Speaker 1:
Welcome to ETF Central, recorded here at the New York Stock Exchange, the home of ETFs. We're diving deep with the people shaping the space, the technologies driving innovation, and the stories behind the tickers. Whether you're an investor, issuer, or industry insider, welcome home.
Bilal Little:
Welcome to today's edition of ETF Central. My name is Bilal Little. I'm your host. I'm excited today to have Matt McLennan, the co-head of Global Value Investing and a portfolio manager of Global Value Investing at First Eagle Investments. They're a $160 billion asset manager, and in December they launched two active ETFs. I'm really excited about this episode. Welcome to the show, Matt.
Matthew McLennan:
Thank you so much. I'm doing very well.
Bilal Little:
Good, excited. So, help us understand your journey to First Eagle and what led you to the firm, and why are you excited to be joining us today?
Matthew McLennan:
Sometimes you end up in a place that ultimately uses all of the bits of your life experience beforehand, and I'd grown up in Australia and started working at the Queensland Investment Corporation in global equities in Australia and then went to Goldman. And at Goldman, I had a range of different experiences from equities. My first IPO I was involved with when I started on the banking side of Goldman was a gold mining IPO up in Papua New Guinea, where I happened to be born, and then I wound up in New York. And part of that time I was running value portfolios, global equity portfolios, and I also served a role on the investment strategy group. That let me look at currencies, international markets versus the US, fixed income versus equities. Point being that First Eagle was a platform where I could look at all of those different markets in one vehicle.
Bilal Little:
Absolutely.
Matthew McLennan:
And I think the other thing too, you find out as you're going through your career, is you end up in a place where you're most comfortable in your own skin as an investor. And so, I think the one thing that distinguishes First Eagle is the temperament of patience. And we're very long-term investors, and I felt very much at home at First Eagle, not just from a skill set standpoint, but a temperament standpoint, and I joined in 2008.
Bilal Little:
Wow. So let's go and stay with First Eagle, and maybe just share a little bit about the firm, the organization, what you guys stand for, and what separates you from other asset managers?
Matthew McLennan:
The ethos of what we do at First Eagle is resilient wealth creation. That's our true north.
Bilal Little:
That's a good way to say it.
Matthew McLennan:
Yeah, and I think it's important to understand that, because from a differentiation standpoint, we tend to be much more focused on defining risk as avoiding the impairment of capital in real terms, as opposed to many strategies you might hear of in ETFs that define risk as tracking error to a benchmark.
Bilal Little:
Absolutely.
Matthew McLennan:
So firstly, we're focused on preserving capital in real terms, and that's an important thing. And I think the second thing is we try to achieve that, and I'm sure we'll get into this in more detail through this notion of scarcity value, bottom up.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And temperament, as I alluded to, is very important at First Eagle. We're great believers not just in patient investing, much more like tending to the garden than mowing the lawn, but also very focused on having the humility to accept uncertainty in markets and that makes you invest differently, and the flexibility to go globally.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And so if you look at the different strategies at First Eagle, that focus on resilient wealth creation is pervasive, and the willingness to be flexible, and to focus on parts of the market that lend themselves to high active share.
Bilal Little:
Wow. Appreciate that. So, I think it's only fitting to start the conversation extremely wide. Today's investment environment, there's no shortage of headlines, whether it's inflation, whether it's global tension. How do you guys set the macro stage as a team for what you're going to communicate to clients, as far as being able to follow these investment principles and philosophies?
Matthew McLennan:
Well, so I think even though we're inherently bottom up, one security at a time, you have to be willing to cast a wary eye to what can go wrong from a macro standpoint.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And I think if I reflect on the list of macro complexities that you just referenced, whether it's inflation and geopolitical tensions and the like, I think one of the variables that's kind of a root cause for those symptoms, if you will, is the situation we find ourselves in today globally, where we have a high degree of fiscal laxity. Budget deficits are high relative to where you'd expect them to be, given relatively low unemployment, not just in the United States, around the world. And so, that means that one has to be more attuned to the fact that if the sovereigns are issuing more claims on themselves and they have a fixed real taxing ability, that we could have more nominal drift in the system, more inflationary drift over time. And so, one of the things that we spend time communicating with our clients about is investing in a world where there's more sovereign risk.
Bilal Little:
Interesting. Interesting. So stay with that and let's talk about the opportunities that you actually see. I know we're just going to stay global and sort of macro here, we don't have to dive directly into the portfolio, but what are areas of the market that you guys like, and then areas of risk that you are concerned about?
Matthew McLennan:
Yeah, so if you think about that backdrop where we have greater sort of nominal growth or inflationary tendency in the system, then I think from a get-go, one has to be perhaps a little more cautious about assets that perhaps low volatility on the surface, but are fixed in nominal principle. Because if there's an upward shift at some point in the indeterminate future in inflation rates, you could lose real purchasing power owning things that are in fixed nominal value, unless you have sufficiently high yield to compensate you for that rate of drift.
Bilal Little:
Sure.
Matthew McLennan:
The problem is, if global sovereign debt's growing at 6% or 7% a year, you need a high yield to cover that threshold.
Bilal Little:
Absolutely.
Matthew McLennan:
And so for us, what that's meant at a big picture level is that when we implement our strategies, we're much more focused on securities or assets that we think have real positional value, that they may be a claim on a resource that's long duration in nature, that were we to have more inflation could preserve its purchasing power, because the underlying price of that resource would go up, or land, or companies that have strong market share positions. If you're 50% or 60% market share of a narrow niche of the world economy, you have the ability over time to reprice your book of business to reflect the monetary equilibrium. And so, I think the big picture take for us is if we're in this world of sovereign risk, focusing on companies with strong real assets and strong positional integrity is important to preserving value in real terms.
Bilal Little:
So let's unpack that a little further. Just thinking about US and I would say globally, how are you identifying those particular companies as evaluation-based? What are you actually looking for right now, or what businesses do you like right now?
Matthew McLennan:
Yeah, so we start with the business first, and then we assess valuation. We feel that you have to feel comfortable in the persistence of a cash flow stream before you can put a multiple on that cash flow stream.
Bilal Little:
Absolutely.
Matthew McLennan:
It sounds simple, but it's not. A lot of people either look for high quality businesses, irrespective of price, or growth stories irrespective of price, or they might statistically filter the market based on price to cash flow, price to book, but then you end up with a business that might be questionable. And so at First Eagle, it's critical in our minds start with the business and then assess price. And so, if you think about those kinds of businesses that have good positional value, scarcity as we would refer to it, they tend to have a few unique clusters. If it's a resource, they tend to have basins that are high ore grade and long duration. If it's real estate, they tend to be very centrally-located, location, location, location.
Bilal Little:
Absolutely, absolutely.
Matthew McLennan:
So, premium rents. These companies can have cycles, but they have cash flow that has long duration and you can value them. And if it's a company that doesn't have tangible assets but has intangible assets, there are different kinds of businesses we focus on, businesses that might control a precision process.
You might be the world leader in CNCs for factory automation, or you might be a world leader in bicycle brakes and gears with 50% or 60% market share. Those sorts of advantages give you scale in R&D and distribution. We focus on companies that have iconic brands. A brand that's been around for 100 years can survive cycles and has pricing power over time. And we focus on companies that have what we'd refer to as network effects. They could be a bottler or a convenience store retailer that has the densest network of stores or bottling operation, or it could be virtual, like a social media platform, or a software company that has high market share. And so if you loop all those together, high market share, sort of density of market position, is kind of a common thread, similar to what you see in real assets, high ore grade or central location is kind of density as well.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And so scarcity and density in our minds kind of coexist.
Bilal Little:
All right, so I want to impact some of this a little bit, because I think it's really valuable. I've known of First Eagle for nearly 20 years, and for most people at the investment level, we all have home country bias, so they're really concerned about going outside of the US, because these are businesses, to your point, that they may not know or be less familiar with. Every time I spoke to a financial advisor, First Eagle was where they source their international and/or commodity exposure, particularly gold. Can you just unpack a little bit about your prowess there? Because it seems that you guys have built a ton of conviction in the financial advisor community.
Matthew McLennan:
If you look at our inception narrative for the global strategy, it started in 1979 and it started as a global strategy. So, many other players started as US and then ventured into international, but our roots are deeply embedded in international markets, and I think there's a lot of institutional memory there. I think the sort of second thing is that when people think of international investing, they tend to sort of line up the risks in their mind. But I think there's also opportunity, and I think one of the benefits that we've had, having been in these markets for a long period of time, is that you see that there's certain types of businesses that exist outside the United States. The US, as great an economy as it is, doesn't have a monopoly on all good businesses.
Bilal Little:
Absolutely.
Matthew McLennan:
So when you look outside the US, you might find the best luxury products companies. You might find eclectic holding companies that own stakes in other companies, but if you buy the holding company, you could get a double discount. There are factory automation companies in Japan that just have technology that's dominant relative to their peers globally. There's real estate that is unique in different parts of the world. And so, I think when you start from a position of looking globally, you realize that there are some unique pockets of scarcity that just happen to exist outside the US. And so, we've always been at peace with the notion that we'll go where the opportunities are, wherever they may be, and that's part of a flexible temperament.
Bilal Little:
Yeah. Look, I think that's an important mandate, especially right now. If someone hires you to be the anchor of the portfolio, you are hiring someone to say, "Go out and identify the best opportunities for me." So I have to get your views on this before we go into parts of the portfolio or how you guys manage capital. You had a unique value perspective on gold through multiple cycles. I have to ask, you know I have to ask, just talk a little bit about what you guys have identified in gold, and how this particular cycle may be different.
Matthew McLennan:
If we go back to the first risk that we talked about, which is that sovereigns are issuing securities on themselves at a faster pace and that we think that the antidote to that, to a certain extent, is to own things that have real positional value?
Bilal Little:
Mm-hmm.
Matthew McLennan:
Well, gold is the embodiment of that. It offers no yield, but it doesn't have supply growth anywhere like the supply growth of sovereign debt.
Bilal Little:
Absolutely.
Matthew McLennan:
Gold is a paradox. When I speak to people about gold, they're like, "Well, isn't it just like a useless lump of metal?" And I'm like, "Actually, you got to understand that the utility of gold as a potential hedge as a monetary reserve is its uselessness as a commodity." It's naturally got low beta, and historically it's had its best decades when equities had its worst decades. And so, gold's chemical character means it's a natural perpetuity. It lasts forever, it's naturally defensive, and it happens to be scarce. So, one way to think about gold is there's scarce defensive land, and we've owned gold as a potential hedge in our mutual funds because it's preserved its real value over generations.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And this tends to perform best when risk assets are in troubled waters. And so, you can imagine it has a role in our portfolios as a potential hedge, but one thing I'll sort of point out is that we tend to be measured. We don't want the portfolios to be a directional bet on that.
Bilal Little:
Absolutely.
Matthew McLennan:
So in our mutual funds, gold tends to peak out at a mid-teens percentage of the portfolio, and gold and gold-related securities. And then on the downside, we tend to keep it more than 5%, because less than that, and it's not material as a potential hedge.
Bilal Little:
Absolutely.
Matthew McLennan:
It's just the same way a bank would think of it's tier one capital.
Bilal Little:
Yeah. So you mentioned the mutual fund. I guess now would be a perfect segue and just to outline sort of how is the ETF that you're managing particularly aligned with that particular view, and how are you sort of allocating in the First Eagle Global Equity strategy?
Matthew McLennan:
Absolutely. So if you think of how we got to offering an ETF, it's been a journey for us at First Eagle. I think one of the things that's important is that for us at First Eagle, the client always comes first. We started as a global mutual fund, and then over time, our clients desired components of that, whether it was international-only, whether it was a US value strategy, whether it was a gold bullion and gold miners fund. At the same time, as clients' needs evolved, some people wanted separately-managed accounts. And more recently, there's been demand from our clients for an ETF vehicle for what we're doing.
So we listen to the clients, because we don't just want to have a unique philosophy. We want to be uniquely easy to deal with at First Eagle.
Bilal Little:
Absolutely.
Matthew McLennan:
And so that was the inception of the ETF. And now, the ETFs themselves tend to be invested in the equity portion of our portfolios, and to the extent that we have gold-related investments, it tends to be through gold miners or royalty and streaming companies. And so, our clients have come to us and said, "We really want your equities. I'm happy for you to invest in some gold equities that are undervalued and good investments in a vehicle that meets our client's idiosyncratic needs." And so, that was the genesis of the ETF.
Bilal Little:
Yeah. Look, and coming into this year, having a overweight to international equities would've been fantastic for a US-based investor. You guys have outperformed, had a great start to the year. What do you attribute that to? Because if you look under the hood a little bit, you have a company that I really like. I'm not going to ask you to point on any specific companies, but you have exposure to tech inside of your particular strategy, but you have this sort of global lens. Could you maybe just unpack a little bit more on sort of how you look at the world?
Matthew McLennan:
Yeah, so it's an interesting thing. If you start with the mindset that you're open-minded to opportunity wherever it may be, perhaps it's not a surprise that our portfolios, in terms of the equities of our portfolios, almost evenly split between opportunities in the US and opportunities outside the US.
Bilal Little:
Mm, great point.
Matthew McLennan:
Now that happens to make us underweight, the US, because the MSCI world today is nearly three-quarters in the US, despite the fact the US is a quarter of the world's GDP and about 5% of the world's population. And so, the way we sort of look at it is, we feel that our portfolio has a kind of balance to it in structure, but it does make us look different from the indices that sometimes get concentrated. People forget that Japan was the largest country in the MSCI world back in the late '80s. Can you imagine having the majority of portfolio at that peak of that bubble?
Bilal Little:
Exactly.
Matthew McLennan:
So I think if your goal is to identify companies that have scarcity at a time when they represent value, you have to be willing to look at markets that may offer more value. And so, when we got to the end of last year, international markets, where if you just looked at the ratio of the MSCI to the MSCI US, were at a 50-year low, and so perhaps unsurprisingly, we were just seeing a little bit more opportunity internationally. And I think given the enthusiasm of markets for the AI narrative, we were seeing some opportunity in more naturally defensive areas of the market where people didn't want what they perceived to be mundanity.
Bilal Little:
For sure.
Matthew McLennan:
And so, we came into this year a little more international, a little more defensive, just by virtue of what we saw bottom up, and that's held us in good stead this year.
Bilal Little:
Yeah, so one would argue that US markets are overvalued, right? We're touching all-time highs, and foreign investments are undervalued still, even though you've had obviously significant outperformance. Maybe expand on your views on AI and tech globally, and how you see the world through that lens.
Matthew McLennan:
We like growth. We just don't like to have to pay too much for it.
Bilal Little:
There it is.
Matthew McLennan:
Yes. That's the thing. Making money in investing is about the asymmetry between price and prospects, not just the identification of interesting prospects.
Bilal Little:
Correct.
Matthew McLennan:
And so, we've been kind of open-minded to AI for some time now, and it's been scattered across different parts of our portfolio. We first started seeing it in the factory automation space in some of our Japanese holdings, where they were using AI for predictive maintenance in their fields of robots and other factory equipment. And then we held shares in a very large relational database company. They started to use AI for self-maintaining database. And then other parts of our portfolio used AI for either network optimization, think of the freight forwarding market, or for targeted advertising, and you can guess the kinds of businesses that would use that, and so we started seeing use cases for it.
Bilal Little:
Absolutely.
Matthew McLennan:
And then I guess as we've gotten into this AI realm where everyone's been focused on one company, I guess the simple insight for us is actually, there's a whole ecosystem that's going to benefit here. There's going to be software companies that have to run the workload. They're not just going to benefit from the upfront sale of a semiconductor chip. There are other companies that need to fabricate the components of those chips that you don't have to pay such a premium valuation for. And there are companies that can use AI, and if they have strong market position, can hang onto the productivity benefits. And so, we've been looking at AI from a kind of multidimensional standpoint, but when you look at our portfolios overall, even though we own a range of technology investments, it's less exposure than the market, just given how much valuations have ascended in that space.
Bilal Little:
Great point. Yeah, great point. I want to give you an opportunity to share with the audience a little bit about the two different strategies, and how investors should think about First Eagle Global Equity, First Eagle Overseas Equity.
Matthew McLennan:
Absolutely. If we think about First Eagle Global Equity, this is a strategy that will deploy capital into businesses that have some kind of incumbency advantage wherever they exist in the world, US or international. First Eagle Overseas Equity is basically those opportunities we see outside the United States. And the reason we have both is that some of our clients have come to us over the years and said, "Look, we love what you do internationally, but we have our own solutions domestically," for one reason or another. And so, they're building the component blocks themselves to an asset allocation, often top down.
The people who come to us for First Eagle Global are saying, "Hey, hey guys, we respect the fact that when you get to an asset allocation, it's the residual of what you're seeing bottom up, not top down." And so, we want to have a core allocation to the global strategy so that the asset allocation evolves with the bottom-up opportunity set. And so, people come to us with different motivations, but that's the essential difference between the two.
Bilal Little:
What would be the overlap between the two strategies?
Matthew McLennan:
Basically the non-US stocks in the global fund, very close to the international stocks.
Bilal Little:
Okay, okay. Okay. And the international has zero allocation to US domiciled, or what? Just so we're clear.
Matthew McLennan:
Incredibly low.
Bilal Little:
Incredibly low.
Matthew McLennan:
I mean, it could episodically have a small ... but from a fund structure standpoint, the substantial weight of the securities are going to be international.
Bilal Little:
Okay. And given where we are right now, so that's the level set of what the strategies are, the landscape obviously looks a little rocky. We have obviously Fed Chair coming out this week to discuss what their plans are. How do you envision the second half of 2025 going for your particular team and strategy as you deploy capital?
Matthew McLennan:
I think one of the things that we're grappling with at the moment is the possibility that, and you alluded to this earlier, US markets are in a moment of complacency. So, we have the fiscal backdrop that I presented for you, and we have a degree of policy uncertainty. Recent tariff rates seem to be coming in a little higher than some people expected. On the other hand, after the passage of the most recent tax legislation, we're committing to a fairly rapid increase in the stock of government debt over time. And so, we have this backdrop at the same time that we don't have a lot of latency in the labor market.
Yes, the unemployment rate tipped up a little bit from the mid-threes to the low fours, but if you look at participation rates for prime age workers in the labor force, they're already high. If you look at prospective population growth, it's very low with immigration reform. And so if we get this kind of nominal drift in the economy, this excess demand from accommodative fiscal policy, if the labor market were to reaccelerate at some point, that could lead to a resurfacing of inflationary pressures. On the other hand, if we end up raising tariffs a lot higher than people expect and it's a fiscal contraction that's meaningful, you could get a recessionary dynamic. And so, there's these tail states of higher interest rates, either if you do nothing fiscally, or higher credit spreads if you do too much fiscally. And yet when we look at equity markets and credit markets in the US, they're priced with low spreads and high multiples, and so we worry a little bit about that from a macro standpoint.
Bilal Little:
You know, it's funny. You brought up something that I was going to stay away from, but I have to just throw it out here. Recently, President Trump just reached a deal with European Union, and we will basically have a 15% tariff coming, obviously, from that particular agreement, and then also they will acquire energy from the United States. How does your team factor in some of that data, and how it will impact the businesses that you guys invest in?
Matthew McLennan:
Well, the first thing I'd say is, the ultimate outcome in these trade deals is uncertain. I'd say at this point, they're more memorandums of understanding, and let's not lose sight of the fact that the tariffs themselves are being challenged from a legal standpoint.
Bilal Little:
Absolutely. Great point.
Matthew McLennan:
And so, where just the federal courts are in a hearing process about whether or not the president was beyond his constitutional ability to enact tariffs, and so we don't know what the final tariff situation will be, but let's just take it for what it is on the surface. I think we view it as a kind of backdoor consumption tax, in a sense, and so there's an element of fiscal contraction in it, which will either hurt corporate profit margins in the US or hurt consumers, because things will cost more. I think if you had to construct a positive side of it, perhaps it addresses some of our trade flow issues.
I think long-term, the question mark I have in my mind, and this is no answer for this, is on the one hand, the idea is to attract investment in the US and manufacturing, all that sort of stuff. But on the other hand, if you're doing that by virtue of tariffs, the rest of the world is adapting to become more competitive, and we've already seen that in China. As their exports to the US have gone down, their exports to the rest of the world has gone up.
Bilal Little:
World's gone up, yeah.
Matthew McLennan:
And so, these are incredibly complex. I think the key thing for us as investors is that we think there's risk everywhere from a change in generational trading patterns, but the risk is arguably being better priced than international markets that trade at lower multiples.
Bilal Little:
I used to work at BlackRock, and one of the things we used to spend a lot of time on was portfolio construction with financial advisors. And one of the things we would say is, "Risk isn't bad, it isn't good, it just is."
Matthew McLennan:
Yeah.
Bilal Little:
So you have to understand it, right, and know where it is and know how to obviously source it appropriately for your portfolio. Given that, thinking about a tactical change, if any, that you've made recently, care to share? Is it raising cash? Is it taking wins, or gains I should say? Is it looking at other areas to deploy capital? I just want to get a sense, given the market dynamic is shifting so quickly.
Matthew McLennan:
I love the way you expressed that, that risk just is, and sometimes when we think of risk, we think of it in a statistical term, like normal distributions and things like that, but true risk is uncertainty, where you don't even know what the distribution is.
Bilal Little:
Correct, correct.
Matthew McLennan:
And that is. And so, the question is price, back to the discussion we had before about the asymmetry between price and prospects. And so tactically, our portfolio evolves in response to what prices are on offer for quality businesses.
Bilal Little:
Yeah, for sure.
Matthew McLennan:
And so, in a strange way, if you know the kinds of businesses you'd like to be owners of, and the price points that make sense, then volatility is your friend, not your enemy.
Bilal Little:
Absolutely. Great point.
Matthew McLennan:
And so this year, if you think about the path of our portfolios this year, when the markets melted down in April, you might imagine that we were able to rotate some capital from cash and consumer staples and buy some other businesses and industrials, or more economically-sensitive areas. In the portfolios that had gold, we were able to trim a little gold at attractive prices and invest into equities. More recently, as you might imagine, with equities having rallied to new highs, we might be trimming some names that are starting to get a little rich relative to our sense of intrinsic value. And so, the point I want to get across here is if risk just is, then you have to acknowledge upfront your ability to predict the zigs and zags of the market in advance is constrained, but if you have the right mindset, you can take advantage of market moves after the fact.
Bilal Little:
Mm. Great point. So for the advisor who says, "Who is First Eagle, and one thing that I should know about them," what would you say?
Matthew McLennan:
Resilient wealth creation for the long term. We are a grind-it-out strategy, and I think by virtue of the extreme focus on the long term, I guess the one thing that I hear back from our clients is that they've felt comfortable being with us for the long haul, and their clients have benefited from the long-term compounding. I think there are many other strategies that can generate outsized returns in up markets when people have fear of missing out, but then that attracts people often at the wrong time. There are other strategies that are so defensive, they're unwilling to take risks that's well-priced, and they could do well when there's a fear of wipeout, but over cycles, they don't produce real wealth creation. And so, I guess the niche that we inhabit is resilient wealth creation, sort of curating the business garden for the long term.
Bilal Little:
Absolutely.
Matthew McLennan:
And that's what we're known for by our clients.
Bilal Little:
I like how you said, "Risk at the wrong time." In a world today where everyone's kind of just chasing the headline or chasing the hot dot or taking on too much leverage into a risk, I think they forget about the impact of loss, just the math of it.
Matthew McLennan:
Right. It's so true. If you're down 50%, you have to be up 100% to break even, so you can win more long term by losing less short term.
Bilal Little:
Yeah. I feel like as an equity investor globally, you have a good sense also on what's happening in the fixed income market. Not saying that that's your primary market, but care to share any just general thoughts on where things are?
Matthew McLennan:
Yeah, it's a real interesting moment in fixed income markets, because the forward end of the curve, I'm talking treasuries now, and the long end are telling two different stories.
Bilal Little:
Yeah, for sure. Yeah.
Matthew McLennan:
The forward end of the curve is saying, "Hey, we're expecting a few cuts as the economy is slowing down." The long end of the curve, if you zero out and get some helicopter perspective, has broken out on the upside after a 40-year downtrend. So the long end is starting to sniff these sovereign risk elements that we were talking about before.
Bilal Little:
Absolutely.
Matthew McLennan:
The yield on the long end is starting to try and catch up to the rate at which the stock of government debt is growing. If you're going to be a 30-year holder of treasuries, you want to be compensated for the rate of issuance in treasuries.
Bilal Little:
Without a doubt. Without a doubt.
Matthew McLennan:
And so you have this kind of stretch between the hopes for the short term and the emergent fears in the long term. And so, I think that the critical issue for treasuries and other sovereign bond yields is really going to be the extent to which credible fiscal strategies emerge. If they don't, we could be in for a window like the '70s where you had a decade or more where interest rates were volatile but trending higher. And then there's the credit side of fixed income, where I guess we see that credit spreads are pretty low right now. They're pricing a Goldilocks scenario, kind of like the front end of the treasury curve, and that for us has been a time of where we're perhaps a little less willing to take risk.
Bilal Little:
Yeah. If you don't mind sharing, from your institutional clients, what are you seeing from a new allocation perspective? Have they added any areas that I would say most people haven't paid attention to?
Matthew McLennan:
Look, I think one of the things that's going on at a very high level is that by virtue of the degree of concentration in markets the last few years, in terms of where outsized returns have been, there's been tremendous flows into a small number of names in growthier strategies in the US market. And I think just institutionally, we're getting a lot more feedback or inquiry or focus on strategies that are either more diversified, particularly international, to your comments earlier, perhaps more price-sensitive, and valuation being an important consideration there, and strategies that have good attractive liquidity characteristics, because they tended to make fairly large and sizable allocations less liquid strategies. And so, that's kind of what we're hearing at the moment from some of our institutional clients.
Bilal Little:
Love it. This is where I give you an opportunity to share something that's in your lineup, it doesn't have to be an ETF, that you have as an investment vehicle. Could be a separate account, it can be a mutual fund, it doesn't matter, what I call the underdog in the portfolio, something that no one pays attention to, an area of the market that hasn't received the attention that it should. It might be significantly undervalued. Is there anything in the chassis that you'd like to share?
Matthew McLennan:
Well, I think you hit on it before, which is the sort of the international stocks. And in a sense, yes, they've performed quite well comparatively this year, but if you zoom out and look at the last 50 years of history, the outperformance is but a blip. And one of the things that we've noticed is that sometimes the regimes shift, and they can shift for a decade at a time. There were decades during the '80s and '90s where the dollar was strong and the S&P was strong, and there were other decades where the dollar was weak and IFA, international stocks, were strong. And so, we've just started to see a potential inflection in that.
Now, the crystal ball is foggy at best. We can't predict, but I do think that when we look at our portfolios, the range of investment opportunities we see in the international equity universe is quite compelling. It doesn't mean we're not finding compelling opportunities in the US, but if you're looking for what has been the underdog that could have legs and is showing some green shoots, I think the First Eagle Overseas Equity is an interesting place to start.
Bilal Little:
Matt, thank you so much. I really appreciate you coming down to ETF Central.
Matthew McLennan:
Thank you so much. Enjoyed the conversation.
Speaker 1:
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