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First Eagle Amundi International AE-C

Analyst Report
Morningstar's Take

by Thomas Lancereau, CFA
*  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.
On Dec. 12, Unicredit signed a binding agreement with Amundi for the sale of Pioneer Investments. According to Unicredit’s and Amundi’s press releases, the total transaction value of around EUR 4 billion entails a cash consideration paid by Amundi of EUR 3.545 billion, whereas UniCredit will receive a EUR 315 million extraordinary dividend to be distributed by Pioneer. The deal is expected to close in the second quarter of 2017. According to both firms, the combined entity will have total assets under management in excess of EUR 1.2 trillion. Under the terms of the deal, Unicredit agrees to continue distributing that entity’s funds in Italy, Germany, and Austria for a period of 10 years. This announcement comes amid a challenging environment for the Italian banking sector and negative sentiment among investors related to the bank’s profitability and capital position. Unicredit’s shares had lost around 50% of their value in 2016 (through the close of business Friday Dec. 9).

Given the information made public by both firms, and assuming the deal closes in 2017 as planned, the current expectation is that Pioneer will be fully integrated into Amundi’s structure by 2018. The French group aims to realize cost synergies of EUR 150 million by merging investment platforms, IT services, and back-office services, as well as reducing duplication in some investment teams. Amundi expects redundancies to be slightly less than 10% of the combined workforce. That said, a number of key factors remain uncertain, at least until the integration phase. These uncertainties relate to both firms and include the location and composition of investment teams, the potential rationalization of the fund range, the pricing strategy, and the incentive structure for investment professionals.

We take some comfort from the fact that Amundi has already identified key areas of retention and growth within Pioneer’s range and expertise, such as multiasset, US equity, US fixed income, and European equities. This might insulate those investment teams from turmoil, at least over the medium term. Outside of those areas, however, there are a number of overlapping fields, such as European fixed income, where rationalization between the two firm’s investment staffs might occur. We are also closely monitoring the investment teams for any signs of turnover during this period. At this stage and up until the closing of the deal, Pioneer retains its well-structured compensation structure. Investment professionals are eligible to a series of deferred pay programs: a Long-Term Incentive Plan, a Share-Based Incentive Plan, which vests over either three or five years, and a Deferred Compensation Plan invested in one or more of Pioneer’s funds and with a vesting schedule of up to 10 years. As long as they remain in place, these measures should contribute to team stability.

All in all, while we are yet to be convinced that the merger will bring substantial benefits to fundholders, we also do not believe investors have immediate reasons to panic. We will continue to monitor developments both at the Parent level and at the level of the individual funds and will update our take as needed in the coming months.

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.

Morningstar Analyst Rating™
To find out how Morningstar rates a fund click here.
Portfolio RoleThe fund can be used as a core portfolio holding for exposure to global stocks.
Morningstar Pillars
Solid and experienced, despite the loss of a veteran manager.
Amundi’s acquisition of Pioneer adds a layer of uncertainty to this unimpressive Parent.
The cautious strategy aims to preserve capital.
The fund remains very expensive.
Morningstar Analyst RatingMorningstar evaluates funds based on five key pillars, which it's analysts believe lead to funds that are most likely to outperform over the long term on a risk-adjusted basis.
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