Lazard Finds Gems in Emerging Markets, Beating Peersby
Russia, Brazil among nations targeted for selective investment
Fund focuses on trade-off between value and return on equity
As economic and political turmoil spurred an exodus of foreign investors from some of the biggest developing nations over the past year, Rohit Chopra held firm. Now his emerging-market equity fund is standing out from the pack.
The $9.2 billion Lazard Emerging Markets Equity Portfolio is beating 93 percent of its peers in 2016. Over the past 12 months, the fund underperformed 83 percent of its competitors, according to data compiled by Bloomberg.
The fund, which is overweight some equities in countries including Brazil, South Africa and Turkey, retreated 20 percent last year, compared with a 17 percent drop in the MSCI Emerging Markets Index benchmark, as markets tumbled amid economic and political tumult. The actively managed portfolio focuses on value stocks, and this year investors have returned to companies that are cheap relative to their profitability, fueling a turnaround in Chopra’s fund.
“You have to be able to assess the macro, the political and some of the corporate governance-related risks, and also acknowledge that economic growth in itself is not necessarily a recipe for stock market returns,” Chopra said by phone from New York. “It’s critical to have a disciplined process, and for us that means assessing financial productivity and valuation. For example, we don’t invest in momentum stocks because they’re doing well.”
Even as the market last year favored companies with growth potential over value, Chopra, who has 20 years of investment experience, said he stuck to the firm’s focus on equities that offer a trade-off between valuation and return on equity. An MSCI gauge of growth-oriented stocks outperformed the value-focused companies by 7 percent in 2015, and some of Chopra’s value-oriented companies, including Banco do Brazil SA, were among the biggest contributors to the fund’s decline in 2015.
This year, the MSCI EM Value Index has outperformed the MSCI EM Growth Index by 1.6 percent. The Lazard Emerging Markets Equity Portfolio has declined 1.8 percent this year, compared with a 6.2 percent drop in the MSCI Emerging Markets Index.
“One can say that very little differentiation and focus on financial productivity are symptomatic of fear in the market,” Chopra said. “A powerful factor of quality-at-any-price, the willingness by the market to pay a high multiple for what is deemed to be high quality, has started to see some contraction this year.”
Across emerging markets, Chopra finds value in selective consumer, telecommunications and financial stocks, where he said demand is “relatively elastic.” He doesn’t favor Internet companies.
History shows that economic expansion doesn’t always correspond with a booming stock market. A 2012 analysis of researchers at the London Business School that focused on 19 developed and emerging markets from 1900 through 2011 found that there was a negative 0.39 correlation coefficient between the real rate of return on equities and real economic growth. A study of 15 developing nations by University of Florida finance professor Jay Ritter drew a similar conclusion.
As China’s economy expanded 14.2 percent in 2007 and the nation’s stocks made up about 18 percent of the MSCI Emerging Markets Index, Chopra’s fund had no exposure to China, as he didn’t see any value companies then. Chinese stocks now make up 13 percent of Chopra’s portfolio, compared with about 20 percent in the MSCI Emerging Markets Index, data compiled by Bloomberg show. Russia accounts for about 8.7 percent of the fund, more than twice the weighting in the benchmark index, the data show.
Russia’s Micex Index fell 4.3 percent last year while the nation’s economy contracted 3.7 percent. The Standard & Poor’s Index slid 0.7 percent in 2015 as the U.S. economy grew 2.4 percent.
“Some people misperceive Russia as the Wild West,” Chopra said. “This is not a rosy environment by any means, but you have an independent central bank focused on markets, Russian reserves are still quite healthy, and employment has remained steady. We see a mispricing here, but I don’t think that one can just take a broad view and say, buy all Russian equities.”
Chopra’s fund has bought oil producer Lukoil PJSC, retailer Magnit PJSC, mobile carriers Megafon PJSC and Mobile TeleSystems PJSC and Russia’s largest lender, Sberbank PJSC, data compiled by Bloomberg based on the filings as of Dec. 31 show.
Turkish shares make up about 4.6 percent of the fund, compared with 3.1 percent for the benchmark. The companies Chopra holds include wireless carrier Turkcell Iletisim Hizmetleri AS and Akbank TAS, its second-largest publicly traded lender, data compiled by Bloomberg show.
Chopra sees opportunities in selective equities in Brazil, where the stock market has been beset by political uncertainty, soaring inflation and shrinking economic growth. Chopra, who is also overweight India and Indonesia, holds companies including Vale SA and Banco do Brazil SA, data compiled by Bloomberg show. Lazard Emerging Markets Equity strategy managed $24.9 billion, as of Dec. 31.
“Our decision on making an allocation to a country is based on absolute upsides,” Chopra said. “We don’t follow the benchmark on a day to day basis. If we don’t find fundamental value in an area, we will have no investment.”