Inside this Issue - First Eagle Funds
Inside this Issue - First Eagle Funds
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ValueInvestor<br />
June 30, 2009<br />
The Leading Authority on Value Investing<br />
INSIGHT<br />
Even Temperament<br />
The accent may be different, but the value-investing message of Matthew<br />
McLennan, Jean-Marie Eveillard’s successor, remains very much the same.<br />
Matthew McLennan is quick to<br />
argue that he is not replacing<br />
retired investing superstar Jean-<br />
Marie Eveillard at <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong> –<br />
which is in fact what he did three months<br />
ago. “I’d rather say we as a team are standing<br />
on his shoulders,” McLennan says.<br />
And broad those shoulders have been. In<br />
30 years in charge of the <strong>First</strong> <strong>Eagle</strong> Global<br />
Fund, Eveillard earned a 14.2% annualized<br />
return, a full five percentage points per year<br />
over the MSCI World index.<br />
McLennan and fellow manager Abhay<br />
Deshpande plan to stick close to Eveillard’s<br />
playbook in managing what is currently<br />
$27 billion in investor assets. Among areas<br />
in which they see value today: robotics,<br />
pharmaceuticals, gold, uniform rental and<br />
investment holding companies. See page 2<br />
INVESTOR INSIGHT<br />
Reprint provided courtesy of:<br />
<strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong><br />
Abhay Deshpande, Matthew McLennan<br />
Investment Focus: Seek competitively<br />
advantaged businesses trading at low multiples<br />
of cyclically weak operating results<br />
that they don't over time expect to persist.<br />
For additional information, please contact <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong><br />
at 800.747.2008 or visit us at www.firsteaglefunds.com.<br />
www.valueinvestorinsight.com<br />
<strong>Inside</strong> <strong>this</strong> <strong>Issue</strong><br />
FEATURES<br />
Investor Insight: Matthew McLennan<br />
Counting on “humility, flexibility and<br />
patience” to produce solid returns in<br />
such companies as Cintas, Fanuc,<br />
Astellas and Pargesa. PAGE 1 »<br />
Investor Insight: Martin Whitman<br />
Explaining the risks and opportunities<br />
of investing in troubled companies,<br />
and why he’s so high on Hong<br />
Kong holding companies. PAGE 1 »<br />
Strategy: Activism<br />
Spotlight Capital founder describes<br />
his style of activist investing and why<br />
he sees untapped value in HRPT<br />
Properties and Convergys. PAGE 17 »<br />
A Fresh Look: Market Turmoil<br />
How Carlo Cannell managed the<br />
short idea he offered up a year ago<br />
and where he sees a similar opportunity<br />
for downside today. PAGE 22 »<br />
Editors’ Letter<br />
Feel free to bash efficient markets theory<br />
... but don’t overdo it. PAGE 24 »<br />
INVESTMENT HIGHLIGHTS<br />
INVESTMENT SNAPSHOTS PAGE<br />
Astellas 6<br />
Cintas 8<br />
Convergys 20<br />
Fanuc 5<br />
Gold Fields 9<br />
HRPT Properties Trust 19<br />
Pargesa Holding 7<br />
Stratasys 23<br />
Zoltek 22<br />
Other companies in <strong>this</strong> issue:<br />
Bic, Cheung Kong Holdings, Chico's, Deltic,<br />
Essilor, Forest City, GMAC, Groupe<br />
Bruxelles Lambert, Henderson Land,<br />
Lafarge, MBIA, Neopost, Nestlé, Plum<br />
Creek, Rayonier, Sanofi-Aventis, Sealy,<br />
Shimano, Total, Wharf Holdings, Wheelock
Investor Insight: <strong>First</strong> <strong>Eagle</strong><br />
June 30, 2009 www.valueinvestorinsight.com<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
<strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong>' Matthew McLennan and Abhay Deshpande describe why “humility, flexibility and patience” drive<br />
their investing strategy, why increased short-term trading should work to their advantage, why they're relative value<br />
investors when it comes to gold, and why they think Cintas, Fanuc, Astellas, Pargesa and Gold Fields are mispriced.<br />
Matthew, we’re assuming one appeal to<br />
joining <strong>First</strong> <strong>Eagle</strong> was a good match<br />
between its investment approach and<br />
yours. Describe the most important elements<br />
of that.<br />
Matthew McLennan: What I think most<br />
differentiates the approach here is temperament.<br />
Starting with the first recorded<br />
and reliable history that we can find – a<br />
history of the Peloponnesian war by a<br />
Greek author named Thucydides – and<br />
following through a broad array of key<br />
historical global crises, you see recurring<br />
aspects of human nature that have gotten<br />
people into trouble: hubris, dogma and<br />
haste. The keys to the investing approach<br />
at <strong>First</strong> <strong>Eagle</strong> are the symmetrical opposite<br />
of that: humility, flexibility and<br />
patience.<br />
On the humility side, one of the<br />
things that Jean-Marie Eveillard firmly<br />
ingrained in the culture here is that the<br />
future is uncertain. That results in investing<br />
with not only a price margin of safety,<br />
but in conservative balance sheets and<br />
alongside prudent and proven management<br />
teams. If you acknowledge your<br />
crystal ball is at best foggy, you follow<br />
the advice of Ben Graham and invest to<br />
avoid the landmines.<br />
In terms of flexibility, we’ve been willing<br />
to be out of the biggest sectors of the<br />
market, whether it was Japan in the late<br />
1980s, technology in the late 1990s or<br />
financials the late 2000s. That wasn’t necessarily<br />
because of any particular gift of<br />
foresight, but reflected a recognition that<br />
each of those areas embodied very widely<br />
accepted and high expectations. It’s<br />
painful and not socially acceptable to be<br />
out of the most revered sectors of the<br />
market, but those types of acts of omission<br />
have been a key contributor to the<br />
strong performance.<br />
In a similar vein, even though the fund<br />
has gotten so big, we don’t feel com-<br />
pelled to own companies that happen to<br />
be big in the global index. What we are<br />
invested in is a series of eclectic companies<br />
that almost define their industries.<br />
That can be a company like Essilor<br />
[EI:FP], a world leader in eyeglass lenses,<br />
or Bic [BB:FP], a cigarette-lighter and disposable-razor<br />
company, or Shimano<br />
[7309:JP], which makes bicycle gears and<br />
brakes, or Neopost [NEO:FP], which<br />
sells mailing and shipping systems. These<br />
certainly aren’t the biggest or most wellknown<br />
companies, but each is competitively<br />
strong and financially sound and<br />
the market has presented us with an<br />
interesting investment opportunity to<br />
take advantage of.<br />
In addition to humility and flexibility,<br />
the third thing in terms of temperament<br />
we think we value more than most<br />
other investors is patience. We have a<br />
five-year average holding period.<br />
Particularly in a volatile market like<br />
today’s, people are trying to zig and zag<br />
ahead of every market turn that they’re<br />
hoping they can forecast with scientific<br />
precision. We like to plant seeds and<br />
then watch the trees grow, and our portfolio<br />
is often kind of a portrait of inactivity.<br />
That’s kept us from making sharp<br />
and sometimes emotional moves that we<br />
eventually come to regret.<br />
Abhay Deshpande: People’s eyes kind of<br />
glaze over in bull markets when we go on<br />
about how we spend more time thinking<br />
about how much money we can lose on<br />
any particular idea than on what we<br />
expect to make. If you’re exposed to<br />
equities, anyone will make money in a<br />
bull market. For us, the key to success<br />
over time is giving less money back when<br />
markets are difficult. That’s a message<br />
people are very receptive to now, but<br />
we’ve been saying it for a very long time,<br />
no matter which way the market winds<br />
are blowing.<br />
Abhay Deshpande, Matthew McLennan<br />
Life Adventure<br />
Having spent the first six years of his life in<br />
Papua New Guinea, where his father was<br />
working as a surveyor for the Australian<br />
government, Matthew McLennan developed<br />
early on a thirst for new experiences.<br />
“My family was always quite big on 'life<br />
adventures,'” he says.<br />
After earning a degree in commerce at<br />
Australia's University of Queensland,<br />
McLennan's adventure as an investor<br />
began with a stint at a local pension fund<br />
prior to joining Goldman Sachs, where he<br />
spent 14 years in a variety of research and<br />
portfolio management positions in Sydney,<br />
New York and London. Last September he<br />
joined <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong> to succeed Jean-<br />
Marie Eveillard as the head of the firm's<br />
Global Value Team. There he shares portfolio<br />
management responsibility with<br />
Abhay Deshpande, a <strong>First</strong> <strong>Eagle</strong> veteran<br />
who joined the firm in 2000.<br />
The New Guinea town where McLennan<br />
lived was in large part destroyed by a volcano<br />
in 1994. “That’s just one example of<br />
how, as Jean-Marie is fond of saying, ‘The<br />
future is uncertain,’” says McLennan.<br />
“Many things people take for granted<br />
won’t be that way forever – keeping that in<br />
mind is central to the way we invest.”<br />
Value Investor Insight 2
Is it harder – or even ill-advised – to be<br />
patient when an ever increasing amount<br />
of automated trading is pushing share<br />
prices around?<br />
MM: The compression of time horizons<br />
and the increased trading done by algorithm<br />
creates more liquidity for us to take<br />
long-term positions. That lowers the cost,<br />
at the margin, of our entering or exiting a<br />
long-term position. More generally, the<br />
more compressed the time horizon of the<br />
market is, the less the market is willing to<br />
pay for a business’ “muddle-through”<br />
value, which we base on looking at peak<br />
and trough margins and normal business<br />
cycles. We look at earnings power three,<br />
four and five years out – the less we have<br />
to pay for that, the more our patience<br />
pays off.<br />
Where the prevalence of short-term<br />
trading can be hurtful is when there’s a<br />
feedback loop between intrinsic value and<br />
the perception of value, which happens<br />
particularly in highly leveraged situations.<br />
When a company is in trouble and<br />
there’s a lot of negative momentum trading<br />
as a result, that can feed on itself as<br />
the company has to recapitalize at progressively<br />
lower prices, diluting value.<br />
That’s a key reason we avoid highly leveraged<br />
situations as a rule.<br />
Marty Whitman, in an interview for <strong>this</strong><br />
issue, says those types of negative feedback<br />
loops have led him to completely<br />
avoid companies reliant on continuous<br />
access to capital markets.<br />
MM: People tend to lose sight of the fact<br />
that what you own in an equity is only a<br />
residual claim on a business. At the heart<br />
of value investing is the notion of mean<br />
reversion, that by paying a low multiple<br />
on a conservative margin you can win<br />
with the passage of time as the valuation<br />
of the business and the margins normalize.<br />
What can break that and cause mean<br />
aversion, though, are things like fading<br />
business models, expeditionary management<br />
deploying capital in a dilutive way<br />
and – what Marty Whitman is talking<br />
about – adverse capital-structure contingencies.<br />
We make every effort to invest<br />
only in the universe of companies where<br />
those risks of breakage are as limited as<br />
possible.<br />
Describe what you mean by a business’<br />
muddle-through value?<br />
AD: Intrinsic value to us means the price<br />
that a knowledgeable buyer would pay<br />
for a business in its entirety in cash today.<br />
Any knowledgeable buyer will recognize<br />
and take into consideration whether current<br />
earnings are too high or too low,<br />
ON UPSIDE:<br />
If we pay a low multiple and<br />
perhaps get a discount to<br />
asset replacement value, we<br />
kind of get the future for free.<br />
based on the cyclicality of the business<br />
and where it is in the cycle. Similarly, we<br />
don’t want to capitalize earnings streams<br />
that are too high or too low, but focus in<br />
valuation on what the cash flow of the<br />
business is somewhere between the<br />
extremes. Because the future is uncertain,<br />
we don’t exaggerate the precision of the<br />
values we come up with. That said, over<br />
time our intrinsic value estimates – based<br />
on actual transactions – have proven to<br />
be quite accurate. We tend if anything to<br />
be too pessimistic, which is fine.<br />
MM: If we can pay a low multiple at an<br />
enterprise level on muddle-through cash<br />
flows, and perhaps also get a discount to<br />
the asset replacement value of the business,<br />
we in a way get the future for free.<br />
We start out trying not to lose money, but<br />
if we’re disciplined in the way we go<br />
about that, we get a shot at a decent<br />
amount of upside over time.<br />
How has the composition of your portfolio<br />
changed in the past year, reflecting<br />
where you’re seeing opportunity and risk?<br />
MM: The biggest change is that we’re<br />
more fully invested, with our cash posi-<br />
June 30, 2009 www.valueinvestorinsight.com<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
tion in the <strong>First</strong> <strong>Eagle</strong> Global Fund down<br />
from about 20% to less than 10% today.<br />
We always like to retain deferred purchasing<br />
power, so the sum of our cash,<br />
short-dated government bonds and our<br />
gold positions is still about 20% of the<br />
portfolio. That’s lower than it has been<br />
historically, which is a reflection of the<br />
fact that we’re finding a higher proportion<br />
of decent businesses at decent valuations<br />
today.<br />
Reflecting some of the balance-sheet<br />
concerns we continue to have in many<br />
parts of the world, we’ve also seen the<br />
portfolio gravitate somewhat more<br />
toward Japan. It’s where the excesses<br />
were not in the last cycle, and most of the<br />
companies we own there have resilient,<br />
global franchises and no debt. The capital<br />
markets could close for a decade and<br />
they’d still be fine.<br />
Has your exposure to gold gone up or<br />
down?<br />
AD: It has gone up, not because we’ve<br />
added to the position, but because the<br />
values of bullion and gold stocks have<br />
held up much better than our typical<br />
equity holding. We've always considered<br />
gold to be a valuable potential hedge<br />
against all the bad things that could hurt<br />
our equity holdings, and that certainly<br />
remains true today. It may be some time<br />
off, but we worry a lot about the potential<br />
for inflation and for currency debasement<br />
– currencies declining in value relative<br />
to real assets – as a result of unprecedented<br />
fiscal and monetary stimulus.<br />
Were the more negative scenarios to play<br />
out, real assets like gold should prove<br />
quite valuable.<br />
Are other commodities interesting to you<br />
as well?<br />
AD: We have some long-held positions in<br />
timber companies, including Rayonier<br />
[RYN], Plum Creek [PCL] and Deltic<br />
[DEL], which have proven to be an effective<br />
hedge against dollar devaluation<br />
over time. We think they will prove to be<br />
an effective hedge against currency<br />
debasement as well.<br />
Value Investor Insight 3
We’re also looking more closely at<br />
agricultural commodities. Historically,<br />
large global demand shocks for such commodities<br />
have resulted in permanent<br />
structural increases in prices, where old<br />
highs become new lows in the pricing<br />
cycle. We believe we’re going through<br />
such a demand shock now, driven by 500<br />
million people in China and India alone<br />
seeing the type of increase in purchasing<br />
power over the last ten years that directly<br />
impacts the quality of food they eat.<br />
Because we don’t believe global supply<br />
will be able to keep up with the increased<br />
demand, the chances of that resulting in a<br />
structural price increase are high. It’s<br />
early yet to know how best to take advantage<br />
of all <strong>this</strong>, but it is an area we’re<br />
interested in.<br />
MM: We don’t expect commodities to<br />
just zoom off from here. We’re in a world<br />
in which there’s still a very large output<br />
gap, but in the past few months many<br />
commodity prices rallied 50% off their<br />
lows. We feel no need to chase that.<br />
You mention India and China, but don’t<br />
appear to have invested much in either<br />
place. Why?<br />
MM: One of the great challenges for<br />
value investors is to link the macro to the<br />
micro. We acknowledge that there’s a<br />
long-term pent-up consumption opportunity<br />
in those markets, but the share prices<br />
of individual, prudently run businesses<br />
would indicate that the path between<br />
today and tomorrow is more linear and<br />
more quickly fertile than we believe will<br />
be the case.<br />
AD: We do have indirect exposure to<br />
India and China through many of our<br />
companies, whether it’s a giant company<br />
like Nestlé or a smaller one like Essilor,<br />
the glass-lens company. That’s a much<br />
lower-risk and cheaper way to go.<br />
Chinese stocks, on average, trade at 40x<br />
earnings!<br />
Fixed income has always been part of<br />
what you do. How would you characterize<br />
the opportunities you see there today?<br />
June 30, 2009<br />
AD: We don’t play in the most speculative<br />
parts of the high-yield market – where<br />
many people have been finding opportunity<br />
over the past six to nine months – so<br />
we’ve actually seen our fixed-income<br />
exposure decline. As stocks sold off and<br />
we could buy things like 3M [MMM] at<br />
a 5% dividend yield, we weren’t devoting<br />
much capital to high-yield bonds. If stock<br />
prices continue to run up and the highyield<br />
market stays around today’s level,<br />
that of course would change.<br />
ON BONDS:<br />
If we’re certain the equity value<br />
is positive, the bonds should<br />
be money good and we might<br />
want to take a look at them.<br />
Can you give an example of the type of<br />
debt opportunity you’re finding today?<br />
AD: Sometimes when we look at the<br />
equity of a company, we’re fairly certain<br />
the intrinsic value is more than zero, but<br />
there’s so much debt that we can’t narrow<br />
the value range down enough to<br />
invest. But if we’ve concluded the equity<br />
value is positive, that means the bonds<br />
should be money good and we should<br />
take a look at them as well.<br />
That process led us to invest earlier<br />
<strong>this</strong> year in the subordinated debt of<br />
Sealy, the mattress maker. We own the<br />
8.25% subordinated debt maturing in<br />
2014, which after a recent recapitalization<br />
has the earliest maturity among their<br />
debt issues.<br />
The housing-market collapse has been<br />
terrible news for bed manufacturers – we<br />
estimate roughly 10% of industry capacity<br />
has gone away through various business<br />
failures and cutbacks. The #2 in the<br />
industry, Simmons, is in serious trouble<br />
and is working to restructure its debt to<br />
keep operating. As the market leader,<br />
though, Sealy still generated around $50<br />
million in free cash flow over the past 12<br />
months, after paying $60 million in debt<br />
interest.<br />
www.valueinvestorinsight.com<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
The bottom line is that we believe<br />
Sealy’s business is viable and will continue<br />
to earn more than enough free cash<br />
flow to support our debt payments. We<br />
also take comfort in having a roughly<br />
$180 million equity market cap cushion<br />
beneath us. So with what we think is<br />
almost no risk of default, we’re getting a<br />
nearly 13% yield to maturity at today’s<br />
price. We consider that a more than<br />
acceptable risk/return.<br />
Your global portfolio has always been<br />
highly diversified, with 200 or so positions.<br />
Is there any reason to expect that to<br />
change?<br />
MM: In broad strokes, we have 20% of<br />
our assets in cash or gold, our top 35<br />
positions make up another 50%, and the<br />
rest is a diversified portfolio of “seed”<br />
positions that we increase or decrease<br />
based on share prices relative to the business<br />
fundamentals. It’s a formula that has<br />
worked well over time and I don’t see<br />
much reason to change it.<br />
Turning to specific ideas, describe one of<br />
your top Japanese holdings, Fanuc<br />
[6954:JP].<br />
MM: Fanuc is a Warren Buffett-type<br />
high-quality company, a global leader in<br />
factory automation software and equipment.<br />
Roughly 60% of its revenues come<br />
from selling computer numeric control<br />
[CNC] systems that are central to multiaxis<br />
machining, a market in which they<br />
have around 60% global market share.<br />
The other 40% of revenues comes from<br />
robotics, where they’re also the global<br />
market leader. The two businesses work<br />
hand-in-hand for almost any precisionengineering<br />
application.<br />
As Japan grew as an industrial power,<br />
you saw a massive shift on the factory<br />
floor away from basic machinery to higher-end<br />
capital-goods machinery. That<br />
same shift is in the early stages in developing<br />
markets like China and India, creating<br />
a tremendous opportunity for<br />
Fanuc, which owns important intellectual<br />
property required for the next-generation<br />
factory floor.<br />
Value Investor Insight 4
Is patience a key with <strong>this</strong> investment?<br />
MM: As a capital-goods provider in the<br />
worst recession in the post-war period,<br />
the company is not going to have anything<br />
impressive in the way of earnings<br />
power over the next 12 months. But if<br />
you take a longer-term perspective,<br />
through previous cycles Fanuc has generated<br />
mid-30% EBIT margins, which<br />
given the strength of its market positions<br />
we fully expect to return. We don’t have<br />
to get the timing of the recovery<br />
absolutely right because there are no<br />
financial contingencies – approximately<br />
one-third of the company’s market cap is<br />
in net cash.<br />
How cheap are the shares, trading now at<br />
just under ¥7,800?<br />
INVESTMENT SNAPSHOT<br />
Fanuc<br />
(Tokyo: 6954:JP)<br />
Business: Global manufacturer of factory<br />
automation systems and equipment, including<br />
computerized numerically controlled<br />
equipment, servo motors and robotics.<br />
Share Information<br />
(@6/30/09, Exchange Rate: $1 = ¥95.915):<br />
Price ¥7,760<br />
52-Week Range ¥4,800 – ¥10,800<br />
Dividend Yield 1.8%<br />
Market Cap ¥1.86 trillion<br />
FANUC HISTORY<br />
15000<br />
12000<br />
9000<br />
6000<br />
3000<br />
June 30, 2009<br />
MM: Stripping out the cash, you’re paying<br />
around ¥5,000 per share for the operating<br />
business, which has generated in the<br />
best times more than ¥600 in earnings per<br />
share. If you normalize that to ¥450-500<br />
per share, you’re only paying 10-11x EPS.<br />
On normalized EBIT, the multiple is<br />
around 7x.<br />
That’s a very conservative price to pay<br />
for a business with dominant market<br />
share and excellent growth prospects,<br />
which in more normal times could be<br />
expected to trade at closer to 15x EBIT.<br />
There’s a need for <strong>this</strong> technology over<br />
time, evidenced by the fact that each successive<br />
peak in Fanuc’s earnings power<br />
over the last few cycles has been substantially<br />
higher than the prior one. There’s<br />
no reason <strong>this</strong> business can’t earn ¥1,000<br />
per share at some point.<br />
THE BOTTOM LINE<br />
The market’s short-term focus is undervaluing the company’s potential to translate leading<br />
market positions and key intellectual property into strong profit growth as the global<br />
economy mends, says Matt McLennan. At a reasonable multiple of 15x his estimate of<br />
the company’s normalized EBIT, the shares would be worth twice their current value.<br />
Sources: Company reports, other publicly available information<br />
Financials (FY2008)<br />
Revenue ¥468.40 billion<br />
Operating Profit Margin 40.5%<br />
Net Profit Margin 27.1%<br />
Valuation Metrics<br />
(Current Price vs. TTM):<br />
FANUC S&P 500<br />
P/E 16.6 35.4<br />
2007 2008 2009<br />
www.valueinvestorinsight.com<br />
15000<br />
12000<br />
9000<br />
6000<br />
3000<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
If we were growth investors, we’d be<br />
out there looking at the penetration of<br />
CNC systems in China ten years out and<br />
then trying to figure out how much<br />
Fanuc would benefit from that. We don’t<br />
have to make those types of precise forecasts<br />
– the stock is currently cheap based<br />
on what they’ve already demonstrated<br />
they can do.<br />
How would you characterize management’s<br />
concern for shareholders?<br />
MM: On the surface, Fanuc seems like<br />
the prototypical company that people<br />
rightly complain about: too much cash<br />
on the balance sheet, no external directors,<br />
not much interaction with the<br />
Street. On the other hand, though, you<br />
have an extremely experienced management<br />
team that has built a very strong<br />
culture and that takes a generational<br />
view in how they do things. The mission<br />
is for the company to live forever, but at<br />
the same time they’ve shown a clear ability<br />
to produce high cash flow through the<br />
cycle. If we can buy into a company like<br />
that at the right price, that’s very appealing<br />
to us.<br />
Staying in Japan, explain your interest in<br />
pharmaceutical company Astellas<br />
[4503:JP].<br />
MM: Astellas isn’t one of the betterknown<br />
global pharmaceutical companies<br />
– it is the product of a merger five years<br />
ago between Yamanouchi Pharmaceutical<br />
and Fujisawa Healthcare – but it generates<br />
nearly ¥1 trillion in annual revenue<br />
[approximately $10 billion] from a portfolio<br />
of 18 drugs, with particular strength<br />
in immunology and urology. It has the<br />
largest salesforce in Japan, distributing<br />
drugs there for others, including Lipitor<br />
for Pfizer.<br />
The company also has a large newproduct<br />
pipeline, with 18 molecules that<br />
are in either Phase 2 or Phase 3 testing.<br />
Roughly half of the pipeline drugs are<br />
focused on areas in which the company<br />
already has a large presence, but the rest<br />
target new areas like diabetes and cardiovascular<br />
treatment.<br />
Value Investor Insight 5
The big issue for Astellas is that its<br />
two biggest global drugs, Prograf (for<br />
protecting against immune-system reactions<br />
to organ transplants) and Harnal<br />
(for treating enlarged prostates) are<br />
going off-patent. The market has been<br />
very focused on the potential earnings<br />
impact from that, which has resulted in<br />
what we believe is an extraordinarily low<br />
valuation for Astellas stock.<br />
How low is low?<br />
MM: At today’s market price [of ¥3,420<br />
per share], after subtracting about<br />
¥1,000 per share in net cash and investments,<br />
you’re paying around ¥2,400 per<br />
share for the company’s ongoing business.<br />
We estimate that the annual EBIT-<br />
DA of that existing business plus<br />
INVESTMENT SNAPSHOT<br />
Astellas<br />
(Tokyo: 4503:JP)<br />
Business: Manufacture, sale and distribution<br />
of pharmaceuticals, with special expertise<br />
in immunology and urology. Leading<br />
global brands include Prograf and Harnal.<br />
Share Information<br />
(@6/30/09, Exchange Rate: $1 = ¥95.915):<br />
Price ¥3,420<br />
52-Week Range ¥2,820 – ¥5,040<br />
Dividend Yield 3.5%<br />
Market Cap ¥1.63 trillion<br />
ASTELLAS HISTORY<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
research-and-development spending –<br />
basically cash earnings if they weren’t<br />
investing a dime into the business – will<br />
over the next few years trend toward<br />
¥600 per share. That means we’re getting<br />
our money back within four years,<br />
so we are effectively paying nothing for<br />
whatever cash flow the current portfolio<br />
of 18 drugs produces from that point on,<br />
and we’re effectively paying nothing for<br />
whatever cash flow the 18 drugs in<br />
Phase 2 or Phase 3 trials might produce.<br />
We don’t have to have detailed forecasts<br />
of those prospective cash flows to see a<br />
lot of upside in the share price from<br />
today’s level.<br />
Is there any overhang in the share price<br />
from concern over U.S. regulatory<br />
changes?<br />
THE BOTTOM LINE<br />
Market concerns over the impact of two of the company’s global drugs going offpatent<br />
have been overdone, says Matt McLennan. “Run-off” cash flow would pay<br />
back today’s share price within four years, he says, leaving any incremental earnings<br />
beyond that from a broad portfolio of existing and new products as pure upside.<br />
Sources: Company reports, other publicly available information<br />
Financials (FY2008)<br />
Revenue ¥965.70 billion<br />
Operating Profit Margin 25.9%<br />
Net Profit Margin 17.7%<br />
Valuation Metrics<br />
(Current Price vs. TTM):<br />
Astellas S&P 500<br />
P/E 9.6 35.4<br />
2007 2008 2009<br />
June 30, 2009 www.valueinvestorinsight.com<br />
6000<br />
5000<br />
4000<br />
3000<br />
2000<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
MM: The company’s most-global drugs<br />
are the ones going off-patent, so expectations<br />
for those are already diminished. In<br />
Japan, the regulatory risk is quite low.<br />
The country is known for being one of<br />
the toughest pricing environments in the<br />
world for pharmaceutical products.<br />
When drugs go off-patent in Japan, the<br />
falloff from generic competition is usually<br />
quite low because the price differences<br />
between branded and generic products<br />
aren’t that big.<br />
AD: That points up one big appeal of a<br />
company like Astellas over, say, Pfizer.<br />
Astellas has a distribution system and<br />
cost base focused on Japan, where you<br />
don’t see the kind of patent cliffs that<br />
some big U.S.-focused pharma companies<br />
have. The negative operating leverage facing<br />
a company like Pfizer with big products<br />
going off patent is much more severe<br />
than what Astellas would ever face.<br />
Any corporate governance complaints<br />
with Astellas?<br />
MM: Not really. They’ve been buying<br />
back some stock and the shares currently<br />
pay a 4% dividend yield, so they aren’t<br />
averse to using excess cash for shareholders’<br />
benefit.<br />
Is your interest in Astellas representative<br />
of a broader interest in pharmaceutical<br />
companies?<br />
AD: I wouldn’t say that. We have some<br />
exposure, but in what we think are somewhat<br />
special situations. We own Sanofi-<br />
Aventis [SAN:FP], for example, which has<br />
a new management team, generates a lot<br />
of free cash flow, pays a high dividend,<br />
and we believe owns a hidden gem in its<br />
vaccine franchise. We believe the vaccine<br />
business could be worth one-fifth of<br />
Sanofi’s total market cap, which leaves<br />
the rest of the business trading at a very<br />
low valuation.<br />
One large position that has badly lagged<br />
the market is Swiss holding company<br />
Pargesa [PARG:SW]. Does that make the<br />
investment case more compelling today?<br />
Value Investor Insight 6
AD: We have had a lot of success over<br />
the years with holding companies like<br />
<strong>this</strong>, but there are clearly cycles in how<br />
they are valued, with bear markets frequently<br />
widening the discounts to the<br />
underlying assets.<br />
There are essentially three layers to<br />
look at with Pargesa. The holding company<br />
itself owns a direct stake in Imerys<br />
[NK:FP], a French company that processes<br />
minerals and sells building materials<br />
worldwide. Pargesa also owns a 50%<br />
stake in Groupe Bruxelles Lambert<br />
[GBLB:BB], which is itself a holding company<br />
run by one of the wealthiest and<br />
most successful investors in Europe,<br />
Albert Frere. The third layer is then the<br />
direct holdings of GBL, which include<br />
stakes in oil giant Total [FP:FP], cement<br />
maker Lafarge [LG:FP], natural gas com-<br />
INVESTMENT SNAPSHOT<br />
Pargesa Holding<br />
(Switzerland: PARG:SW)<br />
Business: Investment holding company with<br />
large positions that it actively manages in<br />
such companies as Imerys, Total, GDF Suez,<br />
Lafarge and Pernod Ricard.<br />
Share Information<br />
(@6/29/09, Exchange Rate: $1 = CHF 0.925):<br />
Price CHF 67.55<br />
52-Week Range CHF 52.10 – CHF 116.40<br />
Dividend Yield 3.9%<br />
Market Cap CHF 5.74 billion<br />
PARGESA HISTORY<br />
150<br />
120<br />
90<br />
60<br />
30<br />
pany GDF Suez [GSZ:FP], water and<br />
waste management firm Suez<br />
Environnement [SEV:FP] and liquor company<br />
Pernod Ricard [RI:FP].<br />
We see three layers of discount here:<br />
Pargesa trades at a discount to the market<br />
value of its holding in GBL; GBL trades at<br />
a discount to the market values of its<br />
holdings; and GBL’s holdings themselves<br />
are undervalued relative to our estimates<br />
of their intrinsic values.<br />
Put some numbers on that, relative to<br />
Pargesa’s current share price of 67.55<br />
Swiss francs.<br />
AD: If you just look through to the end<br />
holdings valued at current market prices,<br />
the net asset value to Pargesa is around<br />
112 Swiss francs per share. If we mark<br />
THE BOTTOM LINE<br />
Bear markets often cause the discount to widen between investment holding company<br />
market values and the net asset value of their underlying holdings, says Abhay<br />
Deshpande. In the case of Pargesa, he says, the discount today is 40% using the current<br />
market value of its holdings, and nearly 50% using estimated intrinsic values.<br />
Sources: Company reports, <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong>, other publicly available information<br />
Financials (2008, attributable to PARG)<br />
Revenue CHF 10.74 billion<br />
Net Profit Margin 9.8%<br />
Valuation Metrics<br />
(@ 6/29/09, based on market prices):<br />
PARG<br />
NAV per share CHF 112.00<br />
Discount to NAV 39.7%<br />
2007 2008 2009<br />
June 30, 2009 www.valueinvestorinsight.com<br />
150<br />
120<br />
90<br />
60<br />
30<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
the end holdings to our estimates of<br />
intrinsic value – the primary adjustments<br />
being our putting 50-euro share prices<br />
each on Total and Lafarge – the Pargesa<br />
net asset value is closer to 130 Swiss<br />
francs.<br />
Are there risks associated with these types<br />
of cascading holding companies that<br />
would help explain such wide discounts?<br />
AD: One typical risk is that minority<br />
holders like us get the short end of the<br />
straw through the shuffling of assets<br />
among various related entities by the<br />
holding-company principals. To avoid<br />
that, we make sure to invest at the same<br />
level of the principals. Pargesa is controlled<br />
by a private entity called<br />
Parjointco, which represents the interests<br />
of Albert Frere and Paul Desmarais, one<br />
of the most highly respected investors in<br />
Canada. Their investment partnership<br />
has been one of the most successful we’ve<br />
ever seen, <strong>this</strong> side of Buffett and Munger.<br />
Given the structure, whatever moves<br />
Frere and Desmarais make to benefit<br />
themselves should also directly benefit us<br />
as Pargesa shareholders as well.<br />
At the portfolio-company level, where are<br />
the biggest challenges?<br />
AD: The biggest uncertainty is probably<br />
Lafarge. Like most big cement companies,<br />
the company gorged itself on acquisitions<br />
in recent years and, while they<br />
acquired some excellent assets, they tended<br />
to pay very high prices. The result is<br />
that the company is heavily laden with<br />
debt, which clearly concerns the market<br />
as the cyclical business has turned down.<br />
Longer-term we’re positive on the cement<br />
business, which is characterized for the<br />
most part by local monopolies, and we<br />
believe Lafarge’s underlying earnings<br />
power will prove to be quite attractive –<br />
particularly in relation to its current<br />
stock price.<br />
MM: With respect to Total, the company’s<br />
market value has fallen over the past<br />
year along with oil prices, but we believe<br />
the market has overreacted and that its<br />
Value Investor Insight 7
extremely large reserve base and extensive<br />
refining capacity are being significantly<br />
undervalued. The company has<br />
generated average annual EBITDA of €25<br />
billion, so even with a low multiple on<br />
that of six to seven times, the stock has<br />
50% upside. We’ve been buyers of Total<br />
directly as well.<br />
You described Cintas [CTAS] recently as<br />
a quintessential <strong>First</strong> <strong>Eagle</strong> idea. Why?<br />
AD: It’s a company that’s very easy to<br />
understand, with clear, basic competitive<br />
strengths and a cheap stock price. Its primary<br />
business is designing, manufacturing<br />
and servicing employee uniforms, and<br />
over time it has expanded the product line<br />
to include things like linens, fire extinguishers<br />
and janitorial supplies. It also<br />
has a document-management business,<br />
not unlike Iron Mountain’s.<br />
The key to Cintas’ business is the route<br />
density around centralized laundry and<br />
warehouse facilities. The more clients<br />
serviced within the radius of the facility,<br />
the higher the incremental margin earned<br />
on each additional client. Drivers are<br />
much more than just delivery people, they<br />
are customer-service contacts and are at<br />
least partly responsible for cross-selling<br />
additional services.<br />
The Cintas growth story was built<br />
around successfully driving the consolidation<br />
of a very fragmented industry. As<br />
the market leader in a business with significant<br />
scale economies, they’ve been<br />
able to translate their size into higher<br />
margins than their competitors, and have<br />
also made it difficult to compete with<br />
them on price.<br />
For a high-quality business, the share<br />
price hasn’t painted a happy picture for a<br />
long time.<br />
AD: As the business matured, the Street<br />
consistently marked down Cintas’ valuation.<br />
The share-price damage only accelerated<br />
as the economy went south in the<br />
latter half of last year. The company has<br />
responded by quickly reducing headcount<br />
and capital spending, but earnings have<br />
still been hit.<br />
We know what we’re getting here,<br />
which is a high-quality franchise, growing<br />
in the mid to low single-digits on the top<br />
line, that is trading at a low valuation<br />
based on muddle-through earnings<br />
power. That may be rather mundane, but<br />
we’ve historically done very well with<br />
these types of situations.<br />
Others have characterized the documentmanagement<br />
business as an interesting<br />
growth area. Do you agree?<br />
AD: There is potential for them to apply<br />
the same model to document management<br />
that they’ve used successfully in the<br />
INVESTMENT SNAPSHOT<br />
Cintas<br />
(Nasdaq: CTAS)<br />
Business: Provider of corporate-identity<br />
uniforms and ancillary products, as well as<br />
document storage, document disposal and<br />
on-site safety-related services.<br />
Share Information<br />
(@6/29/09):<br />
Price 22.93<br />
52-Week Range 18.09 – 33.73<br />
Dividend Yield 2.1%<br />
Market Cap $3.50 billion<br />
Financials (TTM):<br />
Revenue $3.90 billion<br />
Operating Profit Margin 13.8%<br />
Net Profit Margin 8.0%<br />
CTAS PRICE HISTORY<br />
50<br />
June 30, 2009 www.valueinvestorinsight.com<br />
40<br />
30<br />
20<br />
10<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
2007 2008 2009<br />
uniform business. But the document business<br />
is more competitive and we’d actually<br />
prefer they not overspend on it.<br />
With the stock trading at just under $23<br />
per share, what kind of potential upside<br />
do you see?<br />
MM: Based on our normalized estimates,<br />
we’re currently paying multiples of just<br />
over 10x earnings and 6x EBITDA, and<br />
we’re getting a better than 10% free cash<br />
flow yield. If you apply a 16% EBIT margin<br />
to roughly $25 per share in revenue,<br />
put a low double-digit multiple on the<br />
result and strip out net debt, we come to<br />
THE BOTTOM LINE<br />
This is a “quintessential <strong>First</strong> <strong>Eagle</strong> idea,” says Abhay Deshpande: a company that is<br />
easy to understand, with clear competitive strengths and a cheap stock price. By<br />
applying a low double-digit multiple to his estimate of normalized EBIT, he believes<br />
the private-market intrinsic value of the shares, after net debt, is around $40.<br />
Sources: Company reports, other publicly available information<br />
Valuation Metrics<br />
(@6/29/09):<br />
CTAS Nasdaq<br />
Trailing P/E 11.3 34.3<br />
Forward P/E Est. 12.9 19.3<br />
Largest Institutional Owners<br />
(@3/31/09):<br />
Company % Owned<br />
Arnhold & S. Bleichroder 7.9%<br />
Fidelity Mgmt & Research 4.4%<br />
Vanguard Group 3.9%<br />
Fiduciary Mgmt 3.8%<br />
Barclays Global Inv<br />
Short Interest (as of 6/10/09):<br />
3.3%<br />
Shares Short/Float 3.0%<br />
50<br />
40<br />
30<br />
20<br />
10<br />
Value Investor Insight 8
a private-market intrinsic value of around<br />
$40 per share.<br />
Are the biggest risks here cyclical?<br />
AD: The health of the business is closely<br />
tied to employment, so continued rising<br />
unemployment would likely not be a positive<br />
for the share price. That could be<br />
partly offset – or exacerbated – by the<br />
direction of fuel prices, which are a big<br />
cost component.<br />
A more structural risk is that attempts<br />
to unionize the Cintas workforce gain<br />
steam with the advent of new labor laws<br />
and regulations proposed by the current<br />
administration. The company today has<br />
34,000 employees, of which around 400<br />
are unionized, so any significant shift<br />
toward a more unionized employee base<br />
could have a highly negative impact on<br />
margins. They’ve been successful in<br />
avoiding unionization so far, but it’s<br />
clearly an issue we have to keep a close<br />
eye on.<br />
You’ve spoken about the general merits<br />
today of exposure to gold. Describe the<br />
specific merits of your holding in South<br />
Africa’s Gold Fields [GFI].<br />
MM: In addition to owning gold in a<br />
vault, we are also more than willing to<br />
own it in the dirt if we get the right<br />
price. In buying shares in a company like<br />
Gold Fields, we believe we’re effectively<br />
buying the metal at a discount to its<br />
market price.<br />
The company is one of the largest global<br />
gold miners, producing around four<br />
million ounces per year from mines in<br />
South Africa, Peru, Ghana and Australia.<br />
Our valuation of gold producers basically<br />
consists of going mine by mine and looking<br />
at the reserves in the ground and the<br />
costs to extract them, taking into account<br />
things like labor cost escalations and tax<br />
leakage. In Gold Fields’ case, it has close<br />
to 85 million ounces of proven reserves<br />
overall, and its cash costs of extraction<br />
average around $500 per ounce.<br />
One thing we may do a bit differently<br />
in our analysis is that we don’t significantly<br />
mark down the value of long-<br />
June 30, 2009<br />
lived reserves, which is effectively what<br />
people do when they discount the estimated<br />
cash flows from future reserves<br />
back to today. Over long periods of<br />
time, the price of gold has gone up in<br />
nominal terms at CPI plus a little, so<br />
we’d argue that the real value of reserves<br />
ten or twenty years out is not that different<br />
from the value today.<br />
As a buyer of Gold Fields’ stock [at a<br />
recent price of $12.40], you’re paying<br />
$500 per ounce in extraction costs, plus a<br />
premium that is the market cap of the<br />
company. As we calculate it, then, you’re<br />
able to buy the gold in the ground here at<br />
a price in the high-$700s per ounce. That<br />
INVESTMENT SNAPSHOT<br />
Gold Fields<br />
(NYSE ADR: GFI)<br />
Business: Exploration, mining and processing<br />
of gold from mines in South Africa,<br />
Ghana, Australia and Peru. Proven ore<br />
reserves are nearly 85 million ounces.<br />
Share Information<br />
(@6/29/09):<br />
Price 12.39<br />
52-Week Range 4.64 – 13.99<br />
Dividend Yield 0.5%<br />
Market Cap $8.73 billion<br />
Financials (TTM):<br />
Revenue $3.52 billion<br />
Operating Profit Margin 22.1%<br />
Net Profit Margin 9.6%<br />
GFI PRICE HISTORY<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
www.valueinvestorinsight.com<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
2007 2008 2009<br />
compares with paying $900-1,000 on the<br />
spot market.<br />
Are you making any explicit assumption<br />
about the price of gold in your analysis?<br />
AD: No. We believe exposure to gold<br />
adds value to the portfolio as a potential<br />
hedge. With gold, we’re relative rather<br />
than absolute value investors – our buying<br />
bullion versus buying gold stocks is a<br />
function purely of what’s offering us the<br />
best price at the time.<br />
How do changes in the price of gold and<br />
changes in the prices of gold stocks correlate?<br />
THE BOTTOM LINE<br />
Relative value investors when it comes to gold, Matthew McLennan and Abhay<br />
Deshpande buy gold stocks when they’re priced to offer the underlying reserves at a<br />
discount. With Gold Fields, they estimate they’re buying the company’s gold reserves<br />
at a price in the high-$700s per ounce, some 15% less than the spot-market price.<br />
Sources: Company reports, other publicly available information<br />
Valuation Metrics<br />
(@6/29/09):<br />
GFI S&P 500<br />
Trailing P/E 24.3 35.4<br />
Forward P/E Est. 12.8 15.6<br />
Largest Institutional Owners<br />
(@3/31/09):<br />
Company % Owned<br />
Arnhold & S. Bleichroder 5.5%<br />
Tradewinds Global Inv 4.5%<br />
Van Eck Assoc 2.9%<br />
Paulson & Co 2.8%<br />
Deutsche Bank<br />
Short Interest (as of 6/10/09):<br />
2.0%<br />
Shares Short/Float n/a<br />
25<br />
20<br />
15<br />
10<br />
Value Investor Insight 9<br />
5<br />
0
MM: Gold equities are levered to the<br />
price of gold, generally at a ratio of two<br />
or three to one. With a given cost of<br />
extraction, earnings of gold producers are<br />
going to be leveraged on the upside and<br />
downside to gold-price changes. In the<br />
short term that plays out, but in the long<br />
term it’s not as neat, because the only reason<br />
long-term gold prices would change<br />
dramatically would be if gold again<br />
becomes a monetary medium or if the<br />
cost of producing it changes dramatically.<br />
As you extend the time horizon, the relationship<br />
between gold’s price and the<br />
share prices of gold producers gets much<br />
closer to 1:1.<br />
Are there any balance sheet risks with<br />
Gold Fields?<br />
MM: Not really. Its debt is less than 10%<br />
of its intrinsic value, so there isn’t a great<br />
deal of financial leverage.<br />
June 30, 2009<br />
Jean-Marie Eveillard is still as advisor to<br />
the fund. What advice has he given lately?<br />
MM: At a time when you see many<br />
money managers kind of casting about<br />
ON SOCIAL ACCEPTANCE:<br />
It’s important to keep in mind<br />
that our balance and equanimity<br />
should not be based<br />
on external perceptions.<br />
for what they might be doing differently,<br />
Jean-Marie has been very supportive of<br />
our sailing a very steady course and<br />
maintaining a long-term perspective.<br />
Having a voice of experience and reason<br />
like that at a time like <strong>this</strong> has been quite<br />
valuable.<br />
www.valueinvestorinsight.com<br />
INVESTOR INSIGHT: <strong>First</strong> <strong>Eagle</strong><br />
Matthew, any trepidation attached to following<br />
in the footsteps of as accomplished<br />
an investor as Monsieur<br />
Eveillard?<br />
MM: Jean-Marie often talked about how<br />
he was a custodian of the approach<br />
espoused by Ben Graham and Warren<br />
Buffett, and we see ourselves as custodians<br />
as well. Neither Abhay nor I have a<br />
monopoly on what’s right, and there is a<br />
team here following a well-established<br />
approach with what we think is the temperament<br />
necessary to succeed. If we have<br />
that, I’d like to think we have a shot at<br />
continuing to preserve and grow capital<br />
for our clients.<br />
As value investors, we’re quite used to<br />
being short on social acceptance at different<br />
periods of time. It’s always important<br />
to keep in mind that our own balance<br />
and equanimity should not be based on<br />
external perceptions. VII<br />
Value Investor Insight 10
Disclosure<br />
Average Annual Returns as of 03/31/2010 Year to 1 Year 5 Years 10 Years Expense<br />
Date<br />
Ratio<br />
<strong>First</strong> <strong>Eagle</strong> Global Fund - Class A (w/o sales charge)(SGENX)<br />
<strong>First</strong> <strong>Eagle</strong> Global Fund - Class A(w/sales charge)(SGENX)<br />
4.23%<br />
-0.98<br />
39.66%<br />
32.68<br />
8.45%<br />
7.34<br />
12.64%<br />
12.21<br />
1.19%<br />
The performance data quoted herein represents past performance and does not guarantee future results. Market<br />
volatility can dramatically impact the fund’s short-term performance. Current performance may be lower or higher<br />
than figures shown. The investment return and principal value will fluctuate so that an investor's shares, when<br />
redeemed, may be worth more or less than their original cost. Past performance data through the most recent<br />
month end is available at firsteaglefunds.com or by calling 800.334.2143. The average annual returns for Class A<br />
Shares "with sales charge" of <strong>First</strong> <strong>Eagle</strong> Global Fund give effect to the deduction of the maximum sales charge of<br />
3.75% for periods prior to March 1, 2000 and of 5.00% thereafter.<br />
There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market<br />
conditions, economic and political instability and fluctuations in currency exchange rates. Investment in gold and gold<br />
related investment presents certain risks, and returns on gold related investments have traditionally been more volatile<br />
than investments in broader equity or debt markets.<br />
The holdings mentioned herein represent the following percentage of the total net assets of the <strong>First</strong> <strong>Eagle</strong> Global Fund as of March 31,<br />
2010: Cintas Corp. 1.71%, Fanuc Ltd. 2.00%, Astellas Pharma Inc. 1.52%, Pargesa Holding S.A. 1.50%, Gold Fields Ltd. ADS 1.33%, Essilor<br />
International S.A. 0.50%, Societe BIC 0.50%, Shimano Inc. 1.47%, Neopost 0.95%, Rayonier Inc. REIT 1.12%, Plum Creek Timber<br />
Company Inc. 0.72%, Deltic Timber Corp. 0.26%, Nestle S.A. 1.30%, 3M Co. 1.42%, Sealy Corp. 0.00%, Simmons Co. 0.00%, Pfizer Inc.<br />
0.00%, Sanofi-Aventis S.A. 1.65%, Imerys S.A. 0.00%, Groupe Bruxelles Lambert S.A. 0.42%, Total S.A. 0.64%, Lafarge S.A 0.00%,<br />
Suez Environnement S.A. 0.00%, Pernod Ricard S.A. 0.00%, Gold bullion 6.38%. The portfolio is actively managed and holdings can<br />
change at any time. Current and future portfolio holdings are subject to risk.<br />
The commentary represents the opinion of the Global Value Team Portfolio Managers as of June 2009 and is subject to change based on<br />
market and other conditions. The opinions expressed are not necessarily those of the firm. <strong>First</strong> <strong>Eagle</strong> Investment Management, LLC<br />
(FEIM) became investment adviser to the <strong>Funds</strong> commencing January 1, 2000. These materials are provided for informational<br />
purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any<br />
statistics contained here have been obtained from sources believed to be reliable, but the accuracy of <strong>this</strong> information cannot be<br />
guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided<br />
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.<br />
The <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong> are offered by FEF Distributors, LLC, 1345 Avenue of the Americas, New York, New York 10105. This<br />
collateral is not authorized for distribution unless accompanied or preceded by a prospectus. Investors should<br />
consider investment objectives, risks, charges and expenses carefully, which are detailed in our prospectus and<br />
summary prospectus and may be obtained by asking your financial adviser, visiting our website at<br />
firsteaglefunds.com or calling us at 800.334.2143. Please read our prospectus carefully before investing. For further<br />
information about the <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong> please call 800.334.2143. Investments are not FDIC insured or bank<br />
guaranteed, and may lose value.
<strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong><br />
1345 Avenue of the Americas | New York, NY | 10105-4300<br />
800.747.2008 | firsteaglefunds.com
Average Annual Returns as of 06/30/2010: Year to Date 1 Year 5 Years 10 Years Expense Ratio<br />
<strong>First</strong> <strong>Eagle</strong> Global Fund – Class A (w/o sales charge) (SGENX) -1.43% 15.39% 7.25% 11.94%<br />
<strong>First</strong> <strong>Eagle</strong> Global Fund – Class A (w/sales charge) (SGENX) -6.35 9.62 6.16 11.36<br />
The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically impact the<br />
fund’s short-term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate<br />
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<br />
end is available at firsteaglefunds.com or by calling 800.334.2143. The average annual returns for Class A Shares “with sales charge” of <strong>First</strong> <strong>Eagle</strong> Global<br />
Fund give effect to the deduction of the maximum sales charge of 5.00%.<br />
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<br />
fluctuations in currency exchange rates. Investment in gold and gold related investment presents certain risks, and returns on gold related investments have traditionally<br />
been more volatile than investments in broader equity or debt markets. The holdings mentioned herein represent the following percentage of the total net assets of<br />
the <strong>First</strong> <strong>Eagle</strong> Global Fund as of June 30, 2010: Cintas Corp. 1.51%, Fanuc Ltd. 1.89%, Astellas Pharma Inc. 1.45%, Pargesa Holding S.A. 1.20%, Gold Fields Ltd.<br />
ADS 1.45%, Essilor International S.A. 0.45%, Societe BIC 0.42%, Shimano Inc. 1.46%, Neopost 0.83%, Rayonier Inc. REIT 1.12%, Plum Creek Timber Company<br />
Inc. 0.66%, Deltic Timber Corp. 0.25%, Nestle S.A. 1.26%, 3M Co. 1.39%, Sealy Corp. 0.00%, Simmons Co. 0.00%, Pfizer Inc. 0.00%, Sanofi-Aventis S.A.<br />
1.38%, Imerys S.A. 0.00%, Groupe Bruxelles Lambert S.A. 0.72%, Total S.A. 0.51%, Lafarge S.A 0.00%, Suez Environnement S.A. 0.00%, Pernod Ricard S.A.<br />
0.00%, Gold bullion 7.11%. The portfolio is actively managed and holdings can change at any time. Current and future portfolio holdings are subject to risk.<br />
The commentary represents the opinion of the Global Value Team Portfolio Managers as of June 2009 and is subject to change based on market and other<br />
conditions. The opinions expressed are not necessarily those of the firm. <strong>First</strong> <strong>Eagle</strong> Investment Management, LLC (FEIM) became investment adviser to<br />
the <strong>Funds</strong> commencing January 1, 2000. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of<br />
future events, a guarantee of future results, or investment advice. Any statistics contained herein have been obtained from sources believed to be reliable,<br />
but the accuracy of <strong>this</strong> information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The<br />
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.<br />
The <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong> are offered by FEF Distributors, LLC, 1345 Avenue of the Americas, New York, New York 10105. This collateral is not authorized for<br />
distribution unless accompanied or preceded by a prospectus. Investors should consider investment objectives, risks, charges and expenses carefully,<br />
which are detailed in our prospectus and summary prospectus and may be obtained by asking your financial adviser, visiting our website at firsteaglefunds.<br />
com or calling us at 800.334.2143. Please read our prospectus carefully before investing. For further information about the <strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong>, please call<br />
800.334.2143. Investments are not FDIC insured<br />
or bank guaranteed, and may lose value.<br />
<strong>First</strong> <strong>Eagle</strong> <strong>Funds</strong><br />
1345 Avenue of the Americas | New York, NY | 10105-4300<br />
800.334.2143 | firsteaglefunds.com<br />
1.19%<br />
FE VII 06/09 2Q ’10