Best In ClassJan 7 2020

Best in Class: Lazard Global Equity franchise

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Best in Class: Lazard Global Equity franchise

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.

Market valuations are also higher globally than they were at the start of last year

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.

At this point, they perform fundamental and valuation analysis to model the revenue and forecasts of the company, as well as meeting company management.

They score each company on nine criteria, each based on the characteristics they believe a franchise should exhibit.

The final stage is portfolio construction.

This is executed solely on a value ranking system, with positions sized between 1 per cent and 8 per cent, depending on their theoretical upside.

The portfolio will vary between 25-50 names, depending on the number of stocks in the investable universe that are showing upside potential.

When markets are high, the fund has been more concentrated.

Roughly two-thirds of the fund (64.6 per cent*) is held in North American equities, although its largest individual holding is in Italian gambling stock IGT (6.8 per cent).

The fund has reasonable overweights from a sector perspective to healthcare (20.5 per cent), consumer discretionary (20.1 per cent) and industrials (19.3 per cent).

The team excludes certain sectors, such as banks and natural resources, which tend to have less predictable earnings.

The resulting group of companies in the portfolio possesses a combination of predictable earnings and large competitive advantages that has, in the past, enabled them to sustain strong returns for long periods of time.

The managers’ systemic approach to portfolio construction, which also removes behavioural biases, offers invests a slightly different option in the global equities space.

Darius McDermott is managing director of FundCalibre