LISIX – Q3 2017 Commentary
The Lazard International Strategic Equity Fund outperformed its benchmark, MSCI EAFE Index, in the third quarter and has outpaced the index YTD. The Lazard team has rebounded from a period of underperformance that spanned the second half of 2016 through January of this year. The team remains focused on fundamental stock selection, looking for quality names with long term growth potential.
Market Overview:
– International equities rose again in the third quarter
o Growth indicators remained broadly positive especially in Europe
o Commodities, including oil, were on a firmer footing
– Bond yields remained near historically low levels
– Money continued to flow into equities with a slightly cyclical bent
– Energy, materials, discretionary, and tech were the strongest sectors
– Health care, staples, and telecom lagged
Performance Overview:
– LISIX outperformed the MSCI EAFE Index in the third quarter
– Performance has continued its turnaround since the lag that extended into the beginning of 2017
o As was predicted by the Lazard team, the market is beginning to reward more quality names with long term growth potential
o Companies in the higher ROE quartiles have outperformed since February of this year
– Investors applauded early signs of restructuring progress at spirits company Diageo, a leading contributor during the quarter
o Also saw relative performance thanks to a rebound form Brazilian beer stock Ambev
– Industrial company Ashstead saw further strong demand for its equipment rental services in the U.S.
– In the tech sector, global payments operator Worldpay announced a merger with U.S. peer Vantiv
– On the negative side, the portfolio suffered due to a relative underweight to mining companies
o Health care selection continues to be challenged with somewhat disappointing news from Convatec, Medtronic, and Shire
Market Outlook:
– Macroeconomic picture is mixed
o U.S. growth remains patchy and the current administration has struggled to implement a simulative agenda
– China related the global economy again last year but this may be starting to fade
o Increasing core inflation remains unclear despite tight labor markets in the U.S., Japan, and some European countries
– In Europe, growth has finally picked up alongside credit growth, though political risk remains
– The more benign commodity environment and some increased confidence is feeding into strong industrial demand
o Chinese consumers are spending again, driven by rising personal credit
– The response of the team following a period of poor performance is to focus on the key source of alpha over time, namely fundamental stock analysis
o While risk control is important, rotations of the type witnessed in the second half of 2016 tend to wash out over time
– With the level of macroeconomic and political uncertainty high, the team is working to identify investment ideas with strong internal and structural dynamics that are uncorrelated to macro events
o Turnover has picked up somewhat in recent months as more of these ideas have fed into the portfolio
– Overall, portfolio team remains confident that, by continuing to focus on stock selection, the strong long term track record of the portfolio will continue
Performance Review:
