First Eagle Investment Management
High Yield Strategy
Investment Philosophy
The High Yield team believes that rotating risk in each phase of the high yield market cycle is critical to delivering consistent outperformance. In each phase, the strategy may move to overweight or underweight higher- and lower-quality credit tiers in order to add or reduce risk to the portfolio and to rebalance the portfolio’s sensitivity to economic growth.
Investment Process
The High Yield team emphasizes a fundamental bottom-up research approach that drives the identification of investment opportunities in all market environments. The three phases of the process are:
Credit Cycle and Strategy Assessment
The team believes that effective management through the high yield cycle is critical to delivering consistent outperformance. They begin by assessing the primary market and continue with an evaluation of the global economic outlook.
- Assess the primary market
- Focus on spreads
- Evaluate the global economic outlook
Fundamental Research
The emphasis is on bottom-up fundamental research that drives the identification of investment opportunities in all market environments. Research focuses on answering one core question: Does the enterprise possess the ability and willingness to successfully pay coupons and repay or refinance principal?
- Deconstruct the financials
- Understand the business
- Valuation
Portfolio Construction
The team approaches risk management at both credit-specific and portfolio levels.
- Credit-level risk management begins at the security level. The team has the flexibility to invest in opportunities that they feel have an attractive margin of safety at the time of purchase. They seek to avoid issuances whose dynamics are unfavorable to high yield debt holders.
- Portfolio-level risk management begins by rotating risk as the team considers it appropriate to each phase of the high yield market cycle. In each phase, the strategy may move to overweight or underweight higher and lower quality credit tiers in order to add or reduce risk to the portfolio and to rebalance the portfolio’s sensitivity to economic growth.
Competitive Advantages
- Focus on risk† rotation versus sector rotation
- Absolute Return orientation
- Continuity of core team with attractive long-term performance
High Yield Performance
High Yield Annual Returns (%) - as of 3/31/12
■ High Yield — Gross of Fees
■ High Yield — Net of Fees
High Yield Trailing Returns (%)
| Period: 11/2004 – 3/2012 | YTD | 1 Year | 3 Year | 5 Year | Since Inception |
|---|---|---|---|---|---|
|
High Yield – Gross
|
6.63 | 7.55 | 25.76 | 12.22 | 11.95 |
|
High Yield – Net
|
6.44 | 6.76 | 24.87 | 11.43 | 11.16 |
| Barclays Capital U.S. Corporate High Yield Index (Net) | 5.34 | 6.45 | 23.87 | 8.10 | 8.15 |
| Excess Gross Return | 1.29 | 1.10 | 1.90 | 4.12 | 3.80 |
| Excess Net Return | 1.10 | 0.31 | 1.01 | 3.33 | 3.01 |
High Yield Disclosures
| Composite Assets | Annual Performance Results | ||||||
|---|---|---|---|---|---|---|---|
| Year End | Total Firm Assets (millions) | USD (millions) | Number of Accounts | Composite Gross | Composite Net | Index Net** | Composite Dispersion |
| 2011 | 59,646 | 37 | Five or Fewer | 5.46% | 4.69% | 4.98% | N.A. |
| 2010 | 26 | Five or Fewer | 17.03% | 16.21% | 15.12% | N.A. | |
| 2009 | 25 | Five or Fewer | 60.33% | 59.21% | 58.21% | N.A. | |
| 2008 | 19 | Five or Fewer | (15.01%) | (15.60%) | (26.16%) | N.A. | |
| 2007 | 16 | Five or Fewer | 2.31% | 1.60% | 1.87% | N.A. | |
| 2006 | 8 | Five or Fewer | 10.69% | 9.91% | 11.85% | N.A. | |
| 2005 | 5 | Five or Fewer | 9.44% | 8.68% | 2.74% | N.A. | |
| 2004 | 1 | Five or Fewer | 3.92%* | 3.80%* | 2.71%* | N.A. | |
† In this context, risk is defined as the use of high yield securities rated below the highest rated category of non-investment grade. High yield bonds include those that carry a rating such as Ba1/BB+ or lower by credit rating agencies. All high yield securities are considered “speculative” and are often referred to as “junk” bonds.
N.A. — Information is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.
*Performance represents a non-annualized partial period return beginning on 11/1/2004
**Barclays Capital U.S. Corporate High Yield Index
High Yield Composite contains fully discretionary high yield accounts invested primarily in the high yield, below investment grade instruments, including corporate debt and loan instruments. For comparison purposes, the composite is measured against the Barclays Capital US Corporate High Yield Index. The asset mix of the accounts in the composite may not be comparable to the Barclays Capital US Corporate High Yield Index. Indices do not incur management fees or other operating expenses. Investments cannot be made directly into an index.
Prior to December 7, 2009, First Eagle Investment Management, LLC was known as Arnhold and S. Bleichroeder Advisers, LLC.
First Eagle Investment Management, LLC claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. First Eagle Investment Management, LLC has been independently verified for the periods January 1, 1996 through December 31, 2011.
Verification assesses whether 1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and 2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The High Yield Composite has been examined for the periods November 1, 2004 through December 31, 2009. The verification and performance examination reports are available upon request.
First Eagle Investment Management, LLC is an independent SEC registered investment adviser. The firm maintains a complete list and description of composites, which is available upon request.
Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Non-fee paying assets as a percentage of the composite’s assets on December 31st were 62.68%, 45.86%, 55.36% and 62.31%, for 2007, 2008, 2009 and 2010, respectively. Past performance is not indicative of future results.
The U.S. Dollar is the currency used to express performance. Returns are presented gross and net of management fees and include the reinvestment of all income. The net of fees performance was calculated using management fee of 0.70% applied monthly. Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account. The three-year annualized ex-post standard deviation as of December 31, 2011 for the High Yield Composite is 9.82% and 11.09% for the Barclays Capital US Corporate High Yield Index.
The investment management fee schedule is 0.70% on assets. Actual investment advisory fees incurred by clients may vary. The collection of fees produces a compounding effect on the total rate of return net of management fees. As an example, the effect of investment management fees on the total value of a client’s portfolio assuming a) quarterly fee assessment, b) $1,000,000 investment, c) portfolio return of 8% a year, and d) 1.00% annual investment advisory fee would be $10,416 in the first year, and cumulative effects of $59,816 over five years and $143,430 over ten years. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.
The High Yield Composite was created November 1, 2004. Performance presented prior to October 1, 2011, is for accounts managed by Edward Meigs, CFA and Sean Slein, CFA while they were affiliated with another firm and had portfolio management responsibility. First Eagle Investment Management, LLC acquired the High Yield Team on September 30, 2011 from Dwight Asset Management Company. The High Yield Team and their investment process continues intact at First Eagle Investment Management, LLC, therefore the current composite performance is linking to the prior composite history.