Yearsley (pictured), an analyst at the firm, says there is a big problem in the emerging markets sector at the moment due to the popularity of a select number of top-rated funds. However, he says Lazard’s decision to re-open its Emerging Markets fund recently should be welcomed by investors.
"Global Emerging Markets is an exciting but tricky sector in which to excel. It requires in-depth knowledge of an array of different markets," he explained. "Only a few funds have been able to outperform consistently over the long-term."
"This elite group has naturally attracted the most money from investors, and this has brought about a problem."
"Larger funds can be unwieldy and fund managers face issues of liquidity – the ability to buy and sell large quantities of stocks in the portfolio when they need to."
"Sometimes popular funds take steps to stem new investments such as applying high entry costs or closing them altogether."
"One such fund, Lazard Emerging Markets, has recently re-opened to new investment, having effectively closed in 2012. In order to stem inflows, Lazard increased the minimum investment in the fund as well as the initial charge."
"It was a sensible decision. The move preserved the fund's investment approach and it continued to perform well against its peers."
Yearsley explains that the US-domiciled fund remains closed to new money, but that those in the UK now have exposure.
Although the entire strategy is in excess of $35bn in total, Yearsley says he has few concerns over capacity issues.
"The team says it has a capacity of between $43bn and $45bn, so it’s still quite a way off," he said.
"The $35bn represents about 1 per cent of the free float in emerging markets. This is a fair amount, but I think you’d need to see something more like 5 per cent before you need to worry."
"Most of the money comes from the US, but it doesn’t have the same kind of following in the UK and Ireland."
"The portion of money going in to the UK version was very small, and so they decided to re-open it. It’s good news – it’s a good fund with a sound board, and its good timing because others are closing."
The UK-domiciled Lazard Emerging Markets fund is currently £444m in size.
Our data shows that it has beaten its IMA Global Emerging Markets sector average and MSCI EM benchmark over one, three, five and 10 years, but it hasn’t kept up with the likes of First State Global Emerging Markets or Aberdeen Emerging Markets – the darlings of the UK market.
Performance of funds vs sector and index over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Aberdeen Emerging Markets | 21.93 | 32.52 | 73.14 | 545.33 |
| First State Global Emerging Markets | 25.3 | 43.23 | 86.77 | 458.85 |
| Lazard Emerging Markets |
20.02 | 18.65 | 38.58 | 426.77 |
| MSCI Emerging Markets |
16.22 | 12.63 | 23.08 | 340.39 |
| IMA Global Emerging Markets | 17.63 | 13.6 | 19.78 | 320.98 |
Source: FE Analytics
The fund is a standout performer over 10 years, with returns exceeding 420 per cent. Only the Aberdeen and First State funds have returned more.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
With both of these funds, as well as First State Global Emerging Markets Leaders, now either soft-closed or "slowing inflows", Yearsley says Lazard Emerging Markets has emerged as the clear replacement.
When asked if the fund should be considered in the same class as those mentioned above, he said: "Yes, I think so. They are different though."
"In a strongly rising market, all three groups tend to lag, but I’d say Lazard Emerging Markets lags by the least."
"It doesn’t have the same cult following as First State and Aberdeen, partly because they don’t run Asia funds as well."
Although Yearsley says it focuses on protecting against the downside, he points out that Aberdeen and First State have superior records.
Our data shows that Lazard Emerging Markets has a max drawdown of 46.24 per cent over the last 10 years, compared with 39.73 per cent from Aberdeen Emerging Markets, and 37.76 per cent from First State Global Emerging Markets.
The Lazard fund still looks good compared with the MSCI EM index however, which has a drawdown of 52.15 per cent.
However, Yearsley says Lazard Emerging Markets is a very established option, which is important in an area as risky as emerging markets.
"Given the quality of the management team and their record of outperforming their benchmark and peers in a variety of market conditions, we believe it is worth considering for adventurous investors wanting exposure to the sector," he said.
"The management team, headed by the experienced James Donald, focuses on companies that are financially productive yet inexpensively valued."
"They are also conscious of the many political and economic risks inherent in investing in emerging markets when constructing the portfolio."
"Presently they see some of the best opportunities in Russia, where they believe there are many 'mispriced' stocks at attractive valuations, such as Sberbank."
"In Turkey too they are finding some good opportunities, especially in financials and telecoms provider Turkcell."
"Indeed, telecoms stocks are a major theme of the portfolio. The rapid growth of mobile handsets in emerging markets continues and the fund also has positions in Telekomunikasi Indonesia and Philippine Long Distance Telephone, both of which have performed well recently."
"The team – though perhaps not surprisingly – are also bullish on the emerging markets as a whole. They point to the fact that they stand at more attractive valuations than developed market peers, and the fund is therefore positioned relatively aggressively."
Lazard Emerging Markets requires a minimum investment of £2,000 and has an ongoing charges figure (OCF) of 1.6 per cent. It is available across most major platforms
