Martin Whitman wrote the book on investing in troubled securities.

Whitman, the founder of Third Avenue Management, co-authored the 2009 book “Distress Investing,” outlining the lessons he learned over a long career buying the stocks and bonds of companies in trouble. Among them: getting paid is a question of probability, rather than certainty.

It’s a lesson investors in one of his firm’s mutual funds learned the hard way when Third Avenue on Dec. 9 took the rare step of freezing withdrawals from the $788 million Third Avenue Focused Credit Fund, which held positions in a range of struggling companies. Market losses and outflows had left it unable to meet further redemptions without selling assets at fire-sale prices.

The move, which rattled markets on Friday, marks the biggest setback for the firm Whitman, 91, started almost three decades ago and built up using a contrarian philosophy and deep-value style of investing. In recent years, the firm, run by Chief Executive Officer David Barse, has failed to match the results Whitman achieved in his heyday. Its best known fund, Third Avenue Value, has seen its assets shrink by more than 80 percent since the end of 2007, its performance weighed down by bets on energy stocks and Hong Kong-based real estate firms.

“The past few years hasn’t been a good time to be a contrarian investor,” Steven Roge, of R.W. Roge & Co. in Bohemia, New York, said in a telephone interview. “Investors in that group have been trying to catch a falling knife that keeps on falling.”

Markets Rattled

News that the fund had frozen redemptions sent junk bonds and shares of money managers lower on Friday. Affiliated Managers Group Inc., which owns a stake in Third Avenue, fell the most in more than four years, declining 7.9 percent, the worst performer in the 19-member Standard & Poor’s index of money managers and custody banks.

Investing in troubled companies can require considerable time to pay off, making it a strategy that’s difficult to pursue in a mutual fund, which must be able to return investor money at net asset value on a daily basis.

“Very little in distress investing lends itself to certainty,” Whitman and his co-author Fernando Diz wrote in their book. “Rather, the investor always deals in probabilities.”

The credit fund held positions in the debt of bankrupt companies, where gains can take months, if not years, to be realized. Its holdings were far more concentrated than those of a typical mutual fund, according to Sumit Desai, an analyst at Morningstar Inc. in Chicago.

No ‘Plain Vanilla’

“It was not a plain vanilla high-yield fund,” Desai said in a telephone interview. “These investments probably didn’t belong in a mutual fund.”

Not so long ago, the fund was telling investors that concerns about illiquidity in these markets were a “myth.” The fund keeps excess cash on hand, lead manager Thomas Lapointe wrote in a 2012 investor commentary reviewed by Bloomberg News. The fund would also remain small enough — with assets under $3 billion — to stay nimble in building and liquidating positions, he wrote.

Lapointe didn’t respond to requests for comment on the newsletter.

The failed credit fund had $3.5 billion in assets as recently as July of last year, before investors began pulling their money. It lost 27 percent in 2015 through Dec. 9. In his statement explaining the liquidation of the fund, Barse said that given time, the investments would have worked out.

‘Other Whitmans’

“Investors requests for redemption, however, in addition to the general reduction of liquidity in fixed-income markets, have made it impracticable” to hold on, he wrote.

Wilbur Ross, chairman of WL Ross Holding Corp. and another well-known investor in distressed businesses, including steel, said Whitman was one of the most experienced investors in securities of troubled companies. The fund may have been the victim of a changing market environment, he said.

“Because of Dodd Frank and other regulatory pressures all trading desks are deploying less capital than ever before and this is creating tremendous illiquidity and volatility,” he wrote in an e-mail. “There will likely be other Marty Whitmans.”

Third Avenue and AMG didn’t return calls seeking comment.

‘Savvy Managers’

Whitman began investing in distressed companies in the 1970s, making huge profits off bets on Anglo Energy in the 1980s, and retailer Kmart Corp. in the 2000s. When Kmart filed for bankruptcy in 2002, most investors left the company for dead, Christopher Mayer wrote in “Invest Like a Dealmaker.”

“There were a few savvy money managers who saw some life amid the wreckage,” he wrote. “Martin Whitman, manager of the Third Avenue Value Fund, was one of them.”

A graduate of Syracuse University, Whitman earned a master’s degree in economics from the New School for Social research in 1956 after working as an analyst at what later became Lehman Brothers Holdings Inc. The New York native became a bankruptcy specialist and got into the mutual fund business after a hostile takeover of a closed-end fund in 1984, which he turned into a mutual fund called Equity Strategies Fund Inc.

Performance, Turnover

He started Third Avenue in 1986 and in 2002 sold 60 percent of the firm to AMG, a firm in Beverly, Massachusetts, that owns stakes in dozens of investment firms. Whitman remains Third Avenue’s chairman, although he has stepped back from day-to-day management. In 2010 he gave up his post as co-chief investment officer. In 2012 he stopped running the Third Avenue Value Fund after 22 years. 

Leo Acheson, an analyst for Morningstar Inc. in Chicago, said Third Avenue has been plagued by both weak performance and turnover of key personnel. More than 10 people have left the firm, since 2013, he said, including fund managers and analysts.

The $1.6 billion Third Avenue Value Fund trailed 97 percent of peers over the past five years. One its holdings, Devon Energy Corp. fell 45 percent this year. The firm’s biggest fund, the $3.4 billion Real Estate Value Fund, lagged behind 55 percent of peers over the same stretch, returning 9 percent a year.

‘Patient Investor’

In an Oct. 31, letter to investors, the managers of the Third Avenue Value Fund, explained the difficulty of sticking with their contrarian picks. 

“We readily acknowledge that it can be frustrating to stand apart from the herd and post investment returns that trail the flavor of the day,” they wrote. “This sort of volatility is the friend of the patient investor.”

Barse, in an August interview with Bloomberg Television discussing the lack of liquidity in the markets, stressed the importance of having the time to let out-of-favor investments rebound.

“If you stick with your positions over a long time, they will reward you,” he said. “You just need to be patient.”