Market Overview
Equity markets worldwide gained in the second quarter, amid a generally positive outlook for interest rates and investor optimism regarding the impact of artificial intelligence. Markets continued their trend of extreme narrowness during the quarter, as chipmaker Nvidia (NVDA) continued its extraordinary rally. The company, along with Apple (AAPL), drove 65% of the MSCI All Country World Index’s return during the quarter.
Several months of encouraging inflation data revived hopes that the Fed will begin a monetary easing cycle this year. Other economic data were mixed during the quarter, as the US continued to add jobs at a robust pace, but first-quarter GDP came in below expectations, hurt by slower consumer spending. In the eurozone, the European Central Bank (ECB) lowered interest rates for the first time in nearly five years, citing a marked improvement in the eurozone’s inflation outlook as the reason behind its pivot to a less restrictive monetary policy stance. In the UK, the Bank of England (‘BOE’) held its main interest rate steady even as inflation was slowing toward its 2% target, with expectations growing that rate cuts were imminent. However, European stocks came under pressure after far-right parties across several EU countries recorded significant gains in the European Parliament elections.
The conclusion of the first-quarter earnings season painted a mixed picture of how company profits held up in an uncertain macro environment, as US companies generally beat expectations while results in Europe and Japan were more in-line.
Against this backdrop, equity markets in both the developed and developing worlds gained in the second quarter, with the latter outperforming the former. In the US, stocks outperformed, thanks to strong earnings results and optimism that the Fed will retreat from its restrictive monetary policy stance this year. Across the Atlantic, stocks gained but lagged the broader global index due to lukewarm earnings results, concerns that future rate cuts from the ECB will be limited, and political risks. In Japan, stocks declined due to profit-taking in April and a sell-off in June over concerns that the weakening yen may adversely impact the Japanese economy. Meanwhile, in emerging markets, China’s stock market outperformed, thanks to policy support for the country’s beleaguered property sector and signs that the country’s economic outlook was improving.
Portfolio Review
In the second quarter, the Lazard Global Equity Select Portfolio (MUTF:GESIX) slightly underperformed the return for the MSCI All Country World Index. (Portfolio returns are measured net of fees and in US dollar terms.)
Contributors
Stock selection in the industrials sector contributed to performance. ABB (OTCPK:ABBNY), a leader in electrical equipment and automation solutions (2.1% weighting in the Portfolio), reported better-than-expected quarterly earnings, driven by strength in electrification and process automation. We expect the company to continue to benefit from structural growth in electrification and energy efficiency and because of its divestment of lower growth businesses and better accountability in its business units. ABB has also structurally improved margins, and we believe it will continue to grow margins over the next couple of years.
Stock selection in the communication services sector also contributed to performance. Google parent Alphabet (GOOG,GOOGL) 4.9% weighting in the Portfolio) reported good results, including solid revenue growth and strong expense management, driving margin expansion, investments in artificial intelligence, and returning free cashflow to shareholders. We continue to like Alphabet’s significant barriers and advantages in its core search business, and the company’s ability to innovate at a scale, driving growth and creating new adjacent opportunities.
Detractors
In contrast, stock selection in the consumer staples sector detracted from performance. Estée Lauder (EL), a prestige beauty company (0.6% weighting in the Portfolio), reported strong earnings, and an inflection in sales growth and gross margin as well as an improvement in inventories. However, the stock fell on lower-than-expected Q4 guidance and concerns around consumer/macro data points. We continue to own Estée Lauder as we expect the company’s margin and return profile to recover to historic highs and that structural changes in the fragrance and US businesses, expected profit improvement in makeup, and changes in the company’s Asian manufacturing footprint to provide multi-year tailwinds.
Stock selection and an underweight in the information technology sector detracted. Shares of Accenture (ACN, 2.7% weighting in the Portfolio) continued to lag amid cyclical weakness, as an uncertain macro environment pressured customer budgets and delays on discretionary spend and smaller projects. However, Accenture reported better than expected earnings in June and maintained guidance for the year, pointing to increasing confidence in stabilization. We think Accenture is well-positioned, as more enterprises need to move to the cloud, upgrade data, and digitize their business processes before they can adopt and integrate AI into their organizations. We are confident that Accenture will continue to benefit from these structural growth opportunities and will gain a larger share of customer budgets.
Outlook
We expect to see continued volatility as the Fed and other central banks seek to balance the goals of maintaining financial stability and controlling inflation. While artificial intelligence has the potential to transform the way companies operate over the long term, we are cautious that the exuberance surrounding it may drive valuations in certain stocks to unsustainable levels in the short term. We remain focused on our philosophy of investing a majority of the portfolio in quality companies (Compounders) that can sustain elevated levels of financial productivity and supplementing them with companies that we believe can improve their financial productivity (Improvers). A broadening out of index participation will present a better environment for quality investing, and we believe that the empirical work done by co-lead portfolio manager/analyst Louis Florentin-Lee in Relative Value Investing and its update, Quality Investing, shows that our philosophy is one that should deliver outperformance over time.
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Important Information Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For more complete information about The Lazard Funds, Inc. and current performance, you may obtain a prospectus or summary prospectus by calling 800-823-6300 or going to www.lazardassetmanagement.com. Read the prospectus or summary prospectus carefully before you invest. The prospectus and summary prospectus contain investment objectives, risks, charges, expenses, and other information about the Portfolio and The Lazard Funds that may not be detailed in this document. The Lazard Funds are distributed by Lazard Asset Management Securities LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its affiliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. The performance quoted represents past performance. Past performance does not guarantee future results. The current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end online at www.lazardassetmanagement.com. The investment return and principal value of the Portfolio will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. Different share classes may have different returns and different investment minimums. Please click here for standardized returns: https://www.lazardassetmanagement.com/us/en_us/funds/mutual-funds/lazard-global-equity-select-portfolio/F481/S26/ Allocations and security selection are subject to change. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced Page 2 Lazard Global Equity Select Portfolio by political, social, and economic factors affecting companies in these countries. The MSCI All Country World Index (ACWI) is a free-float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The index is unmanaged and has no fees. One cannot invest directly in an index. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward- looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. |
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