Jean-Marie Eveillard was the Portfolio Manager for the First Eagle Global, Overseas, Gold, U.S. Value and Overseas Variable Funds, where he built one of the most successful long-term performance records in the investment business. On March 31, Mr. Eveillard transitioned to a Senior Advisory role at First Eagle Funds. In addition, we spoke with Abhay Deshpande, a Portfolio Manager for the First Eagle Global, Overseas, Gold and U.S. Value Funds.
We spoke with Deshpande and Eveillard on March 31, thus earning the distinction of having the final interview with Eveillard prior to his transition.
Your funds have the flexibility to invest in both debt and equity. Where are you seeing the better opportunities right now – in corporate debt or the equity markets?
We are looking across the capital structure, including looking at high yield opportunities. High yield defaults typically peak 18 months after issuance peaks, and we are now approximately at that point in time.
A lot of the high yield market is truly junk, including much of the paper issued through leveraged buyout transactions that were orchestrated by the private equity industry. These transactions were done at elevated EBITDA levels, and those companies will not be able refinance their debt based on current enterprise valuations. Investors must be very careful about the quality of any high yield debt they consider.
We currently own the bonds of Boston Properties. Our approach is to avoid situations that are likely to end up in reorganization. The bankruptcy courts are clogged and the time value of these investments is very important. Interest accrual on most debt instruments stops when a company files for bankruptcy protection. We target yields to maturity of 12%-15% in our investments, not the higher returns that might be available to investors willing to purchase distressed securities and deal with restructuring.
You maintain a large position in Berkshire Hathaway. How do you feel about Buffett’s latest investments – particularly his preferred stock position in GE? Are you confident that GE will be able to continue to have adequate access to the capital markets to refinance its debt as it matures?
We looked at GE ourselves. The credit arm of GE is thinly capitalized and is faced with a significant duration mismatch between its assets and its liabilities. It is highly dependent on the short-term commercial paper market, and this is very troubling to us. But, if you believe GE is a survivor, then its industrial business is worth $15-$20 per share just by itself. In this case, the market is betting that GE Capital is insolvent, or worse.Â
Berkshire’s investment is not a bad decision, since it came with warrants. At the very least, Buffett will get his money back, plus 10% annually. His risk is a complete wipeout of common shareholders that would eat into his preferred position. A lot would have to go wrong for that to happen.
Looking back at your investment in American Express, what is your assessment of the cause of their declining valuation?
We foresaw everything correctly when we made our investment. We suspected profitability would go to zero and than non-performing loans could rise to over 10%. We didn’t realize, however, that nobody else saw this coming. The Street was expecting $3/share earnings for 2009. We made the right decision by avoiding all the other financial institutions. We have a mark-to-market loss in American Express, but our expectations for future earnings have not changed very much.
Continue on to read the entire article
Robert Huebscher
www.advisorperspectives.com
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We spoke with Deshpande and Eveillard on March 31, thus earning the distinction of having the final interview with Eveillard prior to his transition.
Your funds have the flexibility to invest in both debt and equity. Where are you seeing the better opportunities right now – in corporate debt or the equity markets?
We are looking across the capital structure, including looking at high yield opportunities. High yield defaults typically peak 18 months after issuance peaks, and we are now approximately at that point in time.
A lot of the high yield market is truly junk, including much of the paper issued through leveraged buyout transactions that were orchestrated by the private equity industry. These transactions were done at elevated EBITDA levels, and those companies will not be able refinance their debt based on current enterprise valuations. Investors must be very careful about the quality of any high yield debt they consider.
We currently own the bonds of Boston Properties. Our approach is to avoid situations that are likely to end up in reorganization. The bankruptcy courts are clogged and the time value of these investments is very important. Interest accrual on most debt instruments stops when a company files for bankruptcy protection. We target yields to maturity of 12%-15% in our investments, not the higher returns that might be available to investors willing to purchase distressed securities and deal with restructuring.
You maintain a large position in Berkshire Hathaway. How do you feel about Buffett’s latest investments – particularly his preferred stock position in GE? Are you confident that GE will be able to continue to have adequate access to the capital markets to refinance its debt as it matures?
We looked at GE ourselves. The credit arm of GE is thinly capitalized and is faced with a significant duration mismatch between its assets and its liabilities. It is highly dependent on the short-term commercial paper market, and this is very troubling to us. But, if you believe GE is a survivor, then its industrial business is worth $15-$20 per share just by itself. In this case, the market is betting that GE Capital is insolvent, or worse.Â
Berkshire’s investment is not a bad decision, since it came with warrants. At the very least, Buffett will get his money back, plus 10% annually. His risk is a complete wipeout of common shareholders that would eat into his preferred position. A lot would have to go wrong for that to happen.
Looking back at your investment in American Express, what is your assessment of the cause of their declining valuation?
We foresaw everything correctly when we made our investment. We suspected profitability would go to zero and than non-performing loans could rise to over 10%. We didn’t realize, however, that nobody else saw this coming. The Street was expecting $3/share earnings for 2009. We made the right decision by avoiding all the other financial institutions. We have a mark-to-market loss in American Express, but our expectations for future earnings have not changed very much.
Continue on to read the entire article
Robert Huebscher
www.advisorperspectives.com
[/b]
