The concentrated nature of Martin Flood’s US equity vehicle and his resultant focus on stock-specific risk has led him to shut out financials and oil-related companies altogether.
The newly launched Lazard US Equity Concentrated fund holds up to 25 stocks, with the biggest risk to performance being an incorrect call, according to its manager.
Mr Flood said that he did not like to hold two companies with similar earning streams or that operated in a comparable sector.
“From a concentration standpoint you have to think about stock-specific risk, and [that risk] being wrong,” he said.
“Sector-wise [financials and energy] are the two biggest holes. Financials are more of a structural issue; we haven’t owned a bank in seven years and I don’t see us owning any in the near term going forward.
“Energy is one that we could have exposure to but we haven’t at this time; we’ve found better opportunities,” he added.
The $186m (£140m) fund –previously an institutional strategy but which opened to retail investors earlier this year – has had a low-key year, outperforming peers over three months but lagging across six.
Mr Flood attributed much of the positive performance to online vehicle auctioneer Copart. The company’s stock has risen by about 40 per cent since the fund launched in February, due to improvements in the price of scrap metal and a strong US dollar.
“The [car scrappage] industry has become dominated in the US by a few companies, with Copart being one of them and arguably with one of the best technology platforms to sell these cars,” Mr Flood said.
“It’s a platform that’s fairly capital-intensive to set up, but once it’s set up the business is much less so moving forward.”
The biggest change since February has been a 5 per cent reduction in the fund’s allocation to shipping firm Norwegian Cruise Line.
The reduction was due to fears over terrorism in Europe dampening demand for cruise holidays, along with Caribbean issues over the outbreak of the mosquito-spread Zika virus, Mr Flood said.
The manager added to the fund’s position in pharmaceutical company Allergan after a failed takeover deal by the world’s largest research-based pharma firm, Pfizer, in April.
Allergan’s sale of its generics medicine business compounded the appeal to buy.
“[Allergan] was an opportunity post the Pfizer announcement that they were not going to merge,” Mr Flood said.
“Also, after the sale of its generics business, we’ve now reclassified it as a compounder because that allows a lot of capital and a lot of freedom for the company.
“[There are] a lot of good signs for the company. [People] know it well for Botox, but it also has a lot of other franchises and a good pipeline for the next several years, with a lot of optionality with the cash it receives from selling it generics business.”
The Lazard US Equity Concentrated fund has delivered 13.6 per cent over six months, while the offshore Equity fund sector returned an average 14.9 per cent for the same period, data from FE Analytics shows.
Key Numbers
4.6%
Fund’s holding in Copart at the end of July
35%
Copart’s share price increase year to date
