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Deshpande on Current Valuations

First Eagle's Abhay Deshpande on the valuation outlook for the portfolio holdings and the opportunity set available to them.

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John Coumarianos: I just wanted to finish up with a question about valuations overall. We've already mentioned that bond prices have come up and yields have gone down dramatically. Where do equities stand overall?

We like to look sometimes at cyclically adjusted earnings of various indexes. And stocks look maybe not very expensive, but certainly not very cheap, either. You probably look at things more on a stock-by-stock basis. How are you finding the markets priced right now as you go through your stock-by-stock analysis?

Abhay Deshpande: I guess, I can't make a comment on markets, generally speaking, but I can definitely comment on our portfolio. The portfolio itself is still undervalued versus what we think the, sort of, average intrinsic value is.

Coumarianos: And that's all three funds, the U.S. funds…

Deshpande: I'm talking about all the three funds, yes. What our opinion is of markets maybe is more indirectly available to you by just reading our cash levels over time. So, just our ability or inability to find suitable ideas around the world tends to be reflected in the cash, either high or low. So March '09 we had about 3% cash position, which is the lowest that we've had since early 2000s reflecting our ability to find an abundance of value names.

2010 April, we're starting to worry that many stocks have reached intrinsic value and many stocks outside of our portfolio that we're looking at seem to reflect or require a three- to five-year typical post-World War II expansion to justify the prices. And they are – no one likes a cynic, but you should be skeptical at least in this business. And there we are skeptical.

Coumarianos: As Ben Graham might say, you want a margin of safety; you don't want to assume the most optimistic outcome.

Deshpande: That's right. And when we do an intrinsic value, we try to establish intrinsic value based not on the best case or the worst case but something that's sort of in the middle, maybe muddle-free, if you want to call it that. And on that basis, it was difficult to justify many of the companies that we were looking at. In fact, some of our own companies reached close to intrinsic value, and our cash levels began to rise again to close to 15% – 15%, 16% at the recent peak.

So, I mean, if you just use the cash positions to judge how our – what our interest level is in equities, I think that's probably one way to answer your question. The other is to just simply look at the allocation of equities versus everything else we have…

Coumarianos: Right.

Deshpande: Whether it's gold and so on. And at 75-ish percent, it's not too different than it was, you know, maybe three or four years ago.

Coumarianos: Right. Well, very good. Abhay, thank you so much for joining us today. We really appreciate it.

Deshpande: Absolutely. Thanks.

John Coumarianos does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.