December 12, 2013

First Eagle Fund Goes ‘Anywhere the Value Is,’ but With a Safety Margin

Global Income fund builds on First Eagle Global Fund’s success, always following the diktats of Benjamin Graham, but not averse to the benefits of high-yield bonds

If you’re looking for income in the current low-interest rate environment, “the sources are very limited,” says Rob Hordon, portfolio manager at First Eagle’s Global Income Builder Fund. If you add to that mandate a value bias as a follower of Benjamin Graham, who’s always looking for “intrinsic value” with a “margin of safety,” it would seem your options are even more limited.

That’s why Hordon and his co-PMs search worldwide for equities and fixed income products that meet those requirements. Launched May 1, 2012, FEBAX adds a current income mandate to the caital appreciation mandate of First Eagle’s Global Fund (SGENX), which has returned 10.34% annualized for the past 10 years, though its value mandate leads it to underperform in bull markets, like 2013, in which it has delivered 12.25%, lagging both the MSCI World and the S&P 500 indexes.

Back to the Global Income Builder Fund. “We go anywhere the value is, but always with a margin of safety,” Hordon said at a press gathering on Nov. 5. Though the fund has faced an environment of very low real yields since its launch, the success of FEBAX since its launch “was as much in what we didn’t own as in what we did.”  

In stocks, the managers look to “avoid bond-like equities” due to their interest rate risk, while they favor “buying companies on the cheap that generate an income stream.” On the fixed income side of the portfolio, Hordon says “we prefer selective credit risk to interest rate risk; our portfolio duration is about 3.5 years.”

There’s a third part of the portfolio: “we have 7% in cash, and 3% in gold,” which the managers use “for deferred purchasing power,” Hordon says.

Why the gold? Partly it’s because of First Eagle’s tradition, as most famously espoused by Jean-Marie Eveillard, who remains a senior advisor to First Eagle Investment Management, but it also serves as a hedge “against extreme outcomes," says Hordon. “We own some bullion and some mining stocks," he says. The cash portion of the portfolio will vary, he says, and a portion of that cash is now in commercial paper, but “in times of extreme duress, it will get put to work.”

Eveillard famously foresaw the 2008-2009 credit crunch and went to high levels of cash in the Global fund, which served investors well. When presented with advisors’ typical concerns that an active manager stay fully invested, Hordon nodded, but then said, “As a fiduciary, if you can’t find opportunities to invest, you go to cash.”

Holdings are spread around the world, and some companies that you might not think of as "value" are included. Microsoft (MSFT) is a big holding, said Hordon, because its “dividend’s grown fourfold since it started paying dividends 10 years ago."

While “we like their dominance of the business market,” Hordon said there’s another theme with Microsoft: “people are catching on to the fact that Microsoft has a major retail” presence with its mobile products and Surface tablet. But the portfolio holdings also include the No. 3 wireless carrier in France — Bouygues — and Hopewell Holdings, a property investing company in Hong Kong. While Hordon said “we’re concerned about the bidding up of U.S. REITs,” they like this Asian property firm, which yields 4% and whose stock declined sharply after a failed IPO: We saw Hopewell "as a buying opportunity," Hordon said.

On the fixed income end of the portfolio, Edward Meigs, who co-manages First Eagle’s High Yield and Global Income Builder funds, said a portion of the portfolio’s 34% share in fixed income is in high-yield bonds. “A great benefit of high yield is as a cushion for rising [interest] rates,” Meigs said. While “we’ll play in CCCs, we’re more focused on single Bs,” and 20% of the fixed income portfolio is in floating-rate paper.

Giorgio Caputo summed up the fund’s attraction to an advisor and clients. “This is a core income fund, but with the flexibility to migrate the asset mix as the opportunity set changes.” However, “equities won’t go below 40% or above 65%,” Caputo says.

The fund's “biggest weight” overseas is in Europe, in which he believes “there’s still value,” partly represented by the fund’s high-yield holdings in Europe, where the portfolio managers say high-yield issuance has quadrupled over the past five years. And while Europe may be “bottoming,” he thinks the revival on the Continent may well be “bumpy,” especially in a country like France.

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