A Disciplined Approach to Infrastructure Investing

The following is our latest Fund Analyst Report for Lazard Global Listed Infrastructure (GLIFX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Lazard Global Listed Infrastructure’s Morningstar Analyst Rating has moved to Silver from Bronze because its solid process and experienced and stable management team have made it a standout performer in the US infrastructure Morningstar Category.

Warryn Robertson, assisted by John Malquiney, has led the team since 2005. This collaborative team of five has a limited hierarchy; all four portfolio managers share the same level of decision-making authority. Manager Matt Landy contributes to the team from Lazard’s New York office, overseeing the U.S. positions.

Lazard invests in "preferred infrastructure stocks," which are companies with monopoly characteristics, high revenue certainty, strong profitability, and long-life assets. This relatively narrower definition of infrastructure allows the team to focus its fundamental research to identify undervalued preferred infrastructure companies operating in the developed economies.

The resulting portfolio is concentrated. It has owned fewer than 30 stocks since 2014 and typically holds 25-50. Lazard’s conservative definition of infrastructure leads it to focus on certain sectors and regions. For example, the fund has typically owned a lot of utilities and toll roads; it also favors European firms since the global financial crisis because the managers found their valuations more attractive. Lazard's disciplined low-turnover approach mitigates concentration concerns. Long-held positions like Vinci and CSX have helped drive the fund’s strong absolute and risk-adjusted long-term performance.

This fund’s assets have grown consistently, but at an accelerated pace in the past year. The team has been more conservative about raising assets recently because of industrywide valuation concerns and higher portfolio concentration. Rising interest rates could hurt this fund as infrastructure assets tend to be rate-sensitive, but the fund also would benefit if governments worldwide were to increase fiscal stimulus.

Overall, this team has solid expertise, a disciplined strategy, and a global perspective, making this fund one of the category’s best.

Process Pillar: Positive | Tayfun Icten 08/03/2017
This fund’s team implements a sensible, consistent, and disciplined investment process. The Process rating is Positive.

Lazard adheres to a strict, value-based process for investing in global listed infrastructure. The infrastructure assets' relatively more predictable cash flow helps this team build strong conviction in its valuation approach.

The team starts by defining a universe of "preferred infrastructure." Qualifying investments are in monopolistic industries with steady demand, have regulated and often inflation-linked revenues, have appropriate leverage, and reside in developed economies. This universe ends up being more conservative than many competitors' as it avoids firms with exposure to commodity prices, competitive forces, and most emerging markets. The team conducts thorough fundamental research on the stocks that pass the test, approximately 100 of them, maintaining a very long-term view to develop a fair value for each. It ranks each stock based on the difference between that value and the current stock price, striving to build a portfolio that consists only of stocks offering an expected return greater than inflation plus 5%.

The strict value focus is sensible and makes the process clear and repeatable, but it can also lead to increased concentration and significant portfolio tilts to certain industries and regions.

The managers look for 25-50 stocks that meet their strict valuation criteria, which aims to identify shares that offer an expected return of inflation plus 5%. When few stocks clear that hurdle, and the managers’ investment universe looks expensive, as it has recently, the fund will own fewer holdings, from 25 to 30.

That has been the case from 2014 through the first half of 2017. After several years of strong returns, infrastructure valuations are elevated so the fund owned 26 stocks and packed 60% of assets in its top 10 holdings as of April 30, 2017. The fund also isn’t averse to concentrating in specific industries and regions that look cheap. Its strict definition of preferred infrastructure means it usually owns a lot of utilities, toll roads, airports, and broadcast towers. Since the global financial crisis it also has tilted heavily toward Western European countries. For example, the fund had 18%-25% of assets in Italy through the outbreak of the European debt crisis. Such contrarianism can cause the fund to lag, but Lazard's thorough research and focus on valuation mitigates such concerns.

Investors can use this fund as a supplementary holding within a broader, diversified portfolio. It can serve as a mild diversifier given its 0.5 beta to the S&P 500.

Performance Pillar: Positive | Tayfun Icten 08/03/2017  
Solid absolute and risk-adjusted returns coupled with half the beta of the S&P 500 lead to a Positive Pillar rating.

Lazard Global Infrastructure is the top performer in its category both on a three-year and five-year basis. Since its December 2009 inception, it gained 13.4% annualized, 4 percentage points better than its category. The fund also outpaced the relevant market indexes such as the S&P Global Infrastructure Index and FTSE Developed Core Infrastructure 50/50 Index, its prospectus benchmark. This fund achieved this performance with lower standard deviation than the average of those two indexes.

The sector has been strong since the global financial crisis, but Lazard deserves credit for its impressive relative showing. The fund not only generated nearly twice its category Sharpe ratio, but also posted a since-inception beta of 0.5 to the S&P 500, which means it can provide reasonable diversification for a portfolio. On a sector level, 2016 was a mixed bag. Satellite names SES and Eutelsat hurt the fund. The fund's underweighting in pipelines also detracted as energy prices rebounded. Strong performance from railroad companies  CSX (CSX) and  Norfolk Southern Corp (NSC) partially offset those disappointments. Returns picked up in early 2017 as French toll-road owner Vinci rallied and Eutelsat rebounded. Unexpectedly benign rates markets might have helped the performance in 2017.

People Pillar: Positive | Tayfun Icten 08/03/2017  
This is one of the most established and long-standing teams with a sharp focus on infrastructure investing. The People rating is Positive.

Sydney-based portfolio manager Warryn Robertson has been in charge of this strategy since its launch in October 2005. He joined Lazard in 2001 and is part of the firm's Australian equity team, covering large-cap resources. Before Lazard, he spent three years at Capital Partners, where he got exposure to the infrastructure sector. John Mulquiney joined him in 2005. His previous experience includes time at Tyndall Australia, in Macquarie Group's infrastructure business, and at a venture capital firm. London-based Bertrand Cliquet has been a Lazard staffer since 2004 and is responsible for European infrastructure companies, while Matt Landy covers North America from New York. Both were promoted to portfolio manager/analyst in January 2011. Anthony Rohrlach, research analyst, rounds out the five-person team.

The team has a relatively flat structure and operates in a collegial manner. All members contribute to decision-making and have similar remuneration. They argue this setup fosters stability. They are plugged into Lazard's extensive global roster of investment professionals and robust systems. Both Robertson and Landy have between $100,001 and $500,000 invested in the fund.

Parent Pillar: Neutral | 03/28/2017  
Lazard Asset Management has significant strengths, offset by some concerns. Overall, it earns a Neutral Parent rating.

For decades, Lazard focused on institutional clients, and it still is known globally for that business. It now has a big retail presence as well. Its largest fund is  Lazard Emerging Markets Equity (LZEMX), and its lead manager, James Donald, has established an impressive long-term record. But that fund’s success also carried risk: In 2010, the overwhelming amount of the shop’s assets resided in that fund. Lazard has expanded its lineup, however, and has succeeded in gaining substantial growth in some of them, including Lazard Global Listed Infrastructure (GLFOX), which has a particular following in Australia.

Roughly doubling the number of U.S. funds to the mid-30s has been a mixed blessing. Some seem more appropriate for the fringes of investor portfolios, and many remain very small. The firm says it's focused now on quantitative strategies, multiasset solutions, and nonquantitative factor strategies. This emphasis does not differentiate it from other firms fighting the passives headwind. Overall, the firm has an investment-centric culture with good manager retention, but concerns about its efforts to diversify and grow, specifically its recent launches in the U.S., temper our enthusiasm. In addition, fund pricing is average at best.

Price Pillar: Positive | Tayfun Icten 08/03/2017 
The most of this fund’s assets reside in its Institutional share class, which charges 0.96%, below average when compared with the similarly distributed funds in its category. The fund’s Open (retail) shares charge 1.23% and land in the average range for the comparable group. Overall, the fund earns a Positive Price rating.