Patrick Ryan has an ideal universe from which to pick high yield stocks for his Lazard Global Equity fund - Lazard’s own portfolio range. But if that produces 900 candidates, what then…?
How should you run a global fund? Appoint lots of managers and give them distinct regions to look after? Run a core portfolio internally and outsource other bits to external managers? Or pretend that one fund manager can really comb through all the stocks on the planet?
Lazard Fund Managers has found a different, and rather successful, way of managing a global fund doing none of the above. Its Global Equity Income fund is managed by Patrick Ryan from New York, and in 2009 it gave sterling investors a 24% return, with another 7% in the year to date.
Andy Parsons, an advice manager at the Share Centre, likes it so much he put out a note last week telling investors seeking income and long-term capital growth that they should be taking a close look at it.
”Emerging markets are a much under-appreciated dividend market. Taiwan, Brazil and Israel are all dividend-oriented markets”
Ryan’s approach is simple. He creates a fund from the best income-producing stocks already in the portfolios of his Lazard colleagues around the world. After all, they’re likely to know more about what’s happening on the ground than he does. Indeed, he promises investors that 90% of the stocks in Global Equity Income will be in Lazard funds elsewhere.
Of course, taking other Lazard-held stocks creates a buy list of about 900 stocks for Ryan. So the first cut is size. Global Equity Income has decided to invest only in stocks with a minimum market capitalisation of $3 billion (£2 billion), which brings the list down to 500.
The next cut is yield. The fund takes the top 20% of yielders from those 500 stocks, bringing it down to a more manageable total of 100. Then Ryan’s own stockpicking skills, and those of his co-managers, Andrew Lacey and Kyle Waldhauer, come into play. “We do meet with the management of companies regularly here in New York. We’re the people who ask that dividend commitment question,” says Ryan. (article continues below)
But what do global high yielders look like? Many British investors assume that British and American-listed stocks tend to offer the best yields and dividend discipline, and after that the going gets tough.
Ryan turns that on its head. Nearly 25% of the portfolio of Lazard Global Equity Income is in emerging market stocks. “If you look at the universe of high yielders in the global developed world, then compare it with global developed-plus emerging markets, it is the latter that have the highest yield. Emerging markets are a much under-appreciated dividend market. Taiwan, Brazil and Israel are all dividend-oriented markets.
“We can also find yield in emerging market stocks in otherwise hard-to-find places, such as technology.”
From a global perspective, Ryan says dividends took more of a hit in this recession than in earlier slumps, but he reckons the worst of the pain is over. “The weak links have been broken. The companies that were going to cut have cut. Now I feel that dividend coverage is OK, while earnings forecasts keep getting better.”
He gives an interesting take on sterling from an American perspective. He sees it as a currency that tends to rise when equity markets are rising and fall when equity markets drop. So in that sense, for domestic British investors, sterling acts as a smoothing mechanism on fund performance. But Ryan takes no macro views on sterling or the euro, and doesn’t hedge currencies within the portfolio.
Investments in consumer staples drove Global Equity Income’s performance last year, but Ryan says these are becoming a bit of a crowded trade. “We liked consumer staples last year, especially for their exposure to the consumer in emerging markets. We felt that they were not only cheap but also yielded higher than the market. But they have been getting expensive and we have been reducing our holdings in stocks such as Brazilian cigarette makers. The easy part of that trade is now over.”
That said, Altria (the makers of Marlboro) and Reynolds American, whose brands include Camel and Pall Mall, remain the second- and sixth-largest holdings in the fund. Since December 2008, Altria has risen from $15 a share to $24.60 in a fairly straight line, while Reynolds American has gone from a low of $36 to touch $60 in recent trading. Both stocks are close to their pre-recession highs, despite concern that American tobacco taxes could shrink sales volumes, and despite big price rises in Japan.
Another consumer staples stock, Kimberly-Clark Mexico, also contributed strongly to performance in 2009 after strong earnings driven by solid volume growth, despite softness in the domestic economy.
Holdings in materials stocks also helped the fund, although again Ryan is cautious about the outlook and has been reducing holdings exposed to iron ore and potash. But a position in Total, the fund’s fifth-largest holding, has dragged performance. At the beginning of 2010 it was trading at above €45 (£40) but despite better than expected earnings it has fallen steadily and stands at €38. Meanwhile, the fund’s biggest single holding, Royal Dutch Shell, fell for much of this year before recovering over the past month.
As Ryan has exited consumer staples he has found more comfort in financials and property. He likes some American real estate investment trusts and several financial stocks outside the conventional American and European banks. Redecard, Brazil’s leading credit and debit card processor, is his biggest financial holding. It has helped make Brazil the market where Ryan is most overweight.
The global equity income benchmark would have him 40-45% in the US, but he holds only 30% there. He has only limited exposure to Japan and just 5% in Britain, although he’s moderately overweight in continental Europe. After Brazil, he is most overweight Taiwan, snapping up electronic components makers that have no debt and boast consistent dividend records and terrific growth prospects.
The gross yield target on this fund is 5%, which Ryan says he will have no trouble in meeting. And he sees no reason why a global equity fund should not continue to achieve 5% year in, year out. “Global dividends are more resilient and reliable than many people think,” he says.