Lazard Emerging Markets - Russia and Brazil look good value

Kate Marshall | Fri 15 September 2017

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• Fund is focused on lowly-valued areas of the market such as Russia and Brazil
• These markets have recently been out of favour, which held back performance
• Manager has a good longer-term track record in this sector

Our view

We view James Donald as a sensible and highly-experienced investor in emerging stock markets. In managing the Lazard Emerging Markets Fund he also has the support of a well-resourced team of portfolio managers and analysts.

The fund has underperformed the broader emerging stock market so far this year. James Donald has demonstrated an ability to add value in the past, however, and over the past ten years the fund has grown 107.7%* compared with 91.8% for the IA Global Emerging Markets sector. Please remember past performance is not a guide to future returns and investing in emerging markets tends to be higher-risk than developed markets.

Past performance is not a guide to future returns. Source: *Lipper IM to 31/08/17

We are encouraged the manager is sticking to the same investment process he has followed for many years. The fund currently has a bias to some of the more out-of-favour and undervalued areas of the emerging markets, such as Russia and Brazil, which means it could provide some diversification to a wider investment portfolio investing across the region.

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 developing markets, we are currently happy with our existing line up of funds in this sector.

Fund review

James Donald aims to invest in companies he believes have been undervalued by other investors, but which he believes will deliver high and sustainable levels of profitability. His approach often leads him to invest in out-of-favour companies or areas of the market, and means we would expect the fund to go through periods of underperformance at times.

A focus on undervalued areas has led to a bias towards companies located in Brazil and Russia. This proved beneficial to performance in 2016, but has been a hindrance so far this year. Russia, a resource-rich nation, has suffered amid a falling oil price, while Brazil has been damaged by ongoing corruption scandals. Investments in Brazilian bank Banco do Brasil, Russian bank Sberbank and Brazilian toll road operator CCR have been negative performers, but the manager is upbeat about the longer-term prospects.

Technology companies have performed strongly over the past year, although a small group of firms within the sector, perceived to have higher or more predictable earnings growth potential, have led the pack. James Donald believes the share prices of many of these companies are overvalued and has avoided them, therefore missing out on some of the gains made. He has tended to focus on more lowly-valued companies with high returns on equity (a measure of how well a company uses money invested in the business to generate earnings growth), which he expects will generate better returns over the longer term. Current investments include Chinese internet companies Baidu and Netease.

James Donald is mindful of the shorter-term challenges emerging markets continue to face, including slowing growth in China and its impact on the rest of the emerging world; the impact protectionist policies from US President Donald Trump could have on trade; and weakened commodity prices, which could hamper commodity-focused economies.

That said, corporate earnings growth is expected to improve this year, which should have a greater impact on share price returns over the longer term. US interest rates are also now expected to rise at a more gradual pace than originally anticipated, which is viewed as a positive for companies with high levels of dollar-denominated debt. Many countries, including India and Brazil, are also making progress in economic and political reform, and could ultimately improve the environment for businesses to operate in.

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