While investment returns from publicly traded real estate securities have been more volatile than expected in the last number of years, over the long term, real estate securities have typically delivered investors attractive risk-adjusted returns when compared to other asset classes. In addition, publicly traded real estate securities generally give investors income stability, diversification, inflation-protection potential, and liquidity. The past may be a prologue in many situations, but we believe the long-term performance and differentiated investment attributes of publicly traded real estate (especially in the context of lower return expectations and heightened global unpredictability) warrants consideration of an allocation to the asset class.
(October 2011)
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In recent years, globalization has extended to more and more areas of life. It is therefore astonishing that investors lag far behind the developments of the real economy: Although the share of foreign investments compared to domestic investments has grown steadily in recent years, investments across asset classes still show a pronounced home bias, an overproportional weighting of the home market. This preference for the native currency historically has been pronounced in the area of fixed income.
(September 2011)
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Conventional wisdom holds that Korea, as one of the strongest and fastest-growing of the "Asian Tigers," affords investors little more than a convenient play on global growth, along with the attendant exposure to potential U.S., European, and global downturns. Deeper investigation, however, reveals that maintaining such a view could cause investors to overlook a market we believe is worthy of consideration in its own right.
(September 2011)
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Equities and low risk are rarely mentioned in the same sentence. The recent regular and extreme bouts of volatility have increased the questions raised about the risk/return profile of the asset class. Yet despite these concerns, we believe institutional investors still need equity as a key building block of their asset mix. We think low-volatility equities are a solution for those who cannot tolerate the volatility in asset prices, but need the long-term capital appreciation that equity offers. If successfully implemented, evidence suggests you can achieve equity-market returns with a strong risk/return trade-off through low-volatility stocks. As we will demonstrate, a fully diversified portfolio of low-volatility stocks can have profound implications on an investor's portfolio structure and asset mix.
(August 2011)
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The consensus on Japan within the investment community has become increasingly bearish as 2011 has progressed. March's tragic earthquake and the government's indecisiveness have only added to the preconceptions many already have of the Japanese market. Investors may be correct when they point to Japan's large debt obligations and aging population, but such headlines can be misleading and may distract from a convincing argument of a brighter future for Japanese equities. When people automatically expect the worse, they may be surprised at the weight of evidence for just the opposite.
(June 2011)
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Emerging-market debt has become a recognized asset class in its own right, with a maturity mirroring that of its constituent countries. While recent performance and asset flows in emerging-market bond funds may appear atypically strong, we believe these economies’ outperformance is supported by sound underlying fundamentals.
(January 2011)
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In this paper, we attempt to provide a short summary of the chain of events that contributed to the financial turmoil of the years 2007–2009 in order to find out which drivers are still in play, what has changed as a result, and what this all might portend for the next few years. In summary:
- The process that led to the financial market crisis of 2007–2009 was a complex interaction of government failure and market failure, where neither the public nor private sector worked efficiently in the context of capital markets or decision theory.
- We believe that investors' risk aversion will remain relatively high going forward. In view of the rising wealth worldwide, it is very likely that the demand for safe investments will keep rising as well. On the other hand, the offer of safe investments will probably decline.
- Great opportunity, in our experience, is found during times of great uncertainty. Currently, we believe investors that are selective, tactical, and focused on total returns can find opportunities in U.S. Treasuries; Agency mortgage-backed securities; lower-rated corporate bonds; municipals and/or Build America Bonds; emerging market local currency debt from countries with healthy balance sheets and that are suppliers of raw industrial goods and sophisticated services; and in convertibles. However, each opportunity needs to be analyzed to ensure that it fits the investment objective, and should be considered within the context of the current investment environment.
(December 2010)
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The economic and capital markets volatility of recent years has reduced the attractiveness of equities to many investors and has led to unprecedented inflows into fixed-income mutual funds. However, the yields available in fixed-income markets were already low by historical standards, and the recent flows of money have further reduced those yields. Conversely, dividend yields have begun to rise, as corporate earnings continue to recover. In our view, equities can be a means of securing a high yield, and a global portfolio of equities can be an effective method of achieving that yield. Even more, an unconstrained portfolio can access the most attractive high-yielding stocks globally, thus potentially maximizing income and capital growth. (December 2010)
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After almost 30 years of significant but non-uniform economic growth, the developing world has grown so disperse that the very term "Emerging Markets" has been criticized as being too broad and obsolete. In our view, it is precisely this heterogeneity that beckons a multi-strategy structure. We believe that a well-considered emerging markets strategy today needs to deploy different portfolio construction methods—indeed, different fields of human expertise—at different times to unlock the latent value in the markets. Bottom-up stock selection versus top-down macro, regional versus global, sovereign versus corporate, growth versus value, debt versus equity... increasingly, every choice changes the pattern of returns and risks an investor faces. A multi-strategy approach provides a two-layered solution: specialized portfolio managers selecting securities and building strategies, and a dedicated team allocating capital to them. (July 2010)
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Most observers of the European Monetary Union (EMU) have long known that political leaders in the 1990s decided to follow an extremely bumpy road to get to the political union of Europe by creating a currency union as the first step. In light of the many inconsistencies in the setup of this currency union, it was an enormous success that the EMU had no substantial crises for 10 years—in spite of the increasingly obvious undesirable developments and imbalances. The surprising thing about the crisis of the European periphery is actually not that there is a crisis, but that it took so long for the outbreak to occur. (July 2010)
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The current crisis has challenged a host of established investment analysis methodologies used to identify, measure, and allocate risk, including mean reversion, the normal distribution pattern of returns, and the long-term stability of expected correlations. While backward-looking, historical data are both interesting and important tools of financial analysis, we believe that, in today's environment, successful investing requires forward-looking, fundamental research, robust scenario analysis, and a disciplined investment process. (May 2010)
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During the first half of the 2000-2009 decade, low interest rates facilitated and even encouraged excessive levels of leverage throughout the economy. Increased levels of risk-taking activities during this period enticed investors to buy equities with leveraged business models, enabling them to grow earnings faster than they otherwise could have. This paper will demonstrate how the market is beginning to recognize that debt service costs cannot decline much further, due to the already low absolute level of interest rates. Historically, after emerging from a recession, companies could lower their debt service costs and enjoy the earnings leverage that debt affords. We believe that, in this and future cycles, debt costs are more likely to increase, offsetting the tailwind of economic recovery and potentially eliminating the earnings leverage that debt was supposed to provide. (January 2010)
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Equity investors have traditionally borne the risks of equity investing in pursuit of higher long-term returns; risk was generally managed relative to a benchmark and it was framed in terms of tracking error, beta, information ratios, and diversification relative to a capitalization-weighted benchmark.There was little attention paid to absolute level of risk; investors simply accepted it, as they were taught that their returns would be commensurate with the risk.However, the last few years have highlighted that risk is multi-dimensional and remarkably unpredictable. What does this mean for equity investors?One reaction on the part of many investors has been to lower risk in their equity portfolios by abandoning active management and retreating to the apparent safety of the index. Does this actually address the fundamental issue of lowering risk of an equity portfolio?Also, if one holds that equity investing will produce higher asset class results over time, is it possible to lower risk in the equity portfolio without sacrificing long-term return?This paper introduces an alternative approach, developed by the Lazard Quantitative Equity (LQE) team, to managing equity risk, which focuses on controlling total portfolio volatility at the expense of traditional benchmark-relative risk measures.The LQE – Passive Volatility and LQE – Controlled Volatility strategies are designed to create portfolios that minimize expected volatility and preserve broad sector, capitalization, and regional diversification. The LQE – Passive Volatility strategy controls risk through long-term measures. The LQE – Controlled Volatility strategy integrates both a long-term and short-term perspective on risk and, consequently, has a higher sensitivity to changing risk conditions.Lazard also offers a third version of this approach, the LQE – Managed Volatility strategy, which incorporates our stock ranking process. [Further detail on this approach is provided in another Lazard Investment Focus paper, “Managed Volatility: Market-line Returns for Less Risk?”] These three strategies are collectively referred to as the LQE Managed Equity Risk strategies. (September 2009)
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In what can be considered one of the biggest breakthroughs in recent years, on October10, 2008, the U.S. Securities and Exchange Commission (the SEC) adopted new rulesthat have considerably increased the number of American Depositary Receipts (ADRs)available to investors. Following these changes, one potential drawback of investing inADRs has been essentially eliminated: In the past, the limited availability of ADRs wasa possible concern; today, U.S. investors looking to diversify internationally can takeadvantage of a significantly expanded opportunity set, with ADRs covering approximately90% of the large cap portion (those companies with market capitalization greaterthan $5 billion) of the MSCI EAFE Index as of July 31, 2009. (May 2009)
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Given the current macroeconomic uncertainty, investors worldwide remain concerned about the deterioration in demand for products of companies in all sectors, including information technology (IT). While these concerns are reasonable, at Lazard we believe that many IT subsectors will fare better than the overall economy and better than they did during the last macroeconomic slowdown of 2001-2002. (May 2009)
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Tollroads are a large part of Lazard’s Preferred Infrastructure universe, a subsetof the wider infrastructure sector that have the following investment characteristics:longevity of assets, potential low risk of capital loss, and inflation-linkedrevenues—all of which can produce attractive returns for investors. We onlyinvest in infrastructure companies within this universe.At Lazard, we believe that Preferred Infrastructure companies will deliver highrevenues and profits over the long term. Tollroads are some of the “more preferred”infrastructure assets in our Preferred Infrastructure universe. Despite this,share prices of tollroad stocks have been quite volatile in recent times, and itseems opportune to review how these assets work from an investment viewpoint. (March 2009)
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Finance theory suggests that to get more return from an investment one needs to takeon additional risk. For students and practitioners of finance alike, this equilibrium is basic,as simple as the idea that the more you brush your teeth the fewer cavities you willdevelop. According to Modern Portfolio Theory (MPT), and the Capital Asset PricingModel (CAPM) in particular, if investors hold the market portfolio (widely represented bythe MSCI World Index, FTSE All-Share Index, S&P 500 Index, or local index equivalents),the risk of individual securities will be diversified away. You can thereby pocket the equityrisk premium at the lowest risk level, giving you the optimal risk/return trade-off. Whatever your risk tolerance, you can adjust your risk level by holding a combinationof cash and the market portfolio (index) or, alternatively, leverage up the market portfolio.You can therefore go to bed at night comfortable in the knowledge that you are holding the most efficient portfolio from a risk/return perspective, whatever the direction of themarket. Or can you? The answer, according to research undertaken by the LazardGlobal Quantitative Equity team, other practitioners, and academics, seems to be an overwhelming “no.”
(March 2009)
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We are in the midst of a secular change in the operating environment of virtuallyevery company. To position their portfolios for the decades ahead, investors need to accept the premise that the era of declining rates of inflation—otherwise known as disinflation—has come to an end. The changing operating environment has important implications in terms of how investment managers are evaluated andhow portfolios, both equity and fixed income, are positioned. (February 2009)
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Europe’s investment landscape has changed. Investors’ perceptions of risk and reward, which had been shaped by nearly ten years of outperformance by smallandmid-cap stocks, may need to be adjusted. Large-cap stocks, which had been overlooked in recent years, present a powerful combination of quality and valuethat Lazard believes may offer higher relative performance in both today’s highly challenging market conditions and quite possibly for many years to come.
(December 2008)
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The recent financial-market turmoil has accentuated the case for global fixed-income portfolio diversification. If properly managed, global fixed-income investments can potentially generate strong risk-adjusted returns compared to pure domestic strategiesover many time periods, providing a strong case for diversifying and balancing portfolios—especially during periods of equity market weakness. Additionally, global opportunities to rotate through bonds, credit, and currencies have expanded rapidlyand continue to do so. (September 2008)
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Currently, there is a major developed stock market where almost 60% of stocks are trading at less than their book value, where corporate profitability is rising, where balance sheets are generally unencumbered by high levels of debt, and where the domestic financial sector has largely steered clear of the turmoil in credit marketsand its toxic consequences. That market is Japan. The Japanese equity market often inspires a range of investment views. We reviewsome of the different strands of opinion on Japan that currently exist at Lazard. We also ask whether the criticism leveled at Japanese corporate governance practices is warranted. (September 2008)
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In 1927, Lazard Frères & Co., along with Lehman Brothers,created one of the first closed-end funds in the UnitedStates, General American Investors, which was listed on theNew York Stock Exchange. It soon ushered in an era whenclosed-end funds dominated the investment world—until theGreat Depression, that is. Eighty years later, this first U.S.closed-end fund has survived the euphoria of bull markets andthe ravages of bear markets, economic booms and busts, and it is still going strong.
(April 2008)
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