Performance Review 2006
Holger Mertens: "A positive economic environment supported further tightening in the European High Yield market. Because of a more cautious positioning than the overall market, the Lazard European High Yield fund underperformed in 2006."Performance Review 2007
Holger Mertens: "With the US subprime crisis as the turning point, the positive performance trend in European High Yield ended in summer 2007. In the second half of the year, investors took a more cautious stance on the credit markets. The fund’s performance was below its benchmark and peer group, as exposure to cyclical sectors (i.e. consumer goods) hurt performance."
Performance Review 2008
Holger Mertens: "In the aftermath of the bankruptcy of Lehman Brothers, the European High Yield market sold off in the 4th quarter, as default rates soared. The capital markets saw a massive flight to quality into German and US government bonds. Our value oriented approach helped us to avoid defaults. We were overweight more conservative business models (i.e. cable) and were able to outperform the benchmark and peer group."
Performance Review 2009
Holger Mertens: "In 2009 the European High Yield market recovered from the strong sell off in the 4th quarter of 2008. A strong recovery of distress bank bonds and lower than expected default rates were the main drivers of performance. The Lazard European High Yield Fund took a cautious stance on the banking sector and was overweight defensive names (i.e. cable). The fund performed inline with its peer group, but below the benchmark."
Performance Review 2010
Holger Mertens: "On the back of significant credit quality improvements, the European High Yield market was able to continue its positive performance trend. The market was less affected by the sovereign debt crisis than other markets. The Lazard European High Yield Fund increased its exposure to cyclical issuers (i.e. basic materials) and selectively participated in attractive new issues. The fund outperformed its peer group and its benchmark."
Performance 2011 - Year-to-Date
Holger Mertens: "The first months of 2011 mirrored the developments of 2010. The fund continued its good performance and stayed on top of its peer group."
Performance since 2006
Investment Process and Strategy – How does the Fund Manager invest?
Holger Mertens: "Lazard’s general investment philosophy and process are based on:
• Financial markets are not entirely efficient
• Only active management can seize the opportunities that arise from inefficiency
• Focus on fundamental oriented, bottom-up investment research
• Selection and risk management are key performance drivers
• In-house global research is key for superior risk-adjusted outperformance
Our investment process is focused on proprietary in-house research via our Corporate Research Platform. The most important source of our research is management meetings. As often as possible, we try to meet the management of companies in credit meetings or together with our equity colleagues. External research is secondary and may support decisions, but will never be our sole source of an investment thesis.
Our portfolios consist of a large number of diversified positions, predominantly derived from our in-house research analysts (credit/equity) and proprietary tools. At Lazard there is a team-oriented input process where everybody contributes investment ideas.
Every investment has to have an investment thesis, summarizing the results of the different analysis steps. Each change within the portfolio reflects a change in the investment thesis that documents the relative attractiveness assumption. If, after the re-evaluation of the investment thesis, the thesis does not convince any longer, the security in question will be reduced or sold.
After the identification of attractive investment ideas and portfolio construction, risk management steps in. The risk control is executed on a daily basis, providing the portfolio manager with all relevant risk figures and changes over time."
Investment Outlook
Holger Mertens: "In general, we expect a positive global macro economic landscape over the remainder of this year and the year to come. On the back of these benign developments, we believe default rates in the European High Yield market will stay low.
During the economic recovery over the last years, the average credit quality in the European High Yield market has shown significant improvements. We think that these improvements will enable most issuers to refinance maturing debt or repay it out of existing cash positions.
In the short term rising inflation rates could have a negative impact on operating margins, where companies lack the power to increase prices (i.e. food producer) to offset soaring raw material costs. In the long-term, we expect companies to adjust cost structures and see increasing inflation and interest rates more as a problem for the IG corporates and government bonds. Historically, the correlation between High Yield and interest rates was quite low.
Furthermore the European High Yield market is getting an increasingly important source of funding from mid size companies, as banks continue to deleverage themselves on the back of tighter banking regulation. As a result of this development, attractively priced new issuers are coming to the European High Yield market and offer a broader variety of investment opportunities.
This broader opportunity set, as well as the positive macro and micro environment should help European High Yield to extend the positive developments of the past years."
