InvestmentsApr 7 2014

Fund Review: Lazard Emerging Markets core equity

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Having just passed its one-year anniversary the $3.21m (£1.9m) Lazard Emerging Markets Core Equity fund has a clear focus on what it wants to achieve.

Manager Paul Rogers explains the Dublin-domiciled fund is a benchmark-aware strategy – to the MSCI Emerging Markets index – but emphasises “first and foremost we’re fundamental stock investors”.

“We are managing the portfolio versus the benchmark and it is a relative return strategy with a low tracking error. Our goal is to achieve 300 basis points of outperformance.”

Sitting within Lazard’s wide range of emerging market debt and equity products, the Core Equity fund is an all-cap strategy with approximately 80 stocks at any given time.

Mr Rogers says: “What we try and do is to minimise the style bias and let stock selection drive performance. So, in terms of characteristics, we have a 70 per cent active share and 70 per cent is idiosyncratic or stock risk versus country, sector and other factor risk.”

He notes that as the market shifts between value and growth, and with volatility between large cap and small caps, the team “tries to be flexible in terms of its approach to investing and move up and down the market-cap spectrum as well as across the value and growth spectrum”.

They aim to achieve this by investing in companies at all stages of their life cycles – from start-ups to high-growth stocks to more mature stable companies and even some turnaround stories.

“By being aware of where we are across the style spectrum and then emphasising a more mid- and small-cap approach, we have been able to deliver that outperformance against the benchmark,” says Mr Rogers.

In addition the manager points out the MSCI Emerging Markets index actually only represents roughly one-third of the investable universe. “It is about 820 stocks and our starting point for investing is 2,600 stocks. We believe an active risk-aware approach to investing in emerging markets is a very attractive strategy for investing today.”

Since launch the fund has recorded a small loss of 5.79 per cent, compared with the MSCI EM index loss of 6.27 per cent, as it suffered from the recent sell-off in the sector.

Consistency is the focus for the team, with Mr Rogers noting in baseball parlance: “We try to hit singles every day rather than strike out three times and then hit a home run.”

He adds: “Fundamental stock selection drives performance. We are aware of our sector weights and country weights but we manage those proactively and it’s in the portfolio construction, but it is really a residual of our investment process.”

On a regional basis the portfolio is underweight southeast Asia – primarily Taiwan, South Korea and India – as the valuations are less attractive in many cases, although Samsung is the largest holding in the fund at approximately 4.9 per cent of the portfolio.

Latin America is almost 4 per cent overweight based on attractive opportunities in Mexico, given its ties to the US, while the portfolio is also overweight in Colombia, where oil and gas exploration and production companies are making more discoveries.

Although currently a small fund, Mr Rogers plans to increase its size while ensuring the fund remains “liquid as we grow. The micro cap is not an area we get into, and we keep a close eye on liquidity.”

In spite of the subdued sentiment about emerging markets, the manager remains optimistic on the sector’s outlook, noting that the countries that may have problematic elections scheduled to take place this year tend to be a very small part of the benchmark.

“It’s not a massive regime change that’s going on in emerging markets; it is more of a delay – 2014 will be a transition year in terms of growth and election perspectives, so it will delay some much-needed reforms in some of the countries, but it won’t derail the progress countries are trying to make.”

EXPERT VIEW

Darius McDermott, managing director, Chelsea Financial Services

VERDICT

“This is a recent launch, so very early days yet. However, the strategy being used does have a decent five-year track record. It is a multi-cap, unconstrained and high-conviction fund that also aims to keep volatility low. Given the diversity in performance by region and sector within emerging markets in the past couple of years, the pragmatic approach and flexibility of the fund does have appeal. It currently has a below-benchmark weighting in Asia (53 per cent), with more in EMEA and Latin America than some of its peers. Early calls on being overweight the consumer discretionary sector with good stock selection and underweight energy have paid off, although an overweight to financials has hurt.”