Headlines proclaimed the sharp decline in global stock markets that commenced in January 2016, but in fact the downturn had begun long before the headlines appeared. While the S&P 500 Index finished 2015 with a modest increase, the market’s perfor-mance was far from uniform. The 1.38% total return of the index can be broken into two components: a 3.3% positive return from the top 10 contributors and a 1.93% negative return from all the other stocks in the index. In other words, the top 10 contributors accounted for 240% of the total market return of the S&P 500 Index in 2015—far and away the largest percentage the top-10 stocks have contributed since the Global Credit Crisis (Exhibit 1).
The distortion presented in Exhibit 2 (next page) tells the same story from a different angle. By the end of 2015, roughly 30% of stocks in the S&P 500 Index were trading above their 200-day moving average. In other words, the great majority of stocks were losing ground.
Why did the market narrow so dramatically? In 2015, as in the two prior years, we believe investors’ relentless pursuit of growth stocks and impatience with value stocks were the key drivers. As corporate growth became quite scarce, a small group of stocks scored strong gains while most other stocks in the index languished.
In our view, the narrowing that occurred in 2015 should have sounded an alarm for investors in passive funds—particularly those tracking capitalization-weighted indices. As a few stocks climbed to astronomical heights, passive funds were generally obliged to buy them at higher and higher prices. An investor who overpays for a security faces the very serious risk of permanent impairment of capital.
Market narrowing may indicate risky conditions for passive investors. The trend that appeared in 2015 may have reminded some investors of the “Nifty 50” stocks that predominated in the 1970s. The Nifty 50 were large-cap US growth stocks that were consid-ered solid buy-and-hold investments by a large number of investment managers. Their prices were driven higher and higher, and when the market crashed in 1973, the overvalued Nifty 50 suffered a steep decline.
For active managers who focus on fundamental stock selection and seek downside protection, last year’s market narrowing had a very different impact. For First Eagle, it was a source of opportunity. We seek to purchase shares that are trading at a discount to our estimate of their intrinsic value, and when the market neglected the great majority of stocks, some fell to price levels that inter-ested us. In 2015 we were able to buy shares of companies that had been on our wish list for some time.
We endeavor, above all, to protect our clients’ purchasing power. Aware of the underlying frailties in the markets, we focus on building an all-weather portfolio that can potentially take advantage of declining—or narrowing—markets, as well as rising ones. We believe our form of active, benchmark-agnostic value investing may help meet the challenges of all stages of the market cycle.
There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates.
Investment in gold and gold related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader equity or debt markets.
The principal risk of investing in value stocks is that the price of the security may not approach its anticipated value or may decline in value. All investments involve the risk of loss.
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. Past performance does not guarantee future results.
The Standard & Poor’s 500 Index is a widely recognized unmanaged index including a representative sample of 500 leading companies in leading sectors of the U.S. economy and is not available for purchase. Although the Standard & Poor’s 500 Index focuses on the large-cap segment of the market, with approximately 80% coverage of U.S. equities, it is also considered a proxy for the total market. The Standard & Poor’s 500 Index includes dividends reinvested. One cannot invest directly in an index.
Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this and other information about the Funds and may be obtained by contacting your financial adviser, visiting our website at www.feim.com or calling us at 800.334.2143. Please read our prospectus carefully before investing. Investments are not FDIC insured or bank guaranteed, and may lose value.
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