Q2 2024 Market Insights: Global Equity Funds Performance and Economic Outlook

BNY Mellon Income Stock Fund Q2 2024 Commentary

Developed international markets were lower for the month due to the threat of a major shift in Europe's political landscape. Describe the performance of the fund relative to its benchmark during the last three months. BNY Mellon Income Stock Fund (Class I shares) underperformed its benchmark, the Dow Jones U.S. Select Dividend Index, during the second quarter of 2024. On a sector basis, financials and materials were the largest contributors, while utilities and information technology detracted. Equity markets were mixed in June as political turmoil picked up in Europe and the Middle East crisis intensified. Several major central banks began to loosen monetary policy, with the Bank of Canada, the Swiss National Bank and the European Central Bank (ECB) lowering borrowing costs. However, the US Federal Reserve (Fed) and the Bank of England (BOE) left rates unchanged. The S&P 500® Index jumped 3.59%, the MSCI EAFE Index, a measure of non-US developed markets, lost 1.61%, while the MSCI Emerging Markets Index added 3.94%. US growth stocks gained, again outperforming their value peers, which declined for the month; large caps outperformed small caps. In the US, equities again rose as investors carefully parsed through economic data and Fed speeches for further clues on when the central bank might begin to cut rates. At its June meeting, the Fed held rates steady, and central-bank officials indicated that they would need to see further progress toward their inflation goal of 2% before rate cuts could commence. Preliminary June purchasing managers' index (PMI) data was above forecasts; however, retail sales dropped. Inflation, as measured by the consumer-price index, cooled more than expected in May, while the Fed's preferred inflation measure, the core personal-consumption expenditures index, was in line with expectations. On the supply side, the producer-price index experienced its largest decline since October 2023 as gasoline prices dropped. The yield on the 10-year US Treasury fell, while the US dollar moved higher. Developed international markets were lower for the month due to the threat of a major shift in Europe's political landscape. Uncertainty spiked as French President Emmanuel Macron called an early parliamentary decision, while UK markets were calmer awaiting the country's general election. Political turmoil in France upended the ECB's first interest rate cut since 2019. Switzerland cut rates for the second time in three months, while the BOE left rates steady. Eurozone business activity accelerated as services growth expanded. In France, inflation slowed to a 34- month low. The UK avoided a recession, as gross domestic product increased in the first quarter. The Bank of Japan left short-term interest rates unchanged, announcing that it would reduce government-bond purchases and outline its quantitative tightening in July. However, reports of a significant downward revision to first quarter growth, due to a change in construction order data, could affect monetary policy. Japanese stocks rallied during the month as the yen weakened versus the US dollar. Emerging market equities gained in June. Indian equities moved higher as Prime Minister Narendra Modi was sworn in for a record-equaling third term, although his Hindu nationalist party lost its outright majority in parliament in a surprise election verdict. In emerging Asia, weakness in China's economy dampened sentiment, and the yuan slipped to a multi-month low. To stimulate exports, the People's Bank of China (PBOC) repeatedly weakened the yuan's daily reference rate during the month. The PBOC also signaled that it may update its monetary-policy toolkit, which could include treasury-bond trading in secondary markets and simplifying current policy to one short-term rate. On a more positive note, the China Caixin manufacturing PMI, which measures factory activity among smaller Chinese manufacturers, rose at the fastest pace since 2021 as foreign orders pushed the print ahead of economists' expectations. Hong Kong stocks declined amid weak growth prospects in China. Brazil's central bank increased its economic growth forecasts and inflation projections, leaving interest rates unchanged for the month. The Bank of Mexico also kept rates on hold despite increasing inflation data, while Colombia cut its benchmark rate. Commodities slipped during June. Oil prices gained, as geopolitical turmoil escalated in the Middle East and the Russia/Ukraine war continued. Declining gasoline stockpiles also supported crude prices. The price of gold moved in tandem with the prospect of interest rate cuts, ending the month lower but recouping some gains by the end of June. The Dow Jones Commodity Index, which holds its largest weighting in gold, ended the month 0.97% lower. Positive Impacts Financials: Solid performance by bank names drove returns for the financials sector during the quarter. A position in Goldman Sachs Group (GS) contributed returns in capital markets. Materials: Effective stock selection within the materials sector contributed, particularly in the metals and mining space. Negative Impacts Utilities: An underweight and unfavorable stock selection weighed on relative returns for the period. Information Technology: An overweight to the IT services subsector detracted from returns during the quarter. Positive Impacts Walgreens Boots Alliance, Inc. (WBA): Shares in Walgreens Boots Alliance fell during the quarter after the drugstore chain cut its profit outlook and announced more store closures, citing a difficult pharmacy business and strained American consumers. Applied Materials, Inc. (AMAT): Shares of the semiconductor capital equipment manufacturer rallied over the period as the market realized the company would be a large beneficiary of increased spending around generative artificial intelligence. Goldman Sachs Group, Inc.: As one of the best-positioned banks for an economic soft landing in our view, Goldman Sachs performed well as investment banking volumes have continued to move higher. Negative Impacts Kenvue, Inc. (KVUE): Kenvue, whose core business is over-the-counter (OTC) medicines, saw weakening sales over the past quarter, given a more muted cold and flu season versus last year. Kenvue is also a skincare business with mass-market pricing; this section also performed poorly due to intense competition from "indie brands" and mis- execution from the management team. Medtronic Plc. (MDT): Shares of the medical device maker were weak over the quarter after the company reported robust quarterly earnings but tempered their earnings and growth outlook for the remainder of the year. Intel Corporation (INTC): Intel reported 8.6% growth (year-over-year) in the first quarter, in line with expectations, but provided weak guidance for the second quarter (flat growth year over year), prompting analysts to reduce consensus the company's growth forecast. As we cross the halfway point of 2024, we maintain our "balanced" approach to the markets and value investing. While consensus expectations for interest rates are more aligned with the Fed's guidance today than it was at the start of the year, it remains the top macro concern for many investors. Given the uncertainty around the trajectory of both inflation and economic growth, we believe it's prudent to consider a wider dispersion of potential outcomes. Furthermore, the upcoming US elections are now taking up more investor mindshare. While still relatively early in the campaign season, it has already been eventful and will likely lead to added uncertainty around potential outcomes and, therefore, volatility. From an investment perspective, as bottom-up, fundamental stock pickers, we will continue to view these macro risks through the lens of the companies in which we look to invest and lean on our investment process to identify the best idiosyncratic opportunities. Pulling back from the immediate term, we continue to believe that companies and investors alike are still adjusting to the normalization of both inflation and interest rates in the US - not to pre-pandemic levels, but to pre-Global Financial Crisis levels. In other words, we expect inflation to be higher and more persistent than in the 12 years leading up to the pandemic, which will cause interest rates to likely be higher as a result. While we acknowledge that inflation has moderated off its peak and is headed in the right direction, and monetary policy will likely follow in due course, we firmly believe that the days of "benign" inflation and "free money" are now behind us. On the political front, while we do not have an edge on the potential outcome, we are closely monitoring our holdings with exposure to things like fiscal policy, infrastructure spending, and deglobalization. Similar to macro outcomes, this "new" environment is leading to a wider dispersion of returns among companies. As a result, going forward, we believe that fundamentals, valuations and the ability to generate "in-house" liquidity via free cash flow will now play a larger role in separating the winners from losers. As always, we favor companies sitting at the nexus of robust fundamentals, attractive valuations and catalyst-driven business momentum. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Lazard International Equity Select Portfolio Q2 2024 Commentary

The European Central bank lowered their policy rate 25 basis points (bps), ahead of the US Federal Reserve. International equities digested some of their recent gains in the second quarter. The MSCI EAFE Index fell 0.4% while the MSCI ACW ex-US Index rose 1.0%. Consensus estimates for 2024 and 2025 earnings rose modestly through the second quarter earnings season as companies, on balance, reported better-than-expected results. While corporate earnings for developed markets are only expected to grow 4% in 2024, that growth rate is expected to accelerate to 9% next year. Despite the fact that the Bank of Japan raised short term interest rates for the first time in 17 years in March, the yen fell more than 6% during the second quarter, bringing the year-to-date loss for the currency to over 14%. While local Japanese returns have been strong due to rising inflation and improving corporate governance, USD returns have been negatively impacted by the currency weakness. As the market shifted away from Japan, emerging markets outperformed developed markets the most in a quarter since 2016. Chinese equities led the way rising 7.1% in the quarter, due to continued government stimulus and dramatically lowered market expectations already reflected in valuations. With inflation subsiding, the European Central Bank pivoted and cut rates 25 basis points this quarter. While future rate cuts are still a debate in the market, the central bank has signaled that the aggressive rate hiking cycle is over, which should provide increased confidence for investors. As the US Fed continues to push out rate cuts, the ECB is leading the rate cutting cycle for the first time in 25 years. We have been talking about how the extreme environment, led by either expensive growth or low quality, should transition to a more fundamentally driven market benefitting our Portfolio. This was certainly the case for the six-month period of fourth quarter 2023 and first quarter 2024. However, the current short- term focus of the market on elections and central bank policy decisions has led investors to simply rely on what has worked in the recent past as opposed to focusing on the quality of the business and its long-term earnings power. Stocks with high price momentum, have been, by far, the largest driver of performance in international equity markets this year. The spread in performance between the MSCI EAFE Momentum Index (which aims to reflect performance of stocks with high price performance over the past twelve months) and the MSCI EAFE Index is the largest in 20 years, outside the extreme COVID rally in 2020. This has led the larger stocks in the MSCI EAFE Index to outperform which, in turn, has led to a nearly 5% spread in year-to-date performance between the MSCI EAFE index and the MSCI EAFE Equal Weighted index -the largest spread in more than 20 years. We strongly believe this is unsustainable and the average stock should close the gap with the Index going forward. The Lazard International Equity Select Portfolio (MUTF:LZSIX) fell 1.7% in the second quarter, underperforming the MSCI ACWI ex-US benchmark, which fell 0.4%. (Portfolio return is measured net of fees and in US dollar terms.) We still believe the international equity market continues to be driven by fundamentals as opposed to style, which should be supportive for our relative value strategy over the medium to long term. However, during the second quarter, the market has been more focused on short term concerns like elections and lingering COVID supply chain issues, rather than the long-term earnings power of great businesses. We have substantial weights in many of these great companies but still have room to add when companies indicate the short-term pressures have lifted and normal order patterns have resumed. For instance, AON and Ryanair (RYAAY), two long-term holdings in the Portfolio, have experienced some short-term pressures due to slower than expected growth. While we have not added to these compounders on the pullbacks yet, we are watching for the turn and hope to add when the fundamentals reaccelerate. Additionally, a few of our companies domiciled in emerging markets were temporarily impacted by elections, which introduced short-term volatility into those markets. We believe these concerns will fade. Stock selection in the information technology sector positively contributed to relative returns. ASM International (OTCQX:ASMIY, 0.9% weighting in the Portfolio) is a semiconductor capital equipment manufacturer in the Netherlands. Shares rose after the company reported first quarter results. First quarter orders came in higher than consensus expectations and revenues came in at the top end of guided range as China strength helped margins. We trimmed our position post a period of great performance in order to right size a large position. Taiwan Semiconductor Manufacturing (TSM, 5.1% weighting) is the global leader in semiconductor manufacturing and is the only independent foundry capable of serving customers looking to fabricate semiconductors on advanced nodes. Shares rose after the company reported first quarter results and management reiterated their growth expectation. Lack of inventory related commentary indicated how far the industry is moving past the previous downturn and AI continued to be an important growth driver. We maintained our position and belief that our long-term investment thesis remains intact. Stock selection in the communication services sector positively contributed to relative returns. Domiciled in China, Tencent (TCEHY, 2.5% weighting) is one of the largest technology companies globally. Tencent dominates the Chinese internet space with an estimated ~50% share of all time online being spent within the Tencent family of apps. Tencent has one of the strongest ecosystems in both consumer and enterprise internet technology. Their diversified revenue streams help mitigate regulatory risk in any single division. Shares continued to rise in through the second quarter after reporting earnings in late March. Management commented visibility on their outlook appears to be improving and discussed their continued plans to step up capital returns to shareholders. These results are supportive of our investment thesis, and we maintained our position. High conviction companies where market was focused on short term: Shares of Ireland-based global Insurance broker Aon (1.9% weighting) declined after reporting first quarter results where organic growth came in below consensus expectations. Long term, we believe our investment thesis remains intact. As a broker and an asset- light company in a fairly consolidated industry, Aon generates strong returns on capital, which we believe will be sustained due to strong pricing power (particularly in its insurance brokerage business) and cash flow generation and may benefit from margin expansion opportunities longer term as they digest the NFP acquisition. We maintained our position. Ryanair (1.7% weighting) is the leading European low-cost passenger airline. Shares underperformed largely on lower fare growth assumptions for the first half of 2025, which is in part due to the timing of Easter, and slightly higher non-fuel cost inflation driven by Boeing delays. Overall, we believe Ryanair can continue to grow EPS well into the double digits and is long-term an attractive business to own as the low-cost intra-European airline that continues to gain share. Emerging market domiciled companies where elections introduced short-term market volatility: Banorte (OTCQX:GBOOY, 1.5% weighting) is a bank in Mexico. Shares have underperformed on macroeconomic fears resulting from the presidential election despite the fundamentals of the company remaining intact. First quarter results were strong with ROE of 22.2%, NIM (net interest margin) sensitivity to lower rates fell again attributed to active management, NPL (non-performing loan) ratio was down to 0.9% of fees and insurance revenues were very strong. Capital of 15.5% CET1 offers both EPS growth and a high dividend yield. We maintained our position and belief that our long-term investment thesis remains intact. Mandiri (PPERF, 1.4% weighting) is an Indonesian bank. Shares underperformed after the company reported first quarter results and lower their NIM (net interest margin) guidance. We believe the fundamentals of the company remain intact and the market is expecting a one-off instance to continue to weigh on margins going forward, which we believe is not the case. We maintained our position and belief that our long-term investment thesis remains intact. ECB rate policy could provide the bump quality cyclicals need Geopolitical risk shifts from international to US International valuations remain near all-time lows compared to the US As international risks subside, investors should shift focus to deeply discounted valuations and longer-term earnings power Style extremes have eased over the past year but more recently investors have been too focused on short-term issues and less willing to recognize the attractive valuation and earnings power of some high-quality cyclicals. As a result, the market has become more narrowly focused on simply what has worked in the recent past driving the price momentum factor to extreme levels. We think this will change. Global economic growth is low, but positive. Interest rates, which are at a more normal level than they were during the pandemic, are broadly stable to heading lower, not higher. And in this environment, we have been able to find many great investments across the three alpha buckets of compounders, mispriced, and restructuring stories. Compounders have generally done well but some cyclicals have lagged due to the market's focus on short-term concerns. We believe these companies can, and will, perform better as investors shift their focus away from short term noise. As the ECB has already begun to lower rates, and international elections are behind us, we believe many of these mispriced international equities with deeply discounted valuations and significantly higher earnings power can outperform. We believe our portfolio is well-balanced for the different market outcomes. Having this balance should enable stock selection to drive performance. We still expect that outperforming stocks will broadly come from companies with strong pricing power, companies that can deliver in-line or better than expected margins and companies with less levered balance sheets. And the extremely discounted valuations for international stocks should provide support for international equities going forward. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Lazard International Strategic Equity Portfolio Q2 2024 Commentary

ECB's rate cuts and subsiding international risks could shift investor focus to undervalued international equities with strong earnings potential. After a strong six-month rally, international equity markets were broadly flat in the second quarter. International equities digested some of their recent gains in the second quarter. The MSCI EAFE Index fell 0.4% while the MSCI ACW ex-US Index rose 1.0%. Consensus estimates for 2024 and 2025 earnings rose modestly through the second quarter earnings season as companies, on balance, reported better-than-expected results. While corporate earnings for developed markets are only expected to grow 4% in 2024, that growth rate is expected to accelerate to 9% next year. Despite the fact that the Bank of Japan raised short term interest rates for the first time in 17 years in March, the yen fell more than 6% during the second quarter, bringing the year-to-date loss for the currency to over 14%. While local Japanese returns have been strong due to rising inflation and improving corporate governance, USD returns have been negatively impacted by the currency weakness. As the market shifted away from Japan, emerging markets outperformed developed markets the most in a quarter since 2016. Chinese equities led the way rising 7.1% in the quarter, due to continued government stimulus and dramatically lowered market expectations already reflected in valuations. With inflation subsiding, the European Central Bank pivoted and cut rates 25 basis points this quarter. While future rate cuts are still a debate in the market, the central bank has signaled that the aggressive rate hiking cycle is over, which should provide increased confidence for investors. As the US Fed continues to push out rate cuts, the ECB is leading the rate cutting cycle for the first time in 25 years. We have been talking about how the extreme environment, led by either expensive growth or low quality, should transition to a more fundamentally-driven market benefitting our portfolio. This was certainly the case for the six-month period of fourth quarter 2023 and first quarter 2024. However, the current short- term focus of the market on elections and central bank policy decisions has led investors to simply rely on what has worked in the recent past as opposed to focusing on the quality of the business and its long-term earnings power. Stocks with high price momentum, have been, by far, the largest driver of performance in international equity markets this year. The spread in performance between the MSCI EAFE Momentum Index (which aims to reflect performance of stocks with high price performance over the past twelve months) and the MSCI EAFE Index is the largest in 20 years, outside the extreme COVID rally in 2020. This has led the larger stocks in the MSCI EAFE Index to outperform which, in turn, has led to a nearly 5% spread in YTD performance between the MSCI EAFE index and the MSCI EAFE Equal Weighted index -the largest spread in more than 20 years. We strongly believe this is unsustainable and the average stock should close the gap with the Index going forward. In the second quarter, Lazard International Strategic Equity Portfolio (MUTF:LISIX) fell 3.2%, underperforming the 0.4% depreciation of its benchmark, MSCI EAFE. (Portfolio return is measured net of fees and in US dollar terms.) We still believe the international equity market continues to be driven by fundamentals as opposed to style, which should be supportive for our relative value strategy over the medium to long term. However, during the second quarter, the market has been more focused on short term concerns like elections and lingering pandemic-driven supply chain issues, rather than the long-term earnings power of great businesses. We have substantial weights in many of these great companies but still have room to add when companies indicate the short-term pressures have lifted and normal order patterns have resumed. For instance, AON and Ryanair (RYAAY), two long-term holdings in the portfolio, have experienced some short-term pressures due to slower than expected growth. While we have not added to these compounders on the pullbacks yet, we are watching for the turn and hope to add when the fundamentals reaccelerate. Accenture is another long-term high-quality compounder that has experienced short-term cyclical pressure. In their recent quarterly report, they indicated that order growth has resumed and their book to bill metric had improved, and as a result, we added to our position. We have added capital to some companies we view as mispriced where the short-term view is weighing on their valuation and where we expect that short-term pressure to dissipate, enabling the valuation to lift. One example is the Italian bank, UniCredit (OTCPK:UNCFF), which is generating significant excess capital and returning it to shareholders through significant stock buybacks. We have trimmed some compounders where valuations have become more stretched, such as RELX. While some of our industrial holdings such as Ryanair, which is discussed below, declined on short term pressure, others performed well, helping offset underperformance in the sector. Shares of ABB (ABBNY, 2.2% weighting) rose after the Switzerland-based industrial-technology company reported better-than-expected first-quarter results, highlighted by orders that came in 3% ahead of consensus expectations and full-year guidance that was maintained for +5% organic revenue growth. Margins continued to improve under the direction of ABB's CEO, who was appointed mid-2020. We trimmed the Portfolio's position. Shares of RELX (3.3% weighting) rose after the US-based information and analytics provider reported better-than-expected first- quarter results and maintained its full year guidance. Management referenced the improving growth trajectory for their business long term as analytics software tools grow in the mix. These results are supportive of our investment thesis, which is predicated on data and analytics driving sustainable organic growth acceleration as RELX shifts towards these higher 'value add' analytics products, and away from print and low growth reference products. Additionally, we believe generative AI will drive further product innovation and support continued mix shift. RELX's analytics products are embedded at key decision points in the workAow, which makes the business highly recurring and enables strong pricing power. RELX is the number one or two player in all of its markets, with strong barriers to entry and scale economics. Highly recurring, mid-high single-digit organic growth, operating leverage, and limited capital requirements drive high financial productivity. We trimmed our position. Stock selection in the information technology sector positively contributed to relative returns. Domiciled in Japan, Advantest (OTCPK:ATEYY, 0.9% weighting) is the leading supplier of semiconductor testing equipment globally. Testing is an important step in the semiconductor manufacturing process that helps ensure reliable operation of the end-device as per design specifications. Recent share price weakness on the back of concerns regarding smartphone volume recovery gave us the opportunity to buy the market leader in semiconductor testing equipment (high share defensibility) with high exposure to the fast-growing high-performance compute segment. Medium term, the company should benefit from the structural growth of AI and an improving returns profile over the coming years. After holding the stock for just over a year and +100% gains we sold the name in February as its valuation reached our target. More recently, we took advantage of the roughly 30% share price pullback since we sold and re- initiated a position. On a c. 23x forward PE for c. 30%+ earnings compound annual growth rate ('cagr') over the next 3 years and double-digit topline growth over the cycle, we still see attractive relative value and the stock has risen over 25% since reinitiating the position. Shares of Taiwan Semiconductor Manufacturing Company (TSM, 1.0% weighting) rose after the Taiwan-based contract chipmaker reported better-than-expected first-quarter results and management reiterated its growth expectation. Lack of inventory- related commentary indicated how far the industry is moving past the previous downturn and artificial intelligence continued to be an important growth driver. We trimmed the Portfolio's position after a period of strong performance. High conviction companies where market was focused on short term: Shares of Aon (2.4% weighting) declined after the Ireland-based global Insurance broker reported first-quarter results that saw organic growth came in below consensus expectations. Long term, we believe our investment thesis remains intact. As a broker and an asset-light company in a fairly consolidated industry, Aon generates strong returns on capital which we believe will be sustained due to strong pricing power (particularly in its insurance brokerage business) and cash flow generation and may benefit from margin expansion opportunities longer term as it digests the acquisition of middle market property and casualty broker. We maintained our position. Based in Italy, BFF Bank (1.0% weighting) is a specialty finance firm whose business model and risk profile, we believe, are misunderstood by the market. To the casual observer, BFF looks, and trades like, an Italian Bank when in reality, BFF operates as the scale player in a niche market with attractive organic growth potential. BFF primarily undertakes non-recourse financing for the pharmaceutical companies who do not have the patience to pursue collection of receivables from their public creditors. It has very low credit risk as the company's main borrowers are primarily governments. BFF has a competitive edge on acquiring receivables attributable to its long history of relationships with customers, broad network and its ability to claim recovery costs (BFF fought at the court for five years in order to obtain its right to charge late payment fees to the government, which no other competitor has the ability to do). Recently, shares have underperformed on news that dividend distributions were being halted by the Bank of Italy. Following this regulatory change, we met with the company and remain convinced our investment thesis remains intact. BFF remains a high-quality business that is able to generate lots of capital for shareholders that has underperformed on fears that regulatory changes will lead to lower returns that are misunderstood by the market. We took advantage of this pullback to add to our position. Ireland-based discount airline operator Ryanair (1.9% weighting) saw its stock price fall on lower fare growth assumptions for the first half of 2025, which in part, is due to the timing of Easter, and slightly higher non-fuel cost inflation driven by Boeing delays. Overall, we believe Ryanair can continue to grow earnings per share ('EPS') well into the double digits and is long-term an attractive business to own as the low-cost intra-European airline that continues to gain share. Quality compounder facing short-term cyclical pressures: Domiciled in Ireland, Accenture (ACN, 2.2% weighting) is one of the highest quality IT services companies benefitting from the global transformation of digital infrastructure. They continue to lead customers through digital disruption taking place in all industries and this differentiation coupled with their unique vertical capabilities are enabling strong growth and market share gains. Cost discipline, gained through leverage in winning a bigger share of existing customers wallets, which requires less expense for Accenture than seeking out new business, and pricing power in digital offerings enables margin expansion and cash flow growth. Strong and consistent cash flow has enabled a robust capital allocation framework built on opportunistic acquisitions in addition to dividends, buybacks and reinvestment in the business are all driving strong double digit eps growth. Shares have underperformed on near-term industry softness however recent results highlight book to bill has turned and we believe IT spending should improve as we move through the year and remain optimistic on the structural growth of the industry. Domiciled in Japan, Advantest (1.0% weighting) is the leading supplier of semiconductor testing equipment globally. Testing is an important step in the semiconductor manufacturing process that helps ensure reliable operation of the end-device as per design specifications. Companies designing the semiconductor device (fabless/IDMs) decide on the test methods, configurations, test policy and electrical specifications of the end device. Semiconductor manufacturers (foundries) then purchase the testing equipment based on the recommendations from IDMs and fabless design companies. Testing equipment demand is a function of semiconductor capacity and chip complexity. As such, the testing industry has seen growth substantially improve in recent years driven by four key factors: 1) Data compression and parallel testing have reached their productivity limit as miniaturization improvements have significantly increased the number of transistors on each chip that need to be tested, 2)The adoption of advanced packaging techniques also increases testing intensity, 3) Stringent quality (zero-defect) and power requirements for auto and industrial semiconductors should support demand growth as should the trend towards shorter R&D cycles and the introduction of new chip architectures, and lastly, 4) Testers are no longer viewed as a cost burden, but rather as a tool to improve development time and time to market. Advantest, with a 55% market share, is a duopoly in the testing market (with Teradyne). Margins are high and sustainable driven by their market position, scale, and technology leadership. Product development and SG&A costs do not scale with revenue. Given the low capital expenditure needs, free cash Aow conversion is high. Recent share price weakness on the back of concerns regarding smartphone volume recovery gave us the opportunity to buy the market leader in semiconductor testing equipment (high share defensibility) with high exposure to the fast-growing high-performance compute segment. Medium term the company should benefit from the structural growth of AI and an improving returns profile over the coming years. After holding the stock for just over a year and +100% gains we sold the name in February as the stock reached our valuation target. More recently, we took advantage of the roughly 30% share price pullback since we sold and re-initiated a position. On a c. 23x forward PE for c. 30%+ earnings CAGR over the next 3 years and double-digit topline growth over the cycle, we still see attractive relative value. Domiciled in Germany, Infineon (OTCQX:IFNNY. 0.6% weighting) is a leader in the structurally growing semiconductor market with a focus on the automotive industry. Infineon is well positioned in power-semis providing a good long-term investment on increasing electrification of autos. The auto semiconductor industry is differentiated from consumer technology/smartphones by longer product cycles, larger barriers to entry and long-term structural content growth supported by legislation around emissions. A power semiconductor is used wherever electrical power is generated, transmitted, or used. They manage the flow and amount of power going into a system in order to make that system more efficient. With today's focus for higher energy efficient solutions across applications, demand is high and growing and the business is less cyclical. Auto semis are a major growth driver as the shift to EV drives increasing semi content per car. On average, a battery electric vehicle contains up to 4x higher semi content compared to an internal combustion engine car. The transition to EVs is a large driver of demand for chips that go into EV inverters (where Infineon has the leading market share). Semi chip makers have been adding incremental capacity to cater to this higher demand. Securing stable, long-term chip supply is among the top priorities for leading car OEMs - this is driving capacity reservation agreements/long-term supply agreements between OEMs and chip makers, which has improved both volume and pricing visibility for auto semi manufacturers. After a recent meeting with management, de-risked guidance, and increased focus on their AI server power solutions, we re-initiated a position in this quality asset trading on a 16x 2025 PE and a 15% ROE. Mitsubishi Electric (OTCPK:MIELY, 1.1% weighting) is a Japanese industrial conglomerate comprised of a wide range of business units, including HVAC, automotive, factory automation ('FA'), building systems, and infrastructure among others. Of all Japanese conglomerates, Mitsubishi Electric has historically been the most reluctant to reform corporate governance practices, with no desire to focus their portfolio, and a lack of attention to margins and financial productivity. This all changed in the last couple of years. The current CEO and CFO are intent on improving the business and we believe they have potential to do so with solid underlying assets in Factory Automation and HVAC as a foundation, which combined equate to more than 50% of operating profit. Management has been meeting with shareholders regularly and hearing investor concerns. Our thesis is centered on management restructuring the company, meaningful asset disposal, a focus on higher quality business units with improved margins and using excess cash to fund share buybacks. They have expressed goals of improving pricing strategy (especially in regard to their pricing of custom work), being more selective on order intake, and being more selective on the businesses they own (even within areas like FA which are relatively high performing already). We believe the introduction of ROIC as a KPI to measure top management and business unit heads is a further sign that management wants to improve. Attractively valued with an estimated 15% 2026 ROIC (from 6% in 2023) for a 13x 2026 PE, and a net cash balance sheet we initiated a position. National Grid (NGG, 0.2% weighting) is a UK-based utility company. National Grid has historically traded at a comfortable premium to their RAB (regulatory asset base) driven by stable regulation in both the UK and the US and the market's belief that they can beat the regulated return while growing their asset base. The growth in National Grid's asset base is set to grow significantly going forward, driven by the need to put capital into the ground to protect an ageing grid, and at the same growing renewable connections and delivering on large scale projects that increase the grid connectivity. National Grid's recent equity raise was done at a time with high regulatory uncertainty, with the UK election one month away and a regulatory review in the UK right around the corner. National Grid used this equity raise to be fully funded in advance of the regulatory decision on the UK Electricity Transmission regulated returns. This allows them to engage with the regulator demonstrating they have the capital available to do the large step up in investments that they target and that they need an adequate return to do so. Ofgem, the regulator, is traditionally a sensible regulatory body that is viewed as best in class globally and so our expectation is that the regulatory review comes out rationally. However, should this not be the outcome, National Grid can demand a review by the Competition & Markets Authority ('CMA') into the regulatory allowed returns if they are not deemed adequate. This offers a backstop of protection to the potential that the regulator would want to leave investors short changed while ultimately National Grid can choose to invest into the US instead. Going early in raising capital and increasing their capex budget allows National Grid to get ahead on the global race for suppliers. The second point is that we are one month away from a General Election in the UK with the current premise that the government will change from Conservatives to Labor. There is little to suggest that the Labor party has any plans to change the current regulatory set up, but the market wants to question why raise equity ahead of this rather than letting things settle first. All of this combines to create a level of uncertainty to depress the share price to a suitable entry point. We took this as an opportunity to buy a utility that is fully funded to 2031 with a step up in capex to drive around 10% per year RAB growth in an environment that wants to use more electricity on an ageing grid. We exited our position in National Bank of Canada (OTCPK:NTIOF) following the company's acquisition of CWB which put into question their capital discipline and broke our investment thesis. Tokyo Electron (OTCPK:TOELY) is a Japanese semiconductor equipment manufacturer (semicap). We exited our position after a period of strong performance in order to allocate capital to other relative value ideas. Domiciled in Japan, Advantest (1.0% weighting) is the leading supplier of semiconductor testing equipment globally. Testing is an important step in the semiconductor manufacturing process that helps ensure reliable operation of the end-device as per design specifications. Companies designing the semiconductor device (fabless/IDMs) decide on the test methods, configurations, test policy and electrical specifications of the end device. Semiconductor manufacturers (foundries) then purchase the testing equipment based on the recommendations from IDMs and fabless design companies. Testing equipment demand is a function of semiconductor capacity and chip complexity. As such, the testing industry has seen growth substantially improve in recent years driven by four key factors: 1) Data compression and parallel testing have reached their productivity limit as miniaturization improvements have significantly increased the number of transistors on each chip that need to be tested, 2)The adoption of advanced packaging techniques also increases testing intensity, 3) Stringent quality (zero-defect) and power requirements for auto and industrial semiconductors should support demand growth as should the trend towards shorter R&D cycles and the introduction of new chip architectures, and lastly, 4) Testers are no longer viewed as a cost burden, but rather as a tool to improve development time and time to market. Advantest, with a 55% market share, is a duopoly in the testing market (with Teradyne). Margins are high and sustainable driven by their market position, scale, and technology leadership. Product development and SG&A costs do not scale with revenue. Given the low capital expenditure needs, free cash Aow conversion is high. Recent share price weakness on the back of concerns regarding smartphone volume recovery gave us the opportunity to buy the market leader in semiconductor testing equipment (high share defensibility) with high exposure to the fast-growing high-performance compute segment. Medium term the company should benefit from the structural growth of AI and an improving returns profile over the coming years. After holding the stock for just over a year and +100% gains we sold the name in February as the stock reached our valuation target. More recently, we took advantage of the roughly 30% share price pullback since we sold and re-initiated a position. On a c. 23x forward PE for c. 30%+ earnings CAGR over the next 3 years and double-digit topline growth over the cycle, we still see attractive relative value. Domiciled in Germany, Infineon (0.6% weighting) is a leader in the structurally growing semiconductor market with a focus on the automotive industry. Infineon is well positioned in power-semis providing a good long-term investment on increasing electrification of autos. The auto semiconductor industry is diPerentiated from consumer technology/smartphones by longer product cycles, larger barriers to entry and long-term structural content growth supported by legislation around emissions. A power semiconductor is used wherever electrical power is generated, transmitted, or used. They manage the Aow and amount of power going into a system in order to make that system more efficient. With today's focus for higher energy efficient solutions across applications, demand is high and growing and the business is less cyclical. Auto semis are a major growth driver as the shift to EV drives increasing semi content per car. On average, a battery electric vehicle contains up to 4x higher semi content compared to an internal combustion engine car. The transition to EVs is a large driver of demand for chips that go into EV inverters (where Infineon has the leading market share). Semi chip makers have been adding incremental capacity to cater to this higher demand. Securing stable, long-term chip supply is among the top priorities for leading car OEMs - this is driving capacity reservation agreements/long-term supply agreements between OEMs and chip makers, which has improved both volume and pricing visibility for auto semi manufacturers. After a recent meeting with management, de-risked guidance, and increased focus on their AI server power solutions, we re-initiated a position in this quality asset trading on a 16x 2025 PE and a 15% ROE. Mitsubishi Electric (1.1% weighting) is a Japanese industrial conglomerate comprised of a wide range of business units, including HVAC, automotive, factory automation ('FA'), building systems, and infrastructure among others. Of all Japanese conglomerates, Mitsubishi Electric has historically been the most reluctant to reform corporate governance practices, with no desire to focus their portfolio, and a lack of attention to margins and financial productivity. This all changed in the last couple of years. The current CEO and CFO are intent on improving the business and we believe they have potential to do so with solid underlying assets in Factory Automation and HVAC as a foundation, which combined equate to more than 50% of operating profit. Management has been meeting with shareholders regularly and hearing investor concerns. Our thesis is centered on management restructuring the company, meaningful asset disposal, a focus on higher quality business units with improved margins and using excess cash to fund share buybacks. They have expressed goals of improving pricing strategy (especially in regard to their pricing of custom work), being more selective on order intake, and being more selective on the businesses they own (even within areas like FA which are relatively high performing already). We believe the introduction of ROIC as a KPI to measure top management and business unit heads is a further sign that management wants to improve. Attractively valued with an estimated 15% 2026 ROIC (from 6% in 2023) for a 13x 2026 PE, and a net cash balance sheet we initiated a position. National Grid (0.2% weighting) is a UK-based utility company. National Grid has historically traded at a comfortable premium to their RAB (regulatory asset base) driven by stable regulation in both the UK and the US and the market's belief that they can beat the regulated return while growing their asset base. The growth in National Grid's asset base is set to grow significantly going forward, driven by the need to put capital into the ground to protect an ageing grid, and at the same growing renewable connections and delivering on large scale projects that increase the grid connectivity. National Grid's recent equity raise was done at a time with high regulatory uncertainty, with the UK election one month away and a regulatory review in the UK right around the corner. National Grid used this equity raise to be fully funded in advance of the regulatory decision on the UK Electricity Transmission regulated returns. This allows them to engage with the regulator demonstrating they have the capital available to do the large step up in investments that they target and that they need an adequate return to do so. Ofgem, the regulator, is traditionally a sensible regulatory body that is viewed as best in class globally and so our expectation is that the regulatory review comes out rationally. However, should this not be the outcome, National Grid can demand a review by the Competition & Markets Authority ('CMA') into the regulatory allowed returns if they are not deemed adequate. This oPers a backstop of protection to the potential that the regulator would want to leave investors short changed while ultimately National Grid can choose to invest into the US instead. Going early in raising capital and increasing their capex budget allows National Grid to get ahead on the global race for suppliers. The second point is that we are one month away from a General Election in the UK with the current premise that the government will change from Conservatives to Labor. There is little to suggest that the Labor party has any plans to change the current regulatory set up, but the market wants to question why raise equity ahead of this rather than letting things settle first. All of this combines to create a level of uncertainty to depress the share price to a suitable entry point. We took this as an opportunity to buy a utility that is fully funded to 2031 with a step up in capex to drive around 10% per year RAB growth in an environment that wants to use more electricity on an ageing grid. We exited our position in National Bank of Canada following the company's acquisition of CWB which put into question their capital discipline and broke our investment thesis. Tokyo Electron is a Japanese semiconductor equipment manufacturer (semicap). We exited our position after a period of strong performance in order to allocate capital to other relative value ideas. Style extremes have eased over the past year but more recently investors have been too focused on short-term issues and less willing to recognize the attractive valuation and earnings power of some high-quality cyclicals. As a result, the market has become more narrowly focused on simply what has worked in the recent past driving the price momentum factor to extreme levels. We think this will change. Global economic growth is low, but positive. Interest rates, which are at a more normal level than they were during the pandemic, are broadly stable to heading lower, not higher. And in this environment, we have been able to find many great investments across the three alpha buckets of compounders, mispriced, and restructuring stories. Compounders have generally done well but some cyclicals have lagged due to the market's focus on short-term concerns. We believe these companies can, and will, perform better as investors shift their focus away from short term noise. As the ECB has already begun to lower rates, and international elections are behind us, we believe many of these mispriced international equities with deeply discounted valuations and significantly higher earnings power can outperform. We believe our portfolio is well-balanced for the different market outcomes. Having this balance should enable stock selection to drive performance. We still expect that outperforming stocks will broadly come from companies with strong pricing power, companies that can deliver in-line or better than expected margins and companies with less levered balance sheets. And the extremely discounted valuations for international stocks should provide support for international equities going forward. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Lazard International Equity Portfolio Q2 2024 Commentary

After a strong six-month rally, international equity markets were broadly flat in the second quarter. While corporate profits were generally better than expected, investors focused more on short term macro and political concerns Japan underperformed in dollar terms as local market performance was overwhelmed by continued yen weakness Emerging Markets outperformed developed markets, both in the quarter, and now year to date, led by China which rose 7.1% The European Central bank lowered their policy rate 25 basis points (bps), ahead of the US Federal Reserve International equities digested some of their recent gains in the second quarter. The MSCI EAFE Index fell 0.4% while the MSCI ACW ex-US Index rose 1.0%. Consensus estimates for 2024 and 2025 earnings rose modestly through the second quarter earnings season as companies, on balance, reported better-than-expected results. While corporate earnings for developed markets are only expected to grow 4% in 2024, that growth rate is expected to accelerate to 9% next year. Despite the fact that the Bank of Japan raised short term interest rates for the first time in 17 years in March, the yen fell more than 6% during the second quarter, bringing the year-to-date loss for the currency to over 14%. While local Japanese returns have been strong due to rising inflation and improving corporate governance, USD returns have been negatively impacted by the currency weakness. As the market shifted away from Japan, emerging markets outperformed developed markets the most in a quarter since 2016. Chinese equities led the way rising 7.1% in the quarter, due to continued government stimulus and dramatically lowered market expectations already reflected in valuations. With inflation subsiding, the European Central Bank pivoted and cut rates 25 basis points this quarter. While future rate cuts are still a debate in the market, the central bank has signaled that the aggressive rate hiking cycle is over, which should provide increased confidence for investors. As the US Fed continues to push out rate cuts, the ECB is leading the rate cutting cycle for the first time in 25 years. We have been talking about how the extreme environment, led by either expensive growth or low quality, should transition to a more fundamentally driven market benefiting the Portfolio. This was certainly the case in the six-month period that stretched from the fourth quarter of 2023 to the first quarter of 2024. However, the current short- term focus of the market on elections and central bank policy decisions has led investors to simply rely on what has worked in the recent past as opposed to focusing on the quality of the business and its long-term earnings power. Stocks with high-price momentum, have been, by far, the largest driver of performance in international equity markets this year. The spread in performance between the MSCI EAFE Momentum Index (which aims to reflect performance of stocks with high price performance over the past twelve months) and the MSCI EAFE Index is the widest in 20 years, outside the extreme pandemic-driven rally in 2020. This has led the larger stocks in the MSCI EAFE Index to outperform, which, in turn, has led to a nearly 5% spread in year-to-date performance between the MSCI EAFE index and the MSCI EAFE Equal Weighted Index-the widest spread in more than 20 years. We strongly believe this is unsustainable and the average stock should close the gap with the index going forward. In the second quarter, the Lazard International Equity Portfolio (MUTF:LZIEX) fell 0.8%, underperforming the 0.4% decline of its benchmark, the MSCI EAFE Index. (Portfolio return is measured net of fees and in US dollar terms.) The main detractor in the quarter was sector allocation, not stock selection. Underweight exposures in the financials and healthcare sectors of 5% and 4%, respectively, accounted for the majority of the relative underperformance. The fact that both cyclical and defensive sectors were outperforming in the same quarter was evidence that the international equity market continued to focus more on fundamentals than style, which should be supportive for our relative value strategy over the medium to long term. However, during the second quarter, the market was more focused on short term concerns like elections and lingering pandemic- driven supply chain issues, rather than the long-term earnings power of great businesses. Stock selection in the information technology sector positively contributed to relative returns. Shares of Taiwan Semiconductor Manufacturing (TSM, 2.3% weighting) traded higher after the Taiwan-based contract chipmaker reported better-than-expected first-quarter results and management reiterated their growth expectation. Lack of inventory-related commentary indicated how far the industry is moving past the previous downturn and AI continued to be an important growth driver. We maintained the strategy's position and believe our long-term investment thesis remains intact. Stock selection in the consumer discretionary sector positively contributed to relative returns. Shares of Asics (OTCPK:ASCCF, 1.3% weighting) traded higher after the Japan-based sporting goods and equipment maker reported better-than- expected quarterly results, with operating profit up over 50% from a year earlier, and operating profit margins reaching a record high. Management reduced entry-level models, improved pricing and product mix, all of which are supportive of our investment thesis. We trimmed the strategy's position after a period of strong performance. China outperformed in the quarter. Domiciled in China, Tencent (OTCPK:TCEHY, 1.3% weighting) is one of the largest technology companies globally. Tencent dominates the Chinese internet space with an estimated ~50% share of all time online being spent within the Tencent family of apps. Tencent has one of the strongest ecosystems in both consumer and enterprise internet technology. The company's diversified revenue streams mitigate regulatory risk in any single division. Shares continued to rise during the second quarter after the company reported better- than-expected quarterly earnings in late March. Management commented visibility on its outlook appeared to be improving and discussed its ongoing plans to step up capital returns to shareholders. These results are supportive of our investment thesis. Stock selection in the industrials sector detracted from relative returns. Shares of Airbus (OTCPK:EADSF, 0.0% weighting) traded lower after the France-based airline manufacturer issued a profit warning. While the impact on company fundamentals remains relatively minimal, this development called into question the credibility and visibility that management has on the business. This broke our investment thesis, and we exited our position. Ireland-based discount airline operator Ryanair (RYAAY, 1.6% weighting) saw its stock price fall on lower fare growth assumptions for the first half of 2025, which in part, is due to the timing of Easter, and slightly higher non-fuel cost inflation driven by Boeing (BA) delays. Overall, we believe Ryanair can continue to grow earnings per share ('eps') well into the double digits and is long-term an attractive business to own as the low-cost intra-European airline that continues to gain share. We maintained our position. While overall, stock selection in Japan was positive one of our stocks lagged. Shares of Nitori (OTCPK:NCLTF, 0.9% weighting) faltered after the Japan-based furniture and household goods retailer reported fiscal third- quarter results that saw both sales and operating profit come in below consensus expectations; however, most of the miss can be attributed to currency headwinds and the rest to an irregular comparison hurdle, which was well-flagged by the company in advance of the earnings announcement. We maintained the strategy's position and believe our long-term investment thesis remains intact. Buys Based in Germany, Brenntag (OTCPK:BNTGF, 0.0% weighting) is the largest global chemical distributor, active in both commodity chemicals (essentials division) and specialty chemicals (specialties division). In 2021 and 2022 Brenntag benefited from the surging recovery out of COVID and the associated volume shortages and price hikes across global chemicals. Part of these gains reversed in 2023, however, margins and earnings remained above their pre-COVID average. We believe that recent margin stabilization and organic growth incrementally improving, as price declines are behind us, should start supporting the shares and the multiple. However, the stock is trading on a trough multiple, 12x PE vs 15x average and 0.6x EV/Sales vs 0.75x average, reflecting the markets concern about additional margin and earnings downgrades to consensus. We took advantage of this mispricing to initiate a position. JD Sports Fashion (OTCPK:JDSPY, 0.3% weighting) is a leading, multi-channel, retailer of market-leading sports fashion and outdoor brands and is based in the United Kingdom. A major element to JD's success and strong competitive positioning is its status as a preferred partner to global premium brands (e.g., Nike and Adidas). A key part of maintaining these relationships is not discounting; 90% of JD's sales are full price due to their very strategic and disciplined buying strategy. JD buys narrowly, sticking mostly to black and white colors with only a few, generally exclusive, seasonal colors to mitigate price competition. JD has become a mature player in its home market, the United Kingdom, however we believe they will grow more outside of the UK going forward. They plan on opening 200 to 300 new stores per year over the next five years across North America, Europe, and the Rest of World (largely comprised of APAC and the Middle East). JD uses M&A to look for chains in regions they want to grow in to gain access to space (store fronts). In the United States, JD acquired struggling retailer Finish Line to give them access to 660 stores. In Europe, same store sales growth has been strong as brands gain traction. Additionally, store roll outs are about to accelerate following their Courir acquisition with 320 stores added across Europe. JD not only competes in a segment of the market that benefits from long term secular growth, athleisure and sneakers, but also operates in a unique demographic, their target audience is young, male, urban 16 to 24-year-olds whose spending has proven resilient given their relative lack of financial burden. Attractively valued, trading on a 9x PE for a low teens ROIC and a 30% ROE, we initiated a position. Mitsubishi Electric (OTCPK:MIELY, 0.6% weighting) is a Japanese industrial conglomerate comprised of a wide range of business units, including HVAC, automotive, factory automation ('FA'), building systems, and infrastructure among others. Of all Japanese conglomerates, Mitsubishi Electric has historically been the most reluctant to reform corporate governance practices, with no desire to focus their portfolio, and a lack of attention to margins and financial productivity. This all changed in the last couple of years. The current CEO and CFO are intent on improving the business and we believe they have potential to do so with solid underlying assets in Factory Automation and HVAC as a foundation, which combined equate to more than 50% of operating profit. Management has been meeting with shareholders regularly and hearing investor concerns. Our thesis is centered on management restructuring the company, meaningful asset disposal, a focus on higher quality business units with improved margins and using excess cash to fund share buybacks. They have expressed goals of improving pricing strategy (especially in regard to their pricing of custom work), being more selective on order intake, and being more selective on the businesses they own (even within areas like FA which are relatively high performing already). We believe the introduction of ROIC as a KPI to measure top management and business unit heads is a further sign that management wants to improve. Attractively valued with an estimated 15% 2026 ROIC (from 6% in 2023) for a 13x 2026 PE, and a net cash balance sheet we initiated a position. NEC (OTCPK:NIPNF, 0.1% weighting) is an ICT (information and communication technology) company based in Japan that is well positioned to capitalize on the domestic high demand for digital transformation (i.e., modernizing legacy IT infrastructure). Domestic IT Services comprise the majority of group profits. Within this segment, margins are improving driven by the standardization of delivery (rather than custom system integration), improved pricing (given the tight supply), and restructuring low-margin businesses. These actions should lift margins from 8% to 13% by 2026. Additionally, NEC is benefitting from local strong defense demand where margins should lift to low teens from high single digits and within telecom services operating profit margin should improve from single to double digit as higher-margin software as a percent of sales increases and lower margin business turnaround or are cut. Attractively valued with a net cash balance sheet, high single-digit ROE and improving margins, we initiated a position. Otsuka Holdings (OTCPK:OTSKF, 0.5% weighting) is a Japan-based pharmaceutical (pharma, two-thirds of sales) and neutraceuticals (e.g., energy drinks, one-third of sales) company. Growth in Otsuka's pharma business is driven by four global products: Abilify Maintena (used to help treat bipolar disorder), Rexulti (used to help treat depression and Alzheimer's), Jynarque (used to help treat kidney disease), and Lonsurf (used to help treat colon or rectal cancer). These four products make up around 50% of pharma sales. The patent expiry of Abilify Maintena and Jynarque in 2025 will present a headwind, as those two products account for around 30% of pharma sales and 20% of group sales. However, we believe the market under-appreciates the future royalty income from new drugs and is too focused on the upcoming patent expiry. In 2023, Otsuka disclosed royalty income from Pluvicto and Kisqali, two major growth drivers for Novartis. Otsuka developed Pluvicto through one of its subsidiaries, which licensed-out the drug to a company that was later acquired by Novartis. Pluvicto generates $6bn in estimated peak sales for Novartis, which equates to $1.1bn EBIT for Otsuka via an average 18% royalty. Pluvicto works as a targeted radiotherapy that specifically kills cancer cells that express PSMA (prostate-specific membrane antigen) and are highly linked to prostate cancer. Kisqali was jointly developed by an Otsuka subsidiary and Novartis (NVS), initially to treat stage 4 breast cancer. In 2023, positive trial results indicated it was successful in treating earlier stage breast cancer (Stage 2 & 3), greatly expanding the market size, which is 3x the size of Stage 4. The drug is estimated to generate $6bn in peak sales, generating $540m EBIT for Otsuka via an average 9% royalty. We believe Otsuka is significantly undervalued given that royalties from Pluvicto and Kisqali, among other drugs, can reach an estimated total of $2b EBIT at peak sales, from ~$600m in 2023. We believe group margins and returns will improve significantly as a result from this higher royalty income. Attractively valued on a 11.5x 2025 ex-cash PE and an improving return on invested capital we initiated a position. Rio Tinto (RIO, 1.2% weighting) is a global miner with assets primarily focused on iron ore, copper, and aluminum. Iron ore is the predominant part of Rio Tinto's portfolio. Iron ore is a critical ingredient for steelmaking alongside metallurgical coal for blast furnace-based production. Iron Ore currently produces approximately 70% of Rio Tinto's profits, driven by their low-cost assets in Australia that produce very high 60% EBITDA margins. Such strong margins enable Rio Tinto to earn a 30% ROCE and ROE since they have nearly no net debt now on their balance sheet. The recent pullback in the iron ore price provided us with an opportunity to start a position in a company that should be highly cash generative given the quality of the assets they own. Iron ore prices fell back from $130/tonne at the start of the year to $100 on concerns over the lack of Chinese stimulus since China is approximately 60% of iron ore demand. We believe there is more protection to any potential downside at these levels for iron ore, with Chinese production being the marginal swing producer and having a cost around $90/tonne. Copper, representing around 20% of Rio's profit, continues to have a strong outlook for demand as the energy transition requires greater use of copper for electrification. At these prices Rio trades on 6.5x P/E and an 11% FCF yield, which given the strong balance sheet should see most of that cash Aow generation returned to shareholders. Sells Airbus (OTCPK:EADSF) is domiciled in France and is one of the leading airline manufacturers globally. We exited our position on concerns recent supply chain issues could last longer than the market anticipates, and Airbus will likely struggle to meet their planned delivery schedule. We will continue to track the business as it is clear the company's order book is benefitting from Boeing issues; however, we need to believe in Airbus' ability to execute as well. Akzo Nobel (OTCQX:AKZOF) produces and markets decorative paints and industrial coatings and is domiciled in the Netherlands. We exited the position on continued disappointing operating performance in order to allocate capital into higher conviction ideas elsewhere in the portfolio. BayCurrent Consulting (OTCPK:BYCRF) is a consulting services company that is based in Tokyo. Management's comments regarding their new initiative to build out their IT services division have been inconsistent and lack clarity. We exited our position losing conviction in our investment thesis. Universal Music Group (OTCPK:UMGNF) is a leading multinational music content company. We exited the position after a period of strong performance, in order to allocate capital to higher conviction, relative value, ideas. Zozo (OTCPK:SATLF) is a Japan-based internet operator of apparel shopping sites. We exited our position as a source of funds for higher conviction ideas. ECB rate policy could provide the bump quality cyclicals need Geopolitical risk shifts from international to US International valuations remain near all-time lows compared to the US As international risks subside, investors should shift focus to deeply discounted valuations and longer-term earnings power Style extremes have eased over the past year but more recently investors have been too focused on short-term issues and less willing to recognize the attractive valuation and earnings power of some high-quality cyclicals. As a result, the market has become more narrowly focused on simply what has worked in the recent past driving the price momentum factor to extreme levels. We think this will change. Global economic growth is low, but positive. Interest rates, which are at a more normal level than they were during the pandemic, are broadly stable to heading lower, not higher. And in this environment, we have been able to find many great investments across the three alpha buckets of compounders, mispriced, and restructuring stories. Compounders have generally done well but some cyclicals have lagged due to the market's focus on short-term concerns. We believe these companies can, and will, perform better as investors shift their focus away from short term noise. As the ECB has already begun to lower rates, and international elections are behind us, we believe many of these mispriced international equities with deeply discounted valuations and significantly higher earnings power can outperform. We believe our portfolio is well-balanced for the diPerent market outcomes. Having this balance should enable stock selection to drive performance. We still expect that outperforming stocks will broadly come from companies with strong pricing power, companies that can deliver in-line or better than expected margins and companies with less levered balance sheets. And the extremely discounted valuations for international stocks should provide support for international equities going forward. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Lazard Real Assets Portfolio Q2 2024 Commentary

Optimism remains for global rate cuts, potentially benefiting equity and bond markets, despite looming risks from economic conditions and US election policy uncertainties. 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. In fixed income, US government bonds started the quarter weaker but recovered over the last few weeks. After hitting an interim high of 4.74% in April, the yield on benchmark 10-year US Treasury note (US10Y) rallied and closed at 4.40% at quarter end. The real yield derived from inflation-linked bonds showed a similar pattern and closed 23 basis points higher offering attractive 2.11%. In the credit market, risk premia widened in the beginning and close to the end of the quarter but tightened between April and May. All in all, credit spreads widened from the narrow levels of previous months, both for investment-grade and high-yield bonds. Emerging markets debt bonds were stable in hard currencies, but lost ground in local denominations. The US dollar (USDOLLAR) had a strong quarter in the currency markets, with the US Dollar Index (DXY) gaining 1.3%. In turn, Asian currencies remained under pressure. Both the Japanese yen and the Chinese renminbi weakened over the course of the quarter, depreciating 5.9% and 0.6%, respectively, against the US dollar. In Japan, the weakness was so pronounced that we are now again seeing an increased risk of currency intervention by the Ministry of Finance. Commodities continued positive returns from the previous quarter. Base and precious metals were the leading sectors, followed by energy. Agriculture and livestock underperformed in the second quarter. For commodities as an asset class, the perception seemed to be that no more rate hikes would create a ceiling for US dollar strength. Commodities continued their steady, albeit somewhat pedestrian, positive performance throughout the quarter. Commodity markets seemed to suggest that even if inflation were to increase, US monetary policy may be more constricted by rising borrowing requirements, driven by increased national public debt that is being financed at much higher interest rates and at debt to GDP levels above 122%. In the quarter that ended 30 June 2024, the Lazard Real Assets Portfolio's institutional shares (RALIX) and open shares appreciated 0.71% and 0.54%, respectively, outperforming 0.04% gain of the Real Assets Blend Index [1]. (Portfolio performance is measured as a total return and net of fees. All returns, including that of the index, are in US dollar terms.) The commodities allocation was the top-performing component of the Portfolio, thanks primarily to exposures to silver, gold, zinc, and copper. Silver and gold contributed, with silver prices recording especially strong gains, as investors began to closely monitor the historical gold-to-silver ratio, which pointed to dramatically higher silver prices. Zinc and copper saw a continuation of very low spot smelting charges which is an indication of a shortage of metal concentrate being produced. Agricultural commodities lagged in the period, as better planting and crop conditions resulted in higher supply. Infrastructure, as measured by the MSCI World Core Infrastructure Index, fell 1.0% in the second quarter. Oil & Gas Storage & Transportation (+4.7%) and Utilities (+1.8%) were the best-performing industries while Transportation Infrastructure and Communications Infrastructure were the worst performing, depreciating 6.8% and 5.1%, respectively. Top contributors in the Portfolio were US-based pipeline operator Targa Resources (TRGP) and UK-based power generator and network operator SSE (OTCPK:SSEZF), which represented 1.8% and 1.1% of the Portfolio, respectively. Top detractors were France-based infrastructure builder Vinci SA (OTCPK:VCISF) and US- based wireless tower operator SBA Communications (SBAC), which represented 1.3% and 1.5% of the Portfolio, respectively. Real Estate was the laggard as far as benchmark performance goes in the period, underperforming both Commodities and Infrastructure. The MSCI ACWI IMI Core Real Estate Index retreated 1.9%, with performance led primarily by US Multi-Family Apartments and Health Care real estate investment trusts (REITs). Weakest-performing property sectors included Hotel & Resort REITs (-10.5%), Industrial REITs (-7.4%), and Diversified REITs (-5.1%). While we expect continued signs of decelerating inflation and resilient economic activity to favor Real Estate activities and valuation, adjustment surrounding expectations for timing and pace of initial interest rate cuts by the Fed continued to weigh on the sector during much of the quarter. Security-level contributors included US-based senior housing communities operator Ventas (VTR), and US-based property manager AvalonBay Communities (AVB), which represented 1.3% and 1.4% of the total portfolio, respectively. Notable detractors were US-based warehouse operator Prologis (PLD) and US-based data center provider Equinix (EQIX), which represented 1.8% and 1.5% of the Portfolio, respectively. The global central bank hiking cycle of 2022-2023 was unprecedented. After a prolonged pause at peak policy rates in many economies (e.g., nine months in the eurozone and 11 and counting in the US), resumed disinflation has raised hopes of a similar cutting cycle-even if more gradual and to a higher "terminal rate." To be sure, there have been many twists along this journey and more could be ahead. But the faster a rate cut cycle begins in earnest, the more likely a soft landing-high interest rates and tight credit conditions would have less time to harm a still-resilient economy. Strong labor markets have been the key to ongoing resilience across a number of major economies. Looking ahead, gradual weakening could reach a tipping point and accelerate. Earlier in the recovery, employer demand for labor far exceeded supply. So far, high interest rates and tight monetary policy appear to have reduced this demand without a significant increase in layoffs, as predicted by Fed Governor Christopher Waller. Now, with employer demand lower, it is possible that any step-up in layoffs might not be absorbed by new hiring and unemployment could become more widespread. Despite still-robust jobs growth, we are carefully looking for any sign of such a dynamic-as recently advocated by Fed Governor Adriana Kugler, among others. Nonetheless, we remain optimistic that relief from global rate cuts is on the horizon, and that this will be good for both equity and bond markets. While a number of additional risks hang over the outlook for the second half of the year, we are maintaining similar positioning while seeking to avoid potential policy risks that could emerge from the US election. [1] Me Real Assets Blend Index is an equal weighted blend of the MSCI World Core Infrastructure, MSCI ACW IMI Core Real Estate, and Bloomberg Barclays Commodity Total Return, rebalanced monthly. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

Lazard Equity Franchise Portfolio Q2 2024 Commentary

Despite recent challenges, the Portfolio is positioned for future growth, trading at significant discounts with strong earnings forecasts. Equity markets worldwide gained in the second quarter of 2024, as investor sentiment about the global interest-rate outlook swung from pessimism to cautious optimism. With concerns about inflation continuing to hang over markets, the focus during the quarter was squarely on the interest rate policy paths of key central banks. The US Federal Reserve held interest rates steady in May and June, acknowledging that progress in driving domestic inflation down towards its 2% target had slowed. The European Central Bank lowered interest rates in June, citing a marked improvement in the eurozone's inflation outlook. In the UK, the Bank of England held its main interest rate, even as inflation was slowing toward its 2% target. In the second quarter, the Lazard Equity Franchise Portfolio (MUTF:LZFIX) fell in absolute terms and underperformed its benchmark, the MSCI World Index. (Return is measured net of fees and in US dollars.) The Lazard Equity Franchise Portfolio has not performed in line with our expectations, as this type of market is particularly challenging for valuation-sensitive investors, and the Portfolio was no exception. The Portfolio's main sources of recent underperformance came from stock selection in health care and utilities. The Portfolio's underweight position in information technology, the top-performing sector in the MSCI World Value Index during the quarter and having no positions in the Magnificent Seven artificial intelligence stocks, also hurt performance. H&R Block (HRB) (4.6% weighting in the Portfolio), the largest tax agent in the US, continued its strong share price performance since reporting its better-than-expected full-year results in August last year. HRB is a highly seasonal business, with more than 100% of its operating profit generated in the fourth quarter due to the timing of the US tax year. In May, HRB announced its third quarter results outperforming market estimates. HRB reaffirmed its full-year F2024 guidance. Based on consensus estimates, HRB trades at around 10 times earnings per share, has no net debt, and pays a quarterly dividend of 32 cents per share, implying an annual dividend yield of around 3%. Since 2016, HRB has grown its dividend by over 60% and has returned over US$3.5 billion to shareholders through dividends and share repurchases. The world's number one pest control company, Rentokil (RTO, 3.0% weighting), rose sharply in June after a Bloomberg News report revealed that activist investor Nelson Peltz's Trian Fund Management LP has acquired a significant stake in the company. The investment firm stated that it is now among the top 10 shareholders in Rentokil, which owns Terminix in the US. It was reported that Trian has reached out to Rentokil to discuss ideas for boosting shareholder value. Although Rentokil is down 40% from its 2022 peak, the stock is up around 20% since our initiation. This follows a strong fourth-quarter result announced in March, with EPS 3.5% ahead of consensus, a 15% increase in the dividend, and raised expectations for annual pre-tax synergies from the Terminix integration by an additional US$50 million to approximately US$325 million. Global consumer product and adhesives company Henkel (OTCPK:HENKY, 0.0% weighting) added to performance in during the period, with most of the performance coming in early May after it published strong first quarter results. At the first quarter 2024 result, management raised guidance for 2024 organic revenue growth, operating margin and EPS (EPS to grow in a range of 15-25%, up from guidance of 5-20%). The adhesives business is performing well, and the rationalization of the consumer product division (beauty and laundry) is progressing. During the period, after strong share price performance, we sold our position in the stock. Shares of CVS (6.4% weighting), a US healthcare company, were dragged down in late June by a profit warning issued by pure-play pharmacy retailer Walgreen, citing continued consumer pressures. CVS has a top-3 US Pharmacy Benefit Management ('PBM') company and since 2018 has owned US health insurer Aetna which leverages its third business, the legacy CVS Pharmacy chain. The combined three businesses offer a total healthcare solution at lower costs for consumers. Like Walgreens (WBA), CVS' pharmacy retail business has sustained margin pressures over the last few years. As pharmacy closures accelerate throughout the US, CVS is attempting to shift its operating model to a margin-focused business to limit risk. Success in this initiative is not yet reflected in the company's earnings guidance. Today, CVS trades on barely 8x earnings, with mid to high single-digit EPS growth. Dentsply Sirona (XRAY, 5.0% weighting), the world's largest manufacturer of professional dental products and technologies, detracted from performance following its quarterly announcement, which reported organic growth falling short of market expectations. That said, XRAY did not change its 2024 EPS guidance of $2.00 to $2.10 and continues to reaffirm its medium-term target of $3 in 2026 EPS. Our expectations for XRAY are well below these management forecasts, yet we still see value in the stock. If management's forecasts are realized, we believe XRAY is trading at barely 8 times the targeted 2026 earnings as of 30 June 2024, which is less than half its decade average of around 20 times earnings. Leading dental distributor Henry Schein (HSIC, 3.9% weighting) detracted during the quarter after reporting first quarter results in May. Initially, the results were well-received, with margin expansion ofsetting weakness in the dental end market. The full year 2024 revenue midpoint was slightly lowered, but the EPS range was reaffirmed. Private-label and value implants were a bright spot as consumers traded down. The recovery from last year's cyber impact also appeared to be progressing well. With conservative assumptions around end market demand and the recovery from the cyber incident, the stock remains attractively priced. In aggregate, we have been pleased with the operating performance of the companies in the Portfolio over the last 12-months. In the last three quarters, more than 80% of the holdings have exceeded management and/or market expectations in terms of earnings. Future market expectations for stocks in our Portfolio appear strong, with forecasted earnings growth of an aggregate of more than 40% over the next 3 years. The Portfolio today trades at one of the largest discounts to the market in terms of PE and EBIT multiples, while still maintaining large premiums in term of return on assets and stronger free cash Aow generation. We believe the market today presents a strong opportunity to buy global leaders and monopolies at a significant discount and our Portfolio is positioned to capture any potential re-rating in these names. Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.