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Accounting for Global Revenues

Jason Stipp

Jason Stipp: I want to talk to you a little bit about country of domicile versus revenue source. So, in one of your recent letters, you mentioned that a lot of the Japanese holdings you have, for example, have revenue sources across the world. So, when you look at your portfolio positioning in Japan, it's 25% based on the companies domiciled there. If you were to take a view of your portfolio based on revenue source, do you have a sense of where some of the revenue is coming from? Do you have any weights in one area more than another when you're looking at the portfolio that way?

Matthew McLennan: I think when you look at the broad blocks that we see, whether it's the U.S., or whether it's Europe, or whether it's Japan, as a general rule of thumb, and it's going to split one way or the other side of this, but as a general rule of thumb, roughly 60% of the revenues of the businesses we own are going to be generated in their home country on average.

So, when we look at the Japan exposure that we have, or the European exposure, or the U.S., there's a great amount of revenues that are generated outside of those different jurisdictions. So, when we think about potential currency hedges that we have in place in the portfolio because we don't want to lose on an expensive currency what we make on a cheap stock, if we're going to put a currency hedge on, we're careful only to hedge out the true underlying exposure.

So to give you an extreme example, it would make no sense really put a Swiss franc currency hedge against Nestlé, which is truly a global franchise. So we try to employ a degree of common sense in thinking about where is that the EBIT and revenues actually come from, but I think as a general rule of thumb, you'd see roughly 60% of the revenues come from the home location. And when you step back from it and you look at our portfolio in its entirety, it's truly a global mix.

The weightings in our portfolio are probably more aligned to sort of the GDP mix of the world than they are to the market cap of the world with some notable exceptions, and perhaps the more notable exception is that we don't have a lot of direct investment in China at the moment, which is the world's second-largest economy.

Most of our investment in China would be indirect. Some of the Japanese companies we talked about before have meaningful businesses in China, too, do the companies like Nestlé in Switzerland or other companies that we own in Europe or the United States, and so our exposure to China is more indirect in nature.

Stipp: Matthew McLennan, First Eagle Funds, thanks so much for sitting down with us today and for your insights.

McLennan: It's a pleasure.