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By Jason Stipp | 03-16-2011 02:14 PM

McLennan: Intrinsic Value Still Intact in Japan

It's uncertainty--as opposed to readily identifiable losses in existing intrinsic value--that's weighing on Japan stock prices at the moment, says First Eagle's Matthew McLennan.

Jason Stipp: I'm Jason Stipp for Morningstar. Although we did see the Japanese markets begin to recover on Wednesday [in Japan], news flow [early Thursday morning in Japan] continued to disrupt the [global] markets as Japan markets were closed.

Talking with us today to give us some perspective and insight on the situation in Japan is Matthew McLennan. He is a portfolio manager with First Eagle, including on the First Eagle Global and the First Eagle Overseas funds.

Thanks, so much for calling in today, Matthew.

Matthew McLennan: It's a pleasure.

Stipp: The first question for you, in both of those funds, you've had an emphasis on Japan, so I'm curious to know as you're assessing your portfolio holdings, what factors are you looking at to determine how they may be impacted by the disaster and the unfolding crisis that's happening in Japan?

McLennan: Well, if you look at our portfolios, the reason why we've had an emphasis on Japan--historically in the Global portfolio, we've had a high-teens percentage of the portfolio in Japan and in the Overseas it's been in the high 20s--is that we've seen a margin of safety in the underlying securities that exist in that market. And when I talk about our margin of safety, I'm referring to the fact that the valuations of the businesses that we've identified in Japan have been attractive, and in many cases the capital structures have also been very resilient with no debt and net cash. So, if we've been able to identify companies that embody low valuations and sustainable global market positions with rock-solid balance sheets, then that's where we've gone as the least-worst place to deploy capital, if you will, from the point of view of our overall portfolio construction.

So, in looking at the current situation in Japan, we start out with a piece of mind that despite the fact that we may see adverse stock price reactions in some of these securities in this window of uncertainty, the underlying businesses that we're part owners of in Japan have a great deal of resilience. The starting valuation that we went into this with was quite low.

So, those two factors as a whole help mitigate, if you will, the probability of a permanent impairment of capital. At First Eagle, we've always been focused first and foremost on avoiding permanent impairment of capital.

Stipp: I think one of the questions that investors have as they're looking at this region and the sell-off that we saw the first couple of days after the disaster struck, and you alluded to this is, how much of that price drop is real fundamental loss of value and how much might be fear selling?

So, as you look across your holdings, you said that you had had a margin of safety already. Do you think that your prospects may have dimmed to any extent for those holdings or do you see that the price movements may just be temporary because of the uncertainty?

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