A good idea can come in any shape or size for Mark Little, portfolio manager of Lazard International Strategic Equity Portfolio. This research-intensive, no-load fund with $425 million in assets uses an approach that's part art and part science to identify some of the best-priced growth companies outside the U.S.
Although International Strategic Equity is less than two years old, it follows the same investment approach Lazard Asset Management has applied to its other portfolios for about ten years. Lazard, with offices in ten cities in seven countries, manages about $120 billion in total.
Little describes International Strategic Equity (symbol LISOX) as "a collection of our highest-conviction ideas." The process begins with a 25-analyst network, divided into sector teams, that runs valuation screens to generate ideas.
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The science. The fund generally adheres to a growth-at-a-reasonable-price philosophy. Analysts look first at a company's ability to generate profit growth, then model future earnings and cash flow to determine the company's value. Analysts then meet with company executives to asses their commitment to growth, to improving profitability and adding value for shareholders.
Analysts then pitch their best ideas to Little. Interestingly, analysts are paid not only by how well their picks perform, but by how well they communicate their reasoning to portfolio managers. All of this means that Little is supremely well informed.
The art. Ultimate choices about portfolio composition are where the art side comes in. Little, who collaborates with two other managers and with analysts on final decisions, steers the fund to "wherever we find the best combination of potential returns and valuation." Little is willing to let his best ideas run and, at last report, had more than 30% of assets in the fund's top ten holdings.
German automaker DaimlerChrysler (DAI) was Lazard International Strategic's biggest holding as of June 30, accounting for 4.1% of its assets. Little says that DaimlerChrysler embodies the commitment not just to growth but also to improving profitability that Lazard appreciates.
DaimlerChrysler came up with a new management model in early 2006 to reduce internal redundancies and speed the flow of information. Over the next year, the company took great strides to improve profitability in its Mercedes and global truck business, and then this past summer it sold its less-profitable Chrysler division.
For the most part, Lazard managers are tight-lipped about discussing their holdings. As of June 30, International Strategic Equity held 76% of its assets in the United Kingdom and western Europe, and 11% in Japan. The fund may invest no more than 30% of its assets in emerging markets, and historically Little has kept the fund's developing-market exposure below 10%. Little can invest in companies of any size. As of June, 76% of fund assets were invested in large companies.
Because the fund is relatively new, performance isn't especially meaningful. The Institutional share class, available since November 2005, returned 21% annualized from its inception through September 25. That trailed the MSCI EAFE index by an average of three percentage points per year.
Little says the fund has underperformed over the past year because of an early call to move out of cyclical stocks, particularly some mining companies. But, he says he expects Lazard's investment approach to shine in a weaker market. The newer retail share class of International Strategic Equity requires a $10,000 minimum initial investment and charges 1.45% in annual expenses.
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