By Barbara Kollmeyer, CBS MarketWatch
LOS ANGELES (CBS.MW) -- What does it take to be a top international fund manager these days? Taking a chance on dull stocks and riding against Wall Street headwinds seem good for starters.
With 25 years under his belt as manager of the First Eagle Global Fund (NAS:SGENX) (formerly SoGen International), Jean Marie Eveillard knows this scorecard all too well. He recently received the Morningstar Lifetime Achievement Award, along with Liberty Acorn Fund's (NAS:ACRNX) Ralph Wanger.
Eveillard's fund has logged a 13.3 percent gain year to date, 13.8 percent on a three-year basis and 11.1 percent on a five-year basis, beating the MSCI Europe Asia Far East index by big margins.
"He's one who's really valued capital preservation as well as returns, and that was sort of a scarce breed in the late 1990s," said Russ Kinnel, director of fund analysis at Morningstar.com. "He kept doing it even though he was losing investors. Those who stuck with him are in far better shape because they did.
But just ask Eveillard for his favorite stock picks over the past few months and he balks: "Like with my children, how can I pick among them?"
He will tell you about the time he bought a "dull" Austrian brewing stock, unloved by Wall Street, that turned into a cash cow when Heineken NV bought out the family owners. "The moral for the story is that for an investor to make money investing, it's not necessary to buy an exciting stock. There is nothing duller than Austrian beers," he said.
Attracting Evelliard's eye these days are a few Japan stocks -- interest that would be seen as pure contrarian by many. With 10 percent of his global fund and more than 15 percent of the First Eagle Overseas Fund (NAS:SGOVX) invested in Japan, he says the country's 13-year bear market has created a cluster of buying opportunities.
"The mere fact that there are a number of securities priced very attractively is enough for us. Japan is not a developing country, it's not a Costa Rica or Indonesia. Admittedly, it seems to have major problems, but so do the U.S. and Europe."
CBS MarketWatch.com recently spoke to Eveillard about his award, gleaning some investment insights from the top global manager:
CBS.MW: What are the criteria and methods you use to determine whether or not each stock is a buy?
Eveillard: What we're trying to do is figure out what a somewhat knowledgeable buyer would be willing to pay today in cash, no paper please, for the entire business. ... Benjamin Graham, founder of the value school in the 1930s, says there's an intrinsic value to every security. We call it the intrinsic value of the business and establish one before we buy a stock.
We don't play themes or try to figure out market psychology. We investigate businesses and try to understand the business. We try to figure out what the strengths and weakness of the business are and then try to place a value on the entire business. That's completely different than trying to figure out whether quarterly earnings will be a penny higher a penny lower than whatever Wall Street estimates.
CBS.MW: How do you mitigate risk?
Eveillard: We only investigate businesses that we think are relatively simple to understand, which inevitably implies we seldom investigate technology businesses because they're too complicated for us. We'd rather investigate the business of a plumbing company than a biotech company. And in order to mitigate risk we try to buy securities that are selling below what we believe is the intrinsic value of the business, which if we are right, provides us with a margin of security or cushion.
CBS.MW: What investment risks do you see right now?
Eveillard: We had a gigantic bubble worldwide in the late 1990s, bigger than the bubble in the 1920s ... and we're now in the aftermath. There are all sorts of imbalances and indeed (Fed Chairman Alan) Greenspan seems to be creating even additional imbalances. He engineered and financed the stock market bubble. Then the bubble burst and now he's so desperate he's scrambling to avoid the consequences of his mistakes, so he's in the process of creating additional bubbles.
So what we have done is we have between 5 and 7 percent of assets of the global fund and of the overseas fund in gold-related securities. It's strictly insurance if the roof falls in, then the hit we would be taking on our equity portfolio would be mitigated, partially offset by the gains we would make in gold-rated securities because gold is the ultimate hedge.
CBS.MW: You eschew the idea of benchmarks, is that right? Why?
Eveillard: We understand that over time -- the key words are over time -- we've got to do better than the index, otherwise shareholders will come to us and say, "Hey, I don't need you guys I might as well buy into an index fund."
But we are the opposite extreme from index huggers. I think the big problem with mutual fund industry today, is that in the late '90s, they all or almost all became index huggers ...We have done better than the EFA index by 1,000 basis points per year, but the 10 years include periods particularly in the late '90s when we did much worse than the index and periods when we did much better, because there is no attempt on our part to keep up with the index on a short-term point of view.
CBS.MW: Investing in Japan is undoubtedly viewed as contrarian these days. What exactly is attractive about Japanese stocks right now?
Eveillard: There are securities in Japan where -- if you look at net cash, net of all financial liabilities in excess of market cap -- you pay less than nothing for the business. No you don't find securities like that either in the U.S. or Europe. It doesn't mean that it's a lay-up. There is no such thing as a lay-up in the investment world because you have two risks remaining, the risks of time, having to be patient, but that's a risk we're willing to take ... and the second risk is of course if the company were to run a string of losses for the next five years, the cash would disappear.
CBS.MW: What companies do you like in Japan?
Eveillard: We own all sorts of different sectors in Japan, we own insurance, domestic, multinational stocks. We have a large holding in Shimano, it's a strange consumer good in the sense that the brand is associated much more with the bicycle parts than the bicycle itself. It's a somewhat cyclical business, extraordinary profitable, very successful Japanese multinational company. They do only 20 percent of business in Japan, the rest is done in North America, Europe and in rest of the world. There are only two companies that make good bicycle parts in the entire world ... and the stock only suffers from the fact that the company is Japanese, even though it's a multinational.
CBS.MW: What do you think are the top criteria for a good international investor these days?
Eveillard: We look at foreign securities in the exactly the same way we look at domestic securities. One big advantage of being an American value investor, as we are, is that in continental Europe, for various reasons, there are very few if any value investors. They're all glamour stock investors, momentum investors, traders, index huggers. There are very few investment ideas on the part of the locals in continental Europe ... so if you're a value investor it's a great boon.
CBS.MW: You've been a part of the investment business for more than four decades. How have the criteria changed for fund investors like yourself when compared to your early years in the business?
Eveillard: I think that over time corporate governance has been better, minority shareholders have not always been well treated, but they're treated better than they were 20 or 25 years ago.
CBS.MW: Which international stock pickers among your peers do you admire most?
Eveillard: I tend to know and like and respect people who have somewhat of a similar investment approach, even though I'm sure there are money managers who are quite good with different investment approaches, I don't know them. So among the value types, I think Marty Whitman, at the Third Avenue Value Fund (NAS:TAVFX) , the Oakmark people in Chicago, and the Long Leaf Partners in Tennessee, also some of the people who used to be lieutenants of Michael Price, people like David Winters,
CBS.MW: Any final words for investors who are looking at international stocks right now, but afraid to dip in?
Eveillard: This is truly an inward looking country or it's a country where people think they're superior to the rest of the world. I do not understand the reluctance of American investors to invest outside the U.S. Haven't the past few years revealed tremendous scandals, accounting fraud and even worse than accounting fraud, accounting tricks -- I mean intellectual dishonesty -- and more among a great number of American companies? So what's to fear outside the U.S. ain't going to be worse than what we've see inside the U.S. for the past three years or so.