R E P R I N T E D
F R O M
F E B R U A R Y
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Buying Income Within a Margin of Safety
ROBERT HORDON, CFA, has been Portfolio Manager of the First Eagle Global
Income Builder Fund since its inception in 2012, and he joined First Eagle Investment
Management in 2001 as a Risk Arbitrage Analyst, covering a wide range of eventdriven investments. In addition to his portfolio management duties, he is currently
a senior analyst on the First Eagle Global Value Team, which he joined in 2008. Prior
to joining First Eagle Investment Management, Mr. Hordon worked in the equity
research department of Credit Suisse First Boston. Mr. Hordon received a BA in
politics from Princeton University and his MBA from Columbia Business School.
EDWARD MEIGS, CFA, has been Portfolio Manager of the First Eagle Global
Income Builder Fund since its inception in 2012, and he joined First Eagle Investment
Management in September 2011 as a Portfolio Manager of the First Eagle High Yield
Fund. Prior to joining the firm, Mr. Meigs was a portfolio manager of the Dwight
High Yield strategy at Dwight Asset Management Company LLC. Previously, he
spent four years at Mount Washington Investment Group as a high yield portfolio
manager. Prior to that, he served as Vice President at Falcon Asset Management.
Mr. Meigs began his career at Wheat First as a credit analyst. Mr. Meigs received
his AB from Occidental College and his MBA from the Kellogg Graduate School of
Management at Northwestern University.
SECTOR — GENERAL INVESTING
TWST: Please start by telling us about First Eagle
Investment Management.
Mr. Hordon: First Eagle Investment Management is a
privately held firm. We have approximately $100 billion in assets
under management. The vast majority of our assets are concentrated
in a handful of funds that follow an absolute-return-oriented, longterm value approach with a clear focus on avoiding permanent
impairment of capital. I would describe us as cautious bottom-up
investors who require a margin of safety in price, balance sheet
and business quality across all of our holdings.
TWST: The First Eagle Global Income Builder Fund
has two sides: the equity side and the fixed income side. Why
did you decide to combine those two pieces in one fund?
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Mr. Hordon: The fund was created in response to
feedback that we received from clients who were interested in an
investment option that had a material income component in
addition to all the other attributes that our clients typically look
for in our funds. We saw this as reflecting a structural change in
the investment preferences or requirements of our client base. As
the world ages, and more and more savers approach or enter
retirement, there is a shift in emphasis from capital accumulation
toward capital distribution. At the same time, we now live in this
ultralow interest rate environment where traditional approaches
to generating income — through investments such as CDs or
government bonds — have become relatively ineffective.
Although our funds have never had a specific income
mandate, we have always been investors in high-dividendE
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MONEY MANAGER INTERVIEW ——————— BUYING INCOME WITHIN A MARGIN OF SAFETY
paying stocks. That stems from our preference for cashfor long-term capital appreciation. The fixed income side is there
generative businesses that trade at low valuations and are run
to anchor the income stream that is distributed to owners of the
by prudent capital allocators who believe in returning capital
fund, although income generation is not guaranteed.
to shareholders, either through dividends or share buybacks.
So as such, the allocation of the fund is not done from a
We have also always been investors across the capital
top-down basis. We don’t predetermine that we are going to have
structure and have always looked
a specific split between equities and
to buy debt instruments that might
fixed income. We generally spend
Highlights
offer an attractive, relatively
around 50% in equities, hold some
secure return with lower downside
cash as deferred purchasing power
Robert Hordon and Edward Meigs discuss the
risk potential.
and also some dividend-paying gold
First Eagle Global Income Builder Fund and
So in 2011, First Eagle
mining stocks, perhaps some gold
their investment philosophy. The fund invests
Investment Management recruited
bullion, and then the balance in
in both equity and fixed income, and Mr.
Ed and his partner, Sean Slein,
fixed income instruments.
Hordon and Mr. Meigs use a bottom-up
and the other members of what is
TWST: Do holdings in
process to select investments. In addition,
now the First Eagle credit team
one part of the fund impact
they look for securities that generate income
with the idea that they would help
holdings in another part, or are
within a margin of safety in price, balance
us identify attractive margin of
the decisions made separately?
sheet and business quality. Mr. Hordon and
safety opportunities within fixed
Mr. Meigs: We certainly
Mr. Meigs manage the fund with a benchmarkincome, especially high yield,
are going to be cognizant of industry
agnostic position and aim to buy securities at
which is their area of expertise.
exposure. We aren’t operating in
a discount to what they believe the business is
They shared our focus on
separate silos, and we would want to
actually worth.
fundamental bottom-up research
be aware of industry exposure in
Companies discussed: ACCO Brands
as well as our emphasis on careful
each portion. In general, it is a little
Corporation; MeadWestvaco Corporation;
valuation work. They also had a
bit of apples and oranges because of
Mandarin Oriental International Limited;
demonstrably successful track
the nature of equities versus fixed
Jardine Matheson Holdings Limited; Plum
record applying this value-based
income, but yes, we are aware of
Creek Timber Co. and Microsoft Corporation.
approach and have done a solid
selections on both sides when we
job
preventing
permanent
make decisions.
impairment of capital in periods
Clearly, there’s only a set
of volatility, especially the financial crisis in 2008.
pool of assets. So if we do determine, as a team, that we are
TWST: What is your actual process or strategy for
seeing more value in fixed income classes, then the equity
deciding what goes into the portfolio? How do you come to
percentage may come down a little bit and vice versa. If we are
that decision?
not seeing value in fixed income areas, and we are seeing
Mr. Meigs: As Rob mentioned, everything really is
value on the equity side, then that percentage would increase.
done from a fundamental bottom-up basis, either on the
On the other hand, if we were in a situation where we are
equity side or the fixed income side. We like to say that the
viewing all asset classes as overvalued, we probably would
securities are considered because they generate income, but
defer to a larger cash position.
“On a case-by-case basis, we are able to find dividend stocks — often in
more cyclical companies, holding companies or out-of-favor sectors —
where we think the dividend yields are high, but the valuations are more
reasonable. That has been an important theme for us.”
they will only be purchased because they have an appropriate
margin of safety. The fund has a dual mandate of seeking
current income generation but, at the same time, providing
capital appreciation over the long run.
So you’ve got the two pieces. The equity portion should
provide a certain level of income, and it should provide the basis
TWST: You have about 5% cash right now. What do
you evaluate when you’re looking at how much cash to hold?
Mr. Hordon: Cash can be thought of as the residual of
our bottom-up approach. To the extent we are finding attractive
value opportunities, we will be investing the cash, and to the
extent that’s more difficult, the cash will tend to build. This
MONEY MANAGER INTERVIEW ——————— BUYING INCOME WITHIN A MARGIN OF SAFETY
actually relates to what Ed was just talking about in terms of the
broader asset-allocation question. In periods of distress when risk
assets are attractively valued, you would likely see the fund own
more risk assets, especially equities. The idea with cash is that it
is available to be deployed in periods of real dislocation in the
market and to take advantage of that.
On the other side, in periods where risk assets have
become expensive, where there is a lot of complacency in the
market or a lot of optimism priced into securities, you could
see the cash portion build, and you could see the higherquality fixed income part of the portfolio also grow. It’s really
a reflection of the extent to which we’re finding opportunities
in risk assets in the market.
TWST: On the fixed income side, where are you
seeing some interesting opportunities right now and why?
Mr. Meigs: We really think there is more value in
credit right now, and we’ve been concerned about taking
duration risk. The bulk of the fixed income portfolio is
currently invested in high yield bonds and leveraged loans.
We do focus on the higher-quality end of the spectrum so
that we are really BB and B players. There is not a
prohibition on owning CCCs, and there are a couple in the
portfolio right now, but we think the ones we own generally
have more of the characteristics of a low-B credit. We are
not looking to chase yield by taking undue risk and purchase
a lot of CCC or distressed securities.
Mr. Meigs: Those two names are interesting because
the investment thesis is different in those two names. ACCO
Brands (ACCO) is one of the world’s largest suppliers of
branded office products. They make Swingline staplers, DayTimer planners and those types of supplies. They issued bonds
to lever up to purchase the office products division of
MeadWestvaco (MWV), which was a strategic acquisition
that we viewed very favorably, a situation where they clearly
would be able to recognize significant synergies.
Management has been focused on delevering over
the last few years. The great thing about this situation is that
you have a management that both has the ability to delever
and also has the desire to delever. This is a company that
generates over a $100 million in free cash annually on a base
of net debt of just over $800 million and, at this point, also
has strong interest coverage of over five times. The company
is focused on reducing debt.
Bi-Lo is a southeastern U.S. supermarket chain. They
purchased Winn-Dixie stores and have done a good job
improving the profitability of those stores, so we’ve been happy
with management. The equity sponsors have been relatively
aggressive as far as taking dividends out, which is something
that we don’t tend to view favorably. We are also cautious about
roll-ups or especially acquisitive companies, but Bi-Lo proved
that they could do a good job as far as bringing in the WinnDixie stores and increasing profitability there.
“We look to avoid those pockets of overvaluation, and with every individual
investment we are making, we try to control risk by making sure that the
price we pay reflects a discount to what we think the business is really worth.”
TWST: What is the geographical exposure right now
in fixed income?
Mr. Hordon: Right now, it’s about 25% non-U.S. That
is where our bottom-up fundamental analysis is leading us.
Mr. Meigs: In recent months, high yield as an asset
class has not performed particularly well, and that was
largely driven by the impact that the sharp selloff in oil has
had on the credit market. A large portion of recent high
yield issuance has been in the energy sector. So we have
actually added to our exposure to high yield in the past few
months where we have seen some dislocation, not just in
the energy sector but across the board in the asset class. The
goal is to take advantage of spillover effects from the more
severe impact on energy credits.
TWST: Looking at the top 10 holdings on the fixed
income side, you have ACCO Brands and Bi-Lo. Why do
those two bonds match your philosophy and strategy?
They continue to be acquisitive, and they hit a little
bit of a speed bump this year as, I think, maybe they bit off
a little more than they could chew by making a couple of
acquisitions at the same time as they were transitioning
their distribution network. So the company, in 2014, had a
tough time in making all those changes. We do still have
confidence in the company, and they actually just brought
on board a new CEO who looks to be very accomplished,
and we believe that once again the company may be able to
improve margins and, therefore, delever.
TWST: What types of equities are attracting your
attention right now?
Mr. Hordon: To build on the theme we talked about
on the fixed income side, where we are favoring credit over
duration, on the equity side, when we are looking at the
universe of income-producing stocks, we see more value in
names that don’t have a lot of interest rate sensitivity. So
MONEY MANAGER INTERVIEW ——————— BUYING INCOME WITHIN A MARGIN OF SAFETY
traditional equity income sectors, like utilities or real estate
investment trusts, generally strike us as being potentially fully
valued or overvalued. On a case-by-case basis, we are able to
find dividend stocks — often in more cyclical companies,
holding companies or out-of-favor sectors — where we think
the dividend yields are high, but the valuations are more
reasonable. That has been an important theme for us.
At the same time, the divergence of performance
between the U.S. equity market and international equity
markets was quite pronounced in 2014. Along with the sharp
depreciation of many foreign currencies, which has had a big
impact on valuations, we think on the margin this creates some
more interesting opportunities internationally.
TWST: The top 10 equity holdings include
Mandarin Oriental and Plum Creek Timber. Can you talk
about those two?
Mr. Hordon: Mandarin Oriental is an interesting
security in our eyes. It is differentiated among the other
names you will see in the top 10 because it is a more illiquid
small-cap name, which has about a $2 billion market cap, but
only about $500 million of that is available in the public
float. The company is about 75% owned by a Hong Kongbased holding company, in which we are also investors,
called Jardine Matheson, and we’ve really come to know
the Mandarin Oriental business through our ownership of
Jardine Matheson over the years.
Mandarin Oriental is a high-end luxury hotel chain
that has an attractive valuation. On top of the real estate value
of the company, which we believe exceeds the enterprise
value, they have a successful and vibrant hotel management
business where they basically collect fees without extending
capital. It’s a very high-margin income stream, managing
hotels and residences under the Mandarin Oriental brand for
other landlords who are the owners of the property.
There is a strong backlog of opportunities there. It is
a growing part of the income stream that has nice traction in
mainland China. So they are building up their brand in China
without risking much capital, which is important, because
Chinese tourism abroad is growing at a healthy clip and is
expected to be an important source of demand for the global
tourism industry in the future. On top of this, we are getting
about a 4% dividend yield out of the stock.
Plum Creek Timber is one of the largest private
landowners in the United States with nearly 7 million acres of
timberlands across 19 states. It is now one of the top 10
holdings of the Global Income Builder Fund. As a firm, we
have been involved with it for many years. We find Plum
Creek Timber attractive for several reasons.
First, from a valuation perspective, we think the prices
that are currently being paid for timberlands in the private market
would support a materially higher valuation for the company as a
whole, along with the potential for selling land for higher and
better use purposes, such as real estate development. Additionally,
over time, we think the company’s earnings power may trend up
thanks to a strengthening timber market that is going to be driven
by both the ongoing recovery in the U.S. housing market but also
supply constraints in Canada. And finally, capital return is an
important part of the Plum Creek Timber story. The dividend
yield here is about 4%, and the company is committed to share
buybacks and has an ongoing share buyback program.
TWST: How often you make changes to the portfolio,
and what is the sell discipline? Is it the same on both sides, or
is it different?
Mr. Hordon: I will start on the equity side. One of
the really important features of how we manage money at First
Eagle Investment Management is we are long-term in our
approach, and historically, we have had relatively low turnover.
The First Eagle Global Income Builder Fund had less than
20% portfolio turnover in the past year, so we are patient. We
do a lot of work before we become involved with a name, but
we give the investment time to develop.
When we are selling a stock, it’s typically one or
two things. First, that the valuation of the stock has reached
a level where we think it’s either fully valued or overvalued.
For all of our investments, we have a sense of what we
believe is the intrinsic value of the business, and we like to
buy into the stocks at a discount to that. When they reach
our intrinsic value or exceed it, that’s typically when we
would be trading out of the position.
Another reason for selling a stock could be in less
happy circumstances where something has changed about the
business or in our investment thesis. This is a scenario where
we’ve really just changed our perspective on the business
and the margin of safety it offers us. This is usually in
response to new facts that have emerged, whether or not we
have made any money on the stock.
Mr. Meigs: It’s actually very similar on the fixed
income side, where there are really two possibilities. One is
the change in investment thesis, perhaps due to management
that has lost focus on delevering. All of sudden, there could be
a change in some of their capital-allocation policies, and they
are perhaps taking on a more equity-friendly point of view. It
may be the case where we’re still comfortable holding the
debt, but in other cases, we will go ahead and sell. Another
possibility is that we simply identify a better use of capital. On
the fixed income side, we may conclude a bond is fully valued
and that there is a better opportunity elsewhere.
TWST: How do you manage risk inside a portfolio?
Mr. Hordon: It is important to understand how we
define risk. It is perhaps a little bit different from other money
managers. We think a value investor’s definition of risk is
really the threat of permanent capital impairment, so losing
MONEY MANAGER INTERVIEW ——————— BUYING INCOME WITHIN A MARGIN OF SAFETY
money not because of temporary fluctuations in market prices
but because the business you owned destroyed capital for one
reason or another. This is in contrast with other investors who
may think about risk more as the volatility of the security or
even as the possibility of poor performance relative to an
index. We are benchmark-agnostic. We are trying to generate
positive absolute returns as opposed to simply outperforming
another group of investments.
That being said, the first line of defense in risk
management is the price you pay for a security. So not
overpaying for a security, not buying overvalued securities
and being aware of parts of the market that are overvalued are
all important to us. We have seen many examples over the
decades where certain sectors or geographies — think of the
tech bubble in the late 1990s — were very much in favor and
came to represent large portions of indices, but share prices
were completely unsustainable.
We look to avoid those pockets of overvaluation, and
with every individual investment we are making, we try to
control risk by making sure that the price we pay reflects a
discount to what we think the business is really worth. So if
we are wrong about our assessment of what the business is
really worth, or if the facts change in a way that’s harmful for
the company, at least we are protected by the fact that we had
what we felt was a margin of safety going into the investment
in terms of the price we paid to own the stock.
TWST: Tell us about both of your backgrounds.
Mr. Hordon: I joined First Eagle Investment
Management in 2001 directly from Columbia Business School,
where there is a strong value-investing tradition. I joined with
a group here that managed funds with more of an event-driven
style. At the beginning of 2008, I moved over to the Global
Value Team, which manages the bulk of the assets of the firm
and the First Eagle mutual funds. In 2010, I started to focus on
the development of the income strategy with my colleague on
the Global Value Team, Giorgio Caputo. Along the way, we’ve
had a great deal of support from other members of the global
value team and across the entire organization.
Mr. Meigs: I graduated from the Kellogg Graduate
School of Management at Northwestern University and entered
the fixed income market as an analyst with Wheat First
Securities in 1993. I became a high yield portfolio manager with
Falcon Asset Management in 1996, continued in that role with
Dwight Asset Management from 2001 to 2011 and then joined
First Eagle in 2011 as Rob had mentioned.
TWST: What do you each think are the real strengths
of the fund?
Mr. Hordon: I think it’s important to clarify that there
are four portfolio managers on the First Eagle Global Income
Builder fund. I mentioned Giorgio Caputo as being one of the
other co-portfolio managers, who — like me — is also a Senior
Analyst on the Global Value Team and has an equity background.
Sean Slein, who co-manages our credit team, is a co-portfolio
manager of the Global Income Builder Fund as well. Sean and
Ed have worked together for many years.
To your question about our strengths, I think, first,
this is a strategy that grew out of the First Eagle Global Value
Team. So we are taking advantage of a robust platform to
pursue investment objectives, which — because of the income
emphasis — are a bit different from what our other funds
pursue. It’s not only a strong organization, with a keen sense
of purpose and sense of fiduciary responsibility, but one where
the ideas are being generated across our investment team by an
accomplished group of experienced research analysts. So I
think it’s the people but also the somewhat unconventional
approach we have the freedom to apply.
We are very much practicing a value discipline. We
are not interested in chasing yield. We are not buying income
for income’s sake. We are buying income because it comes
with what we feel is a margin of safety. We have an
unconstrained approach to the portfolio and a lot of flexibility
as to how we are able to pursue our dual objectives.
We are able to invest more or less in any geography
around the world. We are able to invest across the market-cap
spectrum from something as small and illiquid as Mandarin
Oriental to something as large as Microsoft. We can invest
in high yield. We can invest in investment-grade. We can
really invest in any income-producing security around the
world. And we are willing to exercise that flexibility to avoid
parts of the market that are unattractive to us. This is only
possible because we are in an organization that focuses on
absolute returns and takes a long-term perspective on
performance. We are able to keep the focus on putting money
into what we view as the most interesting value opportunities
that exist at any given time, without worrying about what
other people are doing.
TWST: Thank you. (LMR)
ROBERT HORDON, CFA
Portfolio Manager
EDWARD MEIGS, CFA
Portfolio Manager
First Eagle Investment Management
1345 Ave. of the Americas
48th Floor
New York, NY 10105
www.feim.com
© 2 015
T h e Wa l l S t r e e t Tr a n s c r i p t , 6 2 2 3 r d Ave n u e , N ew Yo r k , N Y 10 017
Te l : ( 2 12 ) 9 5 2 - 74 0 0 • Fa x : ( 2 12 ) 6 6 8 - 9 8 4 2 • We b s i t e : w w w. t w s t . c o m
Average Annual Returns as of 09/30/2015:
Year to
Date
1 Year
3 Years
Since
Inception
(5/1/12)
First Eagle Global Income Builder Fund - Class A (w/o sales charge) (FEBAX)
-3.28%
-6.38%
--
4.62%
First Eagle Global Income Builder Fund - Class A (w/ sales charge) (FEBAX)
-8.08
-11.09
--
3.05
Expense
Ratio*
1.23%
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 feim.com or by calling 800.334.2143.
The average annual returns for Class A Shares "with sales charge" of First Eagle Global Income Builder 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
Had fees not been waived and/or expenses reimbursed in the past, returns would have been lower.
The commentary represents the opinions of Robert Hordon and Edward Meigs as of February 2015 and is subject to change based on market and
other conditions. The opinions expressed are not necessarily those of the 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 offer to buy or sell any fund or security.
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.
Funds that invest in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in
which the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuer’s ability to make such
payments may cause the price of that bond to decline.
The Fund invests in high yield securities (commonly known as “junk bonds”) which are generally considered speculative because they may be subject to
greater levels of interest rate, credit (including issuer default) and liquidity risk than investment grade securities and may be subject to greater
volatility. High yield securities are rated lower than investment-grade securities because there is a greater possibility that the issuer may be unable to
make interest and principal payments on those securities.
Bank loans are often less liquid than other types of debt instruments. There is no assurance that the liquidation of any collateral from a secured bank
loan would satisfy the borrower's obligation, or that such collateral could be liquidated.
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.
Income generation is not guaranteed. If dividend paying stocks in the Fund's portfolio stop paying or reduce dividends, the fund's ability to generate
income will be adversely affected.
All investments involve the risk of loss.
The information is not intended to provide and should not be relied on for accounting or tax advice. Any tax information presented is not intended to
constitute an analysis of all tax considerations.
The holdings mentioned herein represent the following percentage of the total net assets of the First Eagle Global Income Builder Fund as of
September 30, 2015: Acco Brands Corporation 6.75% 04/30/2020 1.50%, MeadWestvaco Corporation 0.00%, Mandarin Oriental International Limited
1.55%, Jardine Matheson Holdings Limited 1.09%, Plum Creek Timber Co. 1.26%, Microsoft Corporation 1.70%, Bi-Lo LLC 9.25% 2/15/2019 1.47%
The First Eagle High Yield Fund commenced operations in its present form on December 30, 2011, and is successor to another mutual fund pursuant
to a reorganization December 30, 2011.
Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus and
summary prospectus contain this and other information about the Funds and may be obtained by asking your financial adviser,
visiting our website at feim.com or calling us at 800.334.2143. Please read our prospectus carefully before investing. For further
information about the First Eagle Funds, please call 800.334.2143.
The First Eagle Funds are offered by FEF Distributors, LLC, 1345 Avenue of the Americas, New York, New York 10105.