By Philip van Doorn, MarketWatch
Kimball Brooker says he and his co-managers at the $50 billion First Eagle Global Fund use an insurance term to refer to their process of assessing companies for investment: underwriting.
The word is “taken from insurance or lending, because in those industries you are most focused on the severity of loss,” he said in a phone interview Sept. 19. “This is different from most equity managers, who are only focused on returns. They talk all the time about the returns they are looking to get.”
Brooker is First Eagle Investment Management’s deputy head of global value. Matthew McLennan, who heads the firm’s global value team, is also a portfolio manager for the First Eagle Global Fund /zigman2/quotes/209317528/realtime SGENX +0.37% . Manish Gupta serves as associate portfolio manager. The firm has about $102 billion in assets under management.
Talk of investing risks has reached a fever pitch. We’re reminded daily of the trade conflict between the U.S. and China, the uncertainty over Brexit and what it may mean for the stability of the European Union, and Europe’s anemic economy and the European Central Bank’s ineffectiveness. There is even new military risk to worry about, as evidenced by the recent drone attack against Saudi Arabia’s oil facilities.
You may have money invested in the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX +0.27% through a low-cost index fund within an employer-sponsored retirement plan because performance has been spectacular in the past 10 years. The index is weighted by market capitalization, which means you are not only concentrated in the U.S., you have 17% of your investment in the five companies with the highest market values: Microsoft /zigman2/quotes/207732364/composite MSFT -1.99% , Apple /zigman2/quotes/202934861/composite AAPL +1.45% , Amazon.com /zigman2/quotes/210331248/composite AMZN -0.61% , Alphabet /zigman2/quotes/205453964/composite GOOG +0.11% /zigman2/quotes/202490156/composite GOOGL -0.10% and Facebook /zigman2/quotes/205064656/composite FB -2.03% .
You might think it reasonable to broaden your horizons with an international index fund — maybe the iShares MSCI World Index ETF /zigman2/quotes/208944372/delayed CA:XWD +0.02% or the iShares MSCI EAFE ETF /zigman2/quotes/207663730/composite EFA +0.33% . (EAFE stands for developed economies in Europe, Australia, Asia and the Far East.)
But an actively managed approach to international investing, despite higher expenses, might solve the problems of cap-weighting, over-concentration in the U.S. and elevated valuations for many of the largest components of the indexes.
First Eagle says its Global Fund is run in an “index agnostic” manner. However, its performance benchmark is the MSCI World Index. The fund had an 85.8% active share through the second quarter. The higher the active share, the more a fund’s portfolio is differentiated from the index — and this is a very high active share.
Here’s a 30-year chart showing the performance (after expenses) of the First Eagle Global Fund’s Class A shares against the two international indexes tracked by the ETFs named above, and the S&P 500:
The First Eagle Global Fund’s Class A shares have a 5% sales charge in the fund’s prospectus. That fee is waived at mutual fund “supermarkets,” including Charles Schwab, Fidelity, E-Trade and Ameritrade. The Class A sales charge is not waived for clients on major brokerage platforms. Still, customers with advisory relationships would be directed to the Class I shares, which have no sales charge.
In the 30-year chart, you can see that the fund performed better than the other three indexes, but was particularly strong against the MSCI World Index.
In the interview, Brooker said: “What you don’t own in a portfolio can be more helpful than what you own. A lot of times [during severe market declines] when we were not exposed to certain parts of the market, those were well-represented in the index.”
He continued: “One of the dangers of relying too much on indices ... is you end up owning, typically, the most popular segments of a given market, which can sometimes be overpriced as a group.”
According to First Eagle, the Global Fund’s exposure to the technology sector was less than 5% at the end of 1999, while the MSCI World Index was 32.5% concentrated in the sector. As of Dec. 31, 2006, the fund had less than 2% exposure to financial stocks, compared with 26.4% for the index.
The 30-year chart, of course, encompasses the full dot-com boom-and-bust cycle, as well as the 2008-2009 financial crisis and recovery.
Going all the way back to January 1979, First Eagle provided these upside/downside capture numbers through 2018:
|First Eagle Global Fund - upside capture||First Eagle Global Fund - downside capture|
|MSCI World Index||72%||42%|
|MSCI EAFE Index||50%||28%|
|Source: First Eagle Investment Management|
The 20-year chart shows the fund again outperforming greatly: