Matt McLennan: Investors Should be Positioned to Take Advantage of Opportunities

By on February 8, 2012

Matt McLennan - First Eagle FundsMatt McLennan, portfolio manager, First Eagle Funds, and successor to Jean-Marie Eveillard, was recently interviewed by Wealthtrack’s Consuelo Mack. McLennan’s First Eagle Global fund, which he has managed since 2008, is ranked in the top 20% of funds in its category for the past three years.

McLennan began the interview by discussing the challenges facing world economies and how the policy response has been focused on easy money (negative or low real interest rates and ballooning central bank balance sheets). These policies have created distortions, according to McLennan.

McLennan further stated that the illusion of stability leads to instability; also referred to as the “Minsky Moment.” The recent example being the experience in 2008. Monetary policy, instead of being palliative, is now looked at as a cure, McLennan added.

According to McLennan, over the past 10 years, central bank balance sheets have more than doubled in many instances. People are waking up to the realization that there isn’t a risk-free asset today. The risk is that there will be a de-stabilization of “man made money.”

Mack asked if there was ever a risk-free asset that provided real returns. McLennan answered that if you look at the history of government long-term bonds, they’ve produced low single digit real returns commensurate with the growth rate of the broader economy. He added that if you look at the price of gold over the very long term, it too has produced real returns in the low single digits commensurate with the growth rate of the overall economy. However, there are never totally risk-free investments, according to McLennan. Every government bond has regime risk (war, balance sheet deterioration, printing presses being open in response to other factors). And gold itself, even though it is a perpetual asset because it is chemically inert, has volatility.

McLennan said at First Eagle they’ve always invested under the assumption that there was no “risk-free lunch,” and focus on investing security by security, by and large, where you can obtain a margin of safety.

The interview continued with discussions surrounding instabilities created by central bank intervention, the current valuation of equities, the resilience of holdings in the First Eagle funds, several stocks McLennan finds attractive (Fanuc, Microsoft, Cisco Systems. Newcrest Mining), the merits of gold, “nature’s currency,” the opportunities arising in Europe (Pargesa Holding), the one investment he would recommend if he was limited to one suggestion (Shimano Inc.), and the biggest risk facing investors (paradoxically, not taking risk).

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