Lazard reveals multi-strategy plans, and toughest investor questions

Lazard Asset Management is readying its multi-asset emerging markets strategy in Ucits format. Portfolio manager Jai Jacob explains the plans, and reveals the most probing question he ever faced from investors.

What is in general the case for choosing multi-asset class when it comes to emerging markets – and is this argument perhaps even stronger in developing markets than elsewhere?

The emerging markets have matured considerably over the past 15 to 20 years. Equity markets in emerging economies are more correlated to developed markets as a result of globalisation and different equity styles and market caps have begun to demonstrate distinct patterns of performance. Fixed income markets have moved well beyond the US dollar-denominated sovereign field of 15 years ago, with local currency and corporate debt playing an increasingly important role in the emerging markets opportunity set.

The growth in emerging markets has been widely discussed and understood by most investors.

However, in our view, the marketplace has yet to widely appreciate the range of opportunities within emerging markets, focusing instead on listed equity markets, and as a result characterising emerging markets as a high-risk asset class.

In most asset allocation frameworks, high-risk assets receive less capital and investors are left with the conundrum: a 5% allocation isn’t large enough to benefit substantially from the macro-economic fundamentals in the developing world, but larger allocations increase the overall portfolio risk excessively.

Multi-asset approaches to emerging markets address this problem by lowering the risk. The inclusion of bonds and currencies, which have much lower levels of volatility than outright equity investment, buffer the risk, decreasing the volatility and market risk considerably, while still allowing the possibility to take advantage of the benefits inherent in the broader asset class.

For Lazard’s strategy, on what basis is allocation decided – top down macro calls, or bottom up?

Our approach employs a ‘confederation of specialists’ to build a single portfolio. We do not believe that a group of generalists can fully appreciate the depth of the existing opportunities in the space.

Lazard has different teams with highly specialised skill sets, each using discreet portfolio construction approaches in equity and debt universes. Bottom-up security selection is provided by these portfolio management teams, each of which builds a component of the overall portfolio according to its respective processes.

A separate, independent team then allocates capital to those teams based on the applicability of each set of skills to the macro environment. In this way, each portfolio management team is accountable for their sleeve, and the asset allocation team is accountable for weighting the sleeves dynamically.

Is a fund planned?

The strategy has been running since June 2009, with approximately $500m in emerging markets multi-strategy assets. Funds exist in the US and a Dublin based Ucits fund is currently being planned for the third quarter of 2011, subject to regulatory approval.


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