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March 21, 2024

First Eagle CEO says diversification beyond value equities paying off

Mehdi Mahmud took the helm of First Eagle Investment Management in 2016 with a mission: to diversify the value equity boutique’s business with strategies capable of delivering equity-like returns by other means.

Now, after a prolonged period of dominance for U.S. megacap growth stocks that left value managers struggling to retain clients, Mahmud, in an interview, said First Eagle looks to be turning a corner.

Last year was the firm's second year in a row of positive net flows following heavy outflows over the three preceding years, something "I’m particularly proud of,” said Mahmud, who left his perch as chairman and CEO of Jennison Associates in early 2016 to become First Eagle’s president and CEO.

The industry veteran was brought in by Blackstone and Corsair Capital Partners, after their 2015 purchase of a majority stake in First Eagle from TA Associates and First Eagle's family owners, to diversify and institutionalize a money management firm that, for all its strengths, had remained narrowly focused on value equities and the wealth management space.

Mehdi Mahmud

New York-based First Eagle reported $130.8 billion of assets under management as of Dec. 31, 2023.

Net inflows for 2023 came to about $200 million — “not a lot,” conceded Mahmud, but significant nonetheless against the backdrop of a quick resumption of market dominance last year by megacap growth stocks following a sell-off in 2022 sparked by the start of a U.S. rate hiking cycle.

By contrast, a number of value equity managers have suffered through five years of negative flows, he noted.

Mahmud credited First Eagle’s diversification strategy — including its move into private credit six years ago and last year’s push into high-yield municipal bonds — for helping the firm offset continued headwinds for its equities business.

Those strategic moves — which saw First Eagle’s legacy large-cap value equity business decline to roughly 67% of total AUM from almost 95% over the past eight years — started before he arrived, with the 2011 liftout of a Dwight Asset Management high-yield bond team, the firm’s first foray into fixed income.

But Mahmud has taken the baton and run with it.

“Our strategy is to focus on areas where there’s sustained customer demand, where active management, and therefore best-in-class talent, can add meaningful value, and where First Eagle’s client-centric culture can be a differentiator,” he said in an email.

Mahmud said market segments that meet all of those criteria include:

Alternative credit, his initial gambit with the 2017 acquisition of private credit boutique NewStar Financial.
Small-cap equities, with the liftout of a Royce Investment Partners investment team in late 2021.
And high-yield munis, with the hiring last year of former Nuveen veteran John Miller and the subsequent build out of his team.

The CEO said his team’s approach to expanding First Eagle’s product mix involves identifying markets promising structural growth and then identifying top investors in those segments and waiting for dislocations in the market to put those investors in play.

Insisting instead on one’s own timetable for establishing new capabilities runs into the hurdle of only being able to access candidates making themselves available at any point in time, Mahmud noted.

By way of example, for the firm’s latest move into high-yield munis, Mahmud said while he didn't meet Miller until last July, after the head of Nuveen’s big muni business left that firm after 27 years, “we knew everything about him that you could know from data.”

After confirming he was a cultural fit with First Eagle, “we were able to make a decision very, very quickly,” he said.

First Eagle’s team, meanwhile, is “very bullish” on high-yield munis now, with the huge U.S. infrastructure bill signed into law in late 2021 set to spur supply while the likelihood of steady or falling U.S. rates this year should spur demand for those long-dated bonds as well, he said.

Anticipated returns, meanwhile, should be capable of competing with equities for client allocations.

“We’re generating paper that’s about a 5.8% tax advantaged yield for people who pay federal taxes” — a tax-equivalent return of roughly 8% or more — and with ratings upgrades likely as local governments establish a payment history for those munis, another 2 or 3 percentage points a year of capital gains are possible, Mahmud noted.

At that point it really starts to compete with equity for retail and wealth management clients' portfolio allocations, meeting the moment for an aging American demographic that over time is going to need more income than capital appreciation, Mahmud said.

The math for First Eagle’s private credit business — now roughly $40 billion with the follow-on acquisitions of THL Credit, with $17 billion in AUM, in early 2020, and Napier Park Global Capital, with close to $20 billion in August 2022 — likewise positions it as an attractive alternative to equity allocations, this time predominantly for institutional clients, he said.

Strengthening distribution

Another focus for First Eagle’s management team, meanwhile, has been bolstering distribution, with a threefold expansion of the firm’s retail sales team to 120 since Mahmud joined.

Especially in challenging market environments like the present, “talking to customers and holding their hand along the journey is critical," he said, adding that managers who didn’t invest in client support have suffered disproportionately.

First Eagle’s muscular distribution — an underutilized asset when the firm was singularly focused on value equities — has been another reason to pursue diversification, said Gunnar Overstrom, a partner with Corsair Capital, the New York-based private equity firm that together with Blackstone acquired a majority stake in First Eagle in late 2015.

First Eagle's distribution into high net worth in the U.S. is "pound for pound, the best … in the business,” said Overstrom, adding that with the firm’s move into alternative credit and efforts now to distribute alternative products to retail, and high net worth retail in particular, “we’re really pursuing something that has become kind of the Holy Grail in alternative asset management.”

If alternatives hold promise, Mahmud isn’t giving up on the firm’s legacy value equity business, noting that the prevailing megacap-driven moment now in markets can’t go on forever.

When market leadership broadens beyond those Magnificent Seven growth stocks, the outlook for active managers will inevitably improve. “It’s gravity (and) you can defy gravity for so long … but eventually it catches up with you,” said Mahmud. He declined, however, to predict when that day could arrive.

But he expressed confidence that First Eagle's business is better placed now to roll with the market's punches.

For 2024, “year to date, we are roughly flat” overall — still negative on the equity mutual fund side, reflecting a dearth of new sales rather than heavy redemptions, but that's being offset by money raised for alternative credit, high-yield munis and separately managed account products launched in the retail space over the last year or two, Mahmud said.

“I feel like our firm has turned a corner in terms of managing our flows,” he said.

Meanwhile, the prospect of Blackstone and Corsair, eight years or more into their partnership with First Eagle, eventually exiting — whether through an initial public offering or a sale to a strategic buyer — shouldn't trip up the firm's momentum, Mahmud said.

Those shareholders' highest priority is to "sustain and build upon our momentum, which we believe will maximize shareholder value for both existing and future owners," he said, adding "there are no plans to change our strategy or disrupt our momentum."

The opinions expressed are not necessarily those of the 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.

The information is not intended to provide and should not be relied on for accounting or tax advice. Any tax information presented is not intended to constitute an analysis of all tax considerations.

Gunnar Overstrom is independent of First Eagle Investments (“FEI”). The opinions and views expressed by Gunnar Overstrom are his own and not those of FEI.

The total AUM represents the combined AUM of (i) First Eagle Investment Management, LLC, (ii) its subsidiary investment advisers, First Eagle Separate Account Management, LLC, First Eagle Alternative Credit(“FEAC”) and Napier Park Global Capital (“Napier Park”), and (iii) Regatta Loan Management LLC, an advisory affiliate of Napier Park. The total AUM includes $1.6 billion of committed and other non-fee-paying capital from FEAC and $1.5 billion of committed and other non-fee-paying capital from Napier Park.

"Yield" refers to the earnings generated and realized on an investment over a particular period of time.

The term “Magnificent Seven” is widely used in the financial media and elsewhere to refer to the seven US technology-related stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) that drove an outsized share of equity market gains in 2023.

Risk Disclosures:

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

All investments involve the risk of loss of principal.

Diversification does not guarantee investment returns and does not eliminate the risk of loss.

High yield, lower rated securities involve 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. High yield securities involve greater risk than higher rated securities and portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not.

Strategies that invest 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 issuer’s ability to make such payments may cause the price of that bond to decline.

Municipal bonds are subject to credit risk, interest rate risk, liquidity risk, and call risk. However, the obligations of some municipal issuers may not be enforceable through the exercise of traditional creditors' rights. The reorganization under federal bankruptcy laws of a municipal bond issuer may result in the bonds being cancelled without payment or repaid only in part, or in delays in collecting principal and interest.

Alternative investments can be speculative and are not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing and able to bear the high economic risks associated with such an investment. Investors should carefully review and consider potential risks before investing. Certain of these risks include:

Loss of all or a substantial portion of the investment;
Lack of liquidity in that there may be no secondary market or interest in the strategy and none is expected to develop;
Volatility of returns;
Interest rate risk;
Restrictions on transferring interests in a private investment strategy;
Potential lack of diversification and resulting higher risk due to concentration within one of more sectors, industries, countries or regions;
Absence of information regarding valuations and pricing;
Complex tax structures and delays in tax reporting;
Less regulation and higher fees than mutual funds;
Use of leverage which magnifies the potential for gain or loss on amounts invested and is generally considered a speculative investment technique and increases the risks associated with investing in the strategy;
Carried interest which may cause the strategy to make more speculative, higher risk investments that would be the case in absence of such arrangements; and
Below investment-grade loans which may default and adversely affect returns.

Important Information for Non-US Residents

This material and the information contained herein is provided for informational purposes only, do not constitute and is not intended to constitute an offer of securities, and accordingly should not be construed as such. Any funds or other products or services referenced in this material may not be licensed in all jurisdictions and unless otherwise indicated, no regulator or government authority has reviewed this material or the merits of the products and services referenced herein. This material and the information contained herein has been made available in accordance with the restrictions and/or limitations implemented by any applicable laws and regulations. This material is directed at and intended for institutional investors (as such term is defined in any applicable jurisdiction). This material is provided on a confidential basis for informational purposes only and may not be reproduced in any form. This material is for general information only and is not intended as investment advice or any other specific recommendation as to any particular course of action or inaction. The information in this material does not take into account the specific investment objectives, financial situation, tax situation or particular needs of the recipient. Before acting on any information in this material, prospective investors should inform themselves of and observe all applicable laws, rules and regulations of any relevant jurisdictions and obtain independent advice if required. This material is for the use of the named addressee only and should not be given, forwarded or shown to any other person (other than employees, agents or consultants in connection with the addressee’s consideration thereof).

Important Information for Residents of United Kingdom

This material is issued by First Eagle Investment Management, LLC and is lawfully distributed in the United Kingdom by First Eagle Investment Management, Ltd. First Eagle Investment Management, Ltd is authorised and regulated by the Financial Conduct Authority (FRN: 798029) in the United Kingdom. This material is directed only at persons in the United Kingdom who qualify as “professional investors.”

This material is not directed at any persons in the United Kingdom who would qualify as “retail investors” within the meaning of the UK Alternative Investment Fund Managers Regulations 2013 (S.I. 2013/1773) or the EU Packaged Retail and Insurance-based Investment Products Regulation (No 1286/2014), the UK PRIIPs Regulation, and such persons may not act or rely on the information in this material.

FEF Distributors, LLC (“FEFD”) (SIPC), a limited purpose broker-dealer, distributes certain First Eagle products. FEFD does not provide services to any investor, but rather provides services to its First Eagle affiliates. As such, when FEFD presents a fund, strategy or other product to a prospective investor, FEFD and its representatives do not determine whether an investment in the fund, strategy or other product is in the best interests of, or is otherwise beneficial or suitable for, the investor. No statement by FEFD should be construed as a recommendation. Investors should exercise their own judgment and/or consult with a financial professional to determine whether it is advisable for the investor to invest in any First Eagle fund, strategy or product.

First Eagle Investments is the brand name for First Eagle Investment Management, LLC and its subsidiary investment advisers. First Eagle Alternative Credit and Napier Park are brand names for the two subsidiary investment advisers engaged in the alternative credit business.