Lazard believes that there are four solid reasons to consider its emerging-markets equity products:
A 15-year history of managing emerging-markets portfolios
All its emerging-markets equity products are designed for consistent patterns of performance over time It has extensive resources focused on emerging-markets investing
The portfolio management team follows a consistently applied, repeatable investment process 1
2 3 4
Lazard believes that there are four solid reasons to consider its emerging-markets equity products:
A 15-year history of managing emerging-markets portfolios
All its emerging-markets equity products are designed to achieve consistent patterns of performance over time It has extensive resources focused on emerging-markets investing
The portfolio management team follows a consistently applied, repeatable investment process 1
2 3 4
W H Y L A Z A R D E M E R G I N G M A R K E T S E Q U I T Y ?
Currently, emerging-markets equities (as measured by the MSCI Emerging Markets Index) have generated higher financial productivity and carry an almost 20 percent price-to-earnings-ratio discount relative to devel- oped-markets equities (as measured by the MSCI World Index). Though not as deeply discounted as it was three to five years ago, the asset class has still generated attractive returns.
Lazard Asset Management (“Lazard”) has a substantial history of managing emerging-markets products, includ- ing Emerging Markets Equity Select, a concentrated separate-account portfolio of non-Rule 144A ADRs and The Lazard Funds, Inc. Emerging Markets Portfolio, a U.S. mutual fund of emerging-markets equity securities available as Institutional Shares (LZEMX) and Open Shares (LZOEX).
FEATURING
Lazard EMERGING MARKETS EQUITY
Substantial Emerging-Markets History
Lazard has a substantial history of managing emerging-mar- kets products, with almost $4.4 billion in assets under manage- ment in three emerging-markets asset classes, as of December 31, 2005. These asset classes include emerging-markets equi- ties, launched in 1994, emerging-markets local currency and debt, launched in 1995, and an emerging-markets fund of closed-end funds, launched in 1990.
Designed for Consistency
Lazard’s emerging-markets equity products were designed to outperform in normal market environments (not dominated by crises or external events), to participate in rising markets, and to preserve capital during falling markets versus their peer groups and their benchmark, the MSCI Emerging Markets Index.
Both emerging-markets equity products mentioned in this piece invest in emerging-markets equity securities with a typical market capitalization of $300 million of greater, or that are domiciled in those countries that comprise the MSCI Emerging Markets Index. The Lazard Emerging Markets Portfolio seeks long-term capital appreciation by investing in companies with strong, sustainable financial productivity at attractive valuations. Emerging Markets Equity Select seeks to generate strong relative returns, over a long-term time horizon, by investing in non-Rule 144A ADRs that demonstrate strong financial productivity at attractive valuations.
Depth of Resources
A six-person portfolio team manages both Lazard’s Emerging Markets Equity Select and the Lazard Emerging Markets Portfolio. This seasoned team focuses solely on emerging- markets equity investing, with all members of the team con- ducting fundamental company research and benefiting from research from other Lazard resources.
Q The emerging-markets local currency and debt team provides an emerging-markets local currency perspective as well as other macroeconomic and political input.
Q The emerging-markets fund of closed-end funds team provides in-depth macroeconomic and political insight and access to information from local emerging-markets country managers.
Q The firm’s risk management and quantitative research team generates the database screening and provides input on the risk aspects of the portfolios to aid optimal diversifi- cation.
Q The firm’s global research platform of sector analysts pro- vides sector, industry, and company insight and research recommendations.
A Repeatable Process
For the emerging-markets equity products mentioned here, Lazard’s Emerging Markets Equity portfolio management team follows a bottom-up, relative-value approach to stock selection that includes proprietary database screening, accounting validation, fundamental analysis, and portfolio construction/risk evaluation:
Q Quantitative Screeninghighlights long-term relative value by analyzing the relationships between historical returns and valuations.
Q Accounting Validationexamines a company’s stated financial statistics (income statement, cash flow statement, balance sheet, and footnotes), leading to either an applicable indus- try comparison or an uninvestable opportunity.
Q Fundamental Analysisanalyzes expectations for compa- nies’ revenues, margins, and ROE over the next three years, the existence of potential catalysts, and whether returns can be sustained.
Q Portfolio Construction/Risk Evaluationdetermines stocks’
viability for inclusion in the portfolio. Assesses companies’
political risk, macroeconomic risk, corporate governance risk, and portfolio risk; and monitors the portfolios against country and sector parameters.
L A Z A R D ’ S E M E R G I N G - M A R K E T S A S S E T S
I n M i l l i o n s
WHY INVEST IN
Lazard’s Emerging Markets Equity
PRODUCTS?
Source: Lazard Asset Management LLC. As of December 31, 2005.
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
Jul-92 Dec-92 May-93 Oct-93 Mar-94 Aug-94 Jan-95 Jun-95 Nov-95 Apr-96 Sep-96 Feb-97 Jul-97 Dec-97 May-98 Oct-98 Mar-99 Aug-99 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02
Mexican Peso devalues
Tequila crisis
July 2, 1997 Thai Baht devalues
August 1998 Russian Ruble
devalues Indonesian Rupiah goes
to 15,000/$
Malaysian capital controls implemented
Liquidity-led recovery
January 16, 1999 Brazilian Real
devalues
Turkish Lira
devalues Brazilian
election turmoil Argentine
Peso devalues (US$)
T H E S E V E N Y E A R S O F F A M I N E I N T H E E M E R G I N G M A R K E T S
Why Invest in Emerging Markets Equities?
Steep Climb After Seven Years of Famine
Like the global capital markets, the emerging-markets equity asset class has weathered some dramatic changes over the years. The impressive returns of the late 1980s were followed by an equally significant downturn in the mid-1990s through 2002. Since then, the asset class has been on a steep climb.
At the root of the asset class’s downturn were the pressures of increased globalization and substantial withdrawals of investor capital during periods that included the devaluations of the Mexican peso (1994), the Thai baht and Indonesian rupiah (1997), the Russian ruble (1998), the Brazilian real (1999), the Turkish lira (2001), and the Argentine peso (2002), illustrated in the chart below. While it has taken time to recover from the deeply discounted valuations caused by these crises, when compared to developed-markets returns, emerging-markets equities have generated impressive returns since 2002, as seen in the chart on the right.
Since the beginning of 2002, emerging-markets equities have been in recovery, with all regions playing their part.
Significant Evolution in Emerging-Markets Fundamentals
Today, while the asset class is not as deeply discounted as it was three to five years ago, investors continue to be interested in its still-attractive returns. Why?
0.5 1.0 1.5 2.0 2.5
Dec-05
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
MSCI WORLD ($USD)
MSCI EAFE MSCI EM MSCI US
E M E R G I N G M A R K E T S I N R E C O V E R Y
G r o w t h o f a D o l l a r b y A s s e t C l a s s ( ‘ 0 2 - ’ 0 5 )
Source: Bloomberg and MSCI Emerging Markets Index. As of December 31, 2002.
Source: MSCI. As of December 31, 2005. The performance quoted repre- sents past performance. Past performance does not guarantee future results.
The structure of the emerging-markets equity asset class has fundamentally changed. After a long, difficult period, many developing countries have been able to overhaul their economies, leading to reduced trade deficits and debt, and less-expensive borrowing costs. Growth is at its highest level in 20 years, encouraging even some left-leaning governments toward economic orthodoxy. Furthermore, corporate gover- nance within emerging-markets companies has greatly improved. These fundamental changes have led to higher credit ratings for countries and companies in the emerging markets, as seen in the table below.
E V I D E N C E O F T H I S S I G N I F I C A N T E V O L U T I O N
1998 2005
Current Account (% of GDP) -0.8% 4.1%
GDP Growth 2.4% 6.7%
Fiscal Deficit (% of GDP) -4.6% -0.7%
Inflation 11.8% 5.0%
Average Credit Rating* -BB BBB-
% of Investment Grade* 4% 38%
*External Debt
Source: Goldman Sachs, JPMorgan, Deutsche Bank, Lazard Asset Management. As of December 15, 2005. Current Account (% of GDP), GDP Growth, Fiscal Deficit (% of GDP), and Inflation data for 2005 are estimated.
Emerging-Markets Equities Today
The factors supporting the emerging-markets equity asset class today include:
Q More-flexible currency regimes
Q Decreased volatility
Q Valuation still at a discount to developed-market equities
M O R E - F L E X I B L E C U R R E N C Y R E G I M E S
One outcome of the financial crises that rocked the emerging markets was the breaking of the currency pegs of between 15 and 20 countries, which produced economic dislocations almost universally. In the aftermath came an environment where many of these countries’ currencies no longer required the credibility of pegged exchange rates, due to low levels of global inflation and low interest rates. Today, many emerging- markets countries have the luxury of free-floating currencies.
D E C R E A S E D V O L A T I L I T Y
Although the emerging-markets equity asset class is perceived to be volatile in recent years its volatility has actually been in line with that of the S&P 500 Index, and in line with and below that of the Nasdaq. In fact, volatility for the asset class, almost as high as 40 percent (standard deviation) in 1998, has now retreated to less than 20 percent.
6 10 14 18 22 26
Dec-05
Dec-02
Dec-99
Dec-96
Dec-93
Dec-90
(%)
MSCI World 12 Month Forward P/E MSCI EMF 12 Month Forward P/E
A T T R A C T I V E R E L A T I V E V A L U A T I O N S
0 10 20 30 40 50
Dec-05
Jun-05
Dec-04
Jun-04
Dec-03
Jun-03
Dec-02
Jun-02
Dec-01
Jun-01
Dec-00
Jun-00
Dec-99
Jun-99
Dec-98
Jun-98
Dec-97
Jun-97
Dec-96
Jun-96
S&P 500 MSCI EM Nasdaq
V O L A T I L I T Y C O M P A R I S O N
Source: I/B/E/S, MSCI World Index, and MSCI Emerging Markets Index.
As of December 31, 2005. The performance quoted represents past per- formance. Past performance does not guarantee future results.
Source: MSCI, Frank Russell. As of December 31, 2005.
R e l a t i v e V a l u a t i o n s R e m a i n A t t r a c t i v e S t a n d a r d D e v i a t i o n ( % )
A T T R A C T I V E R E L A T I V E V A L U A T I O N S
In 2000, emerging-markets equities’ valuation discount to global equities reached its widest point. Since then, the asset class has generated fairly consistent outperformance with a narrowing of the valuation discount. Today, emerging-markets equities carry an almost 20 percent price-to-earnings ratio dis- count relative to the developed markets, with significantly higher financial productivity. In fact, emerging-markets equi- ties have generated higher levels of financial productivity than developed-markets equities for 19 consecutive quarters.
Based on forward-looking research analysts’ (I/B/E/S) expec- tations, the outlook continues to appear attractive, as seen in the chart on the previous page.
But There Are Risks
This picture is not entirely rosy. Emerging-markets equities could face some headwinds in the form of abruptly rising interest rates across the global capital markets. Because most emerging-markets nations have growing, yet still modest, dedicated capital, they look to the world’s wealthier nations, leading to dependence on foreign capital. Higher interest rates would likely lead to greater competition for this capital.
The emerging markets also face potential risks from geopoliti- cal issues, such as terrorism, significant increases in the price of oil and other commodities, and trade friction. China remains a potential “wild card” for the asset class. Its equity markets have performed surprisingly poorly, over a long
period of time, yet the country is in the midst of the economic and social changes of a major industrial revolution. History tells us that these revolutions usually have a positive impact on a country’s capital markets.
Another potential risk is the fact that Lazard’s Emerging Markets Equity Select invests in a relatively small number of securities. Consequently, if one or more of the securities held in this portfolio declines or underperforms relative to the mar- ket, it may have a greater impact on an account’s performance than if the account held a larger number of securities. Thus an account invested in Emerging Markets Equity Select may experience more volatility, particularly over the short term, than an account invested with a greater number of holdings.
In Summary
Emerging-markets equities have logged in four consecutive years of dramatic outperformance, outperforming developed- markets equities for the past six years and, for the first time ever, emerging-markets equities have had three consecutive years of positive returns.
While the Lazard Emerging Markets Equity team is some- what cautious in the immediate term, team members remain constructive on the medium-term and long-term outlook for the asset class.
E N D N O T E S :
Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For more complete information about the Lazard Funds, you may obtain a prospectus by calling 800.823.6300. Read the prospectus carefully before you invest. The prospectus contains invest- ment objectives, risks, charges, expenses, and other information about The Lazard Funds, Inc. which may not be detailed in this document. The Lazard Funds are distributed by Lazard Asset Management Securities LLC.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of 26 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey, and Venezuela. The index is unmanaged and has no fees.
To the extent the investments depicted herein represent international securities; you should be aware that there may be additional risks associated with international investing involving foreign economic, political, monetary and/or legal factors. International investing may not be for everyone. These risks may be magnified in emerging markets. In addition, the securities of small-capitalization companies may be subject to higher volatility than larger, more established companies.
Foreign securities may be less liquid, more volatile, and less subject to governmental supervision than in the United States. The values of foreign securities are affected by changes in currency rates, application of foreign tax laws, changes in government administration, and economic and mone- tary policy.
© 2006 Lazard Asset Management LLC
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