First Eagle U.S. Value Fund seeks long-term growth of capital by investing, under normal market conditions, primarily in equity and debt securities issued by U.S. corporations. Management utilizes a highly disciplined, bottom-up, value-oriented approach in achieving its investment objective.
Period: Q4 2012
Portfolio date: 31 Jan 2013
No. of stocks: 68
Portfolio value: $2,286,574,000
* Reported Price is the price of the security on the portfolio date. This value is significant in that it indicates the portfolio manager's confidence in the stock at that price and suggests at least some level of undervaluation and/or margin of safety.
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Articles & Commentaries
Inflation and loss of capital pose dangers to retirees seeking a sustainable income stream...
The PMs’ Perspective is a series of interviews with senior members of First Eagle’s investment teams.
On this week’s Consuelo Mack WealthTrack, one of the fund managers WealthTrack has identified as the next generation of Great Investors. Matthew McLennan, the hand-picked successor to legendary investor Jean Marie Eveillard, tells us where he is finding value with less volatility for the First Eagle funds now.
We had some declines in the portfolio, most notably our holding in Cisco which has a dominant market position in routers and switches, the basic nuts, bolts and software that make the internet tick. In recent months, the market has fretted about cutbacks in government spending budgets (perhaps a sneak preview of things to come more broadly), product cycle issues in their switching business and fears of competitors encroaching on their territory. Our team feels that Cisco is deeply embedded in its customers’ technology platforms and serves as part of an entrenched, interlinked mesh of hardware and software. Cisco also stands to benefit from the growth in video-based traffic over the internet. While we wait for better times ahead, Cisco is exceptionally well capitalized with net cash and has returned substantial capital to shareholders through repurchases and a recently initiated dividend. As such, we have committed some incremental capital to this investment as the valuation margin of safety expanded.
In our top ten list, you’ll also see the emergence of Sysco, not a router company but rather a route company which distributes food to the away-from-home eating market – restaurants, hotels, hospitals, schools and the like. They are the largest player in this market across the United States, and this is a business where route density helps provide a structural cost advantage and therefore serves as a competitive advantage. They are also investing in widening the gap through specialized systems. We believe this is a company with a degree of pricing power over time, yet it offers a dividend yield above the yield of a 10 year treasury investment. Ironically, what gave us the opportunity to purchase Sysco at what we believe is a reasonable price were shorter term investor fears over their ability to pass through food price inflation. We are likely to own this stock for the long term assuming the valuation remains attractive.
In emerging markets, much of our exposure is indirect through the ownership of globally strong businesses listed in developed markets that have meaningful presence in those markets such as Nestle in consumer products or Heidelberg Cement in aggregates and cement. Our direct emerging market investments span a range of intriguing businesses from dominant franchises in spirits, tobacco, and gaming, to holding companies owning unique underlying consumer businesses to owners of scarce real assets, but we remain conspicuously absent from direct equity holdings in China.
Valuation multiples are not exorbitant relative to the low real rates on offer in the fixed income markets but there is an air of complacency in markets today with low levels of implied volatility, above-average business expectations and all this against a backdrop of unusually high corporate profit margins despite close to double digit unemployment. Were it not for the demand support of near double digit fiscal deficits, where would earnings be for the corporate sector? Record levels of stimulus have supported earnings power and put in place the seed for future capital expenditures and hiring growth but the poor state of public finance means that the stimulus may need to be withdrawn ahead of the recovery in private sector confidence so the future path of earnings power is less certain than with a traditional cyclical recovery.
Matthew McLennan, portfolio manager at First Eagle Funds, talks about his investment strategy and investment opportunities in Japan:
Global economic conditions remain exceptionally challenged and pose trade and fiscal uncertainties. Central banks are trying unconventional monetary policies in an attempt to drive down long-term interest rates and stimulate growth. In particular, the Federal government has engaged in a second round of "quantitative easing" in hopes that it will oil the wheels of economic recovery.
At First Eagle, we know that financial outcomes are unpredictable. Rather than being distracted by the uncertainty in the current environment, we continue to pursue our goal of protecting our clients' capital and purchasing power over time.
As long term investors, our approach is primarily to be owners of enterprises, provided that they appear to us to have a solid position in the marketplace, strong balance sheets, capable management and importantly, modest prices. The investment team is hard at work, both monitoring existing positions and uncovering businesses whose shares can be acquired at prices which we believe afford us a margin of safety.
Our global search for royalty-like businesses whose securities trade at a substantial discount to our estimates of intrinsic value is ongoing.
Guiding us through this continuous search is our Global Value Team, which we believe possesses the temperament required of successful value investors. The investment team is led by Portfolio Manager Matt McLennan alongside Portfolio Managers Abhay Deshpande, Rachel Benepe, Kimball Brooker and Director of Research Bruce Greenwald.
We are pleased that Jean-Marie Eveillard still graces our offices on a regular basis and continues an active dialogue with members of the investment team. We are honored that he continues to play an important role in the First Eagle family as a whole.
Jean-Marie Eveillard, senior advisor for First Eagle Investment Management, talks about European government debt, stocks and investment opportunities...
Many practitioners of core|satellite investing use the core of their clients’ portfolios to generate market-like returns with market-level risk exposure, or beta, and use satellite investments to produce excess returns, or alpha. Within this framework, passive investment vehicles — index funds and ETFs — have become standard core investments.
At First Eagle, we question the foundation of this approach to portfolio allocation. Beta, we have all discovered, can expose an investor to a very bumpy ride. In our opinion, the graver concern for investors is not short-term volatility, alarming and uncom- fortable as it may be, but the possibility of permanent impairment of capital...
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- Greenwald Wouldn't Bite on Apple
Matthew McLennan, a portfolio manager at First Eagle Investment Management LLC, talks with Bloomberg...
Eveillard Likes Kansai Paint, Pargesa, Vulcan Materials...
Eveillard Likes Sodexo, Berkshire Hathaway and Hankyu...
First Eagle's Eveillard Discusses Toyota's Shares...
In seeking to protect our investors against permanent impairment of capital, we rely on five operational principles: (1) margin of safety, don’t overpay for assets, (2) diversification, let positive and negative surprises average out, (3) low leverage, avoid potentially catastrophic losses associated with high leverage, (4) balance, build a portfolio that is not overly exposed to any single macroeconomic risk and (5) protection against extreme outcomes, consider assets, like gold, that may do well if the world falls apart. For each of these principles, First Eagle Funds has processes in place that seek to limit the risks involved in investing.
Dataroma's opinion: Good write-up, but strongly disagree with point (5) - Protection against extreme outcomes. It's unlikely that gold will "do well if the world falls apart". Gold has no earnings, has hardly any utility, and only has any "value" because people think it does. Besides, what is the point of protecting 5% of your portfolio (which is the current Value Fund's Gold holding) against extreme events. "Protection against extreme outcomes" is probably a futile attempt since even if possible, in the long run it will come at a huge cost.
A Graham stock is one that is a statistically cheap stock where the value doesn't necessarily grow and maybe even shrinks over time. A Buffett stock is sort of the opposite of that. It's a business with some sort of franchise where the intrinsic value tends to grow over time. In that case, we require different discounts, depending on what kind of a business it is. If it's a Graham-type stock, we tend to be out at intrinsic value and we tend to require a larger discount to intrinsic value. If it's a Buffett-type stock, we tend to acknowledge that the growth in intrinsic value is worth something in itself and will require less of a discount to intrinsic value; and, we're not necessarily selling our entire position at intrinsic value with a Buffett-type stock. The vast majority of companies are somewhere in between. It takes quite a bit of judgment to determine where on the spectrum these companies lie. Over time, it's always easy to find a Graham stock, because it's statistical analysis. The Buffett-type of company where there's a lot of judgment involved takes time and requires a lot of analytical effort and we have great analysts to do that work. And, for the most part, over not just the last year but over five to ten years, the portfolio has shifted more towards Buffett-type companies from Graham-type companies. It's a trend that probably will continue into the future.
One big observation we would make, is that as valuations have recovered from very distressed levels earlier in the year to levels that we would see as being more consistent with a more normal valuation backdrop -- we feel that we are in an environment that is characterized as neither bargains nor bubble -- the focus of the team has to be as resolute as possible on the search for bottom-up opportunities at the security-by-security level. If the market is not mispriced as a whole, you have to look for mispricing at the individual security level, which is, indeed, what we've focused on doing historically.
With our efforts focused on minimizing permanent impairment of capital, we also do not promise to make you the most amount of money in any short period of time. You have seen that in our results. Look at the late '90s where we lagged and we were punished for it, but as Jean-Marie said famously back then, in that lagging period we did not change what we did or how we approached investing. In fact, he said, “I'd rather lose half my shareholders than half of my shareholders' money.” We did lose half our shareholders; we did not lose half our shareholders' money.
Looking at the subject of long term investing, people are a little upset that buy and hold hasn't worked for the last ten years. If you bought in 1999, your annualized return is at approximately minus 2% for ten years. But the buy and hold approach over the long term is wholly dependent on the price that you pay for something. If you bought Cisco at 100 times earnings in 1999, over the long term, you will lose money. If you bought 3M at eight times earnings, with a 4% dividend yield over ten years, there's a high degree of likelihood that you'll make money over the long term. But it all depends on what you pay. Buy and hold is not dead.
And finally, to those very simple concepts that Graham introduced to us and Buffett developed and Jean-Marie applied on an international stage, we've layered our own sort of attentiveness to loss avoidance. Buffett said it best when he said that the two most important rules to investing are, “Rule number one, don't lose money. Rule number two, see rule number one.” When he said “lose money,” he didn’t mean you buy a stock at $20 and it goes to $15. He means if you buy a stock at $20 and you later find out it's only worth $15, that's what is to be avoided at all costs.
"Many of our biggest positions are the sorts of investments that people would say looks decidedly mundane. ...mundane is beautiful for us, provided we own it at the right price."
The most important thing to understand about our investment philosophy is that our long term goal is first and foremost to preserve the real purchasing power of our clients’ capital, and we do so by and large through the ownership of enduring enterprise, buying businesses that we think are there for the long haul and buying them with a valuation margin of safety. We’re very focused on avoiding permanent impairment of capital, that’s at the core of our philosophy. We have a great deal of flexibility in that we look across the entire world for opportunities. We’re also willing to look across the capital structure. Sometimes we’ll make an investment in a high-yielding bond if we think we can get an equity-like return with a more senior position in the capital structure. But the majority of our investments are in businesses that we think are good companies at good prices. We have a long term holding period; we tend to own businesses for five years or more on average. We believe that is a core advantage for us in that our patience is quite differ- ent from that of most global investors, and it enables us to take a bit different perspective and to accumulate more knowledge on the businesses that we own.
Likes large cap quality multinational stocks that have lagged the broader market...
Jean Marie Eveillard of First Eagle Funds interviewed by Steve Forbes...