First Eagle Global Value Fund 2nd Quarter Shareholder Letter

Discussion of holdings and markets

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Jul 24, 2018
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In the second quarter, the negative consequences of policy tightening in the United States became more evident around the world. Currencies weakened in Brazil and Argentina, for example, as a result of both domestic considerations and the Fed’s rate increases. Turkey’s currency also weakened.

China’s currency slipped, as well, but at quarter’s end it was still overvalued, in our view. For most of the last 20 years, China’s cheap currency facilitated very large trade surpluses and the accumulation of extensive dollar reserves. More recently, the overvalued yuan has put pressure on China’s export growth— pressure that will only ratchet up with the introduction of tariffs in the United States. This will be a challenge for Chinese policy makers, who could face difficult choices. If their solution is to ease fiscal policy, the result could be larger fiscal deficits. If China should also have a current account deficit after decades of current account surpluses, investors could begin to question the strength of the country’s sovereign credit.

We are also paying close attention to developments in Italy, where a populist coalition was able to form a government during the second quarter. Italy is the most indebted of the major European economies, and the arrival of the new government caused a spike in risk perception regarding Italy’s sovereign debt. The effects were also felt more broadly in Europe, where the euro weakened and some vulnerable financial institutions in the region saw their share prices decline.

In the geopolitical sphere, we saw further departures from democratic traditions and a continuing drift toward “strongman” politics in several countries. The leading candidate in Brazil’s upcoming election is currently in jail. Turkey’s presi-dent assumed new powers. And as we noted in the first quarter, China’s president removed his own term limits.

We’ve been casting a cautious eye on these developments. Market confidence generally remains high around the world, unemployment low, and average P/E multiples high, but we’re starting to see some signs of emerging trouble.

Portfolio Review

As the overall market declined in the second quarter, the Global Fund underperformed the MSCI World Index. The First Eagle Global Fund class A shares (without sales charge)* returned –0.16% versus the 1.73% return of the MSCI World Index. On a sector basis, energy, healthcare, materials and telecom-munications services contributed to the fund’s second-quarter performance (in absolute terms), and industrials, precious metals, consumer staples and holding companies detracted. On a regional basis, returns were positive in North America, Pacific and Asia ex-Japan, and negative in developed Europe, Japan and emerging markets.

The top contributors for the second quarter were National Oilwell Varco, Inc., Exxon Mobil Corporation, Nutrien Ltd, Tiffany & Co. and ConocoPhillips.

Rising oil prices accounted for rising share prices at three of these companies, which are all based in Texas: National Oilwell Varco, Exxon Mobil and ConocoPhillips. Eighteen months ago, few people imagined that the oil price would recover, and, as a result, few companies invested to increase production. The low price of oil dissuaded companies from increasing supply while, at the same time, it stimulated demand. In this way, the cure for low prices turned out to be low prices.

Outside the energy sector, Nutrien (NTR, Financial)—a Canadian fertilizer company formed from the merger of Potash Corporation of Saskatchewan and Agrium—was another strong performer. During the quarter, the potash market firmed somewhat, but the strength of the stock also reflected investors’ growing comfort with the prospects of the merged entity. Nutrien has talked about $500 million of synergies from the merger, and it has bought back stock at the bottom of the cycle—a measure we support. The company also received a good price for an affiliate it sold in Chile—a potash company that also controls a lithium mine.

Tiffany (TIF, Financial), the New York City-based luxury jeweler, posted solid quarterly numbers for store traffic and same-store sales. The company has benefited from consumers’ growing preference for large, branded jewelers over small local shops.

The largest detractors for the quarter were FANUC Corpora-tion, gold bullion, Cielo, HeidelbergCement Group, and 3M.

FANUC (TSE:6954, Financial), based in Japan, is a leading global producer of robots and the servo -motors used in robots. Its stock lost ground after it announced conservative earnings guidance. The company has a history of conservative guidance, and we don’t see any struc-tural negatives in its business. We do, however, keep our eye on possible changes in the company’s competitive environment. A Chinese competitor intends to expand robot production, and another competitor may be further ahead in the development of robots that can collaborate with humans. Nonetheless, we still believe FANUC’s market position is very strong.

The trading price of gold tends to be negatively correlated with long-term real interest rates and the value of the US dollar. When the dollar has been strong, the dollar value of gold has tended to fall, as it did in the second quarter. Historically, when US interest rates were falling in true crises, gold generally rallied. Weakness in the price of gold detracted from the Fund’s quarterly performance.

Cielo (BSP:CIEL3, Financial) is the leading merchant acquirer for Visa credit cards in Brazil. As the Brazilian economy has weakened, some smaller retailers have gone out of business, which has created a head-wind for the company’s acquisition of business. However, we remain comfortable with this investment. Cielo controls a major share of all transactional volume in Brazil—a market where credit card participation is less than half the level of the United States.

Across Europe, as a reflection of concerns about Italy and the decline in the euro, we saw weakness in construction companies and other economically sensitive names, including HeidelbergCement.

Overseas Fund

The First Eagle Overseas Fund Class A shares (without sales charge)* returned −1.92% versus the MSCI EAFE Index of −1.24%. Sectors contributing to quarterly performance included energy, healthcare, and materials, and sectors detracting included industrials, information technology and consumer staples. On a regional basis, North America, devel-oped Asia ex-Japan and Pacific contributed to returns, and developed Europe, Japan and emerging markets detracted.

The top contributors for the quarter were Nutrien Ltd, Impe-rial Oil Limited, KDDI Corporation, HOYA Corporation and TechnipFMC plc.

The largest detractors for the quarter were FANUC Corpo - ration, gold bullion, Cielo, HeidelbergCement Group and Keyence Corporation.

U.S. Value Fund

The First Eagle U.S. Value Fund Class A shares (without sales charge)* returned 1.30% versus the 3.43% return of the S&P 500 Index. Sectors contributing to quarterly performance included energy, information technology and consumer discre-tionary, and sectors detracting included industrials, precious metals and consumer staples.

The top contributors were National Oilwell Varco, Inc., Tiffany Co., ConocoPhillips, Microsoft Corporation and Exxon Mobil Corporation.

The top detractors were gold bullion, Alleghany Corporation, 3M, Deere & Company, and Oracle Corporation.

We appreciate your confidence and thank you for your support. First Eagle Investment (Trades, Portfolio) Management, LLC

The commentary represents the opinion of the Global Value Team portfolio managers as of June 30, 2018, 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 purposes 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 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.