Year-End 2014

First Eagle Global Value Team

Annual Letter

The First Eagle Global Value Team has structured what we believe to be an all-weather
portfolio for our investors. With 2014 being a strong market for risk assets, it hasnt
been the optimal relative performance period for the portfolio. We ended the year with
sound absolute returns in most currencies but we were below our real return goals in
the United States due to the strength of the U.S. dollar. The weak spots in our bottomup performance were concentrated in the companies that own harder assets such as
precious metals miners or energy extraction companies. Generally, the harder the
assets, the softer the balance sheets and/or the free cash flow, and thus the weaker the
stock price performance in the portfolio. This price action is entirely consistent with
the flattening of the yield curves that we saw around the world for the sovereign markets and the widening of high yield credit spreads which implies lower global growth
expectations. Also, consistent with this was the dramatic weakness in commodities;
not just in energy, but also in agriculture commodities, in iron ore (which lost more

First Eagle Investment Management is an independent, closely held firm with approximately $100 billion in assets under management (as of
12/31/2014) and a heritage dating to 1864. Over its long history, the firm has helped its clients to preserve capital and earn attractive returns
through widely varied economic cyclesa tradition that is central to its mission today. For more information visit www.feim.com.

First Eagle Global Value Team

than half of its value based on spot price over the last couple of years) and more recently in copper. While commodities have continued to be weak early into 2015, gold
has decoupled and acted more like a monetary reserve than a regular commodity in
the wake of the Swiss Franc de-pegging with the Euro and the initiation of European
quantitative easing measures.
You may have heard us refer to Bill White in the past and we continue to focus on his
work. Bill White is the former head of the Monetary and Economic Department of the
Bank for International Settlements who predicted the credit crisis before it unfolded
in 2007. The Bank for International Settlements, given its legacy as the central banks
central bank, has often cast a more cautious eye on the global financial architecture
than say the IMF or Wall Street consensus. Bill White is now the current chair of the
Economic Development and Review Committee at the OECD in Paris. Speaking
at a conference in New York towards the end of last year, he posed a very interesting
rhetorical question which wed like to paraphrase. In reference to the global economy
he asked, What if there is no equilibrium, what if the world economy is much more
like a forest, which is like a complex system thats path dependent? Path dependent
complexity means that the system plays out in ways that are difficult to predict based
on what you do to it. He went on further to ask, What if were actually on a bad path,
a bad path caused by too much debt, exacerbated by the disinflationary pulse of too
much labor? These observations resonate with the themes we have discussed at length
in the past.
On the subject of too much debt, weve repeatedly made the point in the last several
months that globally, we have more debt relative to the economy today than we had
before 2008.1 In essence, the deleveraging in the U.S. private sector debt has been
more than offset by the growth in Chinese debt. Furthermore, within the developed
markets, debt has also grown relative to output due to large growth in government
sector debt and in certain high yield issuers. Regarding the disinflationary pulse from
too much labor, weve spoken at length about factory automation taking away manufacturing jobs. This presents a structural headwind to employment in the world and
a structural challenge for the emerging markets like China which has moved many
people into manufacturing jobs.
A recent TED talk on the subject of technology with guest Jeremy Howard,2 who heads
an artificial intelligence (A.I.) company called Kaggle, was quite illuminating and disturbing. He not only reinforced the message about technology substituting for human
capital on the factory floor, but he took the point further to show how computers are
within a handful of years of substituting for humans within the services industries as
well. The capabilities of A.I. programmed computers could cover many of the jobs in
lower-end services. He also mentions that during the Industrial Revolution, machines
were created that were more efficient than humans, but the growth curve gradually
plateaued as the level of capital grew relative to the economy. Now, Howard describes a
phenomenon that becomes self-reinforcing in which the nature of artificial intelligence
1 Source: Bank of International Settlements. Data as of December 2014.
2 Referenced for informational purposes only.

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Annual Letter Year-End 2014

In a more risky and more

highly valued market, there
has to be some form of a
negative sentiment for you
to get a resilient business
at a good price.

feeds on itself. So what starts to happen in the services sector in the next handful of
years will be a trend in the next decade and beyond that accelerates in nature because
machines will learn from their learning. Long term, it was beneficial to move people
out of low-end agricultural jobs into manufacturing and services. Likewise, it should
be positive long-term for productivity to employ less people in manufacturing and
services jobs in order to free their time for higher and better use; but these trends can
be quite disruptive for the impacted generation.
The forces of too much debt coupled with IT substitution for human capital are going to be with us for a long time, exacerbated because debt levels are generationally
high and the forces of disruptive IT-related change are accelerating. Add to that the
geopolitical developments in the Eurasian continentRussia, China and the Middle
Eastwhich are moving away from the American and European policy agendas.

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First Eagle Global Value Team

Additionally, the broader emerging markets may be moving from the growth solution
of the last 5-10 years to a more complex and potentially problematic set of markets.
The emerging markets have had epic investment booms for the last decade that are
starting to cool, as evidenced by tumbling commodity prices. This, in turn, is invoking
policy behavior in those markets which may become more populist and nationalistic in
nature.
Perhaps Bill White is correct in saying that were a long way from equilibrium. When
we reflect on the patterns of history, in instances where there has been marked disequilibrium in the world, be it geopolitical or economic, it often takes a combination of
policy blunders and crisis to force a more rational hand. Rational hands dont always
come about spontaneously from policy makers who otherwise have to deal with the
agency issues associated with a short-term political process. Democracies sometimes
struggle with making tough long-term decisions. We worry further about liquidity in
fixed income capital markets -- especially in a post Dodd-Frank world where dealers
hold less inventories-- if we get either policy blunders or a crisis. The stunningly low
long-term developed market sovereign bond yields represent a flattening of yield curves

The patience that served us

well as sellers on the way
up in the market is also
likely to be deployed as we
become selective buyers.

without short term rate rises and are potentially signaling a generation of lower than
usual nominal growth in the developed world. Combining the questions over nominal
growth in the developed world, the slowing growth message implicit in falling base
metals commodity prices for the emerging markets complex and the questions raised
around the worlds financial architecture on the heels of golds recent strength versus
other commodities, its a complicated macro picture indeed.
Page 4 of 8

Annual Letter Year-End 2014

There are things that could go right. Low oil prices are arguably a boon for the world
economy and the low level of interest rates are stimulative in nature. These combined
forces ought to produce some short-term positive demand boost. However, the longerterm secular issues remain in place against a backdrop where the global business capital spending cycle may already be above trend and moderating based on the huge and
slowing China-related investment cycle. If the world experiences low secular growth in
nominal terms in an atmosphere of geopolitical uncertainty, it will make generationally high levels of government debt less sustainable. It makes us wonder how resilient
our social contract will be in a world of crisis that requires either higher taxes, lower
entitlements or further monetization measures to cure public debt levels.
When Kimball and I sit down and think about the world, these are the things that
weigh on us heavily. The reason we are casting a wary eye is that when we look at the
world bottom-up, despite the fact that we view ourselves as being in a troubled world,
new investment ideas that embody a margin of safety in price and prospects have
actually been harder to find. You would think in this kind of complex and troubled
backdrop the world would be replete with bottom-up opportunities, but its not. What
has actually happened is that higher prices have forced our bottom-up search for opportunity to move from a broad-based search across many sectors in the wake of the
crisis in 2008-2009 to something thats far more selective. Its become a careful search
for resilience.
Weve talked a lot about the notion of scarcity either in tangible business assets or in
intangible market position as a root cause of resilience. However, the kind of resilience
were starting to look for is not just based on scarcity. More than ever were starting to
focus on management teams that have a willingness to distribute cash to shareholders be it through dividends or repurchase, and that are in a phase of what wed refer
to as behavioral prudence. The emergence of prudent behavior typically arises when
specific sectors are already out of favor in a world of otherwise peak margins and high
multiples or because specific companies are facing new and potentially threatening
competing product trends that necessitate some form of adaptation. As part of our selective business search, we are seeking franchises within cyclical areas that are cyclically depressed or franchises that are in questionbut that have the potential for durability (with adaptation at the margin) because of their existing competitive advantages. In
a more risky and more highly valued market, there has to be some form of a negative
sentiment for you to get a resilient business at a good price. Some of the areas that are
cyclically out of favor that have grabbed our research attention in recent quarters have
been pretty variedareas such as insurance, agriculture and more recently in energy
with the price of oil dipping below $50 a barrel in January.
One thing we would like to mention though is the patience that served us well as
sellers on the way up in the market is also likely to be deployed as we become selective
buyers in these areas of cyclical or product distress. We are waiting for what Ajit Jain
and Warren Buffett refer to as the fat pitch; so dont expect dramatic shifts in the
portfolio. Were legging our way into situations one at a time. To see a more dramatic
shift in the composition of the portfolio would probably require lower risk asset prices
across the board; thats when we tend to get most emboldened. When people start to

Page 5 of 8

First Eagle Global Value Team

price risk, we put capital to work. In that regard, its been a healthy start to the year
with markets softening.
In terms of our cash reserves, which we think of as deferred purchasing power, we have
also spent some amount of time looking at sovereign opportunities in countries where
fiscal realities may be better than the United States and currencies may be cheaper after the pronounced recent strengthening of the U.S. dollar. These are not yet large positions, but we may see more opportunities to diversify our deferred purchasing power
on advantaged terms if the dollar strength persists. The market is starting to price in a
healthy dose of U.S. exceptionalism. While we agree that the U.S. has certain structural attractions in terms of the dynamism of its business, labor and education markets, the U.S. also suffers from excessive levels of total debt and a structural shortage of
domestic savings relative to investment due to its reserve currency status. The strength
of the dollar could exacerbate these imbalances and lead to a moderation in business
confidence. We dont try to predict interest rates, but it strikes us that the U.S. would
likely struggle in the face of more normal interest rates.
The final thing we would like to reiterate is that gold remains a mainstay for us. If the
concern is finding areas of less sovereign debt risk, then gold is nobodys liability. The
criticism of gold has always been that it doesnt have a yield but nor does the sovereign
debt today! The opportunity cost of owning gold has gone down dramatically when
you think of the yield curves of Japan, Germany and France all being anchored below
1% going out a decade. The Swiss yield curve has actually been negative over this time
horizon and the U.S., even in a window of perceived relative economic strength with
a 5% GDP growth quarter, has a 10-year Treasury yield below 2%. The opportunity
cost of owning something without credit risk is lower still. Easy money does not cure
structural imbalances and it arguably makes the long term worse by encouraging more
debt and less restructuring than would otherwise be the case. Central bank balance
sheets have weakened too with large amounts of quantitative easing and a proliferation
of promises to be credibly irresponsible in order to lift inflation expectations. Meanwhile, gold cannot be printed and generally gold miners are slashing capital spending.
Gold, which remains scarce and long-lasting with limited opportunity cost, remains an
important potential hedge to the frailties of todays global financial architecture.
In heated markets, we thank our long-standing clients for sharing our sense of patience
and discipline in capital allocation and we look forward to serving you as prudent
stewards of your capital in the years ahead.
Sincerely,

Matthew McLennan
Head of the Global Value Team
Portfolio Manager
Global, Overseas,
U.S. Value and Gold Funds

Page 6 of 8

T. Kimball Brooker, Jr.

Portfolio Manager
Global, Overseas
and U.S. Value Funds

Annual Letter Year-End 2014

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Page 7 of 8

Annual Letter Year-End 2014

First Eagle Global Value Team

Average Annual Returns as of 12/31/2014 (%)

First Eagle Global | Class A | SGENX

First Eagle Overseas | Class A | SGOVX
First Eagle U.S. Value | Class A | FEVAX
First Eagle Gold | Class A | SGGDX

First Eagle Global Income Builder | Class A | FEBAX

YTD

1 Year

5 Years

10 Years

w/o sales charge

2.93

2.93

9.43

8.76

w sales charge

-2.21

-2.21

8.31

8.21

w/o sales charge

-0.97

-0.97

7.23

7.67

w sales charge

-5.93

-5.93

6.14

7.12

w/o sales charge

8.15

8.15

10.68

7.66

w sales charge

2.75

2.75

9.55

7.11

w/o sales charge

-2.41

-2.41

-10.10

2.86

w sales charge

-7.27

-7.27

-11.02

2.33

YTD

1 Year

3 Years

Since Inception
(05/01/12)

1.24

1.24

--

7.28

-3.79

-3.79

--

5.23

w/o sales charge

w sales charge

Expense Ratio

1.13
1.15
1.16
1.25

Expense Ratio

1.35

The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically
impact the funds short-term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investors shares, when redeemed, may be worth more or less than their original cost. Past performance data
through the most recent month end is available at www.feim.com or by calling 800.334.2143. The average annual returns for Class A Shares
with sales charge of First Eagle Global, Overseas, U.S Value and Global Income Builder Funds give effect to the deduction of the maximum
sales charge of 5.00%.
As of May 9, 2014, the First Eagle Overseas Fund is closed to certain investors. Please see the prospectus for more information.
The annual expense ratio is based on expenses incurred by the fund, as stated in the most recent prospectus. For the High Yield and Global Income Builder Funds
had fees not been waived and/or expenses reimbursed in the past, returns would have been lower.
There are risks associated with investing in funds that invest in securities of foreign countries, such as erratic market conditions, economic and political instability and fluctuations
in currency exchange rates.
Investment in gold and gold related investments present certain risks, and returns on gold related investments have traditionally been more volatile than investments in broader
equity or debt markets.
Global Income Builder Fund: Investments in bonds are subject to interest-rate risk and can lose principal value when interest rates rise. Bonds are also subject to credit risk, in which
the bond issuer may fail to pay interest and principal in a timely manner, or that negative perception of the issuers ability to make such payments may cause the price of that bond
to decline.
Global Income Builder Fund: High yield securities (commonly known as junk bonds) are generally considered speculative because they may be subject to greater price volatility
and present greater risks than high rated fixed income securities. High yield securities are rated lower than investment grade securities because there is a greater possibility that
the issuer may be unable to make interest and principal payments on those securities.
Global Income Builder Fund: Bank loans are often less liquid than other types of debt instruments. There is no assurance that the liquidation of any collateral from a secured bank
loan would satisfy the borrowers obligation, or that such collateral could be liquidated.
Global Income Builder Fund: Income generation is not guaranteed. If dividend paying stocks in the Funds portfolio stop paying or reduce dividends, the funds ability to generate
income will be adversely affected.
The principal risk of investing in value stocks is that the price of the security may not approach its anticipated value or may decline in value.
All investments involve the risk of loss.
The commentary represents the opinion of the Global Value Team Portfolio Managers as of December 31, 2014 and is subject to change based on market and other
conditions. The opinions expressed are not necessarily those of the entire firm. These materials are provided for informational purpose only. These opinions are
not intended to be a forecast of future events, a guarantee of future results, or investment advice. Any statistics contained herein have been obtained from sources
believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue
hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.

Investors should consider investment objectives, risks, charges and expenses carefully before investing. The prospectus and summary
prospectus contain this and other information about the Funds and may be obtained by contacting your financial adviser, visiting our website
at www.feim.com or calling us at 800.334.2143. Please read our prospectus carefully before investing. Investments are not FDIC insured
or bank guaranteed, and may lose value.

First Eagle Funds are offered by FEF Distributors, LLC. www.feim.com

First Eagle Investment Management, LLC 1345 Avenue of the Americas, New York, NY 10105-0048
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