Investors need to stay calm and stand by their process when picking stocks despite what markets might be doing, according to Lazard Asset Management’s Bertrand Cliquet.
Cliquet, manager of the $270m Lazard Global Equity Franchise fund, said that getting valuations right was one of the most important factors when it comes to investing.
This was particularly true last year as the volatility returned after the relatively benign market conditions of 2017.
“It’s all about valuation, valuation, valuation,” he explained. “The belief is all about if we pay too much for our assets then we will be exposed to a very significant de-rating when markets turn and – with the view of having a very consistently defensive record of performance – that is an issue.”
The Lazard Global Equity Franchise fund targets long-term, defensive returns through global companies with a combination of predictable earnings and large competitive advantages.
Cliquet added: “The emphasis on valuation really played out through last year and if you look at the first nine months of the year, we certainly lagged the substantially rising markets especially toward the end of the first quarter, which was the more exuberant part of the market.”
The Lazard manager said the strategy is likely to lag in strong, rallying markets due to the more defensive qualities of its holdings, although it will come perform better in weaker environments.
“What happened in the fourth quarter when the market fell sharply was we defended very well,” he said. “The broader market, in sterling, was down by just over 3 per cent on a net basis and we were up, this is all due to defensive characteristics [of the fund] in the last three months of the year.”
Performance of fund vs sector & benchmark in 2018
Source: FE Analytics
The Lazard manager said the strategy is likely to lag in strong, rallying markets due to the more defensive qualities of its holdings, although it will come perform better in weaker environments.
The return of volatility last year came as the Federal Reserve’s rate-hiking programme, the US-China trade spat and Brexit – among others – all took their toll on markets.
However, that volatility also provided opportunities for the manager to make changes, highlighting two big trends in the portfolio.
“At the end of 2017 we had 38 per cent in the tech sector and those stocks have performed terribly well [in recent years], which means the upside was much more limited,” he said. “So that 38 per cent in the course of the first quarter of last year was brought down to 18 per cent.
“Clearly, with hindsight, that was too early because we play valuations, we don’t play timing. But it was actually very helpful in the fourth quarter.”
The MSCI World/Information Technology index made a 17.70 per cent loss, in dollar terms, during the fourth quarter of the year compared with a 13.42 per cent fall for the broader MSCI World.
Performance of indices in Q4 2018
Source: FE Analytics
However, the fall in markets during the fourth quarter presented some compelling investment opportunities for the Lazard Global Equity Franchise fund and was the cause of the second trend in the portfolio.
“Frankly if you had told us 12 months before that we would have opportunities from a valuation standpoint, we would have been sceptical,” said Cliquet.
“As an example, Fresenius Medical Care – a German company, the largest in the world for dialysis treatment for people with kidney failure – fell 30 per cent in October. Suddenly you have an exceptional business that has a little bit of a blip in the road and that’s an opportunity.”
The Lazard manager said that given the number of valuation opportunities that arose during the course of last year, turnover in the portfolio rose significantly from an average of 30 per cent to 75 per cent in 2018.
“The only reason you trade is because your opportunity set changes, then you have to take that on board,” he said. “If your opportunity set remains the same we’re very happy to invest in our companies for a long period of time.”
After a challenging end to the year for the markets, however, markets have rebounded sharply with the MSCI World index up by 11.7 per cent – in dollar terms – since the start of the year.
“I think we need to find a new letter for a V-shape recovery,” said Cliquet. “It’s almost an I-shape recovery in markets after the strong fall in the fourth quarter.”
This has created another test for the manager’s approach.
“For us a number of the stocks we bought in the fourth quarter we are trying to realise much quicker than expected,” the Lazard manager explained.
“When we invest in a company we are very happy to give them time to come to fruition with their investment cases but if the market is very quick at re-rating those stocks we will be very disciplined and we will take profits and recycle capital.”
The disciplined approach to management is important, said the manager, particularly at times of higher volatility.
“Falling in love with winners is very detrimental because you have to accept that everything has a price and when you have a successful investment and feel-good factor most people will be very reluctant to move away,” he said.
However, the holding’s upside potential might be reduced and the valuation may no longer look as compelling as it once did. In such cases, Cliquet will look to dispose of the stock and recycle capital into other existing holdings or add a new position.
The largest holding in Lazard Global Equity Franchise is US medical supplies company McKesson, which represents 6.3 per cent of the portfolio. Other top holdings include US compliance company Stericycle, Italian gaming firm IGT, US-based marketing research firm Nielsen and French commercial satellite owner SES.
Performance of fund vs sector & benchmark since May 2016
Source: FE Analytics
Since the start of data in May 2016, the fund has returned 50.25 per cent, according to FE Analytics. This compares with a 45.98 per cent gain for its MSCI World benchmark and a 42.19 per cent return for the average IA Global peer.
It has an ongoing charges figure (OCF) of 0.91 per cent.