First Eagle Global Fund commentary for the fourth quarter 2014.
First Eagle Global Fund: Market Overview
In the fourth quarter of 2014, the MSCI World rose 1.1% while in the U.S. the S&P 500 Index increased 4.9%. In Europe, the German DAX decreased -0.9% and the French CAC 40 index declined -7.3% during the quarter. The Nikkei 225 index decreased -1.3% over the period. Crude oil fell 42% to $53 a barrel, and the price of gold declined 1.9% to $1,184 an ounce by year-end. The U.S. dollar rose 9.2% against the yen and 4.4% against the euro.
As 2014 drew to a close, investors began to reassess the outlook for global economic growth. Signs of a slowdown in China in particular contributed to a steep price drop for many commodities. Beyond the declines in oil and gold, we have also seen weakness in agricultural commodities and other metals.
First Eagle Global Fund: Impact of declining oil prices
Declining oil prices are a positive for the broader world economy, especially when coupled with lower interest rates and further central bank asset purchases, which are also stimulative in nature. Despite what could be perceived as some bright spots, we continue to have longer-term secular concerns, particularly with respect to the structural fiscal imbalances that have shown few signs of resolving in the past year.
Debt levels remain generationally high around the world and the forces of disinflationary change—such as technological substitution for human capital—are only accelerating. Add to that mix the rising geopolitical risks we have seen emerge this past year in Russia, China and the Middle East where these countries are arguably moving away from the European and American policy agendas towards increasingly populist and nationalistic global movements.
As we have noted previously, high levels of debt alongside weak nominal economic growth mean that governments will ultimately need to choose between two unattractive options: raising taxes or reducing entitlements. If political populism constrains the ability to undertake tough choices, then we will likely be stuck with financial repression and low real rates for some time in an effort to contain the real level of government debt.
Against this volatile backdrop, we continue to construct our predominantly equity portfolio to be all weather in nature. Despite the concerns above, bottom up opportunities have been scarce not abundant. As such, we are patiently sitting on cash awaiting what we feel are broader bargains and in a rich market are selectively attempting to focus on investments that could remain resilient in the face of cyclical distress either because their end markets are already depressed or because they are less economically sensitive in nature and cheap due to some transient concerns. At the same time, we will retain our allocation to gold as an ongoing potential hedge against the frailties of the financial architecture.
First Eagle Global Fund: Portfolio review
We ended 2014 with a positive return, although our exposure to hard assets such as gold hurt our relative performance. Our strategy continues to reflect our focus on seeking a margin of safety and avoiding permanent capital impairment.
Over the past year we found selective examples of resilience. Some cyclical industries where we found pockets of value included insurance, agriculture, and most recently, energy but our moves here have been tentative thus far. In the universe of less economically sensitive businesses, we have found opportunities in media and telecom and consumer staples which have been impacted by competitive or end market issues.
Positive contributors to performance for the quarter included Oracle Corporation, 3M and Cintas, which all had strong earnings results. These businesses are examples of what we would refer to as corporate staples with somewhat recurring revenues and highly cash flow generative business models. Their resilience was rewarded by the market in an environment of declining global growth expectations. Additionally, Omnicom Group and Comcast round out the top five contributors for the quarter.
The top detractors for the quarter included energy companies hurt by the decline in oil prices: Cenovus Energy and Canadian Natural Resources. Both businesses have invested heavily in their core infrastructure in recent years and have long duration assets that we believe should benefit from a normalization of oil prices, which is why we remain investors in these names. Another detractor was Sanofi, a pharmaceutical company, whose shares declined following disappointing guidance for its diabetes franchise as well as the removal of its CEO. The diabetes franchise only accounts for small portion of Sanofi’s highly diversified revenue stream and we took the opportunity to add modestly to our position. Total SA, another energy stock, and Goldcorp were the other major detractors for the quarter.
We appreciate your confidence and thank you for your support.
First Eagle Investment Management, LLC
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. Past performance data through the most recent month end is available at www.feim.com or by calling 800.334.2143. The average annual returns for Class A Shares “with sales charge” of First Eagle Global Fund give effect to the deduction of the maximum sales charge of 5.00%.
*The annual expense ratio is based on expenses incurred by the fund, as stated in the most recent prospectus.
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 holdings mentioned herein represent the following percentage of the total net assets of the First Eagle Global Fund as of December 31, 2014: Oracle Corp. 2.10%, 3M Company 1.34%, Cintas Corp. 1.04%, Omnicom Group Inc. 1.14%, Comcast Corp. 1.90%, Cenovus Energy 0.83%, Canadian Natural Resources 0.83%, Total SA 0.71%, Sanofi 0.78% and Goldcorp Inc. 0.69%. The portfolio is actively managed and holdings can change at any time. Current and future portfolio holdings are subject to risk.
The commentary represents the opinion of the Global Value Team Portfolio Managers as of December 31, 2014 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