Manager Update: First Eagle Senior Advisers Year-End Conversation
“Senior Advisers Jean-Marie Eveillard and Bruce Greenwald periodically convene to reflect on the investing landscape with Matthew McLennan, Head of the Global Value Team.”
When this team gets together in one room it is certainly worth listening to. Jean-Marie was the long time Portfolio Manager of the First Eagle Global strategy, dating all the way back to 1979 when it was the SoGen International Fund. Eveillard has also been named International Manager of the Year twice (2001, 2003), as well as receiving a Lifetime Achievement Award from investments rating service Morningstar. Bruce Greenwald is the academic director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School. Bruce is an authority on investing and is affectionately known as “a guru to Wall Street’s gurus.” McLennan is the current Portfolio Manager of the First Eagle Global strategy and boasts over 20 years of investments management experience. McLennan also holds the CFA designation.
This group recently met to discuss the global macro-economic backdrop. They draw differing conclusions, which I summarize below:
- On the End of Quantitative Easing:
- Bruce Greenwald believes the end of QE will not have a big impact on the economy or risk assets.
- However, Matt McClennan believes it may cause profits to mean revert.
- Jean Marie sees this period as a credit bust that is not too different from the last bust in the 30s and that we should be careful to think in post WWII terms.
- Regarding security selection First Eagle Global hopes to counter this by owning companies with strong balance sheets.
- On Europe
- Jean Marie sees one key change in Europe. Neither Germany, France, nor Spain now want a common European government. However, none of them want to leave the Euro either.
- Bruce feels the problem has been largely resolved, that core countries are growing and that Southern Europe will just take more time.
- Matt is worried a problem could crop up in the core of Europe, specifically France, because they are taxing success and running an excessively large government.
- On Asia
- Bruce believes the key problem in emerging markets (now China but likely also Brazil and India) is an overreliance on exports. Other countries are likely to repatriate manufacturing and these countries need to focus on developing domestic markets.
- On Gold
- Jean Marie worries that printing money will eventually result in inflation and that gold is a good hedge against this.
- On investing in this new economic reality:
- Matt believes it is far more meaningful to search for value where it exists in individual business rather than make a sweeping asset allocation call. Finding businesses with hard to replicate business models and pricing power or hard to replicate physical assets allows these businesses to sustain real earnings power. The challenge is finding a valuation margin of safety. He has been trimming positions and sold fully valued positions and now holds some cash awaiting opportunities. He feels it is more useful to hold some cash and wait in order to get an asset at a discount than can be fully invested in “frothy” markets.
- On security selection
- Jean Marie details his mistake selling Burlington Northern in the 1980s when he should have held on to it because it morphed from a Benjamin Graham asset play into what investors now call a Warren Buffett franchise holding because railroads are irreplaceable assets with durable real earnings power.
- Matt tells a story of mistakes they have made. Specifically they failed to recognize the decline or brick and mortar retailing in the case of Barnes and Noble and failed to recognize the value of getting the details right in the case of Carrefour, which had great ideas but poor implementation. He has learned some key success factors that feed into margin of safety beyond price:
- Seeking a sound market position
- Management realism
- Capital structure
Matt Summarizes that in an uncertain macro backdrop he believes he can preserve value by finding individual situations with irreplaceable assets or long-duration businesses that will preserve value in an uncertain landscape.
To read the full discussion please visit, https://www.feim.com/sites/default/files/media/ckeditor/1/lit_forms/Senior_Advisers_Conversation.pdf