NEW YORK - Third Avenue Management, the firm founded by famed value investor Marty Whitman, is rolling out its first debt fund on Monday, which will invest in credit securities, such as high-yield junk bonds, bank loans and distressed securities.

The Third Avenue Focused Credit fund, a natural extension of the firm's expertise in finding overlooked and undervalued credit and distressed securities, launches after a monstrous rally in U.S. credit markets.

So far this year, junk bonds have posted total returns of 40 percent while investment-grade corporate debt has chalked up 15 percent, according to Merrill Lynch indexes.

Obviously, we would have preferred to roll this out on March 9 when markets bottomed, Jeffrey Gary, who will manage the new fund, said in an interview. Gary joined Third Avenue from BlackRock Financial in June.

Gary said the fund was never meant to be a six-month trade, anyway. Third Avenue's new debt fund underscores the huge demand for yield. In the second quarter, mom and pop investors poured nearly $90 billion into U.S. bond funds, the biggest quarterly inflow ever for the sector, according to Strategic Insight.

Over the next three to five years, this type of fund makes a lot more sense than your typical high-yield fund, Gary added. Third Avenue once ran a high-yield fund but not one that could invest in all areas of the credit market.

Third Avenue Focused Credit includes a wider mandate, delving into a range of securities, including bank loans, junk bonds and convertible securities as well as debt that is in default.

What's more, the recovery value for defaulted bank loans, for example, are far better than that of junk debt, Gary said. These days, high-yield debt typically recover between 15 cents and 20 cents on the dollar while bank loans usually recover between 55 cents and 60 cents on the dollar, Gary said.

One of Gary's favorite credits for the fund includes the 8 percent senior notes of Vought Aerospace. We are buying some names that we have owned in other funds, Gary added.

That's a comforting thing. Third Avenue, which currently manages about $1 billion in credit and distressed securities throughout equity portfolios and a dedicated hedge fund, has seen many of its funds perform solidly. Its flagship Third Avenue Value Fund (TAVFX.O) is up more than 29.50 percent so far this year. The Value fund has posted returns of more than 7.0 percent annualized for 10 years through Aug. 30, surpassing its peer category by nearly 5.50 percentage points every year. (Additional reporting by Dena Aubin; Editing by Kenneth Barry)

Investment Merrill Lynch