U.S. Mid Cap Equity
Lazard U.S. Mid Cap Equity seeks to generate strong relative returns over a long-term time horizon by investing in companies with strong financial productivity at attractive valuations. The strategy typically invests in 50-70 securities of companies with a market capitalization of between $1 billion and $10 billion, or that comprise the Russell Midcap Index.
PERFORMANCE
UPDATE (as of
06/30/2008
)
| Annualized Returns |
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Performance is presented gross and net of all fees. Net of fees performance has been calculated using a 3.0% fee assumption. Gross of fee performance is presented as supplementary information, as performance excludes transaction costs. Please refer to the disclosures for important additional details of this composite. The performance quoted represents past performance. Past performance does not guarantee future results. |
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| Lazard | Russell Midcap Index |
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| Number of Securities | 72 | 810 | |||
| Current Dividend Yield (%) | 2.0 | 1.7 | |||
| Average Weighted Market Cap ($ billions) |
6.1 | 7.9 | |||
| Turnover – Trailing 12 Months (%) |
75.9 | N/A | |||
| Characteristics |
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| Sector Allocation | Weighting % | |
| Financials | 17.2 | |
| Information Technology | 13.7 | |
| Energy | 13.6 | |
| Industrials | 12.9 | |
| Consumer Discretionary | 11.3 | |
| Consumer Staples | 9.9 | |
| Health Care | 9.4 | |
| Materials | 6.6 | |
| Utilities | 4.2 | |
| Telecommunication Services | 1.4 | |
| Equity | 95.2 |
| Cash and Equivalents | 4.8 |
| Financials | 16.3 |
| Ameriprise Financial | |
| CBL & Associates Properties | |
| City National | |
| Federated Investors Cl B | |
| Hudson City Bancorp | |
| Lincoln National | |
| Marsh & Mclennan Companies | |
| Marshall & Ilsley | |
| OneBeacon Insurance Group | |
| PartnerRe | |
| Public Storage | |
| RenaissanceRe Holdings | |
| The St. Joe Company | |
| Willis Group Holdings | |
| Information Technology | 13.0 |
| Agilent Technologies | |
| Analog Devices | |
| Arrow Electronics | |
| Brocade Communications Systems | |
| Flextronics International | |
| Ingram Micro Cl A | |
| Lexmark International Cl A | |
| NeuStar | |
| Sybase | |
| Energy | 12.9 |
| BJ Services | |
| Exterran Holdings | |
| Foundation Coal Holdings | |
| Holly | |
| Massey Energy | |
| Patterson UTI Energy | |
| Pride International | |
| Sunoco | |
| Williams Companies | |
| Industrials | 12.3 |
| Cintas | |
| Covanta Holding | |
| Dover | |
| Masco | |
| Pitney Bowes | |
| Spirit AeroSystems Holdings Cl A | |
| Industrials (cont.) | |
| Textron | |
| USG | |
| WESCO International | |
| Consumer Discretionary | 10.7 |
| Brinker International | |
| Darden Restaurants | |
| Foot Locker | |
| Goodyear Tire & Rubber | |
| Hanesbrands | |
| J.C. Penney | |
| Leggett & Platt | |
| Liz Claiborne | |
| Pacific Sunwear of California | |
| Consumer Staples | 9.4 |
| Campbell Soup | |
| Coca-Cola Enterprises | |
| Hershey | |
| McCormick & Company | |
| Molson Coors Brewing | |
| Smithfield Foods | |
| Health Care | 9.0 |
| Applera-Applied Biosys | |
| Barr Pharmaceuticals | |
| Forest Laboratories | |
| Hospira | |
| Omnicare | |
| Warner Chilcott Cl A | |
| Materials | 6.2 |
| Ball | |
| Bemis | |
| Intl Flavors & Fragrances | |
| Louisiana Pacific | |
| Packaging of America | |
| RPM International | |
| Utilities | 4.0 |
| American Electric Power | |
| PPL | |
| Wisconsin Energy | |
| Telecommunication Services | 1.3 |
| Citizens Communications | |
The rally that began in mid-March in the aftermath of the near collapse of investment bank Bear Stearns continued until mid-May. Stocks generated sizeable gains, eliminating their losses for the year, powered in particular by the surging energy and materials sectors. However, investor optimism proved misplaced, as equities fell heavily from mid-May to the end of the quarter as concerns weighed on investor sentiment. Among these worries was the price of oil, which climbed unchecked to breach $140 per barrel towards the end of June, contributing to concerns that the economy may be entering a stagflationary period of lower growth and higher inflation. In addition, home prices continued to record significant decreases, and a key consumer confidence measure touched a 16-year low. Comments from U.S. Federal Reserve officials implied a greater focus on inflationary pressures, shifting investor expectations from further rate cuts to potential rate increases.
From a sector perspective, there were renewed concerns about the health of financials. Many financial stocks fell due to fears that the credit crisis is not over and investor expectations of further losses from additional write-offs. Moreover, the downward housing spiral and rising energy costs continued to weigh on consumer discretionary stocks. The consumer staples sector failed to play its usual safe-haven role during market turbulence due to a confluence of rising input costs and fears of a significant consumer slowdown. Conversely, the energy and materials sectors continued to lead the markets, further widening the return gap with other sectors on a year-to-date basis.
The strategy benefited from stock selection in the energy sector, as holdings in coal producers Massey Energy and Foundation Coal rose sharply during the period. These stocks have performed well, as prices for coal used in power plants and steelmaking climb to new highs amid surging demand. Conversely, stock selection in the industrials sector detracted from performance. Some of our holdings with exposure to the aerospace industry, such as Spirit AeroSystems and Textron, lagged due to concerns over the impact that high fuel prices will have on the demand for new aircraft. However, we are confident that these companies will benefit from multi-year contracts and diverse backlog of aircraft demand, particularly since new planes are far more fuel efficient. Stock selection in the consumer staples sector also detracted from performance. Smithfield Foods, the world’s largest hog producer and pork processor, declined after reporting disappointing earnings as a result of surging feed costs. However, we believe that the company will benefit as hog prices improve, offsetting higher the feed costs. Coca-Cola Enterprises, a company that bottles and distributes the Coca-Cola Company’s beverages, declined after reporting disappointing earnings for the most recent quarter. Sales in North America were hurt by slowing demand for immediate-consumptions products due to slower traffic at gas stations and convenience stores.
We believe our focus on companies that generate strong free cash flow with valuations below historical norms should add value in this uncertain economic environment. While we have avoided many of the companies directly affected by the credit crisis, we have been negatively impacted by a lower exposure to selected industries within the energy and materials sectors, which have dramatically outperformed. We continue to avoid areas such as these, where companies are operating beyond peak margins and trading at historically high valuations. However, recent volatility has created opportunities among high-quality, consistently profitable franchises trading at attractive valuations.
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