Q:  What is the history and objective of the fund? A : We manage a group of global funds through a value-driven investment style. While the location of a company is less important to us, the earnings drivers and the price that we, as value seekers, pay for stocks do matter. The First Eagle Overseas Fund was launched on August 31, 1993. The fund currently has about $11 billion in assets under management. The fund’s objective is to seek long-term growth of capital by investing primarily in equities issued by non-U.S. corporations. In so doing, we aim to provide an attractive risk-adjusted rate of return over the long term by attempting to avoid permanent loss of capital. Q:  What is your scope of global investing? A : We invest worldwide because so many businesses are essentially global. Although companies may be located in one region, they may have operations in several growing markets. We can invest anywhere in the world outside the U.S. We invest in both developing to developed markets depending on the business or economic cycle – where we find what we believe to be value opportunities. Also, we do insist on a respect for property rights in any jurisdiction we invest. Currently, we are investing primarily in developed countries because we believe the long run-up in emerging market prices has eliminated the margin of safety in many securities. Consequently, our direct exposure to China, India or Brazil is quite low at the moment. Our largest allocation in the fund, which is roughly 27.86%, is in Japan. Many of the companies we have selected in Japan have a dominant share of revenues from outside the country. Some of our largest holdings such as Shimano Inc., Fanuc Ltd., and SMC Corp. are Tokyo-listed companies, but the majority of the business for these companies is outside Japan. For example, for the bicycle parts maker Shimano 90% of the business is outside Japan, and for Fanuc, the industrial robot maker, the business outside the country accounts for 80% of the company’s revenues. That said, we also have exposure to several smaller Japanese companies that are domestically focused and trading at what we feel are low prices. Although we do not currently have any holdings in emerging markets, we do own companies located in developed economies that have significant exposure to emerging markets. These are typically companies that provide premium products or services. A relevant example of such a company would be Switzerland-based food maker Nestle S.A. with its 45% of revenues generated from emerging economies. Although our First Eagle Overseas Fund is an international fund, we have some indirect exposure to the U.S. In fact, Nestle has a large portion of its business oriented to the U.S. Q:  Would you define the kind of value that you are seeking? A : The perception of value can be different for different people. There is a purely statistical definition of value, which is low price-to-book or low price-to-earnings. On the other hand, there is also the historic franchise-oriented investment approach pioneered by Munger and Buffett where the margin of safety is more a function of the strength of the franchise. We do not discriminate between these two ends of the value spectrum as long as we are able to identify a margin of safety—or a discount in the market price to intrinsic value—of the business that we are comfortable with. We are long-term investors in the sense that we are not predisposed to any length of holding period. Because of our value investing style, we understand and acknowledge that we are often early, and when we are investing in a company there is usually something wrong with it and it takes time for things to right on their own. We are patient and willing to live with that. Our competitive advantage is the long-term approach, where we think of ourselves as owners of businesses rather than traders of their stock certificates. Q:  What are the tenets of your investment philosophy? A : We are long-term value investors seeking value in global markets. We buy stocks at what we believe is less than their intrinsic value and attempt to minimize permanent impairment of capital by focusing on companies with sound balance sheets, sustainable business models and pragmatic management. Q:  What is your investment process? A : In terms of strategy, we are bottom-up investors. We generally invest in companies that have market caps of greater than $2 billion. With that hurdle there are thousands of companies in countries large and small. For instance, Singapore has companies that are neither purely regional nor global in their operations. We own a regional domestic airport terminal services company that is the chief ground-handling and in-flight catering service provider at Singapore Changi Airport. This company has just expanded into Japan and offers servicing operations for Haneda and Narita airports. Our team comprises ten analysts and three portfolio managers, with each analyst being assigned two or three different industries that are not correlated. When considering an investment, we assess if the balance sheet, management and the business model are sound, and unless we get what we feel are confirmations on all three topics, we will generally not invest, regardless of the price, particularly if the business model is under threat. In every industry we tend to be interested in a limited number of stocks at any given time, so we just wait to see the price that we view is appropriate. Before we invest in any company, we establish its intrinsic value. Then we wait for an appropriate stock price in the market that is substantially lower than the intrinsic value, thereby offering us what we feel is a margin of safety to cushion for events that we may have failed to forecast or estimate. Q:  Would you give a few examples to better illustrate your research process? A : We have owned Nestle for more than 10 years now, but when we bought the stock there was intense criticism about the company’s operating margins. That was in fact one of the main reasons why the stock was trading at a discount at the time of our purchase. What is more, they also had investments in publicly-traded securities at the time, which made the discount even more substantial. After carrying out our research on the stock, we discovered that the operating margins appeared to be lower because of Swiss accounting requirements. As soon as we made the adjustment for that accounting difference we saw that the margins appeared to be comparable others in the industry. Once we had become comfortable with those concerns, we started acquiring Nestle because we thought it was an attractive global business with decent returns, good margins, exposure to very stable categories, access to emerging markets, and non-core value in the publicly-traded securities that they owned. What has made Nestle an interesting story is their ability to identify niches where rising incomes will allow people to move up the value chain, whether it is in coffee, confectionary, water, infant milk or pet care. In many countries they operate as a local company and in the portfolio of brands they have local home-grown brands like Maggi noodles. Another example of our process is Shimano Inc., which has around 60% of the global market share of high end bicycle parts. The company also offers brakes and a full set of components for bicycles sold by other manufacturers. Although it is a slowly growing business in developed markets, the company has a dominant market share with what we feel are high returns on capital. We believe this is a good business model with a solid balance sheet and an exceptional management team. Furthermore, the company has bought back over 30% of their shares since the beginning of 2000. Presently, Shimano is capitalizing on a rapidly growing market for road bikes in China, where their market share is 90%. Q:  How do you build your portfolio? A : Our portfolio construction revolves around our bottom-up approach to investing. In addition to the largest allocations to Japan, Europe and other parts of Asia, we have about 20% in cash and cash equivalents and another 11% combined in gold bullion and stocks of gold mining companies. The number of holdings in the First Eagle Overseas Fund has historically fluctuated between 120 and 130 names. Since diversification plays an integral part in our overall risk management strategy, we try to invest across market cap, industry, and geography. While we are not benchmark driven, our investors tend to benchmark us against the MSCI EAFE Index. Yet, we do not pay any attention to that as part of our internal research. Q:  What is your definition of risk and what kinds of risk management strategies do you employ? A : In our view, there is only one risk and that is the permanent loss of capital. We try to avoid this by buying businesses at what we believe are reasonable prices and by attempting to stay away from companies with deteriorating business models or companies that have what we feel is too much leverage their balance sheets. As a further step, we also attempt to avoid companies that are run by management teams we feel are too aggressive. We have no mandate to be fully invested, so we may hold cash and cash equivalents at times. When securities reach what we feel is their intrinsic value, we tend to trim our holdings, which is another level of risk management. Of course, there are certain macro and systemic risks, like a credit bubble, which diversification and the margin of safety may not mitigate. For this purpose we have a holding in gold and gold equities as a potential hedge. As a whole, our multi-level risk management process is very much consistent with what a value investor would do to minimize the risk of permanent loss of capital. The first level of risk management is to purchase a security with what we believe is an adequate margin of safety, the second is to have many of those securities that is to diversify away from the specific risks, and the third level of risk control is about being able to hold cash when we find prices reaching their intrinsic values. Finally, we diversify against systemic risks by holding gold bullion and mining stocks. Q:  How do you, as a value investor, justify the inclusion of gold in your portfolio? A : It is a simple acknowledgment that the future is uncertain. We cannot diversify away from all risks as some of them are purely systemic in nature. As a simple portfolio of common equities can be subject to a systemic kind of impairment, in that event it is worth having a potential hedge against such shocks. In different market environments we find that gold has the potential to help hedge some of the potential volatility caused by exogenous events.