument underlying the contract. The offsetting of a contractual obligation is accomplished by entering into
an opposite position in the identical futures contract on the commodities exchange on which the futures contract was entered into
(or a linked exchange). Such a transaction, which is effected through a member of an exchange, cancels the obligation to make or
take delivery of the instrument underlying the contract. Since all transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the contracts are traded, a Fund incurs brokerage fees when it enters
into futures contracts.
Except for futures contracts that are cash settled by their
terms or as a result of arrangements entered into on behalf of a Fund with its futures brokers, the Funds must segregate at their
custodian an amount of liquid assets equal to the aggregate potential contractual obligation in the contract. Other segregation
requirements apply to cash settled futures or such other arrangements.
The ordinary spreads between prices in the cash and futures
market, due to differences in the nature of those markets, are subject to distortions. First, all participants in the futures market
are subject to initial and variation margin requirements. Rather than meeting additional variation margin requirements, investors
may close futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures
markets. Second, the liquidity of the futures market depends on most participants entering into offsetting transactions rather
than making or taking delivery. To the extent that many participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortion. Third, from the point of view of speculators, the margin deposit requirements
in the futures market are less onerous than margin lending requirements in the securities market.
Therefore, increased participation by speculators in the futures
market may cause temporary price distortions. Due to the possibility of distortion, a correct forecast of general interest rate
or currency exchange rate trends by the Adviser may still not result in a successful transaction.
Futures contracts entail risks. Although the Adviser believes
that use of such contracts will benefit the Fund, if the Adviser’s investment judgment about the general direction of the
index or value of the underlying asset is incorrect, the overall performance of the Fund would be poorer than if they had not entered
into any such contract. For example, if the Fund has hedged against the possibility of an increase in interest rates which would
adversely affect the price of debt securities held in its Fund and interest rates decrease instead, the Fund will lose part or
all of the benefit of the increased value of its debt securities which it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities to meet
daily variation margin requirements. Such sales of bonds may be, but will not necessarily be, at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so.
Futures Contracts on Domestic and Foreign Securities Indices
The Funds may enter into futures contracts providing for cash settlement based upon changes in the value of an index of domestic
or foreign securities. This investment technique may be used as a low-cost method of gaining exposure to a particular securities
market without investing directly in those securities or to hedge against anticipated future changes in general market prices which
otherwise
might either adversely affect the value of securities held by
a Fund or adversely affect the prices of securities which are intended to be purchased at a later date for a Fund.
When used for hedging purposes, each transaction in futures
contracts on a securities index involves the establishment of a position which the Adviser believes will move in a direction opposite
to that of the investment being hedged. If these hedging transactions are successful, the futures positions taken for a Fund will
rise in value by an amount which approximately offsets the decline in value of the portion of the Fund’s investments that
are being hedged. Should general market prices move in an unexpected manner, the full anticipated benefits of futures contracts
may not be achieved or a loss may be realized.
Although futures contracts on securities indices would be entered
into for hedging purposes only, such transactions do involve certain risks. These risks include a lack of correlation between the
futures contract and the foreign equity market being hedged, and incorrect assessments of market trends which may result in poorer
overall performance than if a futures contract had not been entered into.
Options on Futures Contracts
The Funds may purchase
and write options on futures contracts for hedging purposes. The purchase of a call option on a futures contract is similar in
some respects to the purchase of a call option on an individual security. For example, when a Fund is not fully invested it may
purchase a call option on an interest rate sensitive futures contract to hedge against a potential price increase on debt securities
due to declining interest rates. The purchase of a put option on a futures contract is similar in some respects to the purchase
of protective put options on Fund securities. For example, a Fund may purchase a put option on an interest rate sensitive futures
contract to hedge its Fund against the risk of a decline in the prices of debt securities due to rising interest rates.
The writing of a call option on a futures contract may constitute
a partial hedge against declining prices of Fund securities which are the same as or correlate with the security or currency which
is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price,
the Fund retains the full amount of the option premium which provides a partial hedge against any decline that may have occurred
in the Fund’s holdings. The writing of a put option on a futures contract may constitute a partial hedge against increasing
prices of the security or foreign currency which is deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Fund retains the full amount of the option premium which provides
a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option the
Fund has written is exercised, the Fund incurs a loss which is reduced by the amount of the premium it receives. Depending on the
degree of correlation between changes in the value of its Fund securities and changes in the value of its futures positions, the
Fund’s losses from existing options on futures may to some extent be reduced or increased by changes in the value of Fund
securities.
The amount of risk the Fund assumes when it purchases an option
on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be
fully reflected in the value of the option purchased.
Swap Transactions
Swap agreements are over-the-counter contracts in which each
party agrees to make a periodic interest payment based on a reference asset or other value or the value of an asset in return for
a periodic payment from the other party based on a different asset or value. Swap agreements are two party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or “swapped” between the parties are generally calculated
with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested
in a reference asset or obligation. The “notional amount” of the swap agreement is only used as a basis upon which
to calculate the obligations that the parties to a swap agreement have agreed to exchange. Swap agreements will tend to shift investment
exposure from one type of investment to another. Depending on how they are used, swap agreements may increase or decrease the overall
volatility of a Fund’s investments and its share price and yield.
Most swap agreements entered into are cash settled and calculate
the obligations of the parties to the agreement on a “net basis.” Thus, a Fund’s current obligations (or rights)
under a swap agreement generally will be equal only to the net amount to be paid or received under the agreement based on the relative
values of the positions held by each party to the agreement (the “net amount”). A Fund’s current obligations
under a swap agreement will be accrued daily (offset against any amounts owed to the Fund) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the segregation of permissible liquid assets of the Fund.
The swaps market has been an evolving and largely unregulated
market. It is possible that developments in the swaps market, including new regulatory requirements, could limit or prevent a Fund’s
ability to utilize swap agreements or options on swaps as part of its investment strategy, terminate existing swap agreements or
realize amounts to be received under such agreements, which could negatively affect the Fund. As discussed above, some swaps currently
are, and more in the future will be, centrally cleared, which affects how swaps are transacted. In particular, the Dodd-Frank Wall
Street Reform and Consumer Protection Act, enacted on July 21, 2010 (the “Dodd-Frank Act”), has resulted in new clearing
and exchange-trading requirements for swaps and other over-the-counter derivatives. The Dodd-Frank Act also requires the CFTC and/or
the SEC, in consultation with banking regulators, to establish capital requirements for swap dealers and major swap participants
as well as requirements for margin on uncleared derivatives, including swaps, in certain circumstances that will be clarified by
rules proposed by the CFTC and/or the SEC. In addition, the CFTC and the SEC are reviewing the current regulatory requirements
applicable to derivatives, including swaps, and it is not certain at this time how the regulators may change these requirements.
For example, some legislative and regulatory proposals would impose limits on the maximum position that could be held by a single
trader in certain contracts and would subject certain derivatives transactions to new forms of regulation that could create barriers
to certain types of investment activity. Other provisions would expand entity registration requirements; impose business conduct,
reporting and disclosure requirements on dealers, recordkeeping on counterparties such as the Funds; and require banks to move
some derivatives trading units to a non-guaranteed (but capitalized) affiliate separate from the deposit-taking bank or divest
them altogether. While some provisions of the Dodd-Frank Act have either already been implemented through rulemaking by the CFTC
and/or the SEC or must be implemented through future rulemaking by those and other federal agencies, and any regulatory or legislative
activity may not necessarily have a direct, immediate effect upon the Funds, it is possible that, when compliance with these rules
is required, they could potentially limit or completely restrict the ability of a Fund to use certain derivatives as a part of
its investment strategy, increase the cost of entering into derivatives transactions or require more assets of the Fund to be used
for collateral in support of those derivatives than is currently the case. Limits or restrictions applicable to the counterparties
with which a Fund engages in derivative transactions also could prevent the Funds from using derivatives or affect the pricing
or other factors relating to these transactions, or may change the availability of certain derivatives.
Credit Default Swaps
Each Fund may enter into credit
default swap agreements and similar agreements, which may have as reference obligations securities that are or are not currently
held by the Fund. The protection “buyer” in a credit default contract may be obligated to pay the protection “seller”
an up front payment or a periodic stream of payments over the term of the contract provided generally that no credit event on a
reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value”
(full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described
in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either
the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, the Fund recovers nothing if the swap
is held through its termination date. However, if a credit event occurs, the Fund may elect to receive the full notional value
of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no
value. As a seller, a Fund generally receives an up front payment or a fixed rate of income throughout the term of the swap, which
typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the
seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of
the reference entity that may have little or no value.
Equity Swaps
In an equity swap agreement one party typically
makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying
equity security or securities or an index of equity securities. Some equity swaps may involve both parties’ return being
based on equity securities and/or indexes.
Swaptions
The Funds may enter into swap options, which are contracts (sometimes
called “swaptions”) that give a counterparty the right (but not the obligation), in return for payment of a premium,
to enter into a new swap agreement or to shorten, extend, cancel or otherwise modify an existing swap agreement, at some designated
future time on specified terms. Swap agreements are over-the-counter contracts in which each party agrees to make a periodic interest
payment based on an index, rate or the value of an asset in return for a periodic payment from the other party based on a different
index, rate or asset. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard “swap” transaction, two parties agree to exchange the returns
(or differentials in rates of return) earned or realized on particular predetermined investments or instruments (including securities,
indices, interest rates, currencies or commodities (“reference asset”)). The gross returns to be exchanged or “swapped”
between the parties are generally calculated with respect to a “notional amount,” i.e
.
, the return on or increase
in value of “basket” of securities or a particular dollar amount invested at a particular interest rate or in a particular
foreign currency. The “notional amount” of the swap agreement is only used as a basis upon which to calculate the obligations
that the parties to a swap agreement have agreed to exchange.
A cash-settled option on a swap gives the purchaser the right,
in return for the premium paid, to receive an amount of cash equal to the value of the underlying swap as of the exercise date.
These options typically are entered into with institutions, including securities brokerage firms. Depending on the terms of the
particular option agreement, a Fund generally will incur a greater degree of risk when it writes a swap option than it will incur
when it purchases a swap option. When a Fund purchases a swap option, it risks losing only the amount of the premium it has paid
should it decide to let the option expire unexercised. However, when a Fund writes (sells) a swaption, upon exercise of the swaption,
the Fund will become obligated according to the terms of the underlying previously agreed upon swap agreement, and may be obligated
to pay an amount of money that exceeds the sum of the value of the premium that it received for writing (selling) the swaption
plus the value that it received pursuant to the terms of the underlying swap. In addition, the Funds bear the market risk arising
from any change in the value of the reference asset. Entering into a swaption contract involves, to varying degrees, the elements
of risks associated with both option contracts and swap contracts.
As with other options on securities, indices, interest rates,
currencies or commodities, the price of any swaption will reflect both an intrinsic value component, which may be zero, and a time
premium component. The intrinsic value component represents what the value of the swaption would be if it were immediately exercisable
into the underlying swap. The intrinsic value component measures the degree to which an option is in-the-money, if at all. The
time premium component represents the difference between the actual price of the swaption and the intrinsic value.
The use of swaptions, as the foregoing discussion suggests,
is subject to risks and complexities beyond what might be encountered with investing directly in the securities and other direct
investments in the reference asset for the swap or other standardized, exchange traded options and futures contracts. Such risks
include operational, liquidity, valuation, credit and/or counterparty risk (i.e., the risk that the counterparty cannot or will
not perform its obligations under the agreement). While the Funds may utilize swaptions for hedging purposes or to seek to increase
total return, their use might result in poorer overall performance for a Fund than if it had not engaged in any such transactions.
If, for example, the Fund had insufficient cash, it might have to sell or pledge a portion of its underlying portfolio of securities
in order to meet daily mark-to-market segregation or collateralization requirements at a time when it might be disadvantageous
to do so. There may be an imperfect correlation between a Fund’s portfolio holdings and swaptions entered into by the Fund,
which may prevent the Fund from achieving the intended hedge or expose the Fund to risk of loss. Further, a Fund’s use of
swaptions to reduce risk involves costs and will be subject to the Adviser’s ability to predict correctly changes in the
relevant markets or other factors. No assurance can be given that the Adviser’s judgment in this respect will be correct.
CURRENCY EXCHANGE TRANSACTIONS
Because each Fund may buy and sell securities denominated in
currencies other than the U.S. dollar and receives interest, dividends and sale proceeds in currencies other than the U.S. dollar,
each Fund from time to time may enter into currency exchange transactions to convert to and from different foreign currencies and
to convert foreign currencies to and from the U.S. dollar. Each Fund either enters into these transactions on a spot (i.e., cash)
basis at
the spot rate prevailing in the foreign currency exchange market
or uses forward contracts to purchase or sell foreign currencies.
FORWARD CURRENCY EXCHANGE CONTRACTS
Each Fund may enter into foreign currency exchange contracts.
A forward currency exchange contract (forward contract) is an obligation by a Fund to purchase or sell a specific currency at a
future date. Forward foreign currency exchange contracts establish an exchange rate at a future date. These contracts are transferable
in the interbank market conducted directly between currency traders (usually large commercial banks and brokerages) and their customers.
A forward contract may not have a deposit requirement and may be traded at a net price without commission. A Fund maintains with
its custodian a segregated account of cash or liquid securities in an amount at least equal to its obligations under each forward
contract. Neither spot transactions nor forward contracts eliminate fluctuations in the prices of the Fund’s securities or
in foreign exchange rates, or prevent loss if the prices of these securities should decline.
A Fund may enter into currency hedging transactions in an attempt
to protect against changes in currency exchange rates between the trade and settlement dates of specific securities transactions
or changes in currency exchange rates that would adversely affect a Fund position or an anticipated investment position. Since
consideration of the prospect for currency parities will be incorporated into the Adviser’s long-term investment decisions,
a Fund will not routinely enter into currency hedging transactions with respect to securities transactions; however, the Adviser
believes that it is important to have the flexibility to enter into currency hedging transactions when it determines that the transactions
would be in a Fund’s best interest. Although these transactions tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to limit any potential gain that might be realized should the value of
the hedged currency increase. The precise matching of the forward contract amounts and the value of the securities involved will
not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract is entered into and the date it matures. The projection
of currency market movements is extremely difficult, and the successful execution of a hedging strategy is highly uncertain.
Forward contracts may reduce the potential gain from a positive
change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result
in poorer overall performance for a Fund than if it had not entered into such contracts. The use of forward contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or rates of return on a Fund’s foreign currency
denominated fund securities and the use of such techniques will subject a Fund to certain risks.
The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, a Fund may not always be able to enter into forward contracts at attractive prices
and this will limit the Fund’s ability to use such contracts to hedge or cross-hedge its assets. The Funds’ cross hedges
would generally entail hedging one currency to minimize or eliminate the currency risk of another, correlated currency. Also, with
regard to a Fund’s use of cross-hedges, there can be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any time a poor correlation may exist between movements
in the exchange rates of the foreign currencies underlying a Fund’s cross-hedges and the movements in the exchange rates
of the foreign currencies in which a Fund’s assets that are the subject of such cross-hedges are denominated.
OPTIONS ON FOREIGN CURRENCIES
Each Fund may purchase and write options on foreign currencies
for hedging purposes in a manner similar to that in which futures contracts on foreign currencies, or forward contracts, will be
utilized. For example, a decline in the dollar value of a foreign currency in which fund securities are denominated will reduce
the dollar value of such securities, even if their value in the foreign currency remains constant. In order to protect against
such diminutions in the value of fund securities, a Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the Fund will have the right to sell such currency for a fixed amount in dollars and will thereby offset,
in whole or in part, the adverse effect on its Fund which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected, thereby increasing the cost of such securities, a Fund may purchase
call options thereon. The purchase of such options could offset, at least partially, the effects of the adverse movements in exchange
rates. As in the case of
other types of options, however, the benefit to a Fund deriving
from purchases of foreign currency options will be reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent anticipated, the Fund could sustain losses on transactions
in foreign currency options which would require it to forego a portion or all of the benefits of advantageous changes in such rates.
The purchase of an option on foreign currency may be used to
hedge against fluctuations in exchange rates although, in the event of exchange rate movements adverse to a Fund’s position,
it may forfeit the entire amount of the premium plus related transaction costs. In addition, a Fund may purchase call options on
a foreign currency when the Adviser anticipates that the currency will appreciate in value.
A Fund may write options on foreign currencies for the same
types of hedging purposes. For example, where the Adviser anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates a Fund could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the options will most likely not be exercised, and the diminution in
value of Fund securities will be offset by the amount of the premium received. Similarly, instead of purchasing a call option to
hedge against an anticipated increase in the dollar cost of securities to be acquired, a Fund could write a put option on the relevant
currency which, if rates move in the manner projected, will expire unexercised and allow the Fund to hedge such increased cost
up to the amount of the premium. As in the case of other types of options, however, the writing of a foreign currency option constitutes
only a partial hedge up to the amount of the premium, and only if rates move in the expected direction. If this does not occur,
the option may be exercised a Fund would be required to purchase or sell the underlying currency at a loss which may not be offset
by the amount of the premium. Through the writing of options on foreign currencies, a Fund also may be required to forego all or
a portion of the benefits which might otherwise have been obtained from favorable movements in exchange rates.
A Fund may write covered call options on foreign currencies.
A call option written on a foreign currency by the Fund is “covered” if a Fund owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration
(or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if a Fund has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in
cash or liquid securities in a segregated account with its custodian.
A Fund also may write call options on foreign currencies that
are not covered for cross-hedging purposes. A call option on a foreign currency is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in the U.S. dollar value of a security which the Fund owns or has the right
to acquire and which is denominated in a currency other than the currency underlying the option but which is expected to move similarly.
In such circumstances, a Fund collateralizes the option by maintaining in a segregated account with its custodian, cash or liquid
securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked to market daily.
There is no assurance that a liquid secondary market will exist
for any particular option, or at any particular time. If a Fund is unable to effect a closing purchase transaction with respect
to covered options it has written, a Fund will not be able to sell the underlying currency or dispose of assets held in a segregated
account until the options expire or are exercised. Similarly, if a Fund is unable to effect a closing sale transaction with respect
to options it has purchased, it would have to exercise the options in order to realize any profit and will incur transaction costs
upon the purchase or sale of underlying currency. A Fund pays brokerage commissions or spreads in connection with its options transactions.
As in the case of forward contracts, certain options on foreign
currencies are traded over-the-counter and involve liquidity and credit risks which may not be present in the case of exchange-traded
currency options. In some circumstances, a Fund’s ability to terminate OTC Options may be more limited than with exchange-traded
options. It is also possible that broker-dealers participating in OTC Options transactions will not fulfill their obligations.
Each Fund intends to treat OTC Options as not readily marketable and therefore subject to the Fund’s 15% limit on illiquid
securities.
INVESTMENT RESTRICTIONS
For the benefit of shareholders, each Fund has adopted the following
restrictions, which are FUNDAMENTAL policies and thus, together with the investment objectives of each Fund, cannot be changed
without the approval of a majority of such Fund’s outstanding voting securities.*
The following investment restrictions apply to each Fund. No
Fund may:
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1.
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Borrow money or pledge, mortgage or hypothecate any of its assets except that each Fund may borrow on a secured or unsecured basis as a temporary measure for extraordinary or emergency purposes. Such temporary borrowing may not exceed 5% of the value of such Fund’s total assets when the borrowing is made. In no circumstances will the Funds pledge any of their assets in excess of the amount permitted by law.
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2.
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Act as underwriter of securities issued by other persons, except to the extent that, in connection with the disposition of portfolio securities or sale of its own securities, it may technically be deemed to be an underwriter under certain securities laws.
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3.
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Invest in interests in oil, gas, or other mineral exploration or development programs, although it may invest in the marketable securities of companies which invest in or sponsor such programs.
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Issue any senior security (as defined in the 1940 Act). Borrowings permitted by Item 1 above are not senior securities.
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5.
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Invest 25% or more of the value of its total assets in the securities (other than Government Securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the Fund controls and which are determined to be engaged in the same industry or similar trades or businesses, or related trades or businesses.
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6.
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Invest 25% or more of the value of its total assets in any one industry, except that THIRD AVENUE REAL ESTATE VALUE FUND will invest more than 25% of its total assets in the real estate industry or related industries or that own significant real estate assets at the time of investment, and further provided that securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities will not be considered to represent an industry for the THIRD AVENUE FOCUSED CREDIT FUND.
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In addition, the THIRD AVENUE FOCUSED CREDIT FUND may not:
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7.
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Make loans of money or other property, except that the Fund may acquire debt obligations of any type (including through direct extensions of credit), enter into repurchase agreements and lend portfolio assets.
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8.
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Purchase commodities or commodities contracts if such purchase would result in regulation of the Fund as a commodity pool or commodity pool operator.
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9.
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Purchase or sell real estate, provided the Fund may invest in securities and other instruments secured by real estate, interests in real estate obtained upon foreclosure or other transaction relating to a security or other instrument held by the Fund and securities issued by companies that invest in real estate.
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As a FUNDAMENTAL policy, each of THIRD AVENUE VALUE FUND, THIRD
AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE REAL ESTATE VALUE FUND and THIRD AVENUE INTERNATIONAL VALUE FUND reserves the ability
to make loans or to invest in commodities, real estate or interests in real estate without limitation, and each of these Funds
expects to make such loans and investments from time to time in accordance with applicable law, including the lending of portfolio
securities, making or purchasing interests in commercial loans, investments in commodities for hedging purposes and investments
in partnership and other interests in real estate.
The Funds are required to comply with the above fundamental
investment restrictions applicable to them only at the time the relevant action is taken. A Fund is not required to liquidate an
existing position solely because a change in the market value of an investment, or a change in the value of the Fund’s net
or total assets that causes it not to comply with the restriction at a future date.** A Fund will not purchase any portfolio securities
while any borrowing exceeds 5% of its total assets and will not pledge in excess of one-third of its assets to secure any such
borrowings.
As a NON-FUNDAMENTAL policy, under normal circumstances, each
of THIRD AVENUE SMALL-CAP VALUE FUND, THIRD AVENUE REAL ESTATE VALUE FUND, THIRD AVENUE INTERNATIONAL VALUE FUND and THIRD AVENUE
FOCUSED CREDIT FUND will invest at least 80% of its net assets and any borrowing for investment purposes (measured at the time
of investment) in securities of the type suggested by its name. None of these Funds will change its policy in this regard prior
to providing its shareholders with at least 60 days’ advance notice.
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*
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As used in this SAI, any matter requiring approval of a “majority of the outstanding voting securities” of a Fund (or class, as the case may be) means the vote at a shareholder meeting of (i) 67% or more of the voting securities of the Fund (or class, as the case may be) present or represented, if the holders of more than 50% of the outstanding voting securities of the Fund (or class, as the case may be) are present in person or represented by proxy, or (ii) more than 50% of the outstanding voting securities of the Fund (or class, as the case may be), whichever is less.
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**
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In the unlikely event that borrowings exceeds one-third of a Fund’s assets at any time, the Adviser would take steps to reduce borrowings below this level within three days (not including Sundays and holidays). Also, should illiquid assets ever exceed 15% of a Fund’s net assets, the Adviser would work with the Board to determine the appropriate steps and timeframe for alleviating such excess.
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DIVIDENDS, CAPITAL GAIN DISTRIBUTIONS AND
TAXES
The following discussion is a brief summary of certain U.S.
federal income tax considerations affecting the Funds and their U.S. shareholders. This discussion is general in nature and does
not address issues that may be relevant to a particular holder subject to special treatment under U.S. federal income tax laws
(such as banks and financial institutions, insurance companies, dealers in securities, non-U.S. shareholders, tax-exempt or tax-deferred
plans, accounts or entities, or shareholders who engage in constructive sale or conversion transactions). No attempt is made to
present a detailed explanation of all U.S. federal, state, local and foreign tax considerations affecting the Funds and their U.S.
shareholders (including U.S. shareholders owning a large position in a Fund), and the discussions set forth herein and in the prospectus
do not constitute tax advice. Investors are urged to consult their own tax advisers with any specific questions relating to U.S.
federal, state, local and foreign taxes. The discussion reflects applicable tax laws of the United States as of the date of this
SAI, which tax laws may be changed or subject to new interpretations by the courts or the Internal Revenue Service (the “IRS”)
retroactively or prospectively.
For purposes of this discussion, (1) a “U.S. shareholder”
means a beneficial owner of stock that, for U.S. federal income tax purposes, is (A) an individual who is a citizen or resident
of the United States, (B) a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created
or organized in the United States or under the laws of the United States, any state thereof, the District of Columbia or any political
subdivision thereof, (C) an estate, the income of which is subject to U.S. federal income taxation regardless of its source or
(D) a trust, (i) if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control the substantial decisions of the trust or (ii) if a valid election to be treated as a U.S.
person is in place for it, and (2) a “non-U.S. shareholder” means a beneficial owner (other than a partnership) of
stock that is not a “U.S. shareholder.” If a partnership or entity treated as a partnership for U.S. federal income
tax purposes holds shares in a Fund, the U.S. federal income tax treatment of a partner will generally depend upon the status of
the partner and the tax treatment of the partnership. A partner of a partnership owning shares in a Fund should consult its tax
adviser with regard to the U.S. federal income tax consequences of its investment in the Fund.
Each Fund has elected to be treated, has qualified and intends
to continue to qualify as a regulated investment company under Subchapter M of the Code. If a Fund so qualifies, such Fund will
not be subject to U.S. federal income tax on its investment company taxable income including net short-term capital gain, if any,
realized during any fiscal year to the extent that it distributes such income and gain to the Fund’s shareholders. As a regulated
investment company, a Fund is not allowed to utilize any net operating loss realized in a taxable year in computing investment
company taxable income in any prior or subsequent taxable year. A Fund may, however, subject to certain limitations, carry forward
capital losses in excess of capital gains (“net capital losses”) from any taxable year to offset capital gains, if
any, realized during a subsequent taxable year. If a Fund incurs or has incurred net capital losses in a taxable year beginning
on or before December 22, 2010 (“pre-2011 losses”), the Fund is permitted to carry such losses forward for eight taxable
years; in the year to which they are carried forward, such losses are
treated as short-term capital losses that first offset short-term
capital gains, and then offset long-term capital gains. A Fund is permitted to carry forward net capital losses it incurs in taxable
years beginning after December 22, 2010, without any expiration date. Any such loss carryforwards will retain their character as
short-term or long-term; this may well result in larger distributions of short-term gains (taxed as ordinary income to individual
shareholders) than would have resulted under the regime applicable to pre-2011 losses described above. A Fund must use any such
carryforwards, which will not expire, applying them first against gains of the same character, before it uses any pre-2011 capital
losses. This increases the likelihood that pre-2011 capital losses will expire unused. Capital gains that are offset by capital
loss carryforwards are not subject to Fund-level U.S. federal income taxation, regardless of whether they are distributed to shareholders.
As discussed below, if for any taxable year the Fund does not qualify for the special tax treatment afforded regulated investment
companies, all of such Fund’s taxable income, including any net capital gains, would be subject to tax at regular corporate
rates (without any deduction for distributions to shareholders). As a result, cash available for distribution to shareholders and
the value of the Fund’s shares may be reduced materially.
To qualify as a regulated investment company, a Fund must comply
with certain requirements of the Code relating to, among other things, the sources of its income and diversification of its assets.
In certain instances, the nature of a Fund’s investments could make it difficult to determine the Fund’s compliance
with such requirements, although the Funds do not anticipate that this will affect their qualification as regulated investment
companies. In addition, a Fund may be forced to liquidate certain of its investment assets in order to fund redemptions of its
shares or distributions to its shareholders (as discussed below), or in order to comply with such asset diversification requirements.
If a Fund so qualifies and distributes each year to its shareholders at least 90% of its investment company taxable income (generally
including ordinary income and net short-term capital gain, but not net capital gain, which is the excess of net long-term capital
gain over net short-term capital loss) and meets certain other requirements, it will not be required to pay U.S. federal income
taxes on any income or gain it distributes to shareholders.
The Funds will either distribute or retain for reinvestment
all or part of any net capital gain. If any such net capital gain is retained, the appropriate Fund will be subject to a tax of
35% of such amount. In that event, such Fund expects to designate the retained amount as undistributed capital gains in a notice
to its shareholders, and each U.S. shareholder of such Fund (1) will be required to include in income for U.S. federal income tax
purposes, as long-term capital gains, its share of such undistributed amount, (2) will be entitled to credit its proportionate
share of the tax paid by such Fund against its U.S. federal income tax liability and to claim a refund to the extent the credit
exceeds such liability, and (3) will increase its basis in its shares of such Fund by the amount of the undistributed capital gains
included in such shareholder’s gross income less the tax deemed paid by the shareholder. Although distributions by the Funds
will generally be treated as subject to tax in the year in which they are paid, distributions declared by the Funds in October,
November or December, payable to shareholders of record on a specified date during such month and paid by the Funds during January
of the following year, will be deemed to be received on December 31 of the year the distribution is declared, rather than when
the distribution is received.
Under the Code, amounts not distributed on a timely basis in
accordance with a calendar year distribution requirement are subject to a 4% non-deductible excise tax. To avoid the tax, each
Fund generally must distribute during the calendar year, an amount equal at least to the sum of (1) 98% of its ordinary income
for such calendar year (excluding, for these purposes, certain “specified gains and losses” as set forth in the Code
), (2) 98.2% of its capital gains in excess of its capital losses (plus certain “specified gains and losses” as set
forth in the Code) for the twelve-month period ending on October 31 of the calendar year, and (3) all ordinary income and net capital
gains for previous years that were not previously distributed and upon which no U.S. federal income tax was imposed.
If a Fund failed to qualify as a regulated investment company,
such Fund would be subject to tax as a regular C corporation on its taxable income even if such income were distributed to shareholders.
In addition, at the shareholder level, all distributions out of earnings and profits would be subject to tax as ordinary income.
Such distributions may constitute “qualified dividend income” eligible for a maximum U.S. federal capital gain tax
rate of 20% for individuals and certain other non-corporate taxpayers that meet certain requirements (including a minimum holding
period requirement). Certain corporate shareholders may be eligible for a dividends received deduction subject to certain requirements
under the Code. In addition, such Fund may be required to recognize unrealized gains, pay tax, and make distributions (which could
be subject to interest charges) before requalifying to be subject to tax as a regulated investment company. If a Fund failed to
qualify as a regulated investment company in any
taxable year, cash available for distribution to shareholders
and the value of the Fund shares could be reduced materially. In lieu of potential disqualification, a Fund may be permitted to
pay a specified amount of tax for certain failures to satisfy the asset diversification or income requirements, which generally
are those failures due to reasonable cause and not willful neglect or that are
de minimis
under the Code, for taxable years
of the Fund with respect to which the extended due date of the return is after December 22, 2010.
Certain of the Funds’ investment practices may be subject
to special and complex provisions of the Code that, among other things, may affect the character of gains and losses recognized
by the Funds (i.e., may affect whether gains or losses are ordinary or capital), accelerate recognition of income or gains to the
Funds, disallow, suspend or otherwise limit the allowance of certain losses or deductions and impose additional charges in the
nature of interest. These rules could therefore affect the character, amount and timing of distributions to U.S. shareholders.
These provisions also (1) may require a Fund to mark-to-market certain types of its positions (i.e., treat them as if they were
sold at the end of the Fund’s fiscal year) and (2) may cause a Fund to recognize income without receiving cash with which
to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for avoiding income and excise
taxes.
Gains or losses attributable to fluctuations in foreign currency
exchange rates which occur between the time a Fund accrues income or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are
treated as ordinary income or loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition
of certain other instruments, gains or losses attributable to fluctuations in the value of the foreign currency between the date
of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. These gains and
losses, referred to under the Code as “section 988” gains or losses, may increase or decrease the amount of a Fund’s
investment company taxable income to be distributed to its shareholders as ordinary income. The U.S. federal income tax rules governing
the taxation of swaps are not entirely clear and may require the Funds to treat payments received under such arrangements as ordinary
income and to amortize such payments under certain circumstances. The Funds do not anticipate that their activities in this regard
will affect their qualification as regulated investment companies.
If a Fund invests directly or indirectly through a real estate
investment trust (“REIT”) in residual interests in real estate mortgage investment conduits (“REMICs”)
or invests in a REIT that is a taxable mortgage pool or that has an interest in a taxable mortgage pool, a portion of the Fund’s
income may be subject to U.S. federal income tax in all events. Excess inclusion income of a Fund generated by a residual interest
directly in a REMIC or by an interest in a taxable mortgage pool through a REIT may be allocated to shareholders of such Fund in
proportion to the dividends received by the shareholders of the Fund. Excess inclusion income generally (i) cannot be offset by
net operating losses, (ii) will constitute unrelated business taxable income to certain tax exempt investors and (iii) in the case
of a non-U.S. shareholder will not qualify for any reduction in U.S. withholding taxes under any otherwise applicable income tax
treaty or other exemption. In addition, if the shareholders of the Fund include a “disqualified organization” (such
as certain governments or governmental agencies and charitable remainder trusts) the Fund or a nominee may be liable for tax at
the highest applicable corporate tax rate (currently 35%) on the excess inclusion income allocable to the disqualified organization
and, in that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise
to the tax by the amount of the tax that is attributable to such stock ownership. There may be instances, however, in which a Fund
may be unaware of the amount of its share of the excess inclusion income from an underlying investment. In addition, a Fund’s
investment in REIT equity securities may result in the Fund receiving cash in excess of investment company taxable income from
such investment, which could result in some portion of a Fund’s cash distributions to shareholders being treated as a return
of capital for U.S. federal income tax purposes (as described below).
Income received by the Funds from investments in foreign securities
may be subject to income, withholding or other taxes imposed by foreign jurisdictions and U.S. possessions which would reduce the
yield on such investments. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
A Fund may generally elect to pass eligible foreign taxes through to its shareholders, if more than 50% of such Fund’s total
assets at the close of its fiscal year are invested in securities of foreign issuers. If a Fund makes this election, its shareholders
would generally be allowed to decide whether to deduct such taxes or claim a foreign tax credit on their tax returns. An individual
shareholder that does not itemize deductions may not claim a deduction for such taxes, and the ability to claim foreign tax credits
may be subject to limitations. If such election is not made by a Fund, any
foreign taxes paid or accrued will generally represent an expense
to the Fund, which will reduce its investment company taxable income.
The Funds may invest in stocks of foreign corporations that
are passive foreign investment companies (“PFICs”) for U.S. federal income tax purposes, and consequently may be subject
to U.S. federal income tax on a portion of any “excess distribution” with respect to, or gain from the disposition
of, such stock even if such income is distributed as a taxable dividend by the Funds to their shareholders. The tax would be determined
by allocating such distribution or gain ratably to each day of each Fund’s holding period for the stock. The amount so allocated
to any taxable year of the Fund prior to the taxable year in which the excess distribution or disposition occurs would be taxed
to the Fund at the highest marginal U.S. federal corporate income tax rate in effect for the year to which such amount was allocated,
and the tax would be further increased by an interest charge. The amount allocated to the taxable year of the distribution or disposition
would be included in the Fund’s investment company taxable income and, accordingly, would not be taxable to the Fund to the
extent distributed by the Fund as a taxable dividend to shareholders.
The Funds may be able to elect to treat a PFIC as a “qualified
electing fund,” in lieu of being taxable in the manner described in the immediately preceding paragraph, and to include annually
in income their pro rata share of the ordinary earnings and net capital gain (whether or not distributed) of such PFIC. In order
to make this election, the Funds would be required to obtain annual information from the PFICs in which they invest, which information
may be difficult to obtain, making such an election impracticable in many circumstances. Alternatively, the Funds may elect to
mark-to-market at the end of each taxable year all shares that they hold in a PFIC. If a Fund makes this election, the Fund would
recognize as ordinary income any increase in the value of such shares over their adjusted basis and as ordinary loss any decrease
in such value to the extent such decrease does not exceed prior increases. The mark-to-market and qualifying electing fund elections
may cause the Fund to recognize income without receiving cash with which to pay dividends or make distributions in amounts necessary
to satisfy the distribution requirements for avoiding income and excise taxes. The rules for determining whether a foreign company
is a PFIC, and the rules applicable to the taxation of PFICs, are highly complex and involve the determination of various factual
matters that may not be within our control. Accordingly, certain adverse and unintended U.S. federal income tax consequences could
arise to the Funds from investing in certain foreign companies. These adverse and unintended U.S. federal income tax consequences
could include, among other things, the recognition of a significant net operating loss by a Fund which, as discussed above, the
Fund would not be allowed to use in computing its investment company taxable income in any prior or subsequent taxable year.
The U.S. federal income tax treatment of the various high yield
debt securities and other debt instruments (collectively, “Instruments” and individually, an “Instrument”)
which may be acquired by the Funds will depend, in part, upon the nature of those Instruments and the application of various tax
rules. It is expected that the Funds will derive a significant amount of taxable interest income through the accrual of stated
interest payments or through the application of the original issue discount rules, the market discount rules or other similar provisions.
The Funds may be required to accrue original issue discount income (including as a result of interest paid in kind) and in certain
circumstances the Funds may be required to accrue stated interest even though no concurrent cash payments will be received. The
market discount rules, as well as certain other provisions, may require that for U.S. federal tax purposes all or a portion of
any gain recognized on the sale, redemption or other disposition of an Instrument be treated as ordinary income instead of capital
gain. As a result of these and other rules, the Funds may be required to recognize taxable income that they would be required to
distribute even though the underlying Instruments have not made concurrent cash distributions to the Funds.
The Funds may invest in distressed Instruments, which may later
on be modified or exchanged for other Instruments in reorganizations or financial restructurings, either out of court or in bankruptcy.
Such modification or exchange may be treated as a taxable event, even though no cash payment is received in connection with the
modification or exchange, to the extent that it gives rise to “significant modification” within the meaning of Treasury
Regulations. The determination of whether a modification or exchange is “significant”, however, is based on all of
the facts and circumstances, except for certain “safe harbor” modifications specified in the Treasury Regulations.
Thus, the IRS may take the position that the restructuring of an Instrument acquired by a Fund is a “significant modification”
that should be treated as a taxable event even if the Fund did not treat the restructuring as a taxable event on its tax return.
The character and timing of a Fund’s taxable gains and
losses may also be affected by various Code provisions including, but not limited to, those applicable to straddles, controlled
foreign corporations, wash sales, short sales and various types of notional principal contracts, other derivatives, options, forwards
and futures contracts. The body of law applicable to many of the investment instruments discussed above is complex, and in certain
circumstances, not well developed. Thus the Funds and their advisors may be required to interpret various provisions of the Code
and Treasury Regulations, and take certain positions on the Funds’ tax returns, in situations where the law is somewhat uncertain.
Distributions made by a Fund from investment company taxable
income (including distributions of any net short-term capital gains and tax-exempt interest) are taxable to U.S. shareholders as
ordinary income to the extent of such Fund’s earnings and profits. Distributions of net capital gain (including amounts designated
as net capital gain by a Fund and credited to shareholders but retained by the Fund) will be taxable to U.S. shareholders as long-term
capital gains, regardless of how long such shareholders have held their shares. Distributions in excess of a Fund’s earnings
and profits are treated as a return of capital for U.S. federal income tax purposes which will first reduce the adjusted tax basis
of a U.S. shareholder’s stock and, after such adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholders (assuming the shares are held as capital assets).
For individual U.S. shareholders, investment company taxable
income, other than qualified dividend income, is currently taxed at a maximum U.S. federal income tax rate of 39.6%, while net
capital gain and qualified dividend income generally will be taxed at a maximum U.S. federal income tax rate of 20%. Dividends
paid by a Fund, other than distributions of net capital gain, will generally constitute qualified dividend income for individual
U.S. shareholders (provided certain holding period and other requirements are met) to the extent that the Fund receives qualifying
dividend income from domestic corporations (generally excluding real estate investment trusts) and certain qualifying foreign corporations.
For corporate U.S. shareholders, both investment company taxable income and net capital gain are currently taxed at a maximum U.S.
federal income tax rate of 35%. Dividends paid by a Fund will ordinarily qualify for the dividends-received deduction for corporations
to the extent that they are derived from dividends paid by domestic corporations (generally excluding real estate investment trusts).
Distributions to corporate U.S. shareholders of net capital gain are not eligible for the dividends-received deduction. The tax
treatment of distributions whether paid in cash or additional shares is the same. To the extent securities held by a Fund have
appreciated when an investor purchases shares of a Fund, a future realization and distribution of such appreciation will be taxable
to U.S. shareholders even though it may constitute, from an investor’s standpoint, a return of capital.
A redemption of shares is taxable to you for U.S. federal income
tax purposes whether the redemption proceeds are paid in cash or in kind using securities from the applicable Fund’s portfolio.
A redemption, whether in cash or in kind, would generally not be taxable to the Funds. You will generally recognize taxable gain
or loss on a sale, exchange or redemption of shares in an amount equal to the difference between the amount received and your cost
basis in such shares. Such gain or loss will be treated as capital gain or loss if the shares are capital assets in the U.S. shareholder’s
hands, and will be long-term or short-term depending upon such shareholder’s holding period for the shares. Any loss realized
on a redemption or sale of shares will be disallowed to the extent substantially identical shares are purchased, or received through
reinvesting dividends and capital gains distributions in a Fund, within the 61-day period beginning 30 days before and ending 30
days after the date of the redemption. In such a case, the basis of the shares acquired will be increased to reflect the disallowed
loss. Any loss realized by a U.S. shareholder on the sale of a share held by the shareholder for six months or less will be treated
for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of
long-term capital gains received by such shareholder with respect to such share.
The Federal tax law generally requires that the cost basis and
holding period of mutual fund shares be reported to both the Internal Revenue Service and shareholders for sales, redemptions or
exchanges of mutual fund shares that are acquired on or after January 1, 2012. This information will generally be reported on Form
1099-B. Shares in a Fund acquired before January 1, 2012, and shares in a Fund owned by C-corporations and certain tax-deferred/retirement
accounts are generally excluded from cost basis reporting. The cost basis of a share is generally the purchase price, adjusted
for dividends, returns of capital and other corporate actions. For purposes of reporting cost basis and holding period to the Internal
Revenue Service, cost basis and holding period will be calculated using the Funds’ default method unless you instruct the
Funds to use one of the other cost basis reporting methods offered by the Funds. If you hold shares in a Fund through a broker
(or another nominee), please contact that broker (or
nominee) with respect to the reporting of cost basis and available
elections for your account. The applicable cost basis method will be used to determine which specific shares you are treated as
selling when there have been multiple purchases on different dates at differing share prices (i.e., blocks), and the entire position
is not sold at one time. Therefore, the cost basis method used may impact the amount of the capital gain or loss recognized and
the character (long-term or short-term) of such gain or loss. The Funds do not recommend any particular method of determining cost
basis. The Funds are not required to, and in many cases the Funds do not possess the information to, take all possible basis, holding
period or other adjustments into account in reporting cost basis information to you. Therefore, shareholders and their tax advisers
should carefully review the cost basis information provided by the Funds. You are encouraged to consult your tax adviser regarding
the application of the cost basis reporting rules and, in particular, which cost basis calculation method you should select. Additional
information about cost basis reporting and the cost basis methods which are available to the Funds’ shareholders can be found
on our website:
www.thirdave.com
.
A U.S. person that is an individual or estate, or a trust that
does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% “net investment income
tax” on the lesser of (1) the U.S. person’s “net investment income” for the relevant taxable year and (2)
the excess of the U.S. person’s modified adjusted gross income for the taxable year over a certain threshold (which in the
case of individuals will be between $125,000 and $250,000, depending on the individual’s circumstances). A Fund shareholder’s
net investment income will generally include dividend income, capital gains distributions from the Fund, net capital gains retained
by the Fund and net gains from the disposition of Fund shares, unless such dividend income or net gains are derived in the ordinary
course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities).
If you are a U.S. person that is an individual, estate or trust, you are urged to consult your tax advisers regarding the applicability
of the net investment income tax to your income and gains in respect of your investment in a Fund’s shares.
The Funds will backup withhold for U.S. federal income taxes
at the required rate (currently 28%) on all distributions and redemption proceeds payable to shareholders who fail to provide the
Funds with their correct taxpayer identification number or to make required certifications, or who have been notified by the IRS
that they are subject to backup withholding. Corporate U.S. shareholders and other shareholders specified in the Code are or may
be exempt from backup withholding. The backup withholding tax is not an additional tax and may be credited against a taxpayer’s
U.S. federal income tax liability.
The Foreign
Account Tax Compliance Act (“FATCA”)
is imposing extensive new reporting and withholding requirements designed to
inform the U.S. Department of the Treasury of U.S.-owned foreign investment
accounts. It is currently anticipated that effective July 1, 2014, the Funds
will be required to withhold U.S. tax at a 30% rate on Fund distributions made
to certain non-U.S. entities that fail to comply (or be deemed compliant) with
these new requirements. Withholding on redemption proceeds made to such non-compliant
shareholders is scheduled to take effect on January 1, 2017. Shareholders may
be requested to provide additional information to the Funds to enable the Funds
to determine whether withholding is required.
The preceding discussion is meant to be only a general summary
of the potential U.S. federal income tax consequences of an investment in the Funds. The tax law is subject to constant revision.
Legislative, judicial or administrative action may change the tax rules, including applicable tax rates, that apply to the Funds
or their shareholders and any such change may be retroactive. In addition, special rules may apply depending upon your specific
tax status or if you are investing through a tax-deferred retirement account. You should consult your tax advisors as to the U.S.
federal, state, local and non-U.S. tax consequences to you of the ownership of Fund shares.