Ryan, manager of the Lazard Global Equity Income fund, says the recovery in the developed world has made many of the core income stocks – such as pharmaceuticals and consumer staples – look expensive. Instead, he’s setting his sights on the battered and bruised emerging markets, pushing his exposure up to the maximum allowed, at roughly 30 per cent of the fund.
“I’m extremely bullish on emerging markets. We are the highest we can be in emerging markets,” he said.
Ryan says he’s continuing to “peck away” at the region and has recently made a foray into Brazilian consumer stocks, which have been so dampened by sentiment that the prices have fallen within a range he considers cheap. “The story of rising living standards (in emerging markets) continues,” he said.
However, Ryan says the upcoming World Cup and subsequent Olympics are in fact a negative for Brazilian companies because consumers will stay indoors watching matches rather than going out and buying things.
“The World Cup is a negative unless you sell beer,” he joked.
A bullish view on emerging markets has been a difficult place to be, particularly since last summer, but Ryan says the tide is turning and says there’s been a “shift to value” in markets in recent weeks.
Performance of indices since May 2013
Source: FE Analytics
“For 22 weeks money has been coming out of emerging markets. In the last few weeks money has been coming back into emerging markets.”
“When you see sharp outflows like that, you tend to see pretty strong performance for the next 12 months,” he said.
While he doesn’t see the recovery in the developed world reversing or slowing down, the manager does think stocks in the US look expensive, which is another reason he’s set his sights on emerging markets.
“The US is the place I like the least. People have got too excited. Europe is more appealing, though not as compelling as emerging markets,” he said.
The manager says he currently has the lowest exposure to the US he’s ever held.
“We’re typically underweight (the US) but it’s more dramatic than usual,” he said.
The fact that he doesn’t seen a doomsday scenario for the developed world is exactly why Ryan thinks emerging markets are set for a turnaround. He says the idea that emerging markets have “decoupled” from the West is unrealistic.
“When things get better in the US and Europe, the emerging markets feel it. The world is globally integrated, how can a recovery be bad for equities anywhere,” he said.
The manager is so confident in the region he’s even buying into Russia, which has seen more than a few questions raised in the ongoing conflict with Ukraine.
“We have added to our Russian exposure. It was the cheapest market in the world before this and it’s got cheaper since. The economy will not grow this year, but we still think it’s an attractive buying opportunity,” he said.
Ryan adds that global recovery bodes well for managers with a value-bias in their investment process.
“Value tends to outperform when there is economic acceleration. With a global synchronised recovery, you should see a rotation into value stocks,” he said.
The £337.1m fund is yielding 3.7 per cent, making it one of the highest-yielding funds in the IMA Global Equity Income sector. The highest yielding fund in the sector is the Sarasin Global Higher Dividend fund, which is yielding 4.54 per cent.
The fund has performed in line with the MSCI World index over the last one, three and five years, though it has lagged its peers in the IMA Global Equity Income sector over each period.
Since launch in October 2007, the fund has made 36.6 per cent, behind both the sector and index which made 45.2 per cent and 42.72 per cent, respectively.
Performance of fund vs sector and index since 2007
Source: FE Analytics
The underperformance is largely due to Ryan’s bullish view on emerging market equities, which have been largely out of favour over the last several years.
However, the fund did have a more difficult time in the down markets of 2008 and 2011, losing more than its peers in each calendar year, though it did outperform the MSCI World index in 2011.
The fund had a strong 2012, returning 14.36 per cent while the sector and index returned roughly 10 per cent, but it trailed both measures in 2013 and so far this year.
Beyond a punchy weighting in emerging markets, the fund has nearly 30 per cent invested in the US and 20 per cent invested in continental Europe. For investors looking to diversify their equity income exposure away from the UK, the Lazard fund could be a good choice as it has just 4.2 per cent invested in UK stocks.
Financials are the largest sector weighting in the portfolio, dominated by emerging market banks in China, as Ryan previously highlighted. Telecommunications, media and technology stocks are the next highest weighting, followed by consumer products.
Lazard Global Equity Income has ongoing charges of 1.06 per cent.
