It is rare to find fund managers who have run money for more than 30 years: rarer still that they remain with the same fund over their entire career.
But James Donald has co-managed the Lazard Emerging Markets fund alongside Rohit Chopra since 1999. In 2006 Monika Shrestha joined the team, while in 2020 the most recent addition – Ganesh Ramachandran – came aboard.
Over this time it has been the third-best performer in the IA Global Emerging Markets sector, which consists of 15 funds with a long enough track record.
While it has beaten the peer group and the MSCI Emerging Markets benchmark over this time, up 758.6%, it has not rested on its laurels, with top-quartile gains over the shorter term too, as the below chart shows.
Performance of fund against index and sector over 5yrs
Source: FE Analytics
A big part of getting the emerging markets right is to take a view on China, where the fund went overweight for the first time in nearly three decades before the recent market rebound pushed the country’s weighting in the benchmark index above the fund’s allocation.
Below, Donald explains the portfolio’s evolving exposure to China, highlights some recent and career winners and losers, and highlights one company in his portfolio that he never thought he would get the chance to own.
What’s your process?
The process is bottom-up across emerging markets, a very stock-focused approach which is a trade-off between quality and value. The portfolio has always had lower price-to-earnings ratios than the index and it's always had higher ROEs [return on equity] than the index, and that is a primary objective.
It doesn't ignore top-down issues – it looks at them at the end of the process in a discounting structure. We look at what looks very inexpensive, get a sense of whether it will have good profitability in the future, and then discount for risks like politics, macroeconomics and governance.
How do you navigate the value-versus-quality tightrope?
We hold some extremely inexpensive stocks of companies with average emerging market profitability and we also hold more expensive stocks with extraordinarily high profitability. It’s a mix. What we don’t hold are companies with little or no profitability – if we do, we've made a mistake. We also avoid extremely expensive stocks.
Can you share one of your past mistakes?
About 10 years ago, we were invested in Hanwha Life Insurance in South Korea. We thought it was a good, well-positioned business until the regulator forced life insurers to hold much more capital than we expected. As a result, instead of getting ROEs in the high single digits, we got 3–5%, which was simply too low. We didn’t get any upside from that, so it didn’t work.
Is there a stock in the portfolio you’re particularly excited about?
A stock we never thought we’d be able to own but have held in the past two years is Tingyi, the biggest instant-noodle company in the world. It dominates the market in China and has over 5,000 distributors.
It’s been a 15-25% ROE company. For decades, it traded at 40x earnings or more – I never thought we’d be able to own it. But last year it came down to 13-15x earnings, and it’s been doing well. It’s up quite a bit this year, so we’ve trimmed the position back extensively.
Have you trimmed other positions?
We have been trimming a fair bit. I was in China in February and March and I was surprised how bullish local investors were – the market had already risen sharply and we were already selling.
Last year was the first time in 27 years we had a larger exposure to China than the index. But then, 27 years ago, China was 1% of the index. Now it's between about 25% and 32%.
The reason we've had a hard time with China is that a relatively small part of the market is made up by quality companies. And when China is of interest to investors, those quality companies tend to be expensive.
How has that exposure evolved?
In 2020, our exposure was about 22%, while the index peaked at roughly 44%. That was a six-year anti-value market. We underperformed, and we should have, given our style.
In the three years since, China has been on sale. The index weight fell from 44% to 25% and our exposure stayed relatively constant. That meant we were buying, because stock prices were coming down.
By the end of last year, we were at about 30%, while the index was closer to 26%. This year, China has rebounded to around 32% and we’re now at about 27%. As investors have grown more comfortable and prices have risen, we’ve been trimming.
Why do you have so little in India?
We’ve historically owned a lot in India. But today, valuations are generally very high. At the end of March, we had 4.9% in India versus 18.5% in the index. That might surprise people, given how bullish sentiment is. But it’s a difficult market for us.
What were the best and worst calls of the past year?
One good one was increasing exposure to China. Another strong call was in South Korea. We were heavily weighted in several companies that have been improving profitability through buybacks and dividends – particularly the banks.
We also trimmed and eventually sold our position in Samsung Electronics. It’s a great company that makes great products, but it holds too much cash, spends too heavily on capex, and its profitability is too volatile.
From an attribution perspective, Samsung contributed the most to the portfolio's alpha, adding 145 basis points over the trailing 12 months and 99 points over 18 months.
On the negative side, we had large exposures to Mexico and Brazil. Both markets performed poorly. We still see a lot of relative value – companies with strong positioning despite economic and political headwinds – but last year was tough.
Our overweight position in Brazil detracted the most from the portfolio's performance, costing 112 basis points over 12 months and 133 basis points over 18 months.
What are your hobbies?
I travel quite a lot. On Friday I’m going to a family cottage up in the Great Lakes. It's a beautiful part of the world – remote, hard to get to. My degree was in history, so I take an interest in reading about history too.