‘Out of fashion’ firms are in vogue at Lazard
Commentators have started to highlight a bifurcation in equities between high-quality, dividend-paying companies and the rest of the market.
This bull run has been good news for equity income funds globally, but there are now worries of high valuations in certain areas. The Lazard Global Equity Income fund’s contrarian focus on ‘out of fashion’ companies aims to address this problem.
The fund, managed by Patrick Ryan, Andrew Lacey and Kyle Waldhauer, was launched in October 2007 but is based on a strategy that has been running since 2005. It aims to capture reversions to the mean in the stockmarket, creating a portfolio of high-yielding, cash- generative companies that are ‘unloved’ or overlooked by investors.
Mr Ryan says: “This is not a portfolio looking for the classic safe companies, with a well covered dividend. It will have a quality bias, but we like companies where there is substantial mispricing.”
As a result, the fund is a different beast to some of the larger products in the global equity income sector, which select stocks in the first instance through their relationship to investment themes rather than their characteristics. In theory, the fund should also be ‘all-weather’ – that is, it will feature stocks of all sizes and its positioning in different sectors will change with market conditions.
At the moment, for example, the fund holds more than its MSCI World benchmark in US real estate investment trusts, which are benefiting from the slow recovery in the US economy. But it holds less than the index in healthcare, over concerns about research and development.
“I would add that we are not exposed to European banks, but we have found opportunities in large globally diversified insurers. They are very cheap because the sector is out of favour,” Mr Ryan says. “For similar reasons, we are also quite positive on Chinese and Brazilian banks. Banks are essentially a leveraged play on GDP growth, so they are attractive on a long-term outlook.”
The group selects stocks using Lazard’s research capabilities. Mr Ryan then filters that research to isolate higher yielding companies. However, the research starts with the premise of looking for capital growth, so he says its aim is more to generate a ‘total return’ rather than an ‘income return’.
Mr Ryan says using Lazard’s central research process also helps him avoid ‘value traps’ – those companies, for example, that are in long-term decline and will not revert to the mean. He adds that the team constantly tests its thesis for individual stocks and will cut losses before they grow.
As principally a stockpicking fund, the group is not hidebound by geographic weightings. Rather, Mr Ryan says he aims to ‘let ideas flow’ where possible.