First Eagle Global Fund: Helping Investors Stay Invested by First Eagle Investment Management
Investors in the First Eagle Global Fund have generally stayed invested longer than the average mutual fund investor.1 We believe our focus on avoiding the permanent impairment of capital is one of the reasons. Since inception in 1979,2 the Global Fund has had a downside capture ratio of 39%.3 In our view, investors who are spared the full brunt of a bear market are more likely to stay invested, which has historically resulted in capturing attractive returns (Exhibit 1).
First Eagle Global Fund
For more than two decades now, well-known research by Dalbar has reconfirmed that the average investor in equity mutual funds has generally realized much smaller gains than the portfolio itself delivered.
Average investors have often done themselves harm—typically by selling equity mutual funds into bear markets, when prices are depressed, and later buying into bull markets at high prices. Fear of loss is a very powerful force. Daniel Kahneman, a founder of behavioral finance, has shown that investors’ risk aversion is roughly twice as powerful as their desire for investment gain.4 And, of course, the damage from a bear market is not just psychological: To recoup a 20% loss, a fund has to regain 25% just to break even, and to recoup a 50% loss, it has to rise 100%. (Exhibit 2)
In market downturns, advisors may spend hours encouraging investors to resist the urge to sell—reminding them of the rational asset-allocation decisions they made in calmer times and using data from past market recoveries to strengthen their resolve. But there may be a simpler and less painful way to help investors stay invested: lower-volatility mutual funds with strongly defensive character.
At First Eagle, we do not deliberately try to curb short-term market turmoil, but as a by-product of our investment approach, we have, historically, avoided the full severity of market downturns. First Eagle Global Fund is a go-anywhere mutual fund that invests primarily in equities but also holds cash,5 bonds and gold—the latter as a potential hedge against severe market dislocation. We are disciplined, benchmark-agnostic value investors who buy shares that are trading at what we consider a discount to their intrinsic value. In a roaring bull market, when shares of this kind become scarce, our cash holdings generally grow. In a bear market, our holdings of gold and gold-related investments serve as potential ballast in the portfolio, and our cash provides purchasing power. Since we tend not to own growth stocks, which we rarely deem to be attractively priced, we have avoided the severe losses that may have followed when these companies fell from favor.
By adhering to this defensive approach, we have kept our down-market capture ratio to an average of 39% of the MSCI World Index since the inception of the Global Fund in January 1979 (Exhibit 3).6 Over this same period, we have captured 75%7 of the up-market gains in the MSCI World Index.8 Since inception in January 1979, the First Eagle Global Fund has had annualized performance of 13.35%, versus 9.50% for the MSCI World Index, with low annualized volatility (standard deviation) of 10.34% for the Fund, versus 14.92% for the Index.9
Reducing investors’ losses in down markets can potentially add to their long-term returns. Helping them stay in the market so they may potentially participate in the next upturn can be just as valuable. These are among the key advantages of a low-volatility mutual fund with strongly defensive character.
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