Lazard Select Australian Equity Fund is a highly concentrated portfolio that will hold between 12 and 30 companies. It is a high conviction portfolio with high active share and low beta characteristics over time. The Fund’s objective is to achieve total returns (including income and capital appreciation and before the deduction of fees and taxes) that exceed those of the S&P/ASX 200 Accumulation Index by 5% per annum over rolling five-year periods.
Australian equities fell through September 2023, as investors took a cautious stance during a period where the Australian 10 – year bond yields reached the strongest levels since Oct-2011. The S&P/ASX 200 outperformed the Developed World performance, with a fall of -2.8% in September, while the S&P 500 also fell -4.8% in local currency terms. For the quarter ending September 2023, the S&P/ASX 200 ended down -0.8%. On a sector basis, Energy, Financials, and Consumer Staples outperformed in Australia, and Health Care, IT, and REITs sectors were the relative worst performers during the month. During the quarter ended September 2023, the Lazard Select Australian Equity Fund returned 2.5% (net of W Class fees), outperforming the S&P/ASX 200 Accumulation Index which declined -0.8%.
Contributors to Performance
• Monadelphous (MND) was a contributor to portfolio performance over the current quarter. The company announced several major construction contract awards in the lithium and iron ore segment, bringing the value of secured contracts since the start of FY23 to nearly A$1bn with over half of this post balance date. Monadelphous Managing Director, Zoran Bebic, stated that these contracts represented the first in a new wave of major construction projects to come to market. We continue to remain shareholders in MND, with the view that the medium-term earnings power of the company is higher than its current share price valuations.
• Costa Group’s (CGC) shares performed strongly during Q3 2023, rising around 15% after the board entered a Scheme of Arrangement with Paine Partners for the sale of the company at a price of A$3.20 per share. This price was disappointingly lower than the A$3.50 level discussed few months earlier before CGC’s most recent earnings downgrade.
Detractors from Performance
• Aurizon (AZJ) underperformed in the September quarter after issuing FY24 guidance below market consensus at an Investor Day in July 2023. This was primarily due to AZJ ‘brining forward’ debt refinancing to coincide with the regulatory return reset on the rail network which increased interest expense. The company also faced headwinds form higher bond yields later in the quarter with ‘yield stocks’ generally impacted. We believe that the key driver for the business going forward will be demonstrating growth in the Bulk division, especially on the company owned Central Australian Rail Network. In Q3, the company also signed a short duration iron haulage contract.
• Mayne Pharma (MYX) underperformed in the September quarter after releasing FY23 results that showed that the company had to discount its new oral contraceptive more than anticipated in 2H23. We believe it is a temporary headwind and with a new commercially minded management team, the company may be able to reach its projected net sales estimate for this drug. We are more conservative in our estimates and still believe there is value in MYX at these levels.
What is Lazard Select Australian Equity W Cl Lazard Select Australian Equity W Cl is an Managed Funds investment product that is benchmarked against ASX Index 200 Index and sits inside the Domestic Equity - Large Value Index. Think of a benchmark as a standard where investment performance can be measured. Typically, market indices like the ASX200 and market-segment stock indexes are used for this purpose. The Lazard Select Australian Equity W Cl has Assets Under Management of 60.64 M with a management fee of 0.9%, a performance fee of 0.00% and a buy/sell spread fee of 0.5%.
How has the investment product performed recently? The recent investment performance of the investment product shows that the Lazard Select Australian Equity W Cl has returned 5.14% in the last month. The previous three years have returned 11.47% annualised and 14.34% each year since inception, which is when the Lazard Select Australian Equity W Cl first started.
How is risk measured in this investment product? There are many ways that the risk of an investment product can be measured, and each measurement provides a different insight into the risk present. They can be used on their own or together to perform a risk assessment before investing, but when comparing investments, it is common to compare like for like risk measurements to determine which investment holds the most risk. Since Lazard Select Australian Equity W Cl first started, the Sharpe ratio is NA with an annualised volatility of 14.34%. The maximum drawdown of the investment product in the last 12 months is -6.02% and -52.06% since inception. The maximum drawdown is defined as the high-to-low decline of an investment during a particular time period.
What is the relative performance of the investment product? Relative performance is what an asset achieves over a period of time compared to similar investments or its peers. Relative return is a measure of the asset's performance compared to the return to the other investment. The Lazard Select Australian Equity W Cl has a 12-month excess return when compared to the Domestic Equity - Large Value Index of -9.72% and -0.57% since inception.
Does the investment product produce Alpha over its Peers? Alpha is an investing term used to measure an investment's outperformance relative to a market benchmark or peer investment. Alpha describes the excess return generated when compared to peer investment. Lazard Select Australian Equity W Cl has produced Alpha over the Domestic Equity - Large Value Index of NA% in the last 12 months and NA% since inception.
What are similar investment products? For a full list of investment products in the Domestic Equity - Large Value Index category, you can click here for the Peer Investment Report.
What level of diversification will Lazard Select Australian Equity W Cl provide? Lazard Select Australian Equity W Cl has a correlation coefficient of 0.89 and a beta of 0.92 when compared to the Domestic Equity - Large Value Index. Correlation measures how similarly two investments move in relation to one another. This establishes a 'correlation coefficient', which has a value between -1.0 and +1.0. A 100% correlation between two investments means that the correlation coefficient is +1. Beta in investments measures how much the price moves relative to the broader market over a period of time. If the investment moves more than the broader market, it has a beta above 1.0. If it moves less than the broader market, then the beta is less than 1.0. Investments with a high beta tend to carry more risk but have the potential to deliver higher returns.
How do I compare the investment product with its peers? For a full quantitative report on Lazard Select Australian Equity W Cl and its peer investments, you can click here for the Peer Investment Report.
How do I compare the Lazard Select Australian Equity W Cl with the ASX Index 200 Index? For a full quantitative report on Lazard Select Australian Equity W Cl compared to the ASX Index 200 Index, you can click here.
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Performance Commentary - August 31, 2023 The S&P/ASX 200 outperformed the Developed World markets performance, falling -0.7% in August 2023. Weakness in Australian equities was mainly on the back of dull guidance from companies through the earnings season. The Australian 10 – year bond yields sold off by 2bps to 4.03%, trading relatively unchanged as the Reserve Bank of Australia (RBA) remained unmoved on the cash rate, however still retained a tightening bias. On a sector basis, Consumer Discretionary, REITs, and Energy outperformed, while Utilities and Consumer Staples sectors were the relative worst performers.
During the month ended August 2023, the Lazard Select Australian Equity Fund returned -1.0% (net of W Class fees), slightly underperforming the S&P/ASX 200 Accumulation Index which returned -0.7%.
Contributors to Performance
• AMP’s share price rose 12% over the month of August 2023, while the index closed lower. This out-performance was driven by a well-received result and the expected expense reduction plans foreshadowed in April 2023. AMP earned 4.2cps in 1H23, disclosed NTA of $1.33ps, has excess capital of $840m and a plan to reduce group costs by a net $120m by the end of 2024. Offsetting these positives, tough mortgage competition is expected to cut the net interest margin (NIM) at AMP Bank over 2H23. Critical future drivers of the value of the group are AMP’s ability to continue to buy back shares at below NTA, the execution of the expense reductions across head office and Master Trusts, returning Wealth to top -line growth and dealing with various legacy legal issues. Over the last three quarters, consensus EPS for AMP has risen 25% relative to ASX200 consensus expectations, but our valuation – based on a sum-of-parts analysis – has not changed much. By end of August, the discount to NAT had narrowed to 5%. We believe that, AMP remains a relatively attractive investment, but is no longer within the top 30 most undervalued opportunities within our Value Rank.
• Bapcor (BAP) announced their results on August 16, 2023 which were in-line with expectations. BAP shares rose 6% over the month, outperforming the ASX200 which declined in August as the market had concerns that BAP may be impacted by the slowing consumer demand in Australia. The largest value driver for BAP remains the ‘Better Than Before’ program, for which management has announced aggressive cost saving targets. If these are mostly realized, we believe there might be a meaningful upside for BAP shares. We remain attracted to BAP’s resilient top line and rational competitive dynamics in key markets with minimal ‘Better Than Before’ upside included in our valuation. We continue to hold BAP shares.
Detractors from Performance
• South32 (S32) underperformed the market in August 2023 as concerns about a slower than expected Chinese economic recovery continued to weigh on sentiment. S32 reported its FY23 result during the month, and while it was broadly in line with consensus, we believe the guidance for FY24 was disappointing. Costs guidance was significantly higher than expected and production growth guidance was also soft. While S32 is investing in growth, these benefits won’t be seen until post FY25. S32 continues to transform its portfolio with 71% of FY23 revenue related to base metals, up from 45% when the business was demerged from BHP almost 10 years ago. In our view, S32 is well positioned to benefit from the significant energy transition demand for base metals in the medium to long term. Despite some near-term headwinds we continue to see S32 as attractively priced.
• WPR moderately underperformed the broader market, falling 5% in August when it reported 1H23 results which were in – line with expectations for modest earnings decline, primarily because of well-timed non-core asset sales. The company remains well-positioned, with full-year FY23 earnings guidance unchanged being flat versus the prior year, with ~3% rent growth offset by the full-year impact of prior asset sales and higher cost of debt. The balance sheet remains strong with gearing at the low end of the 30-40% target range and 93% hedging for FY24, providing significant headroom. We are currently awaiting the competition regulator ACCC’s adjudication of main tenant Viva Energy’s (VEA) acquisition of On the Run (OTR), expected 21 September 2023. This will determine VEA’s rollout of the OTR format across the store network, which could be partially funded by WPR and provide redevelopment returns. WPR currently trades at a 6.6% dividend yield and 15% discount to net tangible assets, providing a good valuation support.
Performance Commentary - July 31, 2023 Australian equities gained ground in July 2023, lifted by a rally in energy stocks on the back of rising oil prices with the S&P/ASX 200 closing +2.9% for the month. Australian 10-year bond yields sold off by 3bps to 4.05%, trading relatively unchanged as Reserve Bank of Australia’s (RBA) July meeting saw the cash rate paused at 4.10%. On a sector basis, Energy was the strongest performer, while Financials and Information Technology also outperformed. The Materials, Consumer Staples, and Health Care sectors were the relative worst performers.
During the month ended July 2023, the Lazard Select Australian Equity Fund returned 4.2% (net of W Class fees), outperforming the S&P/ASX 200 Accumulation Index which returned 2.9%.
Contributors to Performance
• Costa Group’s (CGC) shares performed strongly in July as a non-binding, indicative offer to acquire the company was made public. The approach made by previous owner Paine Partners was at $3.50 per share, a 29% premium to the share price prior to the offer. We believe the corporate interest confirms our view that Costa’s assets have an underlying earnings power materially higher than what has been witnessed in recent reporting periods. While we do not know if a takeover offer will move to a binding arrangement, in our view, the interest from a knowledgeable buyer supports our thesis. We continue to hold CGC shares.
• Monadelphous (MND) was a contributor to portfolio performance over the month. The company announced two major construction contract awards: the supply and construction of an overland conveyor and transfer station at Fortescue’s Christmas Creek mine and works associated with the expansion of Albemarle’s Kemerton Lithium Hydroxide Processing Plant. Monadelphous Managing Director, Zoran Bebic, stated that these contracts represented “the first in a new wave of major construction projects to come to market.” We continue to remain shareholders in MND, with the view that the medium-term earnings power of the company is significantly higher than its share price is currently capitalizing.
Detractors from Performance
• Healius (HLS) was subject to a conditional non-binding offer from another pathology services operator to acquire the company in March 2023, which offered some support to the shares in recent months. However, the stock underperformed the market in July in anticipation and later release of the ACCC’s preliminary finding that the acquisition would likely substantially lessen competition in Australian pathology services. This likely highlighted that the proposed offer might need to be revised before it is considered again. At current levels, we believe there is still value in the stock as the mark et is not yet fully appreciating the recovery in diagnostics volumes and the company’s refocusing initiatives.
• Sky City Entertainment’s (SKC) stock price underperformed the market during the month despite no material news that we were aware of. The company is now looking more attractive and is trading at close to its book value. The last time that SKC was trading at book value was in March 2020, the height of the COVID-19 “bear” market. We suspect the continued weak price performance was due to a recent regulatory inquiry into its Australian competitors Star Entertainment and Crown Resort. This regulatory enquiry unveiled some questionable industry behaviour primarily in the international business. In early July 2022, the South Australian gaming regulator notified SKC that they intend to undertake an independent review of Adelaide operations. We believe casinos are a relatively defensive businesses and we have observed that casinos globally are performing strongly. We continue to be mindful of the regulation risk for SKC, testing potential negative scenarios whilst acknowledging these outcomes cannot be predicted.
Performance Commentary - June 30, 2023 Australian equities rallied in June 2023 and closing Q2 2023 in positive territory up by +1% as investors shrugged off recession fears amid a local retail spending rebound and easing of inflation. The S&P/ASX 200 rose +1.8% in June, underperforming the Developed Market World during the month, on softening rate hike expectations. Australian 10 – year bond yields sold off by 0.42bps to 4.02%, as the Reserve Bank of Australia’s (RBA) June meeting saw the cash rate hike by 25bps, to 4.10%. On a sector basis, Materials was the strongest performer, while Information Technology, and Financials also outperformed for the month. The Health Care and Communication Services sectors were the relative worst performers.
During the quarter ended June 2023, the Lazard Select Australian Equity Fund returned 3.2% (net of W Class fees), outperforming the S&P/ASX 200 Accumulation Index which returned 1.0%.
Contributors to Performance
• SmartGroup’s (SIQ) share price rose by more than 20% over the quarter. In early April 2023, SIQ announced that former The Star Sydney CEO Scott Wharton would be succeeding outgoing CEO Tim Looi. The company then presented at the Macquarie Conference in May and a provided a positive trading update. There was growth across novated leasing leads, orders, settlements, and yields. In mid-June 23, Eagers Automotive (APE) announced that it had acquired an economic interest of above 5% in McMillan Shakespeare (MMS), the key competitor to SIQ in the salary packaging and novated lease sector. The market has subsequently viewed APE’s strategic investment in MMS as a vote of confidence in the potential growth of the novated lease sector, following recent legislation that provides fringe benefit tax (FBT) exemption to novated leases of electric vehicles below ~A$85,000. SmartGroup (SIQ) may be a key beneficiary of this Government legislation, and we remain shareholders.
Detractors from Performance
• Monadelphous (MND) underperformed the index over the current quarter. Whilst there was no attributable company announcement, a combination of global recession fears, weakening commodity prices, and lack of major contract wins weighed on the share price. We remain shareholders in MND, as we believe its shares are attractively priced. The medium – term backdrop remains positive for MND with strong capex growth projected across various commodities. However, tight labour availability in the industry is proving a short-term headwind to meaningful engineering construction contract wins. Nonetheless, as this normalises, we believe that MND’s earnings power is significantly higher than the current base. MND currently trades on <8x our assessment of normalised ebit, with is undemanding relative to its long-run average 10.0x, upside risk earnings forecast. moreover, the company holds nearly a$200m in net cash.
Performance Commentary - May 31, 2023 Australian equities fell through May 2023 with the S&P ASX 200 index closing down -2.5% for the month, on continued rate hike expectations from central banks and concerns around US law makers intentions on the country’s debt ceiling. Australian 10-year bond yields sold off by 0.26bps to 3.60%, on the resumption of rate hikes by the Reserve Bank of Australia to 3.85% in the May 2023 meeting. On a sector basis, Information Technology was the strongest performer, while Utilities and Energy also outperformed. The Consumer Staples and Consumer Discretionary sectors were the relative worst performers.
During the month ended May 2023, the Lazard Select Australian Equity Fund returned -2.2% (net of W Class fees), outperforming the S&P/ASX 200 Accumulation Index which declined -2.5%.
Contributors to Performance
• Aurizon’s (AZJ) shares rose 3% during the month outperforming a declining market. Early in the month the company presented at the Macquarie Conference where earnings guidance for the 2023 financial year was confirmed. With an increasing number of earnings downgrades in the market due to an apparent slowing in consumer spending, these earnings were welcomed by the market. We continue to favor Aurizon’s defensive earnings profile, cash generation ability as well as the growth supplement from the Bulk division. We believe the market continues to price the company on very modest expectations, as we continue to hold our positions.
Detractors from Performance
• Mayne Pharma (MYX) underperformed the market in May. Earlier during the month, the company released a Market Update to 3Q’FY23 and announced an on-market share-buyback of up to 10% of the issued share capital. The trading update confirmed the net cash balance and highlighted that all the businesses were now delivering positive EBITDA. Within Women’s Health, Nextstellis is expected to reach breakeven during 1HFY24. Despite the recent share price underperformance in May, the trading update provided comfort to our thesis that MYX is significantly undervalued.
Performance Commentary - April 30, 2023 Australian equities rallied over April 2023, as a slowing inflation rate (Q1 -23 headline 7.0% y/y vs 7.8% previously) prompted a reassessment on the need for any further rate hikes from the RBA at that time. The S&P/ASX 200 Index rose +1.9% during the month outperforming the DM World Index, on the back off with strong Australian consumer sentiment underpinned by an RBA interest rate hike pause to 3.60% in April. Australian 10-year bond yields tracked sideways as the cash rate remained unchanged, rallying 4bps to 3.34%. On a sector basis, REITs were the strongest performer, while Information Technology, and Industrials sectors also outperformed on a relative basis. The Energy, Utilities and Materials sectors were the relative worst performing sectors.
During the month ended April 2023, the Lazard Select Australian Equity Fund returned 1.4% (net of W Class fees), underperforming the S&P/ASX 200 Accumulation Index which returned 1.8%.
Performance Commentary - March 31, 2023 The S&P/ASX 200 fell -0.2% during the month of March 2023 and closed Q1 2023 returning 3.5% for the quarter on the back of slowing earnings momentum and continued rate hikes by the Reserve Bank of Australia, raising another +0.25bps to 3.60% during the month of March. Australian 10-year bond yields moved in reaction to slowing inflation, rallying 56bps to 3.30%. During the month, the Materials was the strongest performer, while Communication Services and Consumer Discretionary sectors also outperformed in Australia. The Energy, Financials and REITs sectors were the relative worst performers.
During the quarter ended March 2023, the Lazard Select Australian Equity Fund returned 1.1% (net of W Class fees), underperforming the S&P/ASX 200 Accumulation Index which returned 3.5%.
Contributors to Performance
• Collin’s Foods (CKF) had a strong quarter as the stock rose around 15% in Q1 2023. The strong share market bounce has been led by companies that fell the most in 2022. While we believe CKF is undervalued and expect good returns in the years ahead, the near-term bounce in the CKF share price seems to be consistent with this broader market dynamic.
Detractors from Performance
• Costa’s (CGC) share price fell during the Q1 2023 while the market posted modest gains. The company reported a weak CY22 profit result, in line with expectations. The largest driver of the soft profit result was a lower quality citrus crop which achieved significantly reduced prices. While recovery to normal conditions may result in a significant profit boost the market remains wary after several years of volatile earnings. CGC is also due to appoint a new CEO, adding to the ‘wait and see’ attitude. We note that previous owner Paine Partners bought more shares on market during the quarter which confirms strategic interest in the assets. We continue to believe the earnings power of CGC’s assets is much higher than what we see today and hence continue to hold our positions.
Performance Commentary - February 28, 2023 February was a weak month for equities, as company results illustrated waning earnings momentum. The S&P/ASX 200 declined -2.4% during February 2023, as the RBA’s 25bps rate hike to 3.35% placed pressure on the already decelerating economy. Australian 10-year bond yields moved in reaction to tightening monetary policy, selling off 30bps to 3.86%. Commodity prices fell across the board. In Australia, Utilities was the strongest performer, while Information Technology and Industrials also outperformed. The Energy, Financials and Materials sectors were the relative worst performers.
During the month ended February 2023, the Lazard Select Australian Equity Fund returned -2.5% (net of W Class fees), modestly underperforming the S&P/ASX 200 Accumulation Index which declined -2.4%.
Contributors to Performance
• Eagers Automotive (APE) shares rose 20% during February on the back of a strong CY22 result. The key driver of the positive share price response was the above consensus turnover guidance for CY23. With conservative assumptions, APE expect to earn A$9.5-10 bil of turnover which was 4-10% above prior consensus expectations. Management further detailed their expectations that margins will be ‘stronger for longer’ resulting in much larger increases in profit forecasts than the increase in turnover. Beyond 2023, we believe APE is well positioned to prosper in the transition to EVs and the company has a balance sheet that provides flexibility to capitalize on opportunities.
Detractors from Performance
• Monadelphous (MND) underperformed the benchmark in February. At the announcement of its 1H23 result, management flagged that the award of resource construction contracts continues to be delayed due to labour capacity constraints. However, the pipeline of work available remains robust and the resource capex cycle provides a positive medium-term backdrop for MND. In FY23, we forecast that MND will generate the lowest level of revenue in its E&C segment since preFY07. At the current share price of just over A$12, albeit a net cash balance amounting to ~A$2 per share, MND trades on 22 times forecast FY23 earnings. However, we think earnings could nearly double in the medium-term, as along with its maintenance division, which has been a quiet achiever with compound revenue growth of 15% per annum since 2004, MND will grow earnings strongly off this low base once awards are eventually worked through.
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