Managed by James Donald and his team, the £678m Lazard Emerging Markets fund was launched in 1999, with the retail sterling share class launched in 2007. It aims to outperform the MSCI Emerging Markets index over a market cycle, with lower-than-index levels of volatility.
Mr Donald highlights the relative value investment philosophy of the emerging markets equity team is based on value creation through the process of bottom-up stock selection.
He adds: “This philosophy is implemented by assessing the trade-off between valuation and financial productivity for an individual security. Lazard believes financial productivity is an appropriate measure to estimate valuation; therefore, assessing a company’s financial productivity is a critical part of Lazard’s research process.”
As a result, he points out this bottom-up research process is the key driver of the portfolio, and consequently influences the country or regional allocations.
The manager explains: “We generally seek high-quality, financially productive companies whose valuations have been mispriced due to near-term concerns. We believe such stocks are more likely to outperform over a long-term investment horizon.
“Environmental, social and corporate governance (ESG) factors are also reviewed during the portfolio construction process. The outcome of our ESG analysis can have the effect of significantly altering a security’s target price, and therefore, attractiveness of the security.”
Although the fund is focused on bottom-up stock selection, Mr Donald points out this is “not done in isolation”. Macroeconomic risks are monitored on an ongoing basis because the team is “mindful of the impact that interest rates, economic conditions, the regulatory environment, and political considerations have on final portfolio construction”.
| EXPERT VIEW - Oliver Stone, head of research, Fairstone Group |
| This fund has been run by James Donald and his team since launch in 1999. The team aim to find undervalued stocks showing signs of improving productivity. They screen for such metrics as high return on equity before building detailed financial models of their shortlisted stocks. Despite some recent weakness in performance through 2014 and 2015, over the long term, the comprehensive investment process has generated superior absolute and risk-adjusted performance above the peer group average. |
As with most emerging market funds, performance in recent years has been patchy, with the retail accumulation share class recording losses across one, three and five years to March 31 2016.
In spite of this, the fund’s five year loss of 9.1 per cent still outperformed the MSCI Emerging Markets index fall of 9.7 per cent and the IA Global Emerging Markets sector average loss of 10.3 per cent, according to data from FE Analytics.
Mr Donald acknowledges: “Our strategy was put to the test over the past 18 months because weaker oil prices, a stronger US dollar and political uncertainty in countries such as Brazil and Turkey weighed on emerging markets assets. What is more, it was extremely difficult for valuation-sensitive investors to outperform over this time period if you did not own the most expensive, momentum-oriented stocks.
“Although it is too early to tell whether the challenging environment has changed, there is reason to be optimistic in 2016 because valuation has become more important.”
Overall, he notes positions in Hungarian and Russian financials, as well as Taiwanese technology companies, were helpful to performance in 2015 as was selection in the technology and telecom services sectors. He adds that the largest drivers of positive relative performance year to date include an overweight position, relative to the index, in Brazil, Russia, Indonesia and Turkey, and an underweight to China.
But at the same time the biggest detractor from strategy performance in 2015 was the overweight exposure to Brazil, particularly in financials, which was driven by the weak Brazilian real and economic weakness.
“We believe this will prove a rewarding combination of investment characteristics, but patience is required to realise results,” he says. Looking ahead, he adds: “We anticipate the Federal Reserve plans to gradually raise rates over the course of the next few years. This slow path of tightening should allow emerging markets governments and companies the room to manage potential inflation pressures through independent monetary policies.”
