Performance Review 2006Kun Deng and Team: "The Fund’s outperformance was driven primarily by good stock selection in Asia, particularly China, as well as amongst diversified global emerging market funds. Underweight exposures to the Middle East and Africa also helped returns. Over the period, the portfolio’s weighted average discount narrowed by approximately 170 basis points which added to returns."
Performance Review 2007
Kun Deng and Team: "The Fund’s underperformance was primarily a result of an underweight exposure in Latin America, in particular Brazil, as the region was a strong performer over the period. Stock selection in Mexico also detracted from performance. An underweight exposure to Asia, especially to India and Korea, also hurt performance. Over the period, the portfolio’s weighted average discount widened by approximately 785 basis points which hurt returns."
Performance Review 2008
Kun Deng and Team: "The Fund’s underperformance was primarily a result of poor stock selection in Europe. Russia and Bulgaria were the two largest detractors of performance as these markets severely underperformed the broader markets. Several commodity focused investments also detracted from performance. The portfolio’s weighted average discount widened by approximately 575 basis points which hurt returns."
Performance Review 2009
Kun Deng and Team: "The Fund slightly underperformed the benchmark due primarily to stock selection in Latin America; within the region an underweight exposure to Brazil combined with poor stock selection in the country were the key detractors from return. Stock selection in Europe, driven by Russia, and in Asia, driven by China and Thailand, helped returns. Over the period, the portfolio’s weighted average discount narrowed by approximately 345 basis points which added to returns."
Performance Review 2010
Kun Deng and Team: "The Fund outperformed the benchmark due primarily to stock selection in Asia, with particularly good returns from investments in Indonesia and the Philippines. In Europe, stock selection added to performance, particularly in Russia. An underweight exposure to Latin America helped returns, while an underweight exposure to Africa, particularly South Africa hurt returns. The portfolio’s weighted average discount narrowed by approximately 210 basis points which added to returns."
Performance 2011 - Year-to-Date
Kun Deng and Team: "The Fund’s underperformance is primarily due to stock selection in Europe, where key investments in Russia and Turkey have performed poorly. Underweight exposures to both Latin America and Africa have helped returns. In Asia, stock selection in China and Korea has detracted from performance. The portfolio’s weighted average discount has widened by approximately 215 basis points (through 31 May 2011) which has detracted from performance."
Performance since 2006
Kun Deng and Team: "The Fund’s underperformance is primarily due to an underweight exposure to Latin America, and within this region stock selection in Brazil has further hurt returns. Stock selection in Europe has also hurt returns, especially within Russia. The portfolio’s weighted average discount has widened by a total of 852 basis points (through 31 May 2011) which has been a key detractor from performance."
Investment Process and Strategy – How does the Fund Manager invest?
The World Trust Fund’s investment process begins with seeking and validating value, and ends with identifying catalysts for capturing that value, while closely monitoring and controlling risk. We seek to take advantage of two levels of discounts: (1) entity trading at a discount to its estimated net asset value, as well as (2) undervalued underlying companies, held by the discounted entity, that provide exposure to attractive sectors and countries. The team actively seeks to eliminate or reduce these discounts by promoting corporate restructuring and improved corporate governance. The goal is to gain absolute positive returns from the investments.
• Identify value: Where is the discount? What is the absolute discount? Is it temporary or due to an external event?
• Evaluate investment environment: Are the countries / sectors attractive? Is there any macro catalyst for the value to be recognized?
• Are the companies/businesses undervalued? Validate the discount through due diligence and research
• Is there a catalyst to realize the discount? Invest in the highest conviction discounted securities with identified catalysts, subject to the risk parameters
As summarized in the chart above, our investment process incorporates four levels of investment research:
We employ a dynamic but disciplined search process that begins with a review of the universe to identify assets selling at absolute and relative deep discounts to their net asset value that have potential for high returns going forward. Our extensive database includes detailed up to date information, including market price, NAV, dividend history, performance and risk statistics, comprehensive analytics and news releases.
Our analysts screen the universe of emerging markets and analyzes them in a framework that monitors equity valuations, economic growth, monetary climate, external accounts/currency and the political environment.
Fundamentals closely analyzed include economic indicators, monetary conditions, fiscal policies, equity culture, international money flows, expected currency moves, inflation, consumer inclination, demographic changes, and corporate profits with the goal of creating an attractive and broad investment pool of assets to choose from.
Portfolio Analysis – Once the undervalued assets have passed our valuation framework and macro analysis, attention is focused on further analysis of the entities’ underlying assets. Typically, we buy discounted entities that, in our view, also hold undervalued companies as we seek to obtain a double level of discounts. We then can leverage the bottom-up analysis of these underlying companies often conducted by Lazard’s global analysts. The hallmark of Lazard’s global research is to seek relativevalue. As such, we seek to invest in entities whose underlying assets are attractively priced relative to their financial returns, that also have sustainable returns. Additional accounting scrutiny validation serves to examine companies’ stated financial statistics.
Manager Process – At the next level, the team screens for superior managements and consistent absolute returns. A great deal of consideration is given to the research process and discipline as well as the depth and magnitude of local expertise in the respective market or region.
Lazard maintains its own research database where analysts document their research. This will include detailed analysis with multiple factors including:
1. Discount to NAV analysis;
2. Underlying holdings analysis (including geographic and sector allocations);
3. Catalysts (at both the holding/fund level and underlying assets level);
4. Management (fund/holding company level);
5. Make-up of the Directors;
6. Corporate governance;
7. Issuance concerns (IPO, redemption features, warrants, debt liquidity, etc).
Catalyst for Creating Value – The final factor determining whether a holding gets into the portfolio is in identifying the catalyst that will unlock unrealized value. The Discounted Assets team reviews a security’s structure, performance record, management strategy, current shareholder list, and corporate governance record and other relevant factors in order to identify the potential catalysts and seek to close the current discount to net asset value.
The portfolio will on average hold 30-60 closed-end funds, holding companies and special situations companies. Furthermore, a closed-end fund or holding company will itself typically hold 40-60 or more underlying securities, providing broad exposure to markets and sectors otherwise difficult to replicate in a traditional equity portfolio.
In summary, the investment process focuses on identifying closed-end funds trading at discounts to net asset value and undervalued companies, and lastly, identifying the catalysts to narrow or close the discount.
Kun Deng and Team: "While the investment environment in the emerging markets remains uncertain, we are cautiously optimistic about the Fund’s future returns based on the large amount of attractive opportunities we are finding today. Today’s Fund maintains broad exposures to countries and sectors, and to more underlying companies than most other emerging market equity portfolios. Combining this broad diversification with investment opportunities trading at discounts far wider than historical averages helps create an attractive investment opportunity for investors today."