Passport stamps are a familiar sight to Charles de Vaulx, who was born in Morocco and lived in several countries before moving to the United States in 1985. Now comfortably settled in the New York offices of International Value Advisers, the firm he launched in 2008 with longtime associate Charles de Lardemelle, de Vaulx continues globe-trotting for the IVA Worldwide Fund. In the two years since it opened, the fund has accumulated an astounding $5.5 billion in assets and has a solid fan base that includes many financial advisors.

About two-thirds of that money is invested in a multi-cap portfolio of stocks from countries around the world that have strong balance sheets and trade below estimated intrinsic value, or what a knowledgeable private buyer would pay for a business. The fund's eclectic investment menu also features bonds, precious metals, cash and currency plays.

The undervalued investment stew is designed to offer a margin of safety and downside protection. "My partners and I have a lot of our own money invested in our funds, so we have an incentive to limit losses for ourselves and our shareholders," says the 49-year-old manager in a melodious French accent.

His flexible investment charter, his aversion to downside risk, and his personal stake in the fund are key components of his style and have been since 1999, the year he was named co-manager of two First Eagle mutual funds managed by the legendary Jean-Marie Eveillard.

De Vaulx first met the value maestro more than two decades ago as a young French analyst at Société Générale Asset Management, First Eagle's former parent company. "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," recalled Eveillard in a 2003 interview with Financial Advisor magazine. "Charles was the exception. He took the job seriously."

The Eagle Funds invested in undervalued stocks, but the managers would also move hefty sums into cash when the opportunities seemed unappealing, and they also kept a stake in alternative investments such as gold bullion. Though these gambits kept the funds off the list of chart toppers during strong bull markets, they also helped keep the Eagle Funds resilient in down markets. And over the long term, the funds have delivered market-beating returns with less volatility and risk than most of their peers.

The investment strategy remained seamlessly intact when de Vaulx assumed control of the First Eagle funds after Eveillard's retirement in 2005. But then de Vaulx unexpectedly left the firm in early 2007, launching the IVA Worldwide and IVA International funds the following year.

De Vaulx, who once called Eveillard his "mentor and friend" won't comment on his surprising departure or whether he has had contact with his former colleague, who now sits on First Eagle's board of trustees. The First Eagle camp is equally mum about the subject.

But he responds quickly when asked why investors might consider his new funds over those he left behind, which are now run by a team of Eveillard-trained co-managers. For one thing, the core members of the team that helped make those Eagle funds a success are now at the new firm. They include fund co-manager and former First Eagle associate portfolio manager Charles de Lardemelle, as well as several analysts. To keep the fund at a manageable size, de Vaulx has pledged to close IVA Worldwide, which now has $5.5 billion in assets, once it reaches $15 billion.

He says that while about one-third of the holdings in the IVA Worldwide fund and the First Eagle Global fund overlap, the two funds are more like distant cousins than siblings in their composition. The latter fund has a much lower percentage of assets in bonds and more exposure to gold than IVA Worldwide. The First Eagle fund also gains some of its gold exposure through mining stocks, while IVA sticks strictly to bullion.

"Overall, we are better at picking stocks and have better downside protection," says de Vaulx.

Bracing For A Slow Recovery
That protection will be key to weathering the tough economic times he sees ahead. Instead of a classic V-shaped recovery, he sees economic growth topping out at 2% to 2.5% over the next three to five years. That falls short of the 3% growth he says is necessary for job creation.

"Downturns caused by too much credit in the system are not typically followed by a normal recovery," he says. "Small businesses create jobs and there is no evidence they are expanding. And Americans can't spend because they don't have their homes to use as an ATM machine anymore."

The picture looks even worse in Europe, where economic growth will likely be mired in the 1% to 1.5% range for the foreseeable future. Even the relatively strong economies like those in Germany and Switzerland will be affected, since they are not exporting as much to weaker Southern European nations such as Portugal and Italy.

While emerging economies such as China's are likely to fare better, de Vaulx believes it may be difficult for them to decouple completely from the world's weaker economies. Those countries like Brazil and Argentina that have thrived amid rising commodity prices could suffer a setback if prices weaken.

"The good news is valuation," he says. "Many markets are trading well below the levels of two or three years ago. Company balance sheets are looking better and corporate profits have held up well. And compared to most bonds, equities look relatively cheap."

At the end of April, the fund had more than 20% of its assets in cash-not unusual, since de Vaulx would rather keep money on the sidelines than stay fully invested if he sees nothing he wants to buy. But since April, he has taken advantage of stock market volatility to pick up securities he considers undervalued. He started making a number of purchases concentrated among larger, well-capitalized U.S. companies, and by late July, his cash levels had fallen to around 9% of assets.

He suspects some of these blue chips are undervalued because hedge funds, which gravitate to more exotic fare, simply aren't interested in them. "A few years ago, small and mid-cap stocks were cheap and large companies were expensive," he says. "Now, it's the other way around."

His bargain hunting has led him to technology stocks, where he has been adding to positions in familiar names such as Dell Computer and Microsoft. At prices between six and nine times operating income, he calls the stocks "safe and cheap." But he isn't totally enamored of the way tech companies are using their excess cash to make high-priced acquisitions. "I'd rather see them buy back stock or make a special cash dividend before tax rates increase," he says.

He has also increased positions in insurance brokers Aon and Marsh & McLennan. As service businesses with almost no capital requirements, the companies should provide a good inflation hedge. Mastercard, which earns recurring revenues from fees for processing credit card transactions, should also benefit when inflation picks up.

During the summer, de Vaulx added to the fund's stake in the Washington Post Company, which declined when investors worried that a government crackdown on student loan programs would hurt the company's Kaplan unit. "With the stock so low, we were basically paying for the cable and newspaper operations and getting the Kaplan business for nothing," he says.

The fund has 14% of assets in Japanese companies, which he calls "by far the cheapest market in the world. Stocks there sell at 1.1 times book value, compared to 2 times book value in the U.S." He says that the cheapness of the market has less to do with the country's economy than the fact that companies are not managed with shareholder interests in mind. They do, however, have strong balance sheets and are sitting on a huge amount of cash.

"If you take that cash out of the equation, the adjusted price-earnings ratios are quite low," he says.

The fund's largest Japanese holding is Astellas Pharmaceuticals, which, like other pharmaceutical companies, has a product pipeline in need of replenishment. But Astellas has also made several reasonably priced acquisitions and has bought back a significant percentage of its shares. At a price of less than five times operating income, the stock "is considerably cheaper than Pfizer."

Because Japan now exports more goods to China than the U.S., he views companies there as a back-door entry point to that emerging market's growth. He avoids direct investment in Chinese companies because of their lack of transparency and the threat of government regulation. "It's a mistake to mechanically equate strong economic growth with good stock market performance," he observes.

As new fund inflows go largely toward stock market bargains, the bond portion of the portfolio has shrunk from 35% of assets at the middle of last year to its current level of about 20%. The bulk of the bond allocation is in former investment-grade bonds that became high-yield securities when tough times hit. To prevent a hit if inflation rears up in a couple of years, de Vaulx keeps maturities in the two-to-seven year range.

At 6.5% of assets, gold bullion represents the fund's largest position. The stake represents a form of insurance against both inflation and deflation, since gold prices tend to do well in both types of environments.