The Value of Go-Anywhere Investing
At First Eagle we feel that investment managers should not be rewarded for high returns that are merely the result of a rising market tide. However, benchmarking, like many widely-accepted bad ideas, began life with a respectable purpose. Over time, a fund’s performance should be measured against an appropriate standard, such as the return on a broad-based market index, like the S&P 500 or the MSCI World. But it is our opinion that benchmarking as it is applied today does far more harm than good.
The principal source of this harm is the inappropriately short time horizons over which an investment manager’s performance is judged. A good investment manager with the flexibility to invest where the opportunities lie, who is dedicated to the preservation of client capital and focused on generating positive absolute returns over time, will often invest in ways that differ significantly from capital market benchmarks. This is especially the case when markets are in the grip of a mania. Some examples include Japan in the late 1980s, tech and Internet stocks in the late 1990s and financial stocks and natural resources more recently. As mania stocks rise in value, they come to dominate benchmark indices. Yet, these are precisely the investments whose temporary, but wildly inflated, prices should not tempt investors. Since manias have surprisingly long lives, an investment manager’s refusal to buy the “glamour” stocks can lead to benchmark performance dispersion, or rather benchmark underperformance, potentially lasting for several years. However, we believe that the stocks of valuable businesses with solid balance sheets and sustainable earnings power will win over time. Thus, managers who are given the flexibility to go anywhere and own out-of-benchmark stocks and who make independent investment decisions, in our view, are more likely to outperform over the long term.
The commentary represents the opinion of the Global Value Team as the date noted and is subject to change based on market and other conditions.
The opinions expressed are not necessarily those of the firm. These materials are provided for informational purpose only. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistic contained herein have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The 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.
There are risks associated with investing in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations in currency exchange rates. These risks may be more pronounced with respect to investments in emerging markets.
Investment in gold and gold related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader equity or debt markets.
The principal risk of investing in value stocks is that the price of the security may not approach its anticipated value or may decline in value.
All investments involve the risk of loss of principal.