John P. Arnhold, the chairman and chief investment officer of First Eagle Investment Management LLC, says his firm emerged from the market mayhem of 2008 stronger than ever. The value equity manager lived up to its reputation for protecting investors' capital in the downturn without missing a beat, even as some key portfolio managers and analysts bolted at the height of the market's volatility to start their own firm.
Now, Mr. Arnhold argues, the current team is the strongest the firm has fielded. With the “First Eagle” moniker replacing its legacy Arnhold and S. Bleichroeder Holdings Inc. name in late 2009, and key additions, such as Bridget Macaskill, who became CEO in 2010, the firm's retail and institutional businesses are both firing on all cylinders, he says. The investment team's skills in assembling portfolios resilient to market squalls will come in handy amid what promises to be an unusually uncertain economic environment, he maintains.
Your assets under management were up 15% for the last quarter of 2010, and more than 30% for the year. What are you doing right? The critical issue is performance. Last year, we had a healthy stock market and we tended to outperform by hundreds of basis points, if not close to a thousand, in most of our strategies.
I think of First Eagle as a firm that protects investors in down markets, but for the past quarter you topped a surging market. Are you sticking to your knitting? Absolutely! We haven't changed our style, our strategy, our philosophy at all. We tend to outperform in down markets over cycles, but we also tend to do well in reasonably good markets. Where we significantly underperform is in very ebullient markets, and I would say that last year the markets were not ebullient. They were probably fairly valued.
GMO's Jeremy Grantham cites quality U.S. companies as offering the best value now. We're seeing opportunities in the U.S., both in the large-cap and the midcap arena. Globally, with the exception perhaps of some emerging markets, equities are not in a bubble. They're also not dirt cheap. For the most part, one could argue that they're within 10% or so of fair value. So really it's from the bottom up, trying to find individual securities.
If money keeps flowing into alternatives, where does that leave your predominantly long-only business? Interestingly, we view ourselves as an alternative to alternatives. With our 75-basis-point fee, and our absolute-return, benchmark-agnostic focus, we can provide, we think, excellent returns with volatility that's similar to hedge fund volatility. So some consultants and some plans are beginning to look at us not just as a long-only equity manager but also as possibly someone that they would consider to be in their alternatives bucket.
Is “alternative to alternatives” a phrase on the tips of consultants' tongues? No, it's starting to come out from deep in their throats. We've begun to see a movement more toward absolute return, and the acceptance of philosophies and styles like ours, where we do not really look at the benchmark, (or) care about tracking error. Index-hugging strategies have produced no returns over the last decade. We had a very good decade. (Our global value equity mutual fund's) annual compounded return was about 12.4% from 2000 to the end of 2009. If you count 2010, it would have been higher.
For 2008, your global strategy fell 20% as its benchmark plunged 40%. How did you pull that off? We're not actually very proud of that performance, because first and foremost, we're trying to protect client capital. We were well prepared in the sense that we recognized that there was a credit bubble. We were not well prepared in recognizing how deeply the economy would suffer from that.
If you had, could you have dodged the bullet altogether? We could have done better, and there were maybe two or three instances where we, I think, made some bad judgments on companies. So maybe we would have saved a few percent.
Over and above the market madness, you also had a number of key people bolt in 2007 to start their own firm. How stressful was that? I would say it was short-term stressful, (but) long term has made the environment in this firm substantially better. We've managed to add key personnel with greater experience, but more importantly with the right temperament.
Was it a place of mixed temperament before? I would just offer that the team and the environment we have today is substantially improved over what it was in 2007. We have (senior adviser) Jean-Marie Eveillard, who's continued to be active; (director of research) Bruce Greenwald, and we hired a terrific fellow to run the team, (head of the global value team Matthew B. McLennan). From a corporate standpoint, we hired Bridget Macaskill, originally as COO and then as CEO, freeing me up to spend more time on the investment side.
You suffered only marginal outflows. We've been in business for a couple of centuries, (with) a deeply ingrained philosophy and culture that focuses on preserving capital and always doing what we believe is best for the client. When one of our portfolio managers abruptly left, without regard to a replacement, the next business day Jean-Marie Eveillard was (back) in the office, managing the portfolio. If you focus, as we do, on always trying to do the best job for the client, we will get through difficult times.
First Eagle is best known for its mutual funds. We began a renewed effort to build our institutional business two and a half years ago, (and it's) growing quite nicely. Last year, we had somewhere between 15 and 20 significant wins institutionally. But the flows in the retail business (remain) very strong, so as a percentage of our overall business, retail continues to be very dominant.
All of your investment people are in New York. Would you like to add people in London or Singapore? It's possible that one day we'll have some ears on the ground (but) I have a view on that. If you cover a particular industry or region, you tend to have a bias. You could have an analyst who's the greatest analyst on tech, and for three or four years the sector could be overvalued, but he's still pitching ideas to justify his existence. So you want to give opportunities to people, where they (cover) a number of different industries, so they're not pressured to give you the best idea in a lousy sector.
What's your sense of the market now? My personal view? We could be in for a reasonably good couple of months (but) ultimately very choppy waters ahead, because all of the private sector debt now is being shifted to the government and there are huge imbalances globally and the political and economic consequences and ramifications are huge: How do you get out of a situation where debt is 100% or even 200% of your GDP; where you're printing money hand over fist; where you've got budgets that are out of control? There are going to be very challenging times ahead.
Good thing your windows up here are locked! (laughing) But that's part of the excitement. We don't know what's going to happen, but what we're trying to do is build a portfolio of companies that can better withstand difficult times, so we're not completely dependent on the economy sailing through at 4% or 5%.