This rating and report were issued for a different share class of this fund. The performance and fee structure of this class may vary from that referenced.
Ownership changes at First Eagle, the firm subadvising this fund’s management, and capacity questions have added to our long-standing reservation on its fee structure, and have eroded our conviction.
It has been an eventful year for First Eagle. Its founding family is now a minority shareholder, as private equity firms Blackstone and Corsair combined to buy 58% of the firm. Meanwhile, Bridget Macaskill, CEO since 2010, was replaced in March 2016 by former Jennison Associates CEO Mehdi Mahmud. Finally, on Sept. 21, 2015, the SEC announced that the fund’s advisor will pay nearly $40 million to settle charges that the firm improperly used mutual fund assets to pay for the marketing and distribution of fund shares. Thus, First Eagle’s Parent rating was lowered to Neutral.
Veteran manager Abhay Deshpande--the team’s strongest link to its past under longtime skipper Jean-Marie Eveillard--left in October 2014, but the current team is deep and experienced. Managers Matt McLennan and Kimball Brooker Jr. have worked on the team for roughly eight years, and a 15-person analyst team supports them. Eight of the analysts have served here since at least 2009. Furthermore, the team has maintained the disciplined, valuation-conscious strategy it has employed with great success for decades. The managers focus on companies with sturdy balance sheets selling at a discount to their estimate of intrinsic value, let cash build when opportunities are scarce, and typically own modest stakes in bonds and gold bullion. The success of the strategy has led to strong inflows over time, and ideally, it would close to preserve its flexibility, as it is now more difficult to take significant positions in individual smaller-cap stocks (as it did in the past under Eveillard). This element is adding to our long-standing concerns on the fund’s fee structure. Ongoing charges are not only above average here but also come with a performance fee whose hurdle is linked to Libor rather than to an equity index as one would expect given the portfolio’s positioning. We are downgrading it to a Morningstar Analyst Rating of Neutral.