The IVA International Fund has been adding shares of Allied Irish Banks. It’s basically trading at its tangible book value, it’s a player in an oligopolistic market, it’s well capitalized and, assuming interest rates eventually rise in Europe, it has the potential to grow its earnings as it reduces its nonperforming loans, he says.
Other positions in the fund, global companies that de Vaulx finds reasonably cheap with attractive dividends, include Japan-based Miraca Holdings, which operates in the health-care sector, and Holland-based Royal Boskalis Westminster NV, a leading dredging contractor that provides a variety of maritime services.
Addressing Question Marks
In general, the landscape for international value is “a somewhat precarious environment,” says Matt McLennan, head of global value at First Eagle Investment Management in New York. “There are some potential headwinds the markets may need to digest” over the next 12 to 18 months.
The U.S. will lack fiscal stimulus, he says, and the combination of this, the rise in interest rates and the rise in oil prices could result in a normalization or slowdown in U.S. growth. What happens in the largest economy impacts the rest of the world, he says.
China is becoming a “trickier landscape,” he says. Its stock market tumbled this year amid the country’s shift to more modest monetary growth (an attempt to rein in shadow banking or unregulated lending), its elimination of presidential term limits, its weak exchange rate and President Trump’s exacerbating talk of tariffs, he says.
Europe’s economic growth has decelerated this year and there are “potential fissures,” he says, in Europe’s structure. Besides Brexit, he notes that Italy’s budget crisis will test the European Union and that the spreads between Italian and German sovereign bonds are wider than they’ve been in five years (signifying weakness in Italian bonds).
Prudent investors must look at all these “question marks,” says McLennan.
The First Eagle Overseas Fund, one of the portfolios he manages, had over 72% allocated to equities as of September 30. The balance was in cash (14%), gold-related investments (11.5%) and sovereign bonds (around 2%). The fund is hedging currency a bit because the yen and the euro aren’t as cheap as they have been at times over the last decade, he says.
McLennan is generally open to investing anywhere. “We don’t believe that any one region in the world has a monopoly on good businesses,” he says. “It’s just a matter of finding the right business at the right price.” But he’s avoiding China because many of its larger companies have dramatically grown their balance-sheet debt over the last decade.