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A lower risk way to boost small-cap exposure

Glenn Freeman  |  15 Jan 2018Text size  Decrease  Increase  |  
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Morningstar views this fund as one of the best ways investors can access quality small-cap companies.

As a bronze medallist Morningstar-rated fund, the Lazard Global Small Cap W (10701) is currently our highest-rated fund in the space, "favouring high quality shareholder-focused companies with healthy returns and economic moats".

"That should be rewarded in the long run, given the fund's experienced team and sensible process," says Alex Prineas, associate director, manager research at Morningstar.

While the fund's small-cap process seeks growth at reasonable prices, the portfolio can display both value and growth characteristics.

"They filter for companies with low price multiples relative to their return on equity, returns on assets and operating margins," Prineas says. The equity management team uses discounted cash-flow analysis along with "sum-of-the-parts analysis" for more complex businesses.

"In contrast to deep-value managers with very long time horizons, Lazard demands to see some catalyst for change, be it an impending management change or a share buyback.

"Analysts attach price targets to stocks and trim and add as prices rise and fall," Prineas says.

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The portfolio runs a relatively even split between companies classed as mid-cap and small/micro-cap--54 per cent and 46 per cent, respectively--with a $2.8 billion average market cap.

With a near total focus on develop markets--it had less than 2 per cent exposure to emerging countries in 2017--the top five domiciles of represented companies are the US (42 per cent), Japan (12.5 per cent), UK (11.5 per cent), Canada (10.5 per cent) and Germany (5.6 per cent).

"The portfolio managers pull together ideas from all the regions to build a portfolio of between 60 and 90 stocks. They set only loose constraints on sector- and country-level deviations from the MSCI World Small Cap Index, which includes Australia," Prineas says.

The portfolio turnover has historically been moderate, at around 50 per cent annually.

"Lazard's focus on global small caps means this portfolio is likely to be populated with a lot of unheralded names. But Lazard invests only when it sees sufficiently attractive return on equity or return on assets, so although some holdings may be obscure, typically they are profitable businesses with long track records," Prineas says.

The top five holdings as at September last year were UK company RPC Group; Japan's TechnoPro Holdings, Luxembourg company Aroundtown SA, Canadian firm Spin Master Corporation and Japan's JAFCO.

Lazard typically holds only minimal exposure to defensive, yield-sensitive sectors such as utilities or listed real estate, though it has a modest amount in healthcare.

According to Prineas, "dominant hunting grounds have been consumer cyclicals, industrials, technology, and financials".

He emphasises the fund should only play "a supporting role" in retail investors' global equities exposure, in "helping round out a portfolio if the core portfolio has a bias" such as large-cap global stocks.

"But investors should expect higher volatility so need to make sure they can commit for the long-term," Prineas says.

"There aren't many global small-cap offerings available to Australian retail investors. The Lazard vehicle is slightly pricey compared with that limited peer group, but it's not a great comparison because many of the rivals are passive
or quasi-index strategies," Prineas says.

As such, he believes Lazard Global Small Cap's fees are "reasonable" and "about on par with most global-equity strategies".

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Glenn Freeman is Morningstar's senior editor.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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