“A lot of the biggest names in the index are nowhere to be seen,” says James Donald, managing director and manager of the Lazard Emerging Markets and Emerging Markets Equity funds.
Donald says he runs “a conservatively managed relative value strategy,” and year to date the fund’s performance has been in line with the MSCI Emerging Markets index.
He describes his approach as “strictly bottom-up stockpicking, managing a trade-off between valuation and profitability.”
“We allocate solely on a company basis, never by country, sector or industry,” he says.
Perhaps the most striking example of where Lazard deviates from the index is China. Whilst China holdings account for some 20% of the index, at the end of June they made up just 1% of the Lazard Emerging Market Equity fund.
“It is not that we are anti-China,” says Donald. “But Chinese companies typically aim for very rapid growth and gaining market share, not high profitability, which is a critical selection criteria for us.
“There are companies in China we will invest in at a different point, if they stay in a dominant position in their business.”
He adds: “The Chinese economy is the most important economy in the world, not in terms of size but effect. Without China we would be seeing a global depression. But it does not have any flexibility not to grow.”
Many of Donald’s holdings are related to the Chinese economy. “We do invest in companies which are direct beneficiaries of Chinese demand,” he says. “Kumba Iron Ore, in South Africa, is more affected by China than anywhere else.”
“Chinese demand for basic manufactured goods and economies, most of which are made in emerging markets, will be pretty constant in the next 10 years,” he says.
Lazard’s self-styled ‘contrarian’ approach sees Donald investing in countries that others may find surprising. Some 13% of his portfolio is invested in South Africa, in companies ranging from cement to insurance to women’s fashion.
“South Africa is not just about political instability and building stadia for the World Cup,” he says. “Some of the best managed companies are in South Africa. Truworth, the leading fashion retailer, is delivering 50% returns on equity.”
He has also increased his exposure to Russia. “This is purely valuation linked,” he says. “Russia was the cheapest market in the world at the beginning of the year. It is still risky in terms of political and corporate governance, but very cheap.”
He is underweight in the Czech Republic, Poland and Hungary. “Valuations were high and there were big risks in those markets, especially in the banking sector,” he says.
But Donald says the biggest risk to his fund is not from the countries or stocks he invests in, but investor demand.
“There is a huge wall of money coming into this asset class,” he says, “from collective investments to pension funds. And investors are becoming more sophisticated, picking regions or single countries.”
But he says the Lazard funds have a stable client base. “They are becoming a core holding for many of our clients,” he says.