Fund Manager Profile: Lazard’s James Donald

In a world that is focused on defensive stocks, Lazard’s venerable relative value manager takes a different route to emerging markets growth.

Fund Manager Profile: Lazard's James Donald

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Future scenario

Believing most investors in global and emerging market funds are still in relatively expensive defensive stocks, Donald says the masses are yet to become comfortable with the idea stocks on cheap valuations are an attractive place to be and that they should be in these more economy sensitive stocks.

“My belief is that markets are watching and waiting to see if commodity prices have found a floor. If they do find a floor, that could be the beginning of a major rotation into less expensive areas and even into commodity-oriented stocks,” he says.

Of course, when momentum does stop leading then a fallout can be very dramatic. Unlike most funds in its universe, Lazard Emerging Markets always has a PE ratio lower than its index.

“Things can go two ways. Either we go back to an environment where the markets haven’t fully discounted the overproduction of goods and services in the world economy and pricing power continues to be the same as it has been. This means most companies would see continued discounting of their products and a select few would continue to have relatively strong pricing power, so consensus is vindicated.

“Conversely, this has been more than taken into account and valuation becomes important again, which could bring about a large rotation into more inexpensively valued areas.”

While steadfast in a relative value approach, that does not mean Donald eschews big names in the emerging markets universe. Top-10 holdings include Taiwan Semiconductor Manufacturing Company and Samsung Electronics, both which he believes are mispriced. 

On the latter, he says: “Samsung Electronics is, for various reasons, very cheaply valued. Many would say this is for governance reasons, and the company is willing to address this now.

“It has $65bn of net cash on its balance sheet and we believe it probably doesn’t need as much as that and it is unnecessarily reducing its return on equity (ROE). Although it is a continually profitable company, the lower return on ROE than it could get has had the effect of reducing its valuation significantly.”

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