Lazard
Australian Equity
Value investors in the Australian
market can generate strong riskadjusted returns over the long term.
Key Benefits
• High Conviction
The strategies have high active
share and a differentiated
return pattern. Confidence
does not waver during periods
of relative underperformance
due to the strong belief in and
understanding of the companies in which we invest.
Value investing has a long history of success. However, not all investors have adopted this approach, because executing a value investing
philosophy is not easy. It requires discipline, independence of thought,
conviction, and patience in those periods when value does not work.
Our experience shows that the Australian equity market is no different
from other types of markets in that value investing, if implemented
correctly, should deliver rewards.
The Lazard Australian Equity team takes a long-term view and builds portfolios that can be quite different than those of our competitors. For over a
decade, our process of identifying value has remained unchanged and we
expect that, over time, this will provide our clients with a compelling rate
of return.
We are active value managers who embrace bottom-up stock selection.
Our primary stock-selection screen identifies companies that are trading at
a discount relative to their intrinsic value. The Lazard Australian Equity strategies have delivered strong, top quartile returns over the past decade.¹
Today, we offer three differentiated, long-only Australian equity strategies. Both Lazard Australian Equity and its more concentrated version,
Lazard Select Australian Equity, are fundamental value strategies with a
long history of outperforming their benchmarks. The Lazard Australian
Diversified Income strategy invests in a diversified portfolio of dividendpaying shares currently yielding more than the RBA cash rate, trade at a
discount to our estimate of fair value, and are expected to either maintain
or increase their dividend payments over the next three years.
• Consistency and discipline
Our strategies are designed
to perform in a predictable
pattern and have done so over
the long term.
• Stability and infrastructure
The team has more than
20 years of experience², on
average, in researching and
managing value-style investments.
Australian Equity Investment Strategies
Australian Equity
Select Australian Equity
Australian Diversified Income
Investment Objective
Seeks to outperform the S&P/ASX
200 Accumulation Index by 3% p.a.
over rolling three-year periods
Seeks to outperform the S&P/ASX 200
Accumulation Index by 5% p.a. over
rolling five-year periods
Annual income return above the
RBA cash rate
Investment Style
Value, low beta
Value, low beta, benchmark agnostic
Income focused
Number of Stocks
Typically 25–45
Typically 12–30
Typically 0–50
Stock Position Size Limits
Index +/- 3%*
Typically up to 8% (~15% max)
Up to 3%**
Cash Weighting
0%–5%
0%–5%
0%–100%
Tracking Error
Average 5% p.a.
Not measured
Not measured
Inception Date
17 October 2000
7 June 2002
3 July 2012
* A maximum stock weight of index plus 3% in any one security at the time of purchase, and a minimum stock weight of index minus 3%, subject to an absolute minimum position size of 0.5% of the portfolio.
**At time of purchase (excluding corporate actions).
SP24146
The Case for Value
The concept of value investing was introduced by Benjamin Graham
in 1934 with the release of his classic text, Security Analysis. This
style of investing seeks to profit by identifying stocks that are out
of favour due to irrational investor behavior. By determining a
company’s true worth, a shrewd investor should be able to identify
and take advantage of mispriced opportunities. The track records
of some of the world’s most successful value investors, including
Warren Buffett, demonstrate the effectiveness of the value investing
philosophy when it is skillfully applied.
Knowledge and understanding of value investing has evolved over
the past eighty years. We know better how to implement this investment process, and why this process is likely to be successful in the
long term.
There is abundant evidence of the superior outcomes from value
investing in terms of returns and volatility, across asset classes and,
yet, there is little evidence that these inefficiencies are being arbitraged away.
In 1992, Nobel Prize winner Eugene Fama and Kenneth French
published “The Cross-Section of Expected Stock Returns” in the
Journal of Finance. This seminal article contradicted existing notions
of market efficiency and the capital asset pricing model (CAPM) by
showing that value stocks (as defined by the price-to-book multiple)
had outperformed the market over an extended period.
The limitations of the CAPM and its inability to explain bubbles
and busts, led finance academics and psychologists to establish the
new subject of behavioural finance. They demonstrated that investors exhibit certain human and predictably irrational behaviours,
such as unreasonable confidence in their views, investment myopia,
and framing fallacies. In so doing, they explained why value investing
works and why it is such a difficult philosophy to execute, despite its
theoretical simplicity.
In short, value investing requires considerable discipline, independence of thought, the willingness to be “alone” in opinions and
views and the ability to weather the inevitable periods when value
does not work.
Neither bubbles nor busts, fads or themes, appear to be less common
now than in the past. To the extent that the ultimate origins of the
excess returns to value derive from human nature, this should perhaps not be entirely surprising.
Our strong belief and high
conviction approach has
delivered strong results for
the Lazard Australian Equity
strategy.
Exhibit 1
Lazard Australian Equity Has Outperformed Its Peer Group and the Index
Performance characteristics vs. S&P/ASX 200 (All Ords before 4 January 2000) in $A (before fees) over 15 years and 8 months ending June 2016 (monthly calculations);
Comparison with Australian shares (Long Only) universe (Actual ranking)
RET (% p.a.)
Alpha (% p.a.)
Beta
TE (% p.a.)
11.0
4.0
1.05
8.0
10.0
3.0
1.00
6.0
9.0
2.0
0.95
4.0
8.0
1.0
0.90
2.0
7.0
0.0
0.85
0.0
Lazard Australian Equity
S&P/ASX 200
Upper Quartile
Performance before fees and in Australian dollars.
Source: Mercer Insight MPA, Lazard Asset Management Pacific Co.
Median
Lower Quartile 5th Percentile
3
Lazard Australian Diversified
Income
The Lazard Australian Diversified Income strategy
shares a similar philosophy and process to the
other two Lazard Australian equity strategies and is
managed by the same team. It is designed for investors that require a regular tax-effective income with
the prospect of preserving capital values over time,
adjusted for inflation. It invests in a diversified portfolio
of dividend-paying shares yielding more than the RBA
cash rate, trading at discounts to our target valuations,
and are expected to maintain or increase their dividend
payments over the next three years.
We also believe that there will be times when cash
rates are more attractive than dividend yields. Our
ability to invest in either equities or cash, depending on
their relative income potential is, therefore, very valuable.
Why Invest in the Lazard Australian
Equity Platform
Share markets can move companies away from their intrinsic value,
but when they do, we do not panic sell. Our patience has meant that
the majority of our holdings over time have outperformed. Since the
beginning of 2000, of all the shares held at any point in time in the
representative account, 70% outperformed the benchmark during
their holding period.³
Our strong belief and high conviction approach has delivered strong
results for the Lazard Australian Equity strategy. Our experienced,
extensive, and stable team has stuck to its beliefs and process and has
produced first-quartile returns as a result of successful stock selection
(high alpha) with high conviction and low beta.¹
Investment Philosophy
The Lazard Australian Equity portfolio management team believes
that emotion-driven investing moves share prices away from their
intrinsic value. The team employs the principles of mean reversion
in establishing its assessment of the intrinsic value of shares. We
seek to exploit these opportunities through objective, independent
research, and disciplined execution for the benefit of our clients who
are willing to take the longer view.
Investment Process
In our investment process, we aim to exploit two market inefficiencies: emotional overreaction to news, and impatience.
• We keep conservative valuation estimates for about 140 of the
larger, more liquid companies, listed on the Australian Securities
Exchange
• We undertake detailed Fundamental Research and Modelling on
this universe of securities
• We rank their shares by their valuation discounts in a “Value Rank”
• We build portfolios from stocks with the largest discounts, waiting patiently to sell when market prices approach our valuation
estimates
Provided our valuations are accurate, this process should lead the
strategy to outperform the overall market and maintain a portfolio
with a margin of safety.
Portfolio Construction
Each of the two Australian Equity strategies has specific portfolio
construction rules designed to diversify risk. The team constructs
portfolios from the most attractive shares in the Value Rank.
Portfolio construction is a continual process of review and monitoring of the Value Rank; a company only remains in the portfolio if it
retains a value tilt relative to other companies. A security is typically
sold because its market value rises to what we consider fair value
(achieves target valuation); or occasionally because our view changes
and the underlying investment assumptions are revised.
Exhibit 2
Investment Process
Initial
Filtering
Fundamental
Research and
Modelling
Stock
identification
Detailed financial
modelling
Primary filtering
Suitable earnings
per share
Relative earnings
yield
Value
Rank
Calculate
expected return
of each stock
Rank universe
Portfolio
Construction
Portfolio rules
Economic
sectors
Risk
management
Lazard’s investment process is presented here in sequential steps for illustrative
purposes only. In practice, the process is not sequential and will, as needed, weigh
certain criteria over others.
Lazard Australian Equity Profile
Investment Team
Rob Osborn
Philippe Tison
Aaron Binsted
Warryn Robertson
Philipp Hofflin
Tim Zhao
Thurl Abrahams
Jason Tin
Portfolio Manager/Analyst
Portfolio Manager/Analyst
Portfolio Manager/Analyst
Analyst
Portfolio Manager/Analyst
Portfolio Manager/Analyst
Analyst
Analyst
Notes
1 As at 30 June 2016. Source: Mercer Insight MPA, Lazard Asset Management Pacific Co.
2 As at 31 December 2015
3 Based upon a representative account within Lazard’s Australian Equity Composite, which represents the proposed investment for a full discretionary account. Quarterly data has been added
to produce data since 1 January 2001. Performance calculated gross of fees. Past performance is not indicative of future results. Source: Lazard Asset Management Pacific Co.
Important Information
Published on 19 September 2016.
Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All
opinions expressed herein are as of the published date and are subject to change.
The purpose of this profile is to provide information about the Lazard Australian Equity strategies and Lazard Asset Management Pacific Co ABN 13 064 523 619, AFS Licence 238432
(“Lazard”). This information is not intended as and should not be interpreted as the giving of financial product advice. All of the graphs, charts, and tables have been prepared by Lazard unless
otherwise stated.
The securities referred to in this profile are not necessarily held by Lazard for all client portfolios, and should not be considered a recommendation or solicitation to purchase or sell the security. It should not be assumed that any investment in the security was, or will be, profitable.
This profile has been prepared without taking account of any investor’s objectives, financial situation, or needs. Investors should get professional advice as to whether investment in any of
the strategies referred to in this profile is appropriate having regard to their particular investment needs, objectives, and financial circumstances before investing. Investors should obtain
a copy of the current PDS for the Lazard Australian Equity Fund, Lazard Select Australian Equity Fund, and Lazard Australian Diversified Income Fund, available at www.lazardassetmanagement.com.au or from your IDPS operator, and consider the PDS before making any decision about whether to acquire, or to continue to hold, any of the Funds. Neither Lazard nor any
member of the Lazard Group, including Lazard Asset Management LLC and its affiliates guarantees in any way the performance of the Funds, repayment of capital from the Funds, or any
particular return from or any increase in the value of the Funds.
Information contained in this presentation is confidential and should not be reproduced.
Past performance may not be indicative of future results.
Lazard Asset Management Pacific Co. • ABN 13 064 523 619, AFS License 238432 • Level 39 Gateway, 1 Macquarie Place • Sydney, NSW 2000 • www.lazardassetmanagement.com.au