Return To The Winner's Circle
The legendary Jean-Marie Eveillard is nearing retirement riding a white horse.
In a career that started before many technology fund managers were born, Jean-Marie Eveillard has proven that while value investing has American roots, it can translate well in any language and in any market.
First Eagle Global Fund, which invests in securities issued here and abroad, became one of the first mutual funds to successfully apply the principles of value investing to overseas markets when Eveillard became its manager in 1979. Its five-and ten-year annualized returns of place it in the top 1% of funds in Morningstar's international hybrid category over both periods. Over the last three years, it has finished in the top 4% of funds in the group.
The 62-year-old, French-born Eveillard took his cue from value guru Benjamin Graham, whose works he read as a young research analyst in the New York office of a French bank during the late 1960s. Although value investing was virtually unheard of in Europe then, and remains an oddity there, Eveillard was drawn to Graham's belief that stocks are ownership interests with intrinsic value, and that buying undervalued securities provides a margin of safety.
But when he returned to Paris in the early 1970s, colleagues greeted his enthusiasm for value investing with skepticism. A few years later, he went back to New York to manage the Sogen Fund, now First Eagle Global Fund, which had just $15 million in assets at the time.
Charles de Vaulx, appointed the fund's co-manager in 1999, first met Eveillard in the mid-1980s as one of a group of young French analysts sent to New York by Societe Generale Asset Management, the fund's former parent. His temperament and training as a credit analyst set him apart, says Eveillard.
"Most of the trainees were in New York to have a good time, and they would come to work in the morning looking bleary-eyed," he recalls. "Charles was the exception. He took the job seriously. As a credit analyst familiar with balance sheets, his skills were useful as a value investor. And he was open to that type of security analysis because he had not been trained otherwise."
Eveillard hired de Vaulx as an analyst in 1987, and the two have collaborated ever since. Eveillard, says his 41-year-old co-manager, is "my mentor and my friend." When it comes to presenting their respective portfolio picks, says de Vaulx, "We have to agree somewhat. The important thing is that we do not disagree."
One of the longest-standing professional relationships in the mutual fund industry will draw to a close in 2005, when Eveillard is scheduled to retire. That is a source of concern to many advisors who for years have come to view Eveillard as their own "security blanket." The news that he will continue working in a consulting role while de Vaulx succeeds him as portfolio manager is of some comfort.
Though he is back in the winner's circle posting impressive returns during the recent bear market, Eveillard found his own faith in value investing challenged at the end of the late, 17-year bull market. Looking back, Eveillard says that the late 1990s-when his value funds lagged the broader market averages and growth stocks-marked the low point of his career.
Between 1997 and early 2000, as Eveillard and de Vaulx stuck with their comparatively sleepy strategy and accumulated cash rather than invest in a pricey market, over half of the fund's shareholders left. Between its peak in October 1997 and most recent trough in September 2001, the fund's asset base slipped from $4.4 billion to $1.46 billion.
Eveillard views the era as the peak of his career as well as its nadir. "We stuck to our guns, and were proven right," he recalls. "As one associate told me, it's better to lose half our shareholders than half the value of our investments, which is what happened to a lot of funds when the bubble burst."
Known for his outspokenness, he remains critical of the industry's propensity for latching on to the latest market fad, both then and now. "A mutual fund can be an asset gathering machine or the steward of savings," he says. "Most mutual fund groups are asset gathering machines."
As the funds that once eclipsed First Eagle Global continue to shed assets as quickly as they acquired them, Eveillard and de Vaulx are enjoying renewed recognition for their fund's buoyancy in down markets, and respectable returns in bullish ones. Assets at May 31 stood at $2.9 billion.
The pair selects stocks based on a company's intrinsic value, or the amount a knowledgeable buyer would pay in cash for a business. They'll consider a company of any size as long as its stock appears undervalued in relation to its assets and cash flow. The median market capitalization of the 245 companies in the portfolio is $837 million, but an ample peppering of larger companies, such as Tyco and McDonald's, brings the fund's weighted average market capitalization to about $6 billion. Annual portfolio turnover usually stays below 20%, about one-fifth the industry average.
Bonds account for a mere 18% of fund assets. Morningstar analyst Gregg Wolper notes that despite the fund's tendency to have a smaller bond component than most hybrid funds, its volatility is "extremely low." High-yield corporate bonds dominate, although Eveillard says that he hasn't done much buying recently because yields are down substantially from their levels in late 2002 and he just isn't attracted at current prices.
While pricing is key for both stocks and bonds, economic and cultural trends also come into play. After a multi-decade bear market, Eveillard and de Vaulx believe Japan has the most undervalued stocks of any country. Yet they've only committed about 10% of the fund's foreign stock allocation there because of the country's inability to enact political and financial reform. "From a pure valuation standpoint, the country is intriguing," says de Vaulx. "But we can't jump into a place with such systematic risk, no matter how cheap its stocks are."
U.S. stocks represent 30% of assets, near historically low levels for the fund, because of their high valuations relative to foreign markets. According to Bernstein Research, European stocks sell at 7.3 times cash flow, compared to 11.1 times cash flow for U.S. stocks. They have a dividend yield of 3.5%, compared to 1.9% for U.S. stocks.
De Vaulx says that stock prices in the U.S. will "have to get a good 20% lower before we get excited about things," while Eveillard observes that the relatively small number of value investors combing European markets, particularly for small and mid-sized companies, make them a more productive hunting ground.
Despite reservations about the Japanese and U.S. markets, the fund has a healthy dose of names from both countries, including Japanese bicycle parts maker Shimano. Most growth investors ignore the company because of its low return on equity, and it doesn't show up on many value screens because of its high price-earnings ratio. Yet its cash hoard, which the company is already using to buy back its own shares, represents an astounding 45% of market capitalization. "The low returns on cash mask a very profitable business," says de Vaulx. "People who don't like this company have probably not taken a good look at its balance sheet."
On the U.S. side, a sizable stake in Tyco International's stocks and bonds exemplifies the managers' willingness to buy when few others will, and to hang on through thick and thin. The fund first began accumulating the position in April 2002, soon after accounting scandals caused the stock to fall sharply from the mid-sixties into the high twenties. "The company lied to Wall Street about being a growth stock," says de Vaulx. "In reality, Tyco is actually a group of quality businesses with lots of free cash flow and low growth. It just didn't become attractive to us until the price dropped."
When the stock continued to fall further as more accounting irregularities surfaced later in the year, de Vaulx and Eveillard bought Tyco bonds, which mature in 2011 and have a 11.5% yield to maturity. They also continued accumulating the stock on the way down. Tyco now trades at about $15 a share, about the fund's overall cost basis. The bonds, which they bought at a 30% discount and now trade at close to par, have been far more profitable.
Their tenacity also yielded favorable results recently when long-time gold stock holdings such as Newmont Mining Corp. finally sprang to life with the spike in gold prices, which rose from $260 an ounce in April 2001 to $380 an ounce in early 2003. De Vaulx says that while gold prices aren't as attractive as they were two years ago, they are "still cheap." He also notes the historic relationship between the falling value of the dollar against other currencies, which is happening today, and rising gold prices. Eveillard has always viewed gold as an "insurance policy."