Ask what’s new with the First Eagle High Yield Fund (FEHIX) and you get quite an earful. As the fund approaches its five-year mark, to say it’s experienced rapid growth recently is a bit of an understatement. It’s gone from $20 million in assets under management to $600 million since the beginning of 2012, all from retail inflows (you read that right). Co-portfolio manager Edward Meigs diplomatically chalks it up to “the favorable environment for the asset class.”
Favorable indeed, as the fund reports an average annual one-year return of 6.07%, a three-year average annual return of 16.23% and an average annual return since inception of 12.90%.
Backing up a bit, Sean Slein, the fund’s other portfolio manager, says First Eagle’s clients wanted the opportunity for more income, so he and Meigs joined the First Eagle platform from Dwight Asset Management to fill that need.
“We offer an income solution that is in philosophical alignment with First Eagle Funds,” Slein adds.
He notes the objective of Fed Chairman Ben Bernanke’s QE3 policy is to increase the “wealth effect” for investors, encouraging them through fiscal measures to invest and consume in a way Bernanke hopes will ripple through the economy to stimulate consumption, hiring and, ultimately, GDP growth. These measures, Slein claims, are favorable to a high-yield investment environment.
“High yield has the potential to offer real returns when compared with higher quality issues like Treasuries,” Slein says. “Also, we have a favorable credit environment at the moment, one that’s benign. Many primary issuances are still quality and management of many companies is fairly conservative in their refinancing activity. They have cash on the books and are not doing silly things with their capital."
Despite Meredith Whitney’s well-publicized default prediction, Slein and Meigs note that “the amount and quality of today’s issuance reflects estimates of default over the next three or four years. So we’re seeing quality now, which we believe should mean some stability moving forward.”
The managers describe themselves as value investors who pay very close attention to factors affecting the credit markets, and “all things being equal, the credit space is a nice place to be,” Slein says.
"High yield can be a complement to interest rate risk in the other fixed-income portions of an investor’s portfolio,” Slein concludes. “It has the potential to provide equity-like returns, with lower volatility and lower correlations than equities."