HEAD-TO-HEAD: Lazard versus T Rowe Price

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Investment approach

“While these funds invest in the same market, the way the managers go about building their respective portfolios is very different,” said McDermott.

The Lazard fund is an “extremely concentrated vehicle”, holding no more than 20 to 25 companies, ranging in size from the “fairly small all the way through to the very large,” he said.

Stocks in the fund fall into one of three buckets: “compounders, mispriced or tactical”. Compounders make up the largest bucket and are businesses that do not need a lot of capital to run and can keep re-investing their profits for ongoing growth. “This means the fund typically avoids sectors such as telecommunications or utilities,” McDermott said.

“Mispriced” refers to stocks that are cheap, but where there may be potential for earnings to rise, while “tactical” purchases may be shorter term trades where the managers want exposure to a certain business or sector for a particular period of time.

“Because of the small number of companies in the fund, returns are very dependent on the managers getting their stock picks right,” said McDermott.

The managers can avoid entire sectors, which means they will often perform very differently to the market. “That said, they are careful to invest in many industries and to make sure their companies have diverse profit drivers,” according to McDermott.

The core base of compounders has proved resilient in the past and the strategy has been roughly as volatile as the US market for well over a decade.

“The managers analyse stocks thinking what could go wrong as well as what could go right, which also helps them to prepare for, and protect investors against market falls,” said McDermott.

The fund’s portfolio has historically been very diverse from a sector perspective. Although telecoms, media and technology roughly account for one third of the underlying holdings, “many of the familiar names you find in the top ten of other funds are absent from this portfolio,” McDermott noted.

Turning to the T Rowe Price fund, McDermott pointed out that it has one of the most concentrated portfolios among its peers.

The fund manager, Taymour Tamaddon, looks for companies that can generate above average – and typically double-digit – growth for the next three to five years.

“He believes that most large cap growth companies revert to the mean over time, so he wants to capture outperformance in that period,” said McDermott.

Tamaddon emphasises firms with strong market positions, reputations, and good management, especially those with strong free cash flow, balance sheets, and improving margins and returns on invested capital.

The manager can choose from a universe of approximately 500 companies. This universe is first analysed with a screen, which looks for a minimum of 10% (plus inflation) earnings growth. There is then further fundamental analysis, stress testing and work around ESG is also undertaken to leave around 80-100 names for consideration, before a final portfolio of 60-75 stocks is selected.

Around half of the portfolio is in the top ten holdings, with the rest in the remaining 50 to 65 names.

“This is because the best ideas in the fund command the biggest positions, with the remaining ideas adding potential reward, without adding to risk,” said McDermott.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 30 September 2021

Top 10 holdings:

Source: Fund factsheets, 30 September 2021

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