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Cover Story

What the
Eagle is eyeing
Outlook Profit 19 September 2008
Jean-Marie Eveillard of First Eagle Funds is a
legendary value investor who oversees $36 billion
across six funds. The 68-year-old Frenchman has a
stunning track record: During his 30-year stint,
the First Eagle Global Fund handed in
15.5 per cent average annual returns to investors
compared with 11.1 per cent for the MSCI World
Index. Although he regrets having missed the bus
to India – he has been a marginal investor in the
country – the fund is now eagerly scouting for
opportunities. Read on to get an insight into the
investment style that went on to make Eveillard
a legend, his views on world equity markets and
why he thinks India is an exciting story. First up, his
take on the world of investing today.
Mohammed Ekramul Haque

ning in the mid 19th century,” he says. Eveillard then tried to convince his
“My father was an engineer, I had four bosses in France to let him try his hand
brothers and nobody was interested in at value investing. But they wouldn’t
investing.” give in and it took 10 years before he
Yet, for someone coming from a fam- was finally allocated a $15 million fund
ily that had worked in the railroads in 1978 called the Socgen Internation-
for generations, that did not prove to al Fund (it would later be known as the
be handicap as Eveillard went on to First Eagle Global Fund). Eveillard re-
become one of the greatest investing tired from managing the well-known
minds of our times. fund in 2004 but came back in March
Eveillard’s first brush with investing 2007 after the sudden exit of his suc-
came when he joined a French busi- cessor.
ness magazine as an intern. Quick-  
ly thereafter, he acquired his degree The story in Asia
from a business school, and started his Incidentally, the short period during
long innings with Société Générale, a which Eveillard retired – 2004 to 2007
French bank, as a security analyst. His – also happened to be one of the best
job consisted of analysing stocks and times for Indian equities. But First Ea-
in 1968, his company sent him to New gle stayed steadfastly away from Indi-
York to cover the big stocks there. an stocks. Eveillard admits that was a
It was here that Eveil- mistake: his skepticism
lard turned into a follow- in a rising market kept
er of value investing. The world has him away (wrongly) from
It was accidental: one “changed” now and Indian stocks. In 2003,
day, as Eveillard was cy- First Eagle did make
cling with friends from there are countries some nibbling attempts

the Columbia Business such as China and
at investing here, but as
e didn’t start out as a value School through Central India which are markets continued to
investor, but today global in- Park, one of New York’s becoming more soar, the fund refrained
vestment manager Jean-Ma- most famous landmarks, from making fresh pur-
rie Eveillard has become one they got to discussing important globally chases. “I stopped buy-
of the world’s leading names in value Benjamin Graham (the ing when I shouldn’t
investing. pioneer of value invest- have,” says Eveillard.
It may have been quite a surprise to ing). Intrigued by the conversation, (Two stocks his fund still owns from
the 68-year-old Frenchman himself, Eveillard immediately went to a book- its 2003 purchase are Tata Motors and
who says that no one in his family ever store and bought Graham’s books Nestle India.)
had the slightest inclination towards (The Intelligent Investor and Securi- Historically, Eveillard says, he has
investing “My father, my grandfa- ties Analysis). They were a revelation rarely been inclined to invest in emerg-
thers, my great-uncle, and beyond all to Eveillard. “That was when I saw the ing markets. But he says the world has
worked for the French railroad begin- light,” he would jokingly remark later. “changed” now and “there are coun-
19 September 2008 Outlook Profit
Cover Story

tries such as China and India which clear attack by North Korea but more economic problems that will emerge
are becoming more important glob- from the prospect of unification of the as banks get rid of their excessively
ally from an economic standpoint”. two Koreas. Eveillard says the unifica- leveraged positions. It will take a long
And with stock markets having sur- tion of West and East Germany nearly time, he says, before the system starts
rendered much of their astronomical two decades ago was an unfavourable to operate smoothly again.
gains in the recent past, the time may move from an investing viewpoint. Not surprisingly, he doesn’t have
now have come to look at stock invest- “The same story has the risk of play- a very high opinion of banks today,
ing once again. ing out in Korea,” he adds. which he says are like black boxes and
Indeed, that may be one reason why   disguised hedge funds.
last month, Eveillard deputed research The American pie While some of them may seem like
analyst Vinodh Nalluri to ‘reconnoiter’ On the sub-prime crisis, Eveillard be- good value plays and even boast rela-
the Indian equity scene (See interview lieves that the troubles are not concen- tively strong balance sheets, Eveillard
on Page 43). trated only in the US, as its ripples are is reluctant to place his trust in them
Surprisingly, China’s now being seen around given the lack of transparency in their
scorching growth rates the world. It comes after more complex dealings such as deriva-
don’t impress Eveillard The old-fashioned a 25-year credit boom, tive contracts.
much either as he re- investor also turns interrupted only brief- Banks, he proclaims, are no longer in
mains extremely suspi- up his nose at ly in 1990. Like several the simple business of lending money
cious of the country’s gloomy prophets, Eveil- to customers; instead, they make their
accounting standards. In- hedge funds and lard says this may be the money today by trading in speculative
stead, he believes that if private equity as worst credit crisis the derivative contracts. And despite the
you want to play the Chi- he thinks they world has ever seen since big writedowns by some of banking’s
na market, you should in- are no more than the Great Depression of biggest names, he says it’s still hard to
vest in Singapore, Japan the 1930s. And the worst figure out how much bad debt is still
and South Korea. day traders who may only just be coming. there in the system.
All said and done, he ac- simply use a lot of Eveillard is also worried An exception to Eveillard’s dislike for
knowledges that Asia is leverage about the long-term con- banks is American Express. Though
where the action will take sequences of the unusu- the stock has tumbled over worries
place in future. Eveillard al steps taken by the US about credit card defaults, Eveillard
now believes that emerging markets Federal Reserve to prevent the crisis likes the business model. Express de-
could offer some good growth oppor- from spiralling out of control. Among rives its revenues primarily from fees
tunities, having come off their unsus- the possible consequences are a fall in charged to merchants and not from
tainable highs. the status of the dollar as the world’s extending revolving credit facilities to
Besides, he remains optimistic about reserve currency and the possibility of card-holders. That makes the compa-
investing in Japan, a nation that has accelerated inflation in the US. ny well placed, according to the French
only recently emerged from the grip Eveillard also believes that the Fed investor, to continue benefiting from
of a 13-year bear market. Every sort of needs to take some blame for the cur- the increasing use of plastic across the
stock, at the moment, he points out, is rent crisis since it was the Fed’s poli- globe.
going very cheap. Several stocks are cies of easy money that led to the The old-fashioned investor also turns
now trading at or below net cash level, excesses of the recent past. He says up his nose at hedge funds and private
meaning the value of cash and market- current chairman Ben Bernanke can equity - two of the hottest buzzwords in
able securities minus all financial debt do little than postpone the inevitable investing today – as he thinks they are
is greater than the current market cap-
italisation of a stock. Such stocks have BEATING THE ODDS
practically vanished from the US and Since inception, First Eagle Global Fund has outperformed the MSCI World Index
European markets, says Eveillard.
As a country, Japan now accounts for First Eagle Global Fund - Class A (without load) MSCI World Index average annual returns# (in %)
21.15 per cent of the First Eagle Global Inception (Since Jan 1979) 15.12
Fund. 10.69
Incidentally, in the summer of 1988, 15-yr 12.59
Eveillard sold his last Japanese stock 7.55
even as the Japanese stock market 13.57
10-yr 3.96
rose to become the second biggest
equity market in the world. Avoiding 15.10
the crash, thereafter, proved the point. 10.99
Though he missed out the last leg of 10.56
the rally, he avoided the big crash. For 3-yr
several years the fund owned nothing -2.23
in Japan which was by 1989 the second 12-mth
biggest equity market in the world by
market cap. “We owned nothing be- -8.86
cause the whole market had moved up.
We can disappear from a large equity -2.44 1-mth
market or we can have a large stake in
a small market like Switzerland, de- -5.79
-12.75 2008 (Till July 31, 2008)
pending on the situation.”
As for the rest of Asia, Eveillard picks -15 -10 -5 0 5 10 15 20
out South Korea as a risky bet, not so # The average annual returns shown above are historical and reflect changes in share price, reinvested dividends and are net of expenses
much because of the threat of a nu- Source: First Eagle Funds - July 2008 report
Outlook Profit 19 September 2008
no more than day traders who simply
use a lot of leverage to produce good
results. It’s a strategy Eveillard es-
chews because leverage can take away
your staying power, something that ev-
ery value investor aspires to have.
Covering up
From a long-term perspective, Eveil-
lard says he sees value in all global
markets although it does seem more
challenging to find it in developed
countries such as the US and Europe.
Stocks in developed markets are
down by 20 per cent from the highs of
October 2007 following a five-year bull
run. But that’s not much. “It makes it
difficult to come up with attractive se-
curities in businesses which we think CLOSE CALL: Eveillard with Bruce Greenwald,
we understand, we like and we don’t director-research, First Eagle Global Fund
overpay for the security,” he says.
“Since the beginning of the year it has
been less difficult for us to find such se- well-spread Fund’s single-biggest holding after
curities in Japan than in the US or Eu- First Eagle Global Fund seeks long-term gold at 2.2 per cent. Eveillard has an
rope,” he adds.  growth of capital by investing in a wide interesting take on his Berkshire hold-
So far, investing in foreign stocks has range of asset classes ings. Berkshire, according to him,
been pretty much like holding cash -- provides a safe vehicle in a bear mar-
Foreign currency US dollar
“it’s residual,” he says. But the strate- bonds and note bonds and note Gold bullion ket with a high quality management
gy can vary. “If we find many attractive 2.86 2.52 4.46 and $40 billion in cash to buy compa-
stocks, we will own many.” nies as their prices tank. He likes the
His positions in gold are more as a company’s defensive strategies in the
hedge against what economic histori- US dollar cash short term and offensive moves for the
an Peter Bernstein calls ‘extreme eco- and equivalents long term. He considers his purchase
US stocks 18.21
nomic difficulties’, when the market 25.88
of Berkshire stock at a discount to its
falls for a protracted period of time. net asset value as a case of buying Buf-
The Global Fund has about 5.09 per fett’s talents and skills and not paying
cent of its money invested in bullion for it!
Foreign stocks
and 3.69 per cent in gold mining se- 46.07 A company, Eveillard thinks, is com-
curities, but Eveillard is open to a re- parable to Berkshire is Swiss foods gi-
think on gold if its value rises further. in % ant Nestlé. The value investor has been
Even as many analysts remain bullish quite upbeat on Nestlé for a while. Fac-
on the precious metal, Eveillar says he Total assets: $22 billion as on October 2007 tors swinging in favour of the compa-
is clear about his goal of investing in ny are its huge cash flows and smart
gold: I am not looking at absolute re- Country composition of portfolio in % acquisitions such as Jenny Craig and
turns but more at reducing the dam- United States 32.77 United Kingdom 0.67 Gerber baby foods. He continues to
age. It’s insurance, but the premium Japan 15.24 Thailand 0.48 hold some shares of Nestlé’s Indian
on gold is now much more expensive France 10.6 Brazil 0.46 subsidiary.
at $800 than at $250 and I may decide Switzerland 5.36 India 0.38 Another European firm he likes is
at some point that there is no risk of French pharma company Sanofi-Aven-
South Korea 5.27 Malaysia 0.28
something cataclysmic happening, tis. The stock has been battered in re-
Italy 1.54 Spain 0.25
which means that I don’t need insur- cent times over fears that it could lose
ance.”  Netherlands 1.51 Belgium 0.21 some patents on its existing drugs,
As for currencies, he hedges 50 per Germany 1.34 Taiwan 0.21 especially after the US regulatory au-
cent of his exposure in the euro, but South Africa 1.19 Canada 0.19 thorities rejected its anti obesity drug,
remains completely unhedged against Mexico 1.14 Sweden 0.11 Acomplia (it has already been ap-
the yen because he considers it under- Hong Kong 1.11 Other 0.42 proved in Europe). Eveillard, however,
valued against the US dollar. He also Singapore 1.06 thinks the company has one of the best
expects China to allow its currency to pipelines of new products compared
Source: Annual report, 2007
rise following a rise in inflation there. with other companies.
  The seasoned investor openly admits
Becoming quality conscious do well even 10 years later. Both styles, to being more of a Buffett follower than
Eveillard started off with the Graham however, try to find stocks below their a Graham one today. That’s because
approach to investing that placed intrinsic values. Graham’s approach requires picking
prime importance on stocks quoting It’s impossible not to notice the rev- stocks that were trading at a discount
below their intrinsic value purely based erence in Eveillard’s voice when he to the actual value and booking profits
on their financials. Later, he switched talks about the Oracle of Omaha (Buf- when the discount was recognised and
to the Warren Buffett approach which fett). So it’s not surprising to note that eliminated by the market. Eveillard
studied competitive advantage and Berkshire Hathaway, Buffett’s hold- doesn’t believe this approach could
sought companies that were likely to ing company, accounts for the Global hand in spectacular results in today’s
19 September 2008 Outlook Profit
Cover Story

Source: Eveillard’s letter to shareholders in 2007 (Annual report)

times. “We don’t find any Graham-type which by definition is a rapidly-chang- what different look at a business/stock
stocks today. At least, no large-cap ing field with typically high valuations. sometimes. A typical trend seen with
stocks are available in the US or in Eu- Eveillard belongs to the ‘unadulter- value investing is that there are peri-
rope, except in Japan.” ated’ class of value of in- ods, especially in bull ral-
Which is why he roots for the Buffett vestors. Currently, he We don’t like lies, when such investors
style. According to Eveillard, all poten- refuses to look at stocks the idea of tend to underperform the
tial investments can be condensed into of banks and brokerage broader markets.
three-four major business characteris- firms (primarily in devel-
buying blind and It was a similar case with
tics, which highlight the main facets oped markets) because of if we don’t have Eveillard. In the bull runs
about the business. Take, for exam- uncertainty in their earn- confidence in the of the early 1990s and es-
ple, the newspaper industry. While it ings and their book val- numbers as they pecially in the technol-
can be argued that the industry has an ues. “We don’t like the ogy-driven frenzy of the
unclear long-term business outlook, idea of buying blind and if are recorded then late 1990s, Eveillard de-
the fact remains that newspapers still we don’t have confidence we will give cided against investing
rule as the top advertising space for lo- in the numbers as they it a pass in technology, media and
cal businesses. Even though you have are recorded then we will telecom stocks. It result-
television, radio and the internet as give it a pass,” he says. ed in the Global Fund underperform-
mediums of advertising, they have not Value investors are known to pick ing the rising markets.
been able to replace the newspapers up stocks that quote below their asset Though the Fund did give absolute
as the media of choice for advertisers. values. One such pick of Eveillard’s returns, a lot of investors cashed out to
Want proof? Take a look at any local was Gaumont – a film production invest in the hot favourites of the time.
newspaper at any day of the week. The company, but Eveillard did not buy it In fact, so promising and enticing
chances are high that you are going to just because it was trading cheap. He were these ‘hot’ stocks, that the Global
find as much space devoted to local ads snapped it up because he realised that Fund lost 7 out of every 10 of its share-
as they are to actual news content. This “the real assets of the movie studio was holders in 1997-2000. But rather than
advertising is what drives revenues its movie library, the movies that they follow the crowd and flavour of the sea-
for newspapers and there remains no produce every year. So you have to son, Eveillard remained true to his in-
significant alternative that provides a analyse the value of the movie library. vesting beliefs. After the bubble burst,
comparable size and reach to the tar- They also happen to own real estate the returns came back—and so did the
get local population. Even the internet because they have movie theaters in shareholders.
doesn’t come close. every medium–sized town in France. The seesawing fortune of the fund
  They are usually right in the middle of during those exuberant times is evi-
The avoidables the city and every now and then, they dent from the numbers. In early 1997,
Are there any businesses Eveillar says forget about the movie theatre and re- Eveillard oversaw $6 billion; by 2000,
no to? Most value investors dabble develop the real estate. It illustrates it was down to $2.5 billion. Today, he
very little in the technology sector, how investors need to have a some- manages close to $36 billion. p
Outlook Profit 19 September 2008