Forbes interview with Giorgio Caputo and Sean Slein, First Eagle Investment Management.
First Eagle: Four Very Different Ideas For Yield With Value
Giorgio Caputo: We’ll start off with a brief overview of the First Eagle Global Income Builder Fund (FEBAX) and how it’s currently positioned. Then we will review a few investments.
Seth Klarman: Investing Is Art First, Craft Second And Science Third
The First Eagle Global Income Builder Fund is a growth and income fund managed by a team led by Sean Slein, Rob Hordon, Ed Meigs and me, in which we seek to grow the principal of the fund and pay an attractive dividend. Our goal is to increase the principal over time in real terms. In order to do this, we invest across the capital structure in equities, debt and globally.
A major theme for income-oriented investors today is where to find yield in a very challenging environment.
Forbes: For sure challenging.
Caputo: You have sovereign bond yields that are quite paltry today. And central banks that are actively trying to push them down further, so there’s a great temptation to reach for yield. The way that we try to avoid that is by having very strict valuation criteria where we insist on what we feel is a margin of safety in all investments we pursue for the First Eagle Global Income Builder Fund, so we won’t make a purchase based solely on yield.
Today, many traditional fixed income investments like government bonds, as well as REITs and utilities are at very high valuations, so we think timing is not ideal to invest in long-term fixed income or investments with a lot of duration. So currently, we’re looking for value elsewhere.
One area we have found value is in the credit market, where there’s been a pretty pronounced pullback — particularly towards the end of last year. Sean will talk a little bit about that and the opportunity in high yield and about a few credit investments that we like. And then I will share one or two equities that we also find attractive.
Sean Slein: As Giorgio said, we are seeing value in the credit market. We want to avoid duration risk, and think that credit fundamentals remain attractive in a slow growth world.
Companies continue to manage their balance sheets and remain chastened by their near-death experiences of 2008. As a result, many are prudently allocating capital and essentially managing with a little bit of extra cash on the balance sheet as well as ensuring access to committed credit facilities. I’ll detail a few investments that we believe are good examples.
One of our fixed income investments is issued by ACCO Brands Corp., an office supply company that purchased the office supply subsidiary of MeadWestvaco a few years back. This transaction is really indicative of what we’ve seen in M&A since the le veraged credit markets reopened in March of 2009.
Specifically, we’re seeing more strategic combinations of companies instead of the financially motivated leveraged buyout activity that dominated the years leading up to the financial crisis. These types of combinations tend to be credit neutral to positive: two companies in the same space that combine, rationalize capacity, cut costs and potentially generate an enhanced free cash flow yield to total debt. And that’s essentially what ACCO did when it acquired the MeadWestvaco business.
It may be a fading business. We understand that. But ACCO has been able to de-lever from close to six times leverage, when the deal was consummated three years ago, to a little less than 3.5 times today. And it does generate a fair amount of free cash. Probably 12% of total debt per annum is free cash, so it could hypothetically pay its debt off in eight years.
See full PDF here via First Eagle.