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First Eagle's McLennan: We've Been Putting Money to Work

Bridget B. Hughes, CFA

Bridget Hughes: Hi. I am Bridget Hughes. I am one of the analysts with Morningstar. I am here at First Eagle Funds with Matt McLennan, who is the Head of the Global Value team, and a Manager on First Eagle Global, First Eagle U.S. Value and First Eagle Overseas. Thanks Matt for joining us.

Matthew McLennan: Hi. How are you Bridget?

Hughes: Good. Thanks. So, it's been about 18 months or so since you've been heading the team here and now you are on your own now that Jean-Marie is officially retired. I wonder if you can just comment on where you are in terms of the team and the analysts, and how you think things are going?

McLennan: Well, we feel very good about the team. I think rather like we were buying stocks at the depths of the crisis, we had an opportunity to invest in the human capital of the team. And today we have the most experienced team we've ever fielded. If you look at the resumes of the people on the team, many of these people have followed our funds for many years.

And I think the thing that's most important beneath the surface is that we've got the best temperament we've ever had on the team in terms of the variables that really matter to us, the humility, the willingness to expect that future's uncertain, the patience, the flexibility to look across the world, be open minded to disconfirming evidence, all of those sorts of variables. We feel very good about the DNA of the team, if you will, along with the experience.

We also took the opportunity to invest in our trading floor, and we have seen the benefits of that over the past year with the dramatic reduction in our trading commission costs and very good execution. And so we feel good about the team.

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Hughes: I know that you are a very low-risk approach to investing and cash had gotten to be at that higher levels as the market corrected over the past year or so, but since things have sort of pulled back in the past couple of weeks, have you been busy finding new ideas?

McLennan: Things have certainly been busy. There is a tingle of excitement on the floor here, as we see more businesses available at prices that we think embody a greater margin of safety. And so, we've certainly been putting some money to work. I think, it was getting a little bit more difficult a few months ago. There was a sense of complacency that had crept into the high-yield markets in particular. And I think equity markets were starting to price some more normal environment. It certainly wasn't a bubble environment, but the opportunities were tougher to come by, and we were trimming some of that position, so that left us with enough cash to be well positioned for the current environment. And so we are certainly looking for opportunities.

Hughes: Just to illustrate your thinking in terms of specific investments, I thought we could talk about three of the holdings that are in the portfolio, and the largest of which is Pargesa, following is Groupe Bruxelles, and finally Total, the smallest. Can you talk about how they are related and then how you made your choices?

McLennan: It's a good illustration of what we do. If you look at Total, clearly one of the world's leading energy companies, they have been very focused on being disciplined allocators of capital themselves. They have achieved amongst the best returns on capital over a full cycle, very strong balance sheet. The kind of company that we'd find attractive when it's at the right price, and it is certainly trading at the right price today, but if you look at how we've increased our exposure to Total directly, recently it hasn't necessarily been directly. We have actually chosen to increase our investment in Groupe Bruxelles. Groupe Bruxelles is a Belgium-listed investment holding company that happens to be the largest shareholder in Total. They are also shareholders of Pernod Ricard, GDF SUEZ. These are very reputable companies.

And the reason we like Groupe Bruxelles is that it in turn is controlled by Pargesa. Pargesa is run by two of the best capital allocators in Europe, Baron Frère, Paul Desmarais. They've added substantial value over the last few decades as capital allocators. And when we look at the holding company structure of Groupe Bruxelles, we are able to invest in the underlying companies at about a 30% discount to the sum of their parts. And so we are getting a double discount, and we are getting the good capital allocation thrown in for free.

And we really like those sorts of situations. If you think of our goal at First Eagle, which is first and foremost to preserve capital, if we can find a wider margin of safety by being creative across a holding company structure, we are looking across the capital structure, we'll seek those opportunities out. And paradoxically that's always also been the way we've been able to produce returns, because if you own good businesses at a deeper discount the expected rate of return from that over time is obviously more attractive.

Hughes: Well, thank you, Matt. I appreciate your time.

McLennan: Pleasure.