Best in Class: Lazard Global Equity franchise
Who would have thought global equities would produce returns in excess of 20 per cent in 2019 given the challenges we have seen in the past 12 months?
Resilience has been the buzzword, as markets continue to grind on upwards in the face of geopolitical wrangling.
I think returns will be reasonable for equities again in 2020.
But with geopolitical events like Brexit, and trade wars still rumbling on, not to mention the US election - with the irascible incumbents’ every word during the campaign expected to have an impact on the direction of markets.
In such a late cycle, low interest rate scenario, investors will have to be more careful.
Market valuations are also higher globally than they were at the start of last year.
If there are more risks, investors may need to have a greater focus on diversification and volatility in the next 12 months.
This week’s Best in Class is a global portfolio which offers exactly that.
The Lazard Global Equity Franchise fund targets companies that can reduce volatility and improve their risk adjusted returns.
Lazard defines economic franchises as businesses with market leading positions, a long history of stable financial returns, relatively low leverage and large, sustainable competitive advantages.
The fund is run by the four-strong team of Matthew Landy, John Mulquiney, Bertrand Cliquet and Warryn Robertson.
The quartet are also responsible for managing the highly regarded Lazard Global Listed Infrastructure fund.
The team are based in three global offices: London, Sydney and New York, but have made this work for them in the past decade.
They have a weekly video call, as well as daily email contact, and have incorporated this into their research process.
Although not benchmark aware, the fund can invest in any of the 1,700 or so companies that comprise the MSCI World Index.
The managers are looking for industry leaders, which typically results in a bias towards larger-sized companies.
The fund has a four-stage process to find these stocks.
Initially, the managers will use filters to eliminate industries with low revenue visibility.
Secondly, there will be a more qualitative risk analysis to highlight the economic franchise characteristics they like.
There are five sources of franchises: natural monopolies, cost leadership due to economies of scale, network effects (where the adoption of a product increases value, which in turn increases barriers to competition), strong brands or intellectual property, and high switching costs.
These are not interdependent, and one company can have several of these factors.
It is not until stage three that stock valuation is considered.
The priority initially is to build an investable universe of around 250 names, which exhibit the characteristics the team targets.