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First Eagle Fund’s Arnhold on Loving Japan and Hating Alpha

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John ArnholdHow much do you really know about First Eagle Funds? Sure, it’s racked up fantastic performance and given us legendary investors like Jean-Marie Eveillard, but its history is just as fascinating, and the tradition in which it’s steeped is a big part of its success.

John Arnhold (left), First Eagle Investment Management’s chairman and CIO, is a scion of the family that started the firm in Dresden, Germany, in 1864. It’s quite a tale, and Arnhold took time to explain it to AdvisorOne, along with the firm’s interest in Japan (post-natural disaster as well as long before) and why alpha is simply a Greek letter.

Q: There’s much to be said for longevity. The firm got its start in 1864, but actually traces its roots back to 1803. Can you explain?

A: Our predecessor name was Arnhold and S. Bleichroeder, which is a firm that traces its history back to Germany where my family started its banking business in 1864. The Bleichroeder part of the firm was acquired in 1931, but it actually started in 1803. So we trace our history back over 200 years and we had a very successful bank in Dresden and Berlin. During the Nazi regime we were forced to sell the bank and, thankfully, the family fled the country. A number of family members came to the United States and began the business anew. During the subsequent decade my great granduncle focused the firm on the investment banking and global securities brokerage businesses. 

Q: And today?

A: Our only business today is our asset management business, which began in fund form in 1967. It was called First Eagle Funds N.V. and the name was derived from a bank that we had owned in Switzerland called Adler Bank. Adler is German for Eagle. The name Eagle Funds had already been taken in the United States, so used the name First Eagle. In 1987, we started our first mutual fund called First Eagle Fund of America. In 2002, we sold our investment banking and broker-dealer business to a large French bank. We think of ourselves as investment managers rather than asset gatherers. We focus on long-term capital preservation and preserving purchasing power overtime. And we serve over two million shareholders globally.

Q: How does this history influence First Eagle’s investment philosophy?  

A: It’s actually a result of what happened almost 100 years ago. When Germany went through a period of hyper-inflation in the 1920s, the family had substantial industrial interests in a number of different industries, including brewing and ceramics. It was by owning the actual companies that we managed to preserve capital and purchasing power during that time. So our philosophy has always been that the best way to preserve long-term purchasing power is to own good businesses, but at prices that reflect a margin of safety. The future is uncertain; we can’t predict macro events nor can we predict with accuracy cash flows going out a year, five years and 10 years. But we try to determine what we think a business is worth today. If we can buy that business at a substantial discount from intrinsic value, we believe we have a margin of safety which will protect us to some extent if things don’t turn out as we hoped or anticipated.

Q:  Fantastic. So where are you finding alpha as a firm?

A: Not to be particularly controversial, but we don’t look for alpha. As far as I can tell, alpha is a Greek letter. It really means relative performance. So we’re not looking at relative performance. What we’re trying to find are great businesses that we can own at prices that afford us a margin of safety. If you look at our portfolio, we have a large presence in the United States and a particularly large presence in Japan. In the United States in the last two years, there have been pockets where multiples and prices have become more reasonable. And we’ve been able to add some excellent names, particularly in technology, which we would have loved to have owned in 2000, had they been trading at multiples which afforded us a margin of safety.

Q: What is attractive about Japan after the earthquake, Tsunami and resulting nuclear mess?

A: If you look at Japan, it’s a market and economy that has been a relatively uninteresting place to be an investor. But because the macro picture is less than desirable there has been very little money flowing into Japanese equities. But there are world-class businesses in Japan that actually operate around the world and have traded at very reasonable prices. We’re taking advantage of those opportunities.


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