Lazard is launching its growth-orientated Developing Markets equity strategy to UK investors on 30 September.
The strategy, which has been run in the US since October 2008, is managed by the group’s developing markets equity team, led by Kevin O’Hare and Peter Gillespie.
It has delivered a 30.8% return from inception to end Q2 2010, against a 23.4% rise for its MSCI Emerging Markets benchmark.
The launch comes after Lazard soft-closed its successful Emerging Markets equity strategy, run by James Donald, earlier this year. This strategy has in excess of £18.5bn under management.
While Donald’s value-orientated product has performed strongly over the past decade, O’Hare and Gillespie expect a growth style to outperform in the next stage of the economic cycle.
“In sluggish economic environments only a handful can grow their earnings, so those shares tend to get bid up to a premium,” Gillespie says.
“In the last decade economic growth took off, every company could grow earnings. In this environment, you just wanted to buy the cheapest stock you can. Value basically trumped growth for 10 years.”
O’Hare says emerging market equities are at a discount to world equities, relative to long-term history.
“Today, emerging markets are on 11 times forward earnings and the MSCI World is on 12.5 times. When the asset class was most attractive in the first half of the 1990s, valuations tended to be 15 or 20 times earnings on a forward basis,” he says.
“Part of the reason why we are confident on the asset class right now and why our GARP – growth at a reasonable price – style is also attractive is because we think we are in an environment very similar to the 1990s. In the early 90s, growth outperformed value.
“The US was coming out of a recession, post the S&L crisis, so growth was challenged. As a result, emerging markets were offering stronger economic and earnings growth.”
The Lazard Developing Markets fund will typically hold 60 to 90 bottom-up stock ideas, with a market cap in excess of $300m. The fund’s largest geographical overweight is in Russia, while its largest sector position is in financials.
“Russia is nearly at a 50% discount so you need to consider whether a lot of the concerns are already in the price," O'Hare says. "These are some of the things we take into account with our risk evaluation process.”
Gillespie adds: “When we talk to our perspective client base, they are typically heavily exposed to value managers. Investors have moved a little bit away from GARP investing, but we think this process is a good way of capturing the appealing parts of emerging markets.”
The Lazard Developing Markets fund aims to outperform the MSCI EM Index by 3.5% per annum over a full five- to seven-year cycle, with lower levels of volatility.
