Sticking by its “very boring” process instead of trying to guess the macroeconomic direction was the reason Lazard Asset Management’s Fadi Al Said made a positive return in 2018 when all his peers lost money.
Given the challenging conditions of 2018, only 11.2 per cent of the 3,764 funds in the Investment Association universe made a total return higher than zero last year.
One of these was the $24.5m five FE Crown-rated Lazard Mena fund, which was up by 7.63 per cent in 2018 when its average IA Global Emerging Markets peer was down by 11.78 per cent.
Performance of fund vs sector in 2018
Source: FE Analytics
The fund invests in companies domiciled, listed in or carrying out significant levels of business in the Middle East & North Africa (Mena) region and, as such, had less exposure to the macroeconomic themes that were more negative for generalist funds.
Indeed, a slowdown in the broader global economy and the ongoing trade stand-off between the US and China had some ramifications for emerging markets funds last year.
But that had little impact on the Lazard Mena fund, according to Al Said.
“We were fortunate enough to be in an investment universe and region which had its own dynamics playing for it unlike other emerging markets and unlike what was happening globally,” he explained.
Currency was also less of an issue for the fund than other emerging countries given the amount of dollar-pegging in the Mena region.
“A lot of the currencies are pegged to the US dollar so we were protected from the volatility in the currency and that had an [positive] impact on performance,” he said.
As growth began to slow, sentiment towards emerging markets turned negative with data from the Institute for International Finance suggesting that inflows of $195.5bn were almost $173bn lower than the prior year.
However, the manager said that the fact the Mena region remains under-represented in benchmarks such as the MSCI Emerging Markets index means that it is protected from the shifting of capital as investors became more risk-averse.
“The other part is that there are certain dynamics of the region we invested in being under-owned by a lot of the emerging market managers,” explained Al Said. “So, in a way, we were also protected from outflows and inflows and the risk-off/risk-on game that you saw happening.
“That was something from a macro or regional perspective that helped us.”
He added: “The integration of markets definitely will give you exposure to some of the passive flows of emerging markets and will make you more correlated.”
Performance of major EM currencies vs US dollar in 2018
Source: FE Analytic
Al Said said the fund was also protected by its investment process, which focuses more on bottom-up stock selection than by making macro calls.
He added that the Dubai-based team process involves identifying companies trading at very distressed or very cheap valuations that should be able to make attractive returns over the long term.
“From that perspective I think there was a significant cushion of safety to the companies that we invested in and I think to that extent it has protected us,” he said. “We’re not really going for the expensive names or names that have high expectations built into the price.
“On the contrary, we were invested in names that were in a way hated and did not have a lot of positive expectations so any kind of positive developments for these companies were not expected and as a result rewarded.”
He added: “The process we follow is a very boring process, there are no black boxes, highly sophisticated algorithms or things that try to detect any kind of direction in the markets.
“We look at the management, the businesses, their valuations and we believe that we can generate a long-term return and priced for risks in the business and overall environment then we will be more than happy to invest.”
Lazard Mena is a more regionally focused strategy than many of its peers in the IA Global Emerging Markets sector. And it is a region that some may be warier of given its history.
That can also help the team behind the strategy focus instead on the fundamentals, said Al Said.
“It’s a region that is known to generate headlines on different fronts: politically and economically: we’re always in the news,” he explained. “So, we don’t claim to know a specific theme or position ourselves accordingly. we want to focus our efforts on doing research on stuff we can analyse at least with higher certainty.
“Trying to waste our time on finding potential outcomes, from our experience, turns out to be an effort that might lead nowhere.”
However, Al Said said there were several specific themes that can have an impact on stock performance that he aims to mitigate through stress-testing.
“Oil prices are a factor,” he said, “but it’s not as big as outsiders think.
“Government spending is very significant because they are significant part of the economy and oil prices feed into their ability to spend yet it does not dictate because they can easily tap into their reserves, this is what you’ve seen when oil prices are low.”
Al Said added: “To avoid being anchored around a specific interest rate or oil price we do a lot of scenario and sensitivity analysis on the companies and quantify some of the impact of certain things like oil prices, GDP growth, and things in the economy.”
The fund has a concentrated portfolio of 41 names invested across the region and diversified across a number of industries.
Its largest holding is in Egyptian outsourcing company Raya Contact Center (Rayacc), which represents 5.8 per cent of the fund.
“Now because of devaluation [of the Egyptian pound] their costs per agent are significantly lower, most of their revenues – around 70 per cent – are in US dollars,” he explained.
“We saw a correction triggered by the Turkish lira depreciation [and its] impact on Egypt and one of the names that fell aggressively was this company.
“We managed to build a good position there driven by the fact it’s trading at a single-digit P/E [price to-earnings multiple], it doesn’t have debt, it has a net cash position, EBITDA [earnings before interest, tax, depreciation and amortisation] of 6x and a significant return on equity in excess of 45 per cent. This is a company we’re very positive on for the coming two-to-three years.”
Last year’s strong performance echoed 2017 and 2016 when it delivered a total return of 15.81 per cent and 37.91 per cent respectively.
Performance of fund vs sector over 3yrs to end-2018
Source: FE Analytics
Over the three years to the end of 2018, the fund has generated a total return of 71.91 per cent, compared with a 43.63 per cent gain from the peer group.
The fund has an ongoing charges figure of 1.87 per cent.