First Eagle Fund of America commentary for the fourth quarter 2014.
First Eagle Fund of America: Quarterly commentary and outlook
Despite a challenging fourth quarter, 2014 marked another solid year for Fund of America and the U.S. equity markets. The Fund delivered solid absolute returns. We achieved this result despite the continued absence of utilities and financials from our portfolio, which were two of the best performing sectors, and also a significant exposure to the energy-related companies, which hurt both our fourth-quarter and full-year performances. Fortunately, the balance inherent in the portfolio construction process once again proved its worth, as we were able to largely recover from a difficult period in early October. The foundations of our process have always been the focus on companies undergoing positive corporate change, with strong free cash flow and outstanding management. We recognize that our stock specific approach to investing can lead to periods in which sector allocation may hurt us, but over time, we believe our approach provides balance and resiliency.
As we enter 2015, we face a complex and challenging investment landscape: despite solid U.S. growth, the rest of the world appears to be decelerating; QE is no longer a factor domestically but may soon enter the picture in Europe, and the Fed professes to be “patient” with regard to the need to raise rates. Separately, the breathtaking collapse in energy prices will surely have consequences, positive and negative, that will take awhile to play out.
Last year, we raised the prospect that markets could undergo a period of consolidation after several years of strong performance. While that turned out to be true for small cap stocks, the S&P 500 Index achieved its third straight year of double digit performance and sixth straight positive year. Nevertheless, we continue to believe the broader market could undergo a period of consolidation in 2015. Counterbalancing this potentially negative influence on the market is a continuation of the same factors we highlighted last year: generally high levels of corporate cash, significant unallocated private equity commitments, abundant availability of corporate debt at low rates and attractive terms, and the unprecedented prominence of shareholder “activists.” Due to these factors, 2014 saw resurgence in M&A activity, which we believe will continue in 2015, along with a strong flow of corporate spinoffs, divestitures and buybacks.
As we enter this year, the portfolio has similar prospective free cash flow yield of about 7% as we had last year, which we believe compares very favorably with the alternative of the U.S. “risk-free rate” at about 2%, not to mention the enticing yields in the capitalist hotbeds of France, Spain and Italy. Whether the year ahead brings increased volatility, as we believe likely, or more of the same, our investment team remains poised to identify great stories of corporate change, with strong free cash flow and outstanding management.
We consider it a privilege to invest on your behalf and thank you for your continued support.
First Eagle Investment Management
First Eagle Fund of America: Top 5 Contributors
- Lowe’s raised its guidance for 2014 and also provided long term targets that were better than expected.
- Sealed Air moved up on expectations that the company should benefit from lower oil prices.
- Seagate Technology reported better than expected earnings driven by increased demand for PC and Cloud storage products. The company also announced an increase in its dividend.
- Hewlett-Packard Company
- Avis Budget Group, Inc.
First Eagle Fund of America: Top 5 Detractors
- LyondellBasell Industries, Occidental Petroleum and Phillips 66 traded down on concerns over the decline in the price of oil.
- Eastman Chemical Company
- Avis Budget Group, Inc.