The aim of the Lazard UK Omega strategy is to outperform the FTSE All-Share index by roughly 4 per cent a year across a three- to five-year horizon by adopting a best ideas approach. The fund currently sits at £81.35m in assets under management after it merged with the Lazard UK Alpha fund at the end of February 2015.
Alan Custis, who manages the fund alongside his team, notes the vehicle is a 25- to 35-stock portfolio that reflects the best ideas in the UK market from both the portfolio management and the investment analyst teams.
The fund recently celebrated its 10th anniversary, having launched in 2005, with Mr Custis noting the investment process has remained fairly constant during this period. But he adds: “Before 2009 we had quite a complicated process of sector buckets, which frankly didn’t work as we wanted. What we wanted was to have a focused fund where the outperformance was driven by stock selection, rather than some kind of thematic or macro top-down perspective on the fund.”
The philosophy behind the process is consistent with that of Lazard itself. Within the UK Omega fund, that translates into a focus on stocks that fall into roughly three categories: those that are going through a process of restructuring, those that can be considered mispricing opportunities, or compound stocks where the market is anticipating a fall in returns on equity that the team does not share.
As a relatively concentrated portfolio, its key investor information document shows the fund’s retail C accumulation share class sits towards the riskier end of the spectrum at level six out of seven, while its ongoing charges are 1.93 per cent.
The fund’s performance has been strong, delivering a five-year return to March 19 2015 of 75.97 per cent, outperforming the Investment Association UK All Companies sector average of 61.66 per cent and the FTSE All-Share index rise of 54.05 per cent, data from FE Analytics shows.
In addition, the fund has outperformed both the sector average and the index across one, three and 10 years, which Mr Custis attributes partly to its quite prescriptive stop-loss policy. He explains: “When a stock loses 40 basis points on a rolling three months we undertake a full review.” One of the reasons for this is that the minimum position size within the fund is 2 per cent, so if a stock has been underperforming, typically the position size may fall below that level and the team will have to make a decision whether to top it back up or to sell.
Two stocks that the fund has sold out of in the past 12 months as a result of this policy were Aberdeen and Oxford Instruments, while no exposure to tobacco has also dragged slightly on performance as that sector has performed well in recent months.
But the manager notes: “We continue to sit here without any tobacco as it continues to look expensive. We are also going into a plain-packaged environment in the UK. The last time we saw a market go plain packaged was Australia and that caused quite a lot of disruption and dislocation to market share. So we are waiting on the sideline to see how that plays out.”
On a positive note, performance in the past 12 months has been helped by an underweight to oil and gas, particularly in the final quarter of 2014 as the price of oil declined. Mr Custis says: “What we have been doing this year is to cover some of that underweight in the oil and gas space. Our view is very much that we think the oil price will bottom around the second quarter, and the supply and demand imbalance will potentially correct itself as we go through the second half of the year. We are not overweight yet, but we’ve covered some of that underweight.”
Meanwhile, the political situation in the UK remains the biggest concern for the next few weeks, as the manager notes there could be significant volatility similar to that seen in the run-up to the Scottish referendum last year. He notes: “I think there is further risk of some politicisation of sectors over and above the utilities. I think we need to be mindful of that and try at this stage to avoid sectors that could be caught up in cheap political comments. We do see some value in some of these sectors, but what is going on in the next six to seven weeks is temporarily putting a hold on our activity.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
This is a truly tiny fund at £1.9m in assets, [according to the pre-merger UK retail share class February factsheet] and the charging on the portfolio also suffers from the diminutive size. Performance is top quartile but little can be read into this given its size. The fund is surprisingly like its benchmark bar a punchy position in services firms and corresponding underweights in oil and gas and consumer goods. I would position this only for discretionary fund buyers who can conduct due diligence, negotiate favourable terms and are willing to buy and hold.
