Goldberg's Picks for Low-Risk Stock Funds: First Eagle Global

Note: Most investors couldn't care less about beating the market. They want solid returns from funds that will hold up well in awful markets. This is the final of five columns on my favorite low-risk stock funds.

Japanese stocks have been a sinkhole for value investors. But Matthew McLennan, co-manager of First Eagle Global (symbol SGENX), has planted 20% of the fund’s assets in Japan, where the stock market is more than 75% below its 1989 peak.

That kind of contrarian move is just what you’d expect from a fund that was once run by Jean-Marie Eveillard. The legendary former fund manager, now 71, chalked up one of the best and longest records in the business -- and he did it while keeping his fund’s volatility remarkably low. He helped select McLennan and his fellow co-managers before stepping down (for the second time) in March 2009, and he still serves as “senior adviser” to First Eagle.

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McLennan describes Eveillard’s current role as “a mentor and source of wisdom.” Eveillard is at the fund’s Manhattan office one or two days a week but says he’s “very careful not to give the impression that the old man is trying to put his hand in the decision-making.”

It was Eveillard who years ago started putting some of First Eagle Global’s assets into gold, at a time when virtually nobody else would touch it. First Eagle Global currently has 6.6% of assets in physical gold and a bit less than 5% in gold mining stocks. McLennan sees the value of gold as the “inverse of faith in paper currencies.” And he thinks many mining stocks are undervalued relative to the metal itself. (Try our quiz: What You Need to Know About Gold.)

The big Japan stake “isn’t a bet on Japan, Inc., or Japanese politics,” says McLennan. Rather, he says, the fund has found solid businesses in Japan trading at low prices. Secom Ltd., for instance, controls more than 50% of Japan’s home-security business, boasts no debt and has attractive profit margins. SMC Corp. is a global leader in automation equipment. McLennan also says Japan’s proximity to emerging Asian nations gives its companies advantages over firms that are located farther away.

If you had to use one word to describe First Eagle Global, it would be “cautious.” “Our most important principle has been to avoid permanent loss of capital,” McLennan says. “We start with gold and cash as ballast and move to stocks when we can find a margin of safety” in their share prices. The fund has 10% in cash, down from 20% before the market began its selloff in late July.

This one-of-a-kind fund has produced a rare combination of high returns and low volatility. Over the past ten years through September 23, the fund gained an annualized 12.9%. That compares with an annualized 3.1% for the MSCI All Countries World Index. First Eagle lost only 34.8% in the 2007-09 bear market, compared to a loss of 59% for the index. The fund is 34% less volatile than the MSCI global index.

McLennan, 42, his two co-managers and about a dozen analysts assemble the portfolio by focusing on individual stocks, but they devote a lot of attention to the big picture as well. And what they, and Eveillard, see isn’t pretty. The financial crisis led governments to bail out the private sector, but now the U.S. and European nations are up to their necks in debt. Meanwhile, returns on cash and bonds are likely to be meager going forward. “Stocks are the least-worst choice,” McLennan says.

First Eagle Global buys “high-quality, eclectic, durable businesses when they’re out of favor,” he adds. Then it holds them, typically for five years or more. “Our core competitive advantage is our patience.” Patience allows the fund to invest in companies that are out of favor and, consequently, cheaply priced because they’re economically sensitive or because they’ve made some mistakes.

For instance, the fund owns Sysco (SYY), the restaurant supplier, and Cisco Systems (CSCO), the maker of routers and switches. Sysco has fallen from its 2007 peak of $35 to $26, largely because of the weak economy. Cisco faces increased competition, and management has made some rotten decisions. Its stock trades at $16, down 80% from its 2000 high. (For more about Cisco, see STOCK WATCH: Can Two Tech Titans Get Off the Mat?)

About one-third of the fund is in U.S. stocks, and roughly 45% is in foreign stocks. But the fund has just 7% in emerging-markets stocks, which suffered terribly in the recent selloff. McLennan says it’s folly to think that emerging markets can keep growing rapidly when the developed world is in the doldrums. China, in particular, will have to adapt to slower global growth, he says.

The fund has one negative: If you buy it on your own, you’ll have to pay a 5% sales charge (annual expenses on the class A shares are 1.16%). You can get the fund without a load if you go through an adviser, but he or she will charge you one way or another.

The bigger concern is how much of Eveillard’s brilliance is rubbing off on the current managers. McLennan and his colleagues are impressive, but the long-term record still belongs to Eveillard. I think the new crew is doing a fine job of following in Eveillard’s footsteps, and I believe First Eagle Global will continue to be a superior fund.

Note: This now concludes our five-column series on my favorite low-risk stock funds. You can view all of my picks on Our Mutual Funds Guide under "Goldberg's Picks."

Steven T. Goldberg (bio) is an investment adviser in the Washington, D.C. area.

Steve has been writing for Kiplinger's for more than 25 years. As an associate editor and then senior associate editor, he covered mutual funds for Kiplinger's Personal Finance magazine from 1994-2006. He also authored a book, But Which Mutual Funds? In 2006 he joined with Jerry Tweddell, one of his best sources on investing, to form Tweddell Goldberg Investment Management to manage money for individual investors. Steve continues to write a regular column for Kiplinger.com and enjoys hearing investing questions from readers. You can contact Steve at 301.650.6567 or sgoldberg@kiplinger.com.