Two fund managers have found a way to outperform in both bull and bear markets. Kameleon007/Getty Images
While it’s worth watching markets evolve, two top fund managers aren’t obsessed.
Instead, Matt McLennan and Kimball Brooker succeed by following a proven process.
Here are four investments to make now when stocks are at risk of giving up their gains.
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Instead of worrying about how the economy is going, the two minds behind one of the best mutual funds of the past 15 years believe investors should focus on finding quality stocks.
Throughout its 44-year history, the First Eagle Global Fund (SGENX) has navigated almost every market imaginable, and many of the most volatile moments occurred when the fund was managed by portfolio managers Matt McLennan and Kimball Brooker. Its investors should be grateful that these two were at the helm.
In the 15 years that McLennan has managed the First Eagle Global Fund, he has outperformed 97 percent of funds in his category, according to Morningstar. Since Brooker joined the fund in 2011, the fund’s impressive performance has continued, and the fund has outperformed 96 percent of its peers over the past decade, with a compound annual return of 6.5 percent. The fund also had strong relative performance in 2022 and 2023.
Although this year was radically different in the markets from last year, McLennan and Brooker confirmed in an interview with Business Insider that their investment strategy, which they unveiled last November, hasn’t changed. They said they’re still looking to find quality free cash flow stocks that are trading at a discount to intrinsic value.
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Although McLennan and Brooker try to focus on their process and tune out expert predictions, they concede that it helps to keep an eye on economic developments.
“People get into trouble if they don’t at least keep an eye on the macro situation,” Brooker told Business Insider. “So let’s keep an eye on them. It’s helpful, but it doesn’t dictate decision-making.”
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U.S. stocks have far exceeded expectations for the first six months of 2023, although many on Wall Street are nervous about what comes next. The general consensus is that the S&P 500 will decline modestly for the remainder of the year as the rally fueled by artificial intelligence (AI) stocks fades.
McLennan and Brooker are also on the defensive. While there are reasons for optimism, including Wednesday’s surprisingly low inflation readings, the Federal Reserve may adopt a wait-and-see stance. But McLennan is concerned that the economy’s resilience is due to fiscal stimulus.
“If the current growth rate in tax spending continues, even if we see the cyclical improvement in inflation, we risk a more secular risk of stagflation, like in the 1970s,” McLennan said. “And the stagflation of the 1970s led to pretty bad outcomes for many assets.”
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Although stocks are pricing in the best-case scenario, McLennan noted that the bond market is showing warning signs. The yield curve has been inverted for over a year, which has historically been a reliable indicator of a recession. Wider credit spreads also pose a risk, he said.
Many leading investment firms remain of the opinion that a recession is imminent, although stocks in any market could suffer a setback if valuations fall. Goldman Sachs recently noted that the vast majority of the S&P 500’s gains in the first half of the year were due to rising earnings multiples, rather than underlying earnings growth.
In case stocks decline, McLennan and Brooker have about 10 percent of their wealth in cash and are trimming some successful holdings. That way, they’re ready to hit a sell-off.
“Typically when we see market trouble, we have a number of opportunities to use that cash,” McLennan said.
Four places to invest in this shaky environment
As the name suggests, the First Eagle Global Fund is well diversified across different countries. While US equities still have the largest weighting in the group at 37.4 percent (as of March 31), they’re far from the only option, with international equities making up a sizeable portion of the fund at 30.6 percent .
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“The US is a great economy, but it doesn’t have a monopoly on good companies,” McLennan said. “And the US does not have a monopoly on a strong currency.”
If foreign currencies continue to appreciate against the dollar, the fund managers believe international stocks could rise. Another reason foreign stocks are attractive is their low valuations relative to their US peers, McLennan said.
“They are paid to consider international markets,” McLennan said. Perhaps that’s why, of the four preferred investments they currently make, three are international stocks. All three of the stocks McLennan and Brooker believe in the most are trading at discounts despite being leaders in their fields and with strong leadership teams, the two say.
“This isn’t a speculative AI bet or anything like that,” Brooker said of his favorite stocks. “They have a very solid cash flow that they can use in a variety of ways to increase returns for shareholders, whether it’s through buybacks or dividends.
Below are McLennan and Brooker’s four current favorite investments, along with their thesis, ticker and market cap, if applicable.
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1. Gold
Markets Insider
These: The yellow metal is a proven volatility hedge and has been a cornerstone of the First Eagle Global Fund since its inception, Brooker said. In his opinion, there are few better ways to protect a portfolio from the geopolitical risks ahead.
“If you live in Florida and are exposed to hurricanes, it’s probably a good idea to buy hurricane insurance well before the hurricane is on the horizon,” Brooker said. “And so we think a little bit about gold.”
2. Jardine Matheson
Markets Insider
Ticker: JMHLY
Market Cap: $14.2 billion (€12.6 billion)
These: This Hong Kong-based conglomerate has multiple businesses, including a chain of retail outlets. Although the company has faced severe headwinds recently, including a difficult political environment, the portfolio managers are quite satisfied with the company’s performance.
Jardine Matheson stands out because it’s undervalued by 40 percent, according to Brooker, despite being an industry leader with a clean balance sheet and a solid dividend. McLennan added that the company has a strong track record and a capable management team that is buying back stock.
“We’ll have to be patient with this stock over time, but given the quality and the fact that we’re receiving a decent dividend, we’re comfortable with this stock,” Brooker said.
3. Secom
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Ticker: SOMLY
Market Cap: $15.6 billion (€13.88 billion)
These: Secom is a Tokyo-based security company that is up 18 percent in 2023 despite the weakness of the yen and the strong rebound in Japanese stocks. The company hadn’t made a price increase in decades prior to this year, McLennan said, but such an increase would boost the company’s profitability and allow it to return even more cash to shareholders.
Additionally, Secom has a strong balance sheet and limited debt, according to McLennan. Management also appears confident that the stock is undervalued at 8 times EBITDA now that the company is buying back its shares.
4. Ambev
Markets Insider
Ticker: Bev
Market Cap: $47.9 billion (€42.6 billion)
These: The Brazil-based beer giant has a dominant position in its market with a market share of almost two-thirds, according to Brooker. The stock was “a good house in a bad neighborhood,” he said, while his home country struggled with economic woes. But business has improved since the price hike.
Ambev’s attractive valuation and clean balance sheet give the company a safety margin, Brooker says, so it should be able to hold its ground regardless of how global markets evolve.
Read the original article in English here.
Disclaimer: Stocks and other investments are always associated with risk. A total loss of the invested capital cannot be ruled out either. The published articles, data and forecasts are not an invitation to buy or sell securities or rights. They also do not replace professional advice.