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Global stocks Shares

Dollar Tree Inc

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Our planned change is primarily a result of a higher ongoing tax rate assumption (26% statutory rate from 2022 onward, from 21% prior), as a time value of money-related adjustment mostly offsets the impact of a softer near-term outlook amid heightened freight costs. Our long-term targets still call for mid-single-digit annual top line growth and high-single-digit adjusted operating margins. We do not see a buying opportunity at the shares’ current trading price, despite a mid-single-digit percentage pullback after the announcement.

Quarterly comparable sales rose 4.7% at the Dollar Tree banner (with about a 100-basis-point impact from adverse weather in February) and fell 2.8% at Family Dollar (after a 15.5% increase in the same period of fiscal 2020 as consumers stocked up in the early days of the pandemic). We had expected a 5.5% increase and a 4% decline, respectively. Management set full-year guidance of $5.80- $6.05 in adjusted diluted EPS, including a $0.70-$0.80 freight cost headwind on a per share basis. Our prior $6.28 mark (excluding forecast share buybacks) will likely fall toward the new range, considering Dollar Tree’s heightened dependence on spot freight markets in light of capacity constraints.

Management still expects Dollar Tree Plus (a format that includes a section with certain discretionary items that cost more than the traditional $1 Dollar Tree limit) and its combo stores (which combine elements from the Family Dollar and Dollar Tree assortments in rural areas) to drive growth long term. We view the concepts favorably and think they should allow the company to leverage the strengths of each banner and its purchasing power. Still, we do not anticipate the benefits will include the development of an economic moat, considering the intense competitive environment

Profile

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1 price (CAD 1.25 in Canada). Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

Source:Morningstar

Disclaimer

General Advice Warning Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Avantis® U.S. Equity Institutional

The fund offers broad exposure to stocks of all sizes listed in the U.S. and tilts toward those with lower price/book multiples and higher profitability. To accomplish this, the managers assign weights based on a stock’s market cap and a market-cap multiplier. They apply larger multipliers to stocks with lower valuations and higher profitability, while those with opposite characteristics receive smaller multipliers. This technique has two advantages. It effectively leans toward factors that have historically been associated with superior long-term returns, which should give the fund an edge when those styles are in favour. It also cuts back on turnover and trading costs because a stock’s market cap is incorporated into the weighting scheme. Overall, this is one of the best diversified and lowest turnover funds in the large-blend Morningstar Category.

The portfolio’s emphasis on stocks with lower valuations has been persistent. But its preference for profitable firms was less obvious because cheaper stocks tend to be less profitable than their larger and faster-growing counterparts. However, the fund’s profitability tilt is still at work, even if its holdings, on average, generate lower returns on invested capital than the market. Incorporating profitability paints a more complete picture about each stock’s expected return and should steer the portfolio away from lower-quality names. Leaning toward stocks trading at lower valuations has paid off over this fund’s short live track record. It modestly outperformed the Russell 1000 Index, beating the bogy by 1.1 percentage points per year from its launch in December 2019 through April 2021. The fund’s 0.15% expense ratio lands within the cheapest decile of the category and should provide a long-term edge over many of its peers.

The Fund’s Approach

The fund’s managers start with a broad universe that includes U.S. stocks of all sizes. They use market-cap multipliers to emphasize those trading at low price/book ratios (adjusted to remove goodwill) and high profitability (using a cash-based measure of operating income that removes accruals). Names with lower price/book ratios and higher profitability receive larger multipliers than those with opposite characteristics. This effectively tilts the portfolio toward profitable names trading at lower valuations without incurring a lot of turnovers because each stock’s weight remains linked to its market cap, so weights will change proportionally with price changes.

The strategy takes measures to reducing trading costs. Some turnover is required when a stock’s book value or profitability changes, but the mangers will allow stocks to float within predetermined tolerances to avoid unnecessary trading. Traders can help further cut back on transaction costs.

The Fund’s Portfolio

The strategy’s broad reach and emphasis on stocks trading at lower multiples pushes it away from the largest and most expensive names in the market and improves diversification relative to the Russell 1000 Index. Its average market capitalization has been less than half that of the index. As of April 30, 2021, the fund’s 10 largest names represented 16% of assets, while the same ten firms represented about one fourth of the Russell 1000 Index.

Including small caps expands the fund’s reach and makes it one of the broadest in the large-blend category. It holds more than twice the number of stocks in the Russell 1000 Index. The benchmark does not include small-cap companies, which represent about 15% of this fund. The fund’s emphasis on stocks with low price/book ratios has been evident. Its average price/book ratio has consistently landed below that of the Russell 1000 Index, though it still lands in the large-blend segment of the Morningstar Style Box. Its value orientation also steers it toward cyclical sectors. The fund has larger stakes in the consumer cyclical and financial-services sectors, with comparably smaller positions in names from the technology and communications sectors. The portfolio’s average return on invested capital has also been lower than the index because companies trading at lower multiplies tend to be smaller and less profitable, on average.

The Fund’s Performance

This fund has a short live track record, but it managed to outperform the Russell 1000 Index by 1.1 percentage points from its launch in December 2019 through April 2021. On balance, its value orientation contributed to that mild advantage. Overweighting stocks trading at lower multiples hurt performance during the coronavirus sell-off in the first quarter of 2020, when it lagged the Russell 1000 Index by 3.7 percentage points. But value stocks aided performance during the ensuing rebound. The fund outperformed the index by 7.2 percentage points between October 2020 and April 2021. So far, this strategy has been more volatile than the Russell 1000 Index. Its standard deviation since its December 2019 inception has been about 6% higher than the benchmark, so it slightly underperformed the index on a risk-adjusted basis.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Fixed Income Fixed Income

DWS Global High-Income Inst

Gary Russell has led this strategy since August 2006 and previously ran DWS’ high-yield team in Europe. Thomas Bouchard and Lonnie Fox have comanaged the strategy since 2016 and 2018, respectively, after joining as credit analysts in 2006 and 2008. The trio is supported by European counterpart Per Wehrmann and 14 analysts split between the United States and Europe. The support team is sizable, but with 19 departures since 2016, turnover has been an issue.

The managers leverage the firm’s macro-outlook to shape risk budgeting and industry allocation. Analysts assign a recovery value and probability of default to each bond and loan and look at standard fundamental metrics to assess attractiveness relative to the constituents of the strategy’s BofAML Non-Financial Developed Markets High Yield Index benchmark. High-conviction names are typically sized up to 3%, while names perceived as riskier are scaled down accordingly.

The strategy’s higher-quality and global approach sets it apart from peers. The allocation to riskier bonds rated CCC and below stood at 5% as of March 31, 2021, well under the high-yield bond Morningstar Category’s 13% median. The managers pursue opportunities across the globe, and while allocation to the U.S. represents the bulk of assets (60% as of March 31), the portfolio includes sizable exposures to Europe (19%) and Canada (7%). Low-single-digit stakes in emerging markets round out the portfolio.

Over Russell’s tenure from Aug. 1, 2006, through April 31, 2021, the 6.5% annualized gain of the strategy’s institutional share class slightly edged out the category median (comparing distinct funds) peer, landing it in the top half of the category, while the strategy’s volatility-adjusted performance beat over two thirds of rivals.

The Bond Fund’s Approach

The strategy’s disciplined and conservative credit-driven process has demonstrated its value through time, but the analyst churn casts a shadow on its execution and puts a lid on our confidence level, supporting an Average Process Pillar rating. The team takes a conservative and straightforward approach to credit investing. Lead manager Gary Russell and six other high-yield managers focus on portfolio construction, translating the firm’s macro view into investment decisions. Analysts assign each company a recovery value and probability of default, which helps the managers appropriately size positions. All positions are typically capped at 3% and riskier names are scaled down, resulting in a portfolio that usually counts over 350 holdings, ensuring proper diversification, especially on the portfolio’s riskier sleeves.

The strategy’s global mandate has historically resulted in about 60% of assets invested in U.S. high-yield bonds, with most of the balance split between Canadian and European issues, but non-U.S. currency exposure is hedged back to the U.S. dollar. In terms of credit profile, the portfolio tends to skew higher-quality than its high-yield bond category peers, with a relatively large BB stake and limited allocations to issues rated CCC or below.

The Bond Fund’s Portfolio

The team has expressed its conservatism by favouring higher-quality segments of the high-yield market. For example, issues rated BB represented 57% of this strategy’s portfolio as of March 31, 2021, versus 41% for its typical high-yield bond category peer. On the other hand, issues rated CCC and below totalled just 5% of assets or 8 percentage points less than the strategy’s typical peer. The strategy uses its global team to offer a distinct geographic footprint that separates it from many of its peers. Indeed, its non-U.S. exposure stood at 30% as of March 2021, or almost 3 times its typical peer’s. Developed European corporates accounted for 19% of assets and Canadian positions for 7%. Smaller allocations to Asia, Latin America, Africa, and the Middle East stood in the low single digits.

The strategy has had a sluggish start to 2021 owing to its higher-quality tilt and minimal use of bank loans. Rising rates for much of 2021 has prompted many peers to favour higher-yielding and lower-quality assets and bank loans to offset this. As of March 2021, the 41% in B and below was on the aggressive end for this strategy, but its typical peer had over 50% here, including 13% in CCC and below. At the same time, the strategy held less than 1% in bank loans, while a fifth of its peers held about 10% here.

The Bond Fund’s Performance

| Owing to its conservative credit profile and good security selection, this strategy has produced solid returns under lead manager Gary Russell’s watch. Since Russell took over in August 2006 through April 2021, its institutional shares returned 6.5% annualized, landing it in the top half of its high-yield bond category peers. Impressively, the team was able to keep volatility at bay for most of this period, and the strategy’s volatility-adjusted performance–as measured by Sharpe ratio–beat 66% of rivals. During the energy-led credit sell-off from June 2015 to February 2016, a lower exposure to bonds rated CCC or below helped the strategy hold up better than most rivals. Over the period, its 5.9% loss outperformed the category median by 2.3 percentage points, landing ahead of 70% of its distinct peers.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Fixed Income Fixed Income

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares

Metcash Is Falling Behind

Convenience and locally tailored product ranges remain a point of differentiation for smaller independent retailers, but consumers are increasingly willing to sacrifice convenience for value.Scale has proved to be an important attribute, enabling the larger retailers to pass on better pricing through purchasing power and the ability to spread the cost of distribution across a wider revenue base. The volumes that Woolworths and Coles flow through their supply chains are considerably larger than those for Metcash.

  • The expansion of discount supermarket Aldi is likely to continue pressuring on profit margins in the Australian supermarket sector.
  • The larger supermarket groups are using their scale advantage to offer lower prices and take market share from independent retailers.
  • The expansion of its hardware business through the acquisition of the Home Timber & Hardware Group further diversified earnings, but the food and grocery business still accounts for the majority of earnings.
  • Metcash’s supermarket sales grew by 14% in the first quarter, still ahead of supermarket giant Coles. However, the temporary advantage of the many stores within Metcash’s network of independent IGAs is likely waning. While restrictions were severe, customers were more inclined to shop at their local grocer to avoid longer travel distances and crowds.
  • Metcash dominates the Australian wholesale distribution of packaged groceries to the independent retailer. From th small corner shop to the local independent supermarket, Metcash acts as a co-operative, funnelling independent sales volume through a single channel to derive buying power to negotiate volume discounts with manufacturers. Metcash is the fourth force in the supermarket and liquor industry, with 11% market share (IGA), with Woolworths and Coles accounting for 65%, and Aldi 9%.
  • The predominant supplier of packaged groceries to independent retailers provides a monopolistic market position to sustain above-average returns on capital.
  • Strategic and cost-cutting initiatives undertaken by Metcash are gaining traction. Also, independent supermarket operators across all states are stepping up investments in new stores, additional floor spare, and refurbishments.
  • Metcash’s acquisitive expansion of its hardware business has diversified the company’s earnings and cash flows away from the robust competition and lower margins experienced in the food and grocery business.
  • Intense competition between Coles, Woolworths, and Aldi is leading to price deflation to capture sales volume. A loss of volume from the independent channel could make it increasingly difficult for Metcash to match grocery pricing from its larger rivals.
  • Metcash’s customers (independent retailers) are effectively competing through differentiation of convenience, product range and service. These points of difference are likely to become marginalised in periods of economic constraint.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Shares

Netwealth Group -Still Racing Higher and Looking Increasingly Overvalued

However, with low switching costs, we expect strong FUMA growth to be offset by industry fee compression, as platform providers largely compete on price. We expect Netwealth to generate a revenue CAGR of 12% over the next decade, and the relatively fixed-cost nature of the business and associated operating leverage should drive margin expansion and a 13% EBIT CAGR over the decade.

Key Considerations

Netwealth is the largest independent investment administration platform in Australia but still only comprises around 3% of the market.

The wealth management sector is experiencing fee compression as a result of technological innovation, and we expect this trend to continue.

Administration platform fees could potentially compress to close to zero, as they have done in the U.S., where platform managers monetise their intellectual property via transactional revenue.

Netwealth provides investment administration software as a service, or SaaS, in Australia via its proprietary software platform, which includes investment portfolio administration, investment management tools, and investment and managed account services. The company charges for its software based on the value of funds under management on its platform, comprising over 95% of group revenue, in addition to providing Netwealth-branded investment products, which are managed by third-party investment managers.

In contrast to the independent platforms, the large vertically integrated wealth managers have narrow economic moat ratings. With the wealth business contributing less than 10% of earnings for most of these companies, their economic moats don’t necessarily reflect their platform businesses or even their wealth management businesses, as these companies are very large and diversified financial services organisations. However, IOOF, which only owns a vertically integrated wealth management business, has a narrow economic moat based on switching costs and intangible assets.

Netwealth may be affected by the requirement that financial advisors act in their clients’ “best interests” if financial advisors feel obliged to move their clients onto the cheapest administration platform. This could create significant downward fee pressure for platforms.

Netwealth operates in a commoditised industry and is much smaller than many of its competitors. We expect the larger administration platforms to continue improving the functionality of their platforms and compete more

aggressively on price.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks Shares

NIB Holdings Ltd – Grow Earnings Over Time

Approximately 53% of the population is covered by private health insurance because of taxation benefits, shorter wait times, a choice of doctor and hospital, and cover of ancillary health services. NIB demutualised and listed on the Australian Securities Exchange in 2007. It is Australia’s fourth-largest health fund. Attractive long-term industry dynamics are supported by a growing population, government taxation incentives and penalties, and regulated pricing.

  • By spending on customer acquisition NIB can continue to take share, but annual growth in policyholders is expected to be low given affordability issues.
  • NIB can continue to generate attractive returns, using scale benefits and modest switching costs in a highly regulated industry. NIB could also participate in industry consolidation if smaller players become unprofitable.
  • We forecast mid-single digit earnings and dividend growth, with NIB’s 60% to 70% dividend payout ratio lower than peers being a reflection of the firm’s strategy to make small acquisitions to strengthen the private health business and diversify revenue.
  • NIB made two acquisitions to grow its travel insurance offering in recent years, with the rationale to diversify revenue outside of private health insurance, add exposure and scale in an industry expected to experience long-term growth, and leverage its claims management capability and existing distribution channels. We believe NIB will find success in cross-selling, but the business remains dependent on travel activity and being commoditised, is vulnerable to pricing pressure. While leveraging the NIB brand in Australia may come with some success, we do not believe insurers can build a competitive advantage on intangible assets.
  • Industry growth is tied to a steadily increasing population, ageing demographics and the unavoidable rise in healthcare spending. Governments will continue to incentivise participation in private health insurance to share the burden of escalating healthcare costs.
  • Premium growth is generally tied to the increasing cost of healthcare. The government regulator approves/rejects price increases as part of an annual review. Very few have been rejected which helps reduce uncertainty around insurance margins.
  • The symbiotic relationship of private hospital operators, and buyer power over general practitioners, is a key strength of NIB’s business model. Private hospitals are reliant on the private insurance system, as the majority of private hospital income is paid by the insurers.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks Shares

United Malt Group Ltd – Result as a Public Company Offers Optimism

Nonetheless, the company is the fourth-largest global malt processor and works with some of the world’s largest breweries and distillers as well as fast-growing craft producers. Although management expects United to face higher near-term costs related to its recent public listing, we think this will be offset by longer-term savings. But despite some attractive aspects of the business, we don’t think United has carved an economic moat. It is a commodity processor, with a high degree of fixed costs and limited ability to substantially differentiate its product.

Key Considerations

  • Although we anticipate craft beer consumption–a key driver for malt demand–will rise as a proportion of overall beer in United’s primary markets, the rate of growth is likely to slow, owing to the already high amount of craft brewers globally and flat overall beer volume trends.
  • Long-term client contracts, and the ability to pass through costs in periods of high barley prices help underpin a stable earnings stream and a manageable dividend policy.
  • We expect slowing end-market demand and limited barriers to supply additions driving returns on invested capital about equal to the company’s weighted average cost of capital.
  • Underlying earnings are stable, supported by longterm client contracts and its ability to pass through costs during periods of high barley prices.
  • United Malt benefits from rising craft beer production globally, which requires greater malt volumes and attracts higher prices.
  • Opportunities exist for further penetration into relatively underdeveloped beer markets, such as Asia and Latin America.
  • The commodity products that United Malt provide are readily available from competitors, and the company has little pricing power over the products it buys and sells, making for slim margins.
  • Barley acreage has declined in favour of other adjunct grains like corn or soybean in recent years, which could lead to periods of short supply and higher short-term costs.
  • The loss of key brewing customers, especially if they become self-sufficient for malt, could materially threaten its earnings stream.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Funds Funds

First Eagle US Value A

First Eagle’s multifaceted global value team runs the strategy. Its co-heads, Matt McLennan and Kimball Brooker, each have more than 25 years of investing experience and have cooperated as managers here since March 2010. They also spearhead siblings First Eagle Global SGIIX and First Eagle Overseas SGOIX. Comanager Matt Lamphier directs the research team whose coverage ranges from equities to sovereign bonds and investment-grade credits–all fair game for this portfolio. The manager team added depth in May 2021 with Mark Wright’s promotion to full-fledged comanager after two years of honing his skills as an associate manager.

The team takes a risk-averse approach. With capital preservation in mind, it invests mostly in large-cap equities having what it sees as margins of safety–or prices well below the value of those firms’ average earnings or profitability over a business cycle, their hard assets (such as forest lands), or the strength of their balance sheets. The managers also hold cash (often 10%- 20% of assets) and gold (5%-15%), with gold serving as a hedge against economic calamity.

The Fund’s Approach

This risk-averse approach works well on sibling strategies with broader geographic reach but is less effective for this U.S.-focused offering. It warrants an Average Process rating. Whether investing internationally or in the U.S., First Eagle’s global value team takes an uncommon line. Its managers prioritize capital preservation. While sticking mostly with large-cap equities, they will also hold bonds, gold bullion, and cash. The managers target investments with a margin of safety–that is, a price well below intrinsic value–and assets (real or intangible) that should hold value even during economic distress. The team takes a long-term view, looking at average earnings and profit margins over a business cycle, earnings stability, and balance-sheet health to determine valuations. They often keep annual portfolio turnover under 20%.

Cash and gold stakes are key to this defensive approach. The managers typically keep around 10% of assets in cash–more if opportunities are scarce–and 5%-15% in gold and the equities of gold miners as hedges against economic calamity. The team’s prowess outside the U.S. has served First Eagle’s global and international strategies well, but this U.S.-focused version has struggled to compete. Keeping so much cash and gold on the side-lines has held it back in equity bull markets, and mediocre stock selection over time hasn’t helped.

The Fund’s Portfolio

This portfolio stands out in many ways. With so much cash and gold and so few bonds, equities typically account for 60%-80% of total assets, unlike the equity-only S&P 500 prospectus benchmark and many allocation–70% to 85% equity peers who wade more into bonds. The managers usually own 70-90 stocks. Cash had never been less than 12% of assets at the end of any month in manager Matt McLellan’s 12- year tenure until April 2020; it went on to hit a low of 2% in October 2020 before rising to nearly 10% in March 2021. The portfolio’s gold stake had hovered around 10% going into 2020; it appreciated to more than 15% in July 2020 before dropping back to 10% in early 2021.

The portfolio’s equity exposure is also distinctive. It has tended to be light on consumer cyclicals relative to peers (1.5% of total assets in March compared with the 8.9% category norm) but heavy on energy (7% versus 2%) and basic materials (6% to 3%). The basic-materials stake can be larger if the team is buying the stocks of gold miners such as Newmont NEM and Barrick Gold ABX, but it pared most of those as the price of gold rallied in 2020. Firms with hard assets– such as Weyerhaeuser WY, which owns forest lands, and integrated oil firm Exxon Mobil XOM– also suit this portfolio’s conservative bent.

The Fund’s Performance

This fund’s track record is middling, though a recent category change offers better points of comparison. The portfolio’s gold and cash stakes made it a poor match for its equity-only S&P 500 prospectus benchmark in the decade-long bull market for stocks following the 2007-09 global financial crisis. The strategy’s value tilt didn’t help either, as growth stocks drove much of the rally. A December 2020 Morningstar Category change to allocation–70% to 85% equity from large blend improves the picture somewhat. From manager Matt McLennan’s January 2009 start through April 2021, the fund’s I share class gained 10.6% annualized; that beat the allocation category’s 10.2% average but trailed the S&P 500’s 15.3% and the large-blend category norm of 13.5%. The fund also lagged a custom index approximating the fund’s historical asset exposures (to stocks, cash, gold, and bonds), albeit by a narrower 1.3-percentage-point margin.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.