Gov't bonds are anything but 'risk-free': First Eagle's McLennan

Buyers of government bonds beware. Efforts by central banks to stimulate the global economy are distorting bond and currency prices and causing potential economic dislocation, according to Matthew McLennan, a portfolio manager for the First Eagle family of funds. Investors now face the ironic choice of having to buy stocks in order to preserve capital in real terms, said Mr. McLennan, head of the global value team at First Eagle. "When people think about investing, they think the risk-free rate is [from a] Treasury bill or something of that nature," he said. But “risk-free” assets are anything but free of risk, given their negative real interest rates, Mr. McLennan added. “If your goal is to preserve capital in real terms, you may have to take risk” by investing in stocks, he said. That's why the First Eagle funds are 75% to 80% invested in real businesses, with the remainder split between cash and gold, Mr. McLennan said. The cash is “there to take advantage of opportunities, and gold [is the] substitute for paper money,” he said. Gold is a hedge and an “investment in a form of currency that can't be printed.” Mr. McLennan said government bond prices are being set for mild deflationary scenario, but a serious bout of deflation could stress governments and raise concerns about their creditworthiness. “The companies we own have very strong market positions and could even thrive in deflation,” he said. First Eagle's flagship Global Fund Ticker:(SGENX) has about 20% in Japanese equities — its largest country weighting. “Some of those Japanese stocks have been our best investments, despite deflation” in Japan, Mr. McLennan said. With weakness in Europe recently, the funds have boosted holdings there, he added. German companies, for example, have reduced labor costs over the last decade and now benefit from a weak currency. Mr. McLennan highlighted Daimler AG, known as an automobile maker but also a “world leader in the trucking market,” and HeidelbergCement AG, one of the largest owners of quarries worldwide.