First Eagle Fund Of America commentary for the second quarter ended June 30, 2015.
First Eagle Fund Of America Quarterly Commentary and Outlook
In the second quarter of 2015, Fund of America delivered a positive return, modestly ahead of the broader market (S&P 500 Index) as well as the most commonly referenced mid cap indices.
Consistent with our view that the market is in a period of consolidation, equity markets in the first half of the year have been buffeted by myriad of macro headwinds and generally have been flat to slightly up. We continue to believe that macro issues (Greek debt, China’s faltering economy and equity volatility, the Russia/Ukraine conflict, and Middle East violence) could weigh on the market in the second half of 2015. Even with these substantial challenges, we remain generally optimistic on the relative attractiveness of the portfolio.
As we reflect on Q2, we observed a tale of two portfolios. Many of our names performed well, particularly in the Health Care and Materials sectors and we also benefitted from an increasingly active M&A environment as two of our companies, Omnicare and AOL, announced plans to be acquired. However, we also suffered large declines in values in some of our technology holdings and in travel related companies.
We continue to believe that the portfolio remains attractive on an absolute basis and relative to many other assets classes. Our companies are generally growing free cash flow and their respective management teams are working to maximize shareholder value by acting as good stewards of that cash flow.
On the new idea front, we continue to add new ideas to the portfolio. When considering our focus on corporate change opportunities, the environment is ripe with management change, industry structures evolving, and companies rethinking capital allocation. In addition, we continue to find hidden value in many places that other investors don’t see when running standard investment screens.
As we look to the second half of the year, we see potential moderate economic expansion even in the likely context of slightly rising rates. While we suspect the markets could continue to demonstrate a consolidation pattern (up or down mid-single digit percentage), we could continue to potentially benefit from a high level of corporate M&A activity.
We thank you for your ongoing support.
First Eagle Investment Management
First Eagle Fund Of America – Top 5 Contributors
Halozyme Therapeutics announced that it has entered into a global collaboration and license agreement with AbbVie for the development and commercialization of therapies by combining the company’s ENHANZE technology platform with AbbVie’s proprietary compounds. This could have a very material increase in the company’s future royalty stream.
Valeant raised its earnings outlook for 2015 after completing its acquisition of Salix Pharmaceuticals. The company also received FDA approval for Salix’s irritable bowel syndrome drug, Xifaxan.
Eastman Chemical Company reported a solid quarter and slightly raised its full year earnings guidance. Additionally, a competitor’s move to close an acetate tow plant left investors more confident that Eastman could be able to hold margins steady despite lackluster demand.
Sealed Air Corporation released strong 1st quarter results despite the incremental currency headwinds during the quarter, raised its forecast for organic EBITDA growth for 2015 and issued strong long-term guidance through 2018. The company also completed a debt refinancing that increased its flexibility to buy back shares. Subsequent to quarter-end, Sealed Air announced a $1.5 billion share repurchase authorization.
LyondellBasell Industries continues to benefit from strong global operating rates in its core chemical franchises as well as the spread between crude oil linked selling prices and cheap natural gas feedstocks. The company continues to buy back approximately 10% of its outstanding shares each year.
First Eagle Fund Of America – Top 5 Detractors
Avis Budget Group declined sharply due to concerns over pricing and demand trends in the industry. As their competitor, Hertz recovers from an over-fleeted posture, we believe all industry participants could benefit. We also believe Avis is capable of repurchasing 10% of its outstanding shares before year-end 2016. Over the longer term, we continue to see opportunities for Avis to expand margins as sales grow.
Micron Technology reduced its guidance for the next several quarters due to a continued deterioration in the DRAM (Dynamic Random Access Memory) market driven by weak PC sales and poor execution of their 20nm mode transition. We still hold shares of Micron as we believe the weakness in end markets and company earnings represent temporary problems, not structural issues. When we bought Micron, we expected that the consolidation of the DRAM market down to three leading manufacturers would lead to more consistent and higher returns as producers would exert supply discipline to avoid the boom-bust cycles experienced in the past. While DRAM manufacturers have been disciplined in adding capacity, weakness in PC demand has led to excess supply and DRAM pricing to fall considerably. We believe that DRAM demand should recover and that suppliers will continue to restrict supply growth, leading to potentially better pricing and profitability for Micron and the industry.
Pitney Bowes stock, despite solid execution, has pulled back after our initial purchase in 2013. We believe the company is executing well on its turn around and will begin to accelerate its capital return program in coming quarters.
Lowe’s Companies traded down on lower than expected earnings from a few building suppliers and on mixed housing data. We believe that housing continues to enjoy a very favorable multi-year outlook, even in the face of modest interest rates. After changing a number of operational executives, Lowe’s is focused on execution, as well as its share repurchase program over store growth. Wyndham Worldwide declined in the second quarter along with a number of hotel stocks that were strong performers in the first quarter of 2015. The company continues its shift towards an asset light lodging company and is returning the majority of its free cash flow to shareholders.
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