Lazard Emerging Markets Total Ret Debt (LAZ0023AU) Report & Performance

In July, the Lazard Emerging Markets Total Return Debt Fund (“the Fund”) gained 0.37% (net of fees), lagging the broader asset class and reflecting defensive positioning.

We deployed just over half of the Fund’s risk budget throughout the month with an emphasis on local debt, particularly markets with high nominal and real yields and scope for monetary easing. Consistent with this positioning, local debt was the main contributor to absolute returns in the month. Within this allocation, the Fund’s long position in South Africa was a notable contributor as rates rallied after the South African Reserve Bank held rates steady in a split decision, compared to consensus expectations of a 25-bp hike. To a lesser extent, the Fund’s sovereign credit allocation with an emphasis on borderline investment grade countries like Colombia contributed to absolute returns. These gains were partly offset by Fund hedges implemented through credit default swaps (CDX) and foreign exchange options, which detracted as emerging markets sovereign credit spreads continued to compress during the month.

The Lazard Emerging Markets Total Return Debt Fund (the Fund) returned 0.13% (in AUD net of fees) in second quarter and lagged the broader asset class, reflecting defensive positioning. We deployed roughly half of the strategy’s risk budget throughout the second quarter and rotated sovereign credit exposure in favour of local debt as we currently see opportunities in markets with high nominal and real yields and scope for monetary easing.

Local rates positions were the main contributors to absolute returns during the second quarter. Within this allocation, exposure to select high yielders such as Brazil, Colombia, and Mexico were the most notable drivers of absolute returns as yields in these markets moved lower in stark contrast to the increase in core rates. The portfolio’s long position in Peruvian rates also contributed as the country’s central bank appears to have reached the end of its rate hike cycle. These gains were partly offset by the portfolio’s sovereign credit positions and portfolio hedges. In sovereign credit, diversified investment grade exposure detracted amid the increase in US Treasury yields during the quarter. Portfolio hedges implemented through credit default swaps and foreign exchange options also detracted primarily driven by the compression in EM sovereign credit spreads.

The Lazard Emerging Markets Total Return Debt Fund (the Fund) declined 1.09% (in AUD net of fees) in May 2023. We continued to deploy a defensive stance throughout the month, deploying less than half of the strategy’s risk budget. Sovereign credit and local currency positions were the main detractors from absolute returns in May. In sovereign credit, long positions in Central and Eastern European (CEE) countries such as Serbia and Poland—which we continue to believe offer attractive yields and balance sheet strength to withstand a slowdown in global growth—were notable detractors.

The Fund’s local currency allocation detracted, consistent with the environment of broad US dollar strength during the month. Within this allocation, long positions in CEE currencies, including the Czech koruna and the Polish zloty, as well as select Asian currencies such as the Malaysian ringgit and Thai baht, were among the most notable detractors. These losses were partly offset by the Fund’s long position in Brazilian local rates, where markets moved to price in rate cuts after the Banco Central do Brazil (BCB) left its key policy rate on hold.

The Lazard Emerging Markets Total Return Debt Fund (the Fund) climbed 0.5% (in AUD net of fees) in April, slightly ahead of the broader asset class.

Over the course of the month, we continued to pare the Fund’s risk budget usage from around 65% to less than 50%, primarily by reducing sovereign credit and local currency exposure in markets that may be vulnerable to tighter financial conditions. Sovereign credit and local debt positions were the main contributors to absolute returns in April. In sovereign credit, diversified long positions in Central and Eastern European (CEE) countries such as Serbia, Poland, and Romania—which offered attractive yields and balance sheet strength to withstand a slowdown in global growth—were notable contributors. In local debt, the Fund’s key overweight duration positions in Brazil and Mexico contributed to absolute returns, but these gains were partly offset by South Africa, where local rates underperformed on higher-than-expected inflation. Fund hedges implemented through foreign exchange options detracted slightly.

In the first quarter of 2023, the Lazard Emerging Markets Total Return Debt Fund advanced 2.27% (net of fees and in AUD terms).

Over the course of the first quarter, we pared the strategy’s risk budget usage from around 90% to 65% primarily by reducing sovereign credit and local currency exposure in markets that may be vulnerable to tighter financial conditions.

Sovereign credit and local debt positions were the main contributors to absolute returns during the first quarter. In sovereign credit, long positions in borderline investment grade countries that offered attractive yields and balance sheet strength to withstand a slowdown in global growth such as Romania and Serbia were notable contributors. These gains were partly offset by Egypt, which underperformed on concerns over the country’s ability to continue to tap capital markets to meet financing needs. We eliminated the portfolio’s position in Egypt during the quarter because the government has failed to make progress on much needed policy reforms. Throughout the quarter, we maintained a roughly 25%–35% allocation to local currencies, which also contributed as EM currencies appreciated by over 2% against the dollar. Within this allocation, long positions in high yielders (e.g., Mexican peso and Brazilian real) and Central and Eastern European (CEE) currencies (e.g., Hungarian forint and Czech koruna) were beneficial. In local rates, key positions in South Africa, Mexico, Colombia, and Brazil all contributed meaningfully to absolute returns, as local yields followed the decline in core rates. Portfolio hedges implemented through foreign exchange options detracted marginally in the quarter.

The Lazard Emerging Markets Total Return Debt Fund (“the Fund”) fell 2.78% (net of fees in AUD terms) in February. In late 2022, we began adding risk to the strategy, primarily in the most cyclical parts of the market—high yield sovereign credit and local currencies—increasing the strategy’s risk budget usage from around 40% to 90% in the process. Over the course of the past month, we have pared risk budget usage to around 75% primarily by reducing sovereign credit exposure in countries that may be vulnerable to tighter financing conditions. All of the strategy’s major risk buckets—sovereign credit, corporate credit, local rates and local currency—detracted from absolute returns in February as the asset class gave back a portion of its January gains. In sovereign credit, the Fund’s small exposure to select high yielding credits including Ecuador was the largest detractor. Throughout the month, we maintained a roughly 30-35% allocation to local currencies, which also detracted as emerging markets currencies depreciated by around 2.6% against the dollar. Within this allocation, Asian currencies including the Thai baht, Malaysian ringgit and Indonesian rupiah detracted the most. We chose to focus on these currencies because we expected them to be the biggest beneficiaries of China’s reopening; uncertainty over China’s policy trajectory contributed to volatility in these currencies during the month. Within the strategy’s corporate credit allocation, the Chinese real estate company Country Garden was a notable detractor as bond prices declined after strong gains over the past few months. We have maintained this position as we believe the company will receive additional government support, and thus we see significant additional upside potential from current levels. These losses were partly offset by fund hedges implemented through foreign exchange options.