On July 1, 2021, First Eagle Investment Management launched the First Eagle Small Cap Opportunity Fund (FESAX / FESCX / FESRX). The investable universe is primarily domestic small- and micro-cap value stocks. In general, they’ll own 180 – 300 of them.

The fund pursues an opportunistic small-cap value strategy, investing in companies that the portfolio management team believes to be attractively valued and have the potential to benefit from a catalyst—such as new management, a more favorable business cycle, product innovation and/or margin improvement—for a recovery in earnings growth. Small caps are very sensitive to asset flows and even small changes in underlying economic conditions, as a result, “the limited liquidity in the US small-cap equity market can amplify stock price movements in both directions.” The manager believes that can be harvested by disciplined investors.

The fund will be managed by Bill Hench, with Associate Portfolio Managers Suzanne Franks and Rob Kosowsky and Senior Research Analyst Adam Mielnik.

The management team is what will draw attention to the fund, for good or ill.

The Fund is managed by First Eagle’s Small Cap team which, until April 2021, was Royce’s Small Cap Opportunistic Value team. Two things are clear about them:

1. The team is experienced, coherent and talented. Mr. Hench has been working with the strategy since 2004, serving as lead manager from 2018. He has been “building an excellent track record, first as an understudy and then as successor to Boniface ‘Buzz’ Zaino.” Mr. Kosowsky joined Royce in 2015 and has nearly two decades of small-cap experience. Ms. Franks worked for a firm that provided research to Messrs. Zaino and Hench from 2012 to 2018.
2. The team appears to have left without warning. There’s no word on why and Morningstar’s references to the event are negatively framed: “a less-than-ideal transition” when an “abrupt manager change” which “surprised their colleagues” occurred as “the squad bolted to a competitor” which “forced Royce Investment Partners to scramble to assemble a backup plan” involving a “cobbled-together team.”

Whether the circumstances surrounding their departure are material, is in the eyes of the beholder (or the potential investor, as the case might be). Regardless, it’s quite clear that the strategy generates alpha. When I pulled the risk profile of Royce Opportunity from the MFO Premium database, it shows the fund posting returns in the top 20% of their peer group for the following periods:

• • 1 -year
  • 3-year
  • 5-year
  • 10-year
  • 20-year
  • Since inception
  • Full market cycle, 2000-07
  • Full market cycle, 2020-2021
  • Up cycle, 2002-07
  • Up cycle, 2009-19
  • Up cycle, 2020-2021

The fund lags badly in down cycles, but more than makes up for it in the rebound.

Bottom line: a winning but volatile strategy, a strong team, and a demonstrable performance record.  

“A” shares have an expense ratio of 1.25% and a minimum initial investment of $2,500. The First Eagle site has not yet been updated to account for the fund’s existence but should be soon.