There is growing concern that the rally in US stocks may soon fade. The bull market is eight years old, and as of February 28, the S&P 500 Index had risen roughly 11% since the election and 6% since January 1.1 Today, stock valuations are, by many measures, stretched. At the same time, the Federal Reserve appears to be entering a less accommodative phase, and while the Trump admin-istration has announced an aggressive growth agenda, questions remain about the timing and the extent of its execution. Aggregate global debt—sovereign, corporate and personal—is now higher than it was in 2007.2 And in Europe, where populism and nation-alism have continued to proliferate on the heels of the Brexit vote, upcoming elections may heighten strains within the European Union.
None of this means that a crisis is necessarily imminent. At First Eagle, we believe the future is uncertain, and we do not attempt to predict it. We believe stock valuations are generally rich today, but they could continue to get richer. However, in light of the above risks, we think it is wise for investors to be prepared. This is a time for neither complacency nor panic.
Despite the uncertain conditions, we believe investors need, above all, to remain invested. To our knowledge no one has demon-strated a surefire ability to time the markets. Getting out before a downturn is only half the challenge; getting back in before the next recovery is just as critical.
Staying the Course with an All-Weather Fund
We think an all-weather fund can make it easier for investors to stay the course—a fund that has combined participation in rising markets with downside protection in periods of market distress. The First Eagle Global Fund is managed with unwavering adher-ence to the value investment philosophy developed by Benjamin Graham and refined by Warren Buffett (Trades, Portfolio). In all market condi-tions, we aim to invest in stocks that we believe are trading at a discount to their intrinsic value. Our discipline in applying this philosophy and our patience in waiting for such discounts to appear are keys to our approach. They have resulted in a fund that has combined upside potential with downside protection.
Our approach stands on these four pillars:
- Security selection — Emphasizing a long-term perspective, we look for companies with strong balance sheets, sustainable earnings and careful management stewardship. Before buying, we may wait 10 years for a company’s share price to fall to what we consider an acceptable level, and after buying, we may wait another decade for the shares to reach what we believe is their intrinsic value.
- Use of cash & cash equivalents — We believe it is more important to stay true to our convictions than to stay fully invest-ed. When discounted stocks are scarce, we hold the residual cash and wait patiently for volatility to return and better prices to reappear. Used in this way—as deferred purchasing power—cash can serve as a bridge between buying low in volatile markets and selling high in buoyant ones.
- Currency management — Dedicated to investing globally, we believe that a thoughtful approach to currencies—holding some investments in undervalued currencies and selectively hedging positions in overvalued currencies—can help both to pre-serve wealth and, potentially, to generate real returns.
- Gold — Since the time of the Great Depression, the price of gold has risen in periods when stocks declined sharply. We main-tain a position in gold as a potential hedge against market dislocation.
By adhering to this approach, we have kept our down-market capture ratio to an average of 30%3 of the MSCI World Index since the inception of the Global Fund in January 1979.4 Over this same period, we have captured 84%3 of the up-market gains in the MSCI World Index. Since inception, the First Eagle Global Fund has had annualized performance of 13.34%, versus 9.55% for the MSCI World Index, with lower annualized volatility measured by standard deviation of 10.26% for the Fund, versus 14.80% for the Index5 (Exhibit 1).
Reducing investors’ losses in down markets may add to their long-term returns. Helping them stay in the market so they may poten-tially participate in the next upturn can be just as valuable. These are among the key advantages of a low-volatility mutual fund with strongly defensive character—an all-weather fund.
- Source: FactSet. A fund’s down-market capture ratio measures its performance relative to an index in periods when the market declines. Upside capture measures a fund’s performance in up markets relative to the benchmark. Calculated based on quarterly returns.
- Source: FactSet. Data as of 02/28/2017. Performance for periods prior to January 1, 2000, occurred while a prior portfolio manager of the Fund was affiliated with another firm. Inception date shown is when this prior portfolio manager assumed portfolio management responsibilities.
- Source: FactSet. Performance is for Class A shares without the effect of sales charges and assumes all distributions have been reinvested; if a sales charge were included, values would be lower. Date selected assumes purchase at month end. One cannot invest directly in an index.
The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically impact the fund’s short-term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
The commentary represents the opinion of the First Eagle Investment (Trades, Portfolio) Management as of March, 2017 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 recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.
