Market Overview
In the first quarter of 2016, the MSCI World Index declined −0.35% while in the United States the S&P 500 Index increased 1.35%. The Barclays U.S. Aggregate Bond Index and the Barclays U.S. Corporate High Yield Index returned -0.45% and 3.35%, respectively. In Europe, the German DAX was down −3.07% and the French CAC 40 Index decreased −0.80%. In Japan the Nikkei 225 Index fell −5.76% over the period. Crude oil rose 3.51% to $38.34 a barrel, and the price of gold rose 16.40% to $1,234.20 an ounce. The US dollar weakened −7.03% against the yen and weakened −4.90% against the euro.
It has been a volatile series of months for financial markets. In August and September of 2015, investors faced sharp declines in the prices of risk assets, only to see those declines somewhat reverse in the fourth quarter. The New Year brought a renewed sharp decline in risk appetite around the world, only to once again see a recovery—all within the first quarter of 2016. Sparked by Chinese devaluation and growth concerns, the MSCI World Index touched its lowest levels in over two years in mid-February1. Poor conditions in credit markets also prevailed in early 2016, as the corporate high yield index continued a downward trend that began roughly a year ago.
Markets have struggled to digest the steep and destabilizing decline in the price of commodities, most notably crude oil, which has had broad and perhaps unanticipated impacts across asset classes and geographies. While cheaper energy should in principle be a net positive for global economic growth, the severe decline in the price of crude appears to have damaged short-term growth, as a sharp decline in capital expenditures seems to have pre-dated any gains in consumption from lower fuel costs. The steep fall in crude prices also tightened financial conditions in a number of asset classes. The most direct impact was, naturally, on the equity and debt of energy companies, but we have also seen pronounced effects in other areas, such as certain industrial companies that have partial exposure to energy markets. Given the importance of energy in commodity production generally, low energy prices appear to have put downward pressure on agricultural and industrial commodities as well.
The ripple effects across financial markets have continued. Low commodity prices have been particularly threatening to the solvency of many emerging markets, including Russia and Brazil. Such commodity- oriented economies have faced significant declines in GDP and questions about the resilience of their banking systems. This has been compounded in such geographies as Brazil, where significant internal dollar-denominated borrowing has in some cases led to full blown currency crises.
In the first quarter of 2016, this dynamic also spilled over into global banking equities and debt, as markets began to fear the poten-tial losses resulting from banks’ exposure to energy and emerging markets. Energy is also a significant component of high yield issuance, and the rise in default expectations among energy-related issuers frightened investors from the high yield asset class.
The variety of concerns recounted above hit their most acute level on Feb 11th with the MSCI World Index posting a year-to-date decline of 11.47% while the Barclays US Corporate High Yield Index fell −5.16%2.
As we write, it appears the crisis has been (perhaps temporarily) averted by renewed central bank actions globally, with the Fed, European Central Bank and Bank of Japan all either easing or walking back the path of anticipated rate increases. Chinese authori-ties have once again engaged in debt-financed economic stimulus and used their currency reserves to wrong-foot speculation against China’s RMB. A modest decline in the dollar has improved financial conditions in emerging markets and supported oil prices, which also benefited from an improving supply/demand picture, as US oil production firmly shifted into decline. From February 11 to the end of March, the price of crude oil rallied nearly 50%, which played a central role in driving the sharp reversal in sentiment as we ended the first quarter3.
All told, this amounted to quite a circuitous path to what, remarkably, turned out to be a relatively flat quarter.
Portfolio Review
Global Income Builder Class A Shares (w/out sales charge) returned 3.23% during the quarter versus 1.10% for the composite index.4 The market volatility of the first quarter once again provided an opportunity for the Global Income Builder Fund to commit incremental capital during periods of market stress. Despite a significant decline in equity markets, the equity exposure of the fund was modestly higher in both January and February, relative to year-end levels, because our addition of new capital to equities more than offset equity-market declines.
Equity allocations were relatively constant during the latter portion of the first quarter, reflecting some net sales of stocks, as the strong market recovery in late February and March led some investments to approach what we believe to be their intrinsic values. In particular, our credit exposure declined, as a recovery in credit markets in March narrowed some spreads.
Changes in our portfolio take place on the margin and are driven from the bottom up by the valuation levels of the individual investments we hold. Nonetheless, it is remarkable—though perhaps a sign of the times —that we shifted from being, on balance, buyers of risk assets to being sellers of risk assets within just one quarter.
Gold and gold-related investments increased as a percentage of the portfolio, driven by price appreciation in both gold bullion and the gold-mining shares we hold. This was offset somewhat by our modest trimming of certain gold-mining positions. As discussed above, the multitude of central bank interventions, as well as questions regarding their future efficacy, led to a very supportive envi-ronment for gold as a potential hedge.
The best-performing securities during the quarter illustrate this dynamic, with three of the top five being gold bullion and gold-mining stocks. The detractors continued to cluster in the energy area, with certain of our investments lagging the recovery in the price of oil.
Top contributors to performance during the first quarter were Weyerhaeuser Company (WY, Financial), Goldcorp Inc. (GG, Financial), TransAlta Renewables, Inc., gold bullion, and Agnico Eagle Mines Limited.
Over the same time period, top detractors included Plum Creek Timber (PCL, Financial), Mandarin Oriental International Limited (SGX:M04, Financial), Cactus Well-head LLC Term Loan 7.00% 07/31/2020, EP Energy Corp. 9.375% 05/01/2020, and ConocoPhillips.
We appreciate your confidence and thank you for your support.
Sincerely,
First Eagle Investment (Trades, Portfolio) Management, LLC
- Source: Bloomberg
- Source: Bloomberg
- Source: Bloomberg
- Source: FactSet. Effective March 1, 2016, the Fund is compared against a composite index, 60% of which consists of the MSCI World Index and 40% of which consists of the Barclays U.S. Aggregate Bond Index. The Fund believes this composite index provides a useful comparison against the performance of the Fund, which currently invests in both equity and fixed income securities.
The commentary represents the opinion of the Global Income Builder Portfolio Managers as of Marh 31, 2016 and is subject to change based on market and other conditions. The opinions expressed are not necessarily those of the entire firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommenda-tion or an offer to buy or sell or the solicitation of an offer to buy or sell any fund of security.
