U.S. Markets closed

First Eagle Fund of America 4th Quarter Commentary

- By Holly LaFon

In the fourth quarter of 2017, Fund of America Class A Shares (without sales charge)* returned 3.45%, and the S&P 500 Index returned 6.64%. The Fund's calendar-year performance was virtually on a par with the Index.

Throughout this economic recovery and bull market, we have spoken many times about the relative attractiveness of equi-ties. A year ago, we wrote about the four pillars of "Trumpo-nomics"--taxation, repatriation, deregulation and infrastruc-ture--and suggested that the year ahead could be a positive one for equity markets. The year turned out to be even stronger than we imagined. At midyear, we said we expected a seasonal 5% decline of the kind the US equity market had seen once a year since 1995. However, to our surprise, the S&P 500 powered ahead unabated.

As we begin 2018, we see a number of factors supporting the equity market:

o Global economic expansion may power strong earnings and revenue growth;

o Lower US corporate tax rates may provide an additional accelerant to earnings growth and stimulate share repur-chases, and mergers and acquisitions (M&A);

  • The new rules on expensing and accelerated cost recovery may lead to a powerful capital investment cycle, buoying earnings for industrial companies;

  • Finally, the clarity on tax provisions may also accelerate M&A activity, which had declined in 2017 as companies hesitated to act, due to uncertainty.

Offsetting these positive factors, probably the biggest risk factor will be how the Federal Reserve manages the delicate deflation of the monetary balloon. Additionally, we suspect Washington politics and infighting will provide plenty of colorful fireworks, some of which could shake markets. Lastly, beyond our borders, a plethora of trouble spots could provide an exogenous shock.

Front and center will be trade negotiations with NAFTA part-ners Mexico and Canada, but other political and/or economic crises could emanate from the Middle East or Asia as well.

Portfolio Review

In the fourth quarter of 2017, the largest contributions to Fund performance came from Halozyme Therapeutics, Inc.; Mara-thon Petroleum Corporation; KLX Inc; Tyson Foods, Inc. Class A; and Armstrong World Industries, Inc.

Halozyme (HALO) is a biotech company focusing on developing oncology drugs that also licenses its drug-delivery technology (ENHANZE). Its shares advanced after the company signed another ENHANZE royalty deal with Alexion. In addition, Janssen initiated a phase 3 study of SC Daratumumab using Halozyme's ENHANZE technology. If the trial succeeds, we believe this will lead to an increase in royalty revenue for Halozyme.

Shares of Marathon Petroleum (MPC), which refines, markets and transports oil, moved higher as the company finalized its plan to restructure MPLX, a master limited partnership that owns pipe-lines, storage and logistics assets. Marathon Petroleum's stock was also helped by investors' expectations that the oil refining market may improve.

KLX (KLXI) provides fasteners to the aerospace industry as well as services and products to the energy industry. The company reported strong earnings performance in the third quarter. In addition, just before year-end, it announced the hiring of an investment bank to review strategic alternatives, which may result in the sale or breakup of the company.

Tyson Foods reported a strong quarter and announced the potential for upside from synergies, M&A and share buybacks in 2018.

Armstrong World Industries (AWI), which manufactures flooring, walls and ceilings, announced that the sale of its international business will take place sooner than expected. As a result, inves-tors will receive more capital at an earlier date than originally foreseen.

The most significant detractors from fourth-quarter perfor-mance were The Medicines Company; Albemarle Corporation; Western Digital Corporation; Post Holdings, Inc.; and Intrexon Corporation.

The Medicines Company, a biopharmaceutical firm, declined as investors were disappointed with the net proceeds from the sale of the company's infectious disease business. The company continues to proceed with its phase 3 trial of its flagship PCSK9 antibody, Inclisiran, for lowering LDL cholesterol.

Albemarle Corporation, a specialty chemical company, declined after a significant move higher in the first nine months of 2017.

Western Digital, which produces hard disk drives, traded down on concerns that the computer memory market is rolling over. General weakness in the technology sector also affected the stock.

Shares of Post Holdings were down on concerns that the chal-lenging packaged food environment will put pressure on pricing.

Intrexon (XON), a biotech company that conducts research together with partners in the areas of health, food, energy and the environment, continued to be impacted by concerns over its inability to sign new partnership agreements and by the lack of tangible progress toward commercialization of its current research projects.

We enter 2018, as we finished 2017, with a continued appe-tite for seeking new ideas of companies undergoing corporate change that will prove to be rewarding investments over time in a broad range of environments.

We thank you for your continued support, which we aim to reaffirm with strong results.


First Eagle Investment (Trades, Portfolio) Management, LLC

The performance data quoted herein represent past performance and do not guarantee future results. Market volatility can dramatically impact the Fund's short-term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investor's 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 Fund of America give effect to the deduction of the maximum sales charge of 5.00%.

Performance assumes reinvestment of all distributions and does not account for taxes.

*The annual expense ratio is based on expenses incurred by the Fund, as stated in the most recent prospectus.

The commentary represents the opinion of the Fund of America team as of the date noted and is subject to change based on market and other conditions. The opinions expressed are not necessarily those of the firm. These materials are provided for informational purposes 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 information provided is not to be construed as a recommendation or an offer to buy, hold or sell or the solicitation of an offer to buy or sell any fund or security.

This article first appeared on GuruFocus.