Lazard Emerging Markets - a look at the past year

Kate Marshall | Mon 30 April 2018

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• Low exposure to Chinese technology companies held back performance
• The support of a well-resourced team could help over the longer term
• The fund does not currently feature on the Wealth 150+

Our View

The emerging markets cover a vast number of countries and companies. There's plenty of opportunity on offer, but the sheer scale makes it difficult for the everyday investor to sift through every company and identify the very best.

In such a diverse market, if often makes sense to invest in a fund with the support of a well-resourced team of fund managers and analysts. We believe the Lazard Emerging Markets Fund has a good team behind it. The team is headed by James Donald – he has run this fund for over 20 years and plenty of experience.

We believe the team use a sensible approach to investing in these markets. They have served investors relatively well, but it hasn't all been plain sailing. Investing in emerging markets is higher risk and the fund has underperformed its benchmark significantly at times, as we have seen over the past year. Past performance is not a guide to the future.

The fund does not feature on the Wealth 150+ list of our favourite funds for new investments. We currently favour other funds for broad exposure to the emerging markets, which are also available at a lower ongoing fund charge.

Performance review

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2018.

Technology was the best-performing emerging markets sector over the past year, though only a handful of companies contributed significantly to the market's returns. Chinese internet companies JD.com, Alibaba, Naspers and Tencent all benefited from the shift to online retail, the popularity of online gaming, and their ability to make profits from advertising.

Funds with large investments in these companies were given a boost to performance, while funds without tended to be weaker. Lazard Emerging Markets doesn’t invest in these companies, so it missed out on the gains made.

James Donald believes the share prices of these companies are too expensive and aren’t justified by high enough levels of profit potential. Instead he favours companies whose shares can be bought at a price below their true worth, and have the potential to grow and be supported by higher future profits.

Investments in Russia also held back the fund's recent performance. A volatile oil price led to weak returns in the early part of 2017, and more recently the Russian ruble's weakness against sterling has been a headwind for UK investors. The Russian market remains out of favour with a lot of investors, but James Donald believes this means there's a lot of value on offer and performance could improve once sentiment turns.

It's not all bad news and a number of other investments helped performance. NetEase, which provides online services including mobile games, delivered strong returns after it announced an upbeat outlook for its pipeline of games in 2018. And despite Russia having a tougher time, shares in Russian bank Sberbank rose on the back of strong company results – the bank has seen greater demand for loans and increased cash deposits, while a dividend increase is also expected.

Outlook

The shorter-term risks to emerging stock markets should not be overlooked. For example, some companies borrow money in US dollars, so if interest rates in the US rise too quickly it could make debts more expensive to pay back. US President Donald Trump has also introduced policies, such as trade tariffs on Chinese imports, which could create some uncertainty.

James Donald expects longer-term forces will drive growth across the developing world. The rate of innovation and technological development is gathering pace and this could help companies grow faster than their competitors in the West. Company earnings are also recovering – this could help keep businesses in good financial health and support share prices over the longer term, though there are no guarantees.

Please read the Key Features/ Key Investor Information in addition to the information above.

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