Lazard Emerging Markets - Fund research update

Kate Marshall | Fri 03 June 2016

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• This fund is managed by an experienced emerging markets investor
• Following a difficult 2015, the fund's focus on lowly-valued yet profitable companies has aided performance so far this year
• Investments in Brazilian companies, as well as the financials sector, has aided recent performance

Investor sentiment towards emerging markets remained low throughout 2015. In this environment, companies favoured for their perceived reliability of earnings growth, such as those in the healthcare and consumer-related sectors, were most popular with investors. This drove the valuations of these sectors to unattractive levels according to James Donald, manager of the Lazard Emerging Markets Fund.

Instead James Donald favours undervalued areas of the market, which he believes will deliver high and sustainable levels of profitability. A preference for this type of company held back the fund’s performance last year, although 2016 has so far seen a reversal of last year’s trend.

Lowly-valued firms, some of which are more economically-sensitive, have generally performed well so far this year, benefiting the fund. A bias towards countries such as Brazil, whose stock markets suffered in 2015 but rebounded in recent months, has also helped. Within Brazil, a number of financials firms such as Banco do Brasil, one of Brazil's largest banks, and insurance firm BB Seguridade proved beneficial to performance. Other financial firms, such as Russia's Sberbank, have also seen their share prices rebound.

A relatively low exposure to China, which has lagged the broader emerging markets this year, also added value. That said, a few investments in Chinese businesses, such as NetEase, the online gaming company, and China Construction Bank, recently held back returns.

James Donald has made few changes to the portfolio over the past year, although an investment in Vale was recently sold. The Brazilian mining company is not generating consistently high enough levels of profitability, in the manager's view. He therefore took the opportunity to sell the investment after the share price rose strongly earlier this year. The manager can also invest in smaller companies, which are higher risk than their larger counterparts.

Going forwards, the manager is mindful of the risks creating short-term volatility across the emerging markets, including uncertainty surrounding global economic growth; declining commodity prices; and geopolitical risks. Against this backdrop he continues to seek companies that will continue to thrive through their strong business models or ongoing innovation.

Our view on this fund

Following a difficult period for the fund, we are encouraged to see performance and the manager's stock selection improve so far this year. Over the longer term he has built a strong record and over the past decade the fund has grown 83.9%* compared with 67.1% for the average fund in the sector, although please remember past performance is not a guide to future returns.

*Source: Lipper IM to 01/06/2016. Past performance is not a guide to future returns.

We agree with the manager's view that emerging markets valuations are low compared with their history. This could present an attractive entry point to the market. That said, a long-term investment horizon is essential as volatility could persist in the near term in this higher-risk sector.

In our view, James Donald is a sensible and highly-experienced emerging markets investor. He also has the support of one of the most well-resourced emerging markets equities teams. The fund does not currently feature on the Wealth 150 list of our favourite funds across the major sectors. While we view the fund as a sensible choice for broad exposure to the emerging markets, we are currently happy with our existing line up of funds in this sector on the Wealth 150.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.