Global value manager First Eagle Investments holds 5-15% of all its equity funds in gold-related securities to hedge against inflation and protect wealth, especially during bear markets.
The gold allocation is a combination of gold bullion, exchange-traded commodities (ETCs) and shares in gold mining and royalty companies, depending on regulations and fund parameters (UCITS aren’t allowed to own bullion, for instance).
First Eagle does not take a directional view on gold – which has just hit an all-time nominal high – but instead, perceives gold to be a core part of its investment process.
So much so that when it established the $531m First Eagle Amundi Sustainable Value fund three years ago, First Eagle wanted to keep the gold element.
UCITS vehicles are not allowed to own bullion and besides, gold doesn’t have an environmental, social and governance (ESG) rating, so the sustainable fund invests selectively in the shares of gold miners that have high ESG credentials and strong management teams.
Portfolio manager Julien Albertini said the gold “ballast” gives the funds “delayed purchasing power” so First Eagle can “be aggressive when others are fearful”.
In other words, by not losing money – or by losing less than most – during down markets, First Eagle’s funds have the resources to buy shares in high quality companies when they are cheaper. “By losing less, you end up winning,” Albertini said.
By employing this ethos, the $90bn First Eagle Global Value strategy has only had seven loss-making years in its 45-year history. Portfolio manager George Ross said resilient wealth creation is “etched into the fabric of the firm”.
The delayed purchasing power element of holding gold has come to the fore during the past two volatile years, which have provided a fertile hunting ground.
“The much higher cost of capital worked like gravity and pushed down a lot of assets trading at bubble valuations”, Albertini said. First Eagle’s holdings were reasonably valued so were protected from excesses.
First Eagle has found opportunities in real estate investment trusts (REITs), the self-storage sector, healthcare and niche industries such as salmon farming.
“Listed real estate assets sold off wholesale with an undifferentiated retreat based on the interest rate movements,” Ross said. During the past 12-18 months as the rate tightening cycle accelerated, “the sector became more unloved and therefore more interesting to us.”
Another property theme First Eagle is exploring is self-storage – “one of the most attractive long-term structural stories in real estate,” Ross said.
Self-storage experienced a boom during lockdown as people changed their lifestyles, which meant “a lot of the demand was pulled forward during Covid,” he explained.
Demand has waned since then and rate hikes have hurt real estate in general. These factors pushed valuations in the self-storage sector down, giving First Eagle the opportunity to own some “extremely attractive compounding businesses”, Ross said.
In the US, 9% of the population uses self-storage compared to 1% or less in Europe and the UK, which are under-penetrated markets.
More recently, healthcare assets – from medical device companies to hospitals – sold off during the summer of 2023 in reaction to diabetes drug advances and expectations that people would need less medical care. Ross described the sell-off as “difficult to justify” and said First Eagle has been able to buy companies that the investment team already knew well at deeply discounted valuations.
First Eagle has also been looking at idiosyncratic opportunities, such as salmon farming. Globally people are eating more salmon and there are high barriers to entry in this industry because salmon can only be farmed in a few locations, including Norway and Scotland.
Last year, the industry encountered difficulties due to disease and warming waters, as well as tax changes in Norway, so the entire sector sold off and First Eagle invested in a best-in-class business. Ross described it as “an impossible to replicate, high quality asset” in a niche, supply-constrained industry.