The Lazard European Smaller Companies fund aims to generate strong relative returns by investing in undervalued firms with good management structures and attractive financial data.
Managed by Ed Rosenfeld – alongside Patricia Biggers, Alan Clifford and Steven Fockens – the investment process of the £170.1m fund is based on the Lazard philosophy of relative value investing, which “looks at the trade-off between valuation and financial productivity”.
Mr Rosenfeld explains: “We look for quality companies with high or improving returns on capital and high barriers to entry that are attractively priced. We believe this enables us to generate consistent results, protecting capital in down markets and participating in market rallies.”
The process has remained unaltered, with the team focusing on businesses with “long-term and sustainable” competitive advantages. Therefore, macroeconomic factors are less of an issue. “Like any fund manager, we are aware of macroeconomic issues, but we do not allow such matters to dictate where we allocate capital,” he says.
“We are company-focused and rely on our stock picking to find financially productive businesses with high barriers to entry. We do not take large sector bets on the back of newsworthy policy announcements or data points, be they positive or negative.”
The fund sits towards the higher end of the risk spectrum with a synthetic risk-reward indicator of six out of seven, according to its key investor information document, while ongoing charges for the ‘clean’ retail C share class are 0.88 per cent.
The performance of the fund is consistently strong, outperforming the IA European Smaller Companies sector average and the MSCI Europe Small Cap index across one, three and five years. The fund’s five-year return to February 9 2015 of 105.95 per cent is more than 20 percentage points higher than the index return of 81.46 per cent and the sector average of 71.7 per cent, according to FE Analytics.
The manager notes there have been few changes to the portfolio as the team sells companies “either when they are fully valued or when our investment thesis does not play out”.
Mr Rosenfeld says performance in the past year has been boosted by media companies sitting within the consumer discretionary sector. The best-performing stock of the year was one of the fund’s top-10 holdings – Belgium-based European cinema operator Kinepolis.
“The company is cash-generative and continues to execute a share buyback programme, even as it assesses continued opportunities in reasonably priced European cinemas,” he explains. “In 2014, Kinepolis made important acquisitions in the Netherlands and Spain, and the existing business is highly adept at optimising operations and growing in-theatre sales.”
Other sectors that contributed positively to performance include the industrial sector, through holdings such as German company Kuka, which provides robotics and automation solutions for industrial production processes. On the flip side the manager acknowledges an underweight position in the real estate industry detracted from performance. Its holding in Foxtons was the worst performer for the fund as it suffered from the slowdown in the London housing market in the second half of the year. But he adds: “The team continues to hold the shares given the conviction that, once uncertainties have been resolved and the market recovers post-election, Foxtons will make high margins on its incremental revenue.”
Mr Rosenfeld notes the European small-cap sector had “an uneven 2014”, but that the year ended on a modest high. The outlook is broadly positive as this year has “begun with several strong catalysts”, he says, such as the European Central Bank’s quantitative easing programme, lower fuel prices and a weaker euro. “While the indicators at this early stage are encouraging, we must bear in mind the fragility of the European recovery, especially when political uncertainties and geopolitical risks remain. At the ‘micro’ level, however, corporate balance sheets are in great shape and there are ongoing opportunities for attractive cash deployments, whether they are in the area of merger and acquisitions, dividends or share repurchases,” he adds.
EXPERT VIEW
Jake Moeller, head of UK and Ireland research, Lipper
Lazard has an excellent infrastructure in place for small-company analysis on the back of its ‘core’ relative-value methodology. A strong and experienced team under Edward Rosenfeld commits to high levels of due diligence prior to stock inclusion, which assists low portfolio turnover and a pan-European approach resulting in broader geographical diversity. Consequently, the fund exhibits a lower risk profile than many of its peers.
