Lazard Global Managed Volatility AUD Inc (LAZ1240AU) Report & Performance

The Lazard Global Managed Volatility Fund gained 1.71% during the month (net of fees), outperforming its MSCI All Country Index benchmark. Stock selection contributed to the excess return; sector positioning detracted. Stock selection was led by consumer discretionary and financials. Allocation wise, the underweight to materials and energy added the most value, which was offset by the underweight to information technology. Regionally, selection was strongest in Japan and China, and weakest in the US and Korea.

The Lazard ACW Global Managed Volatility Fund lost 2.0% during the month (net of fees in AUD terms), underperforming its MSCI All Country benchmark. Both stock selection and sector positioning detracted. Stock selection was led by utilities and healthcare. Allocation wise, the underweight to energy and overweight to communication services added the most value. But these were offset by the overweight to consumer staples. Regionally, selection was strongest in India and Thailand, and weakest in the US and Japan.

The Lazard Global Managed Volatility Fund outperformed its MSCI All Country World Index benchmark (net of fees in AUD terms) during the quarter. Both stock selection and sector positioning accounted for the excess return. Selection in consumer discretionary and healthcare were beneficial; Holdings in industrials and materials were the largest detractors. Underweights to information technology and consumer discretionary were the largest contributors along with operating cash. Underweights to energy and financials detracted. Regionally, selection was strongest in the United States and Switzerland, and weakest in Taiwan and Singapore. Alpha was mixed but positive as value measures offset weakness in sentiment which suffered large drawdown in November. Quality measures were flat to positive. Growth measure underperformed in October and December but overall, it was flat. Global stocks closed out 2022 with a monthly decline of 3.8% to finish the year with a loss of over 18%, its worst result since 2008. The US dollar continued its recent weakness helping pare the loss for US investors. The broad themes of 2022 – inflation, rising interest rates, war in Ukraine and slowing corporate profits, continued to dominate investor fears in December. Inflation showed signs abating but remained well above central bank targets causing the US Federal Reserve (“Fed”) to maintain its hawkish tone. The inverted yield curve, tepid consumer spending and weak manufacturing orders all point to a likely recession in 2023 with the bond market anticipating that the Fed will soften its tone in response. The Bank of Japan surprised the market by easing yield curve control by 25 basis points as they dealt with the highest inflation in over 40 years and an increasingly illiquid market for Japanese bonds. Chinese officials also began to relax their zero-COVID policies to boost domestic spending and international travel. Unfortunately, it also resulted in a near term surge in COVID cases at year-end. European inflation appears to have peaked in October but remains well above the European Central Bank targets. While the eurozone remains in a recession, optimism that the contraction will not be as deep as initially feared, surfaced in December. Asian markets, led by China, posted a positive return for the month but was the worst region for the year. North America (United States) markets trailed in the month as the US proved to be one of the weakest markets. Small cap stocks lost ground in the month but outperformed the board market indices. Sector dispersion was relatively modest with defensive sectors (utilities and consumer staples) leading for the month. Information technology and consumer discretionary shares lagged. Factor performance reflected investor trepidation as low beta and less volatile stocks outperformed in December. Value measures enjoyed a second strong month and were the best performing factor for the year in both developed and emerging markets. Beyond preference for defensive, value stocks, emerging and developed markets showed divergence in investor factor preferences. Growth measures sold off in developed markets, most notably in Japan but were favoured in emerging markets. Price momentum lagged again in emerging markets even after the extraordinary sell-off in November. Stocks with favourable sell-side analyst revisions underperformed in developed markets but were favoured in emerging markets. Quality measures were favoured in developed markets but showed mixed results in the emerging markets.

The Lazard Global Managed Volatility Fund underperformed its MSCI All Country World Index benchmark (net of fees in AUD terms) during the month. Sector positioning accounted modestly for the performance, while stock selection detracted. Stock selection was led by holdings in the energy sector. Holdings in industrials and materials were the largest detractors. Allocation wise, the underweight to energy added the most value, which was offset by the underweight to materials.

Regionally, selection was strongest in Canada, and weakest in the United States and China. Stocks that made the largest contribution to return included Japan Tobacco (JT), whose shares rallied over the month after the company and Altria Group accounted a joint venture to commercialise Ploom heated tobacco sticks products in the US. In our view, integration of the domestic tobacco business into JT will enhance the company’s competitive position in reduced risk products and organisational restructuring of the domestic tobacco business will free up some resources for RRP marketing and R&D investment. Japan Post delivered a strong month reaching its six-month peak. The Japanese government has financial and political incentives to ensure that the environment supporting the company’s profitability remains benign. Gilead Sciences continued its strong performance following solid third-quarter results that displayed the strength of the company’s dominant HIV regimen as well as oncology therapies. Sales were well ahead of market expectations, mostly due to continuing demand for the company’s COVID-19 drug. Detractors in the month included Kellogg, whose share price fell following Q3 2022 results.

The organic growth of 13% was largely driven by higher prices. Similar to its peers, Kellogg has strained to keep up with the rapid evolution of consumer trends which has weighed on volume growth. Public Storage’s stock continued to struggle throughout the month despite a decent set of numbers in the third quarter earnings results. We see increasing signs of growth moderation in the upcoming years with a slowing economy and additional storage supply coming to market. Molina Healthcare’s shares saw significant movement during recent months, with the share price falling after the third quarter earnings call.

In October, the Lazard Global Managed Volatility Fund returned 5.7 (net of fees) underperforming its MSCI All Country Index benchmark by 1.0%. Stock selection accounted for the performance, while sector positioning detracted. Stock selection was favorable in five of eleven sectors, led by consumer discretionary and communication services. Allocation wise, the underweight to consumer discretionary and overweight to health care added the most value, which was partially offset by the underweight to energy. Regionally, selection was strongest in the US, and weakest in Japan and Canada. Stocks that made the largest contribution to return included Gilead Sciences, whose shares rose significantly by 13% after reporting third quarter results which topped expectations and boosted its full- year profit and sales outlook. The company generates stellar profit margins with its HIV and HCV portfolios, which require only a small salesforce and inexpensive manufacturing. Merck announced positive top-line results from the pivotal phase 3 Stellar trail evaluating the safety and efficacy of sotatercept. The stock rallied throughout the month. Shares of Everest rebounded strongly in October, responding positively to the third quarter earning calls. The reinsurer consistently grows its portfolio without substantially changing the risk profile. The management is targeting over 13% shareholder returns by 2023. Detractors in the month included WH Group, which reported third-quarter results that trailed the market’s estimates of revenue and operating profit. The deterioration in the operating margin was primarily caused by the upstream business across China and the US. Yamazaki Baking reported the third quarter earnings in the month and the result missed analysts’ forecasts. Bread companies in Japan have been hit hard by soaring material prices, as well as the declining population. SinoPac Financial reported missed performance for the first half of the year. The weakening in financial markets has generally led to a decline in banks’ wealth management business.

The Lazard Global Managed Volatility Fund lost 0.49% during the month outperforming its MSCI All Country World Index benchmark by 3.09%. Both sector positioning and stock selection accounted for the excess return. Stock selection was favorable in all sectors led by health care and industrials. Sector allocation was helped by the underweight to information technology and overweight in consumer staples. Utilities holdings was the only sector that underperformed.

Stocks that provided the largest benefit to the Fund’s excess return were all in the health care sector. Bristol-Myers Squibb announced scientific research across several solid tumors and received European Commission approval of Opdualag in unresectable or metastatic melanoma. A few analysts upgraded its ratings to overweight or buy during the month. Merck delivered a great month led by their blockbuster Keytruda as well as other oncology and vaccine recovery. There are some regulatory risks on Keytruda, but we believe, they are limited in the medium term. Eli Lilly continued its strong price momentum reporting favorable phase 3 results for a dermatitis medication. The company also received the first and only RET inhibitor approval from the FDA. Stocks that detracted in the month included Charter Communications, the judge order of USD 1.15 billion and the announcement of the retirement plan of the CEO cost the company’s price declined 28% in September. Comcast Corporation’s broadband business has stagnated, with the company adding no net subscribers over the most recently reported periods, as the demand seen through the COVID pandemic cooled off. Portland General Electric’s price suffered a sharp decline after the company shut off power for 37,000 customers in early September to protect against wildfires.