Lazard seeks fortune in america and financials

Patrick Ryan, manager of Lazard Global Equity Income, answers questions from Adam Lewis.

Q. The Lazard Global Equity Income fund launched on October 22. Is it fully invested yet?

A.

It was fully invested within days of the launch.

Q. How many assets has the fund raised to date?

A.

The fund is now about £6m.

Q. In which global regions is the fund most invested?

A.

The largest country weighting is in America, where we have 35% of the portfolio’s assets. However this is less than the fund’s benchmark (MSCI All Countries World index) which is 42% invested in America.

The second largest country weighting is in Britain, which represents 14% of the fund, which is above the benchmark weighting of 9%.

However, only these two single countries represent more than 10% of the portfolio, the rest is spread across a diverse range of regions, including a 7% position in Italy and a 6% weighting in Australia.

Q. Which sectors globally offer the best dividends?

A.

Right now the financials sector represents one of the best long-term opportunities. The sector is traditionally a strong income provider, but last summer’s credit crunch has led to unwarranted weakness.

However, this volatility has created several opportunities that we are taking advantage of. At present we have a 29% weighting in financials. We also like the telecoms sector as it is cash generative and income orientated and we have a 12% exposure to it.

Q. The fund was launched off the back of the World Dividend Equity fund you also manage, are there any differences in the way the two funds are run?

A.

The strategies are essentially the same. We launched the World Dividend Equity fund on June 30, 2005 and it is a US mutual fund. Because it is a US mutual fund it holds some securities that are not tax efficient to invest in over here. However, that is about the only difference in the two portfolios.

Q. How has the American version of the fund performed since launch?

A.

The fund performed strongly in 2006, its first full calendar year, and beat the benchmark by about 800 basis points, which was pleasing.

Last year proved to be a bit tougher as our exposure to financials hurt us and a number of other high yielding areas of the market struggled. Overall, since the launch of the strategy, we are pretty much in line with the benchmark after fees are taken into consideration.

Q. What is the fund’s yield target?

A.

The target yield is 5% per year and at present the portfolio is yielding 5.4% on a forward looking basis.

Q. How many holdings are there in the portfolio?

A.

The typical range of holdings is 60 to 100, but there are 75 stocks in the portfolio. These stocks represent the highest yielding stocks that are held across Lazard’s suite of investment funds.

The screening process starts with compiling a list of all securities held in the various Lazard strategies. This list is then sorted by trailing 12-month dividend yield and the 100 highest yielding stocks over $3 billion (£1.5 billion) form the list of holdings for the fund.

At any one time the fund is required to hold at least 70% of its assets in the focus list, while up to 20% can be held in stocks in other Lazard portfolios, but which aren’t in the top 100 list.

The fund can also hold up to a maximum of 10% in stocks that are not held in any Lazard managed funds. We do seek to avoid companies whose one time ‘special dividend’ causes them to appear in the top 100 list in favour of companies with a longer-term record of robust and consistent dividend payments

Q. Is turnover in the fund high?

A.

Last year turnover was quite high – it was nearly 100%. However, over time we expect it to be in the 60-100% range.

Q. What risk controls do you have on the fund?

A.

At cost, the maximum size position we will take in any position is 4%. In addition, the fund will only be a maximum of 10% of the portfolio held in stocks with a market cap below $3 billion, a maximum of 25% in emerging market companies and a maximum of 35% in any one sector. At present 4.5% of the fund is held in companies that are not in any other Lazard funds and this will be the typical average.

Q. Overseas equity income funds are becoming an increasingly popular concept, why has it taken so long for them to become available to British investors?

A.

It is all to do with the expanding dividend culture outside Britain. This has increased the opportunity set and allows us to create a more diversified portfolio than we could a few years ago.

It does continue to be an attractive market, but dividends are growing less strongly than they are outside Britain, meaning its yield advantage has dwindled. The spread has also compressed and we expect this to continue.

Owing to the fact that British companies are already dividend orientated, there is not much room to raise this ratio, whereas outside Britain there is much more room because companies are starting from a lower base.

Q. What is the outlook for dividend paying companies this year?

A.

The outlook is excellent. One of the reasons for why we launched the fund is the turmoil in credit markets is creating strong opportunities in the high yield sectors.

We are not expecting the world to improve in a month, but these issues will start to erode.

Our strategy is value orientated. This means when areas perform strongly, as emerging markets did in 2007, our weighting to that are decreases. As such if America continues to struggle this year, our weighting to it may increase.

Elsewhere the outlook for financials is improving, and while the London interbank offer rate [Libor] was high last year, we are seeing an improvement that is encouraging.

Merger activity continues to be strong, meaning various areas of the market will continue being resilient. After a tough 2007, we are starting to turn a corner in the high yield area of the market.

Patrick Ryan – senior vice president and portfolio manager, is lead manager on both Lazard World Dividend Equity fund and the Lazard Global Equity Income fund, which was launched in October 2007. He began working in the investment industry in 1989. Before joining Lazard in February 1994, Ryan was an equity analyst at Hutson Management.