Market Overview
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.
Portfolio Review
In the second quarter, the Lazard Global Listed Infrastructure Portfolio (MUTF:GLIFX) underperformed the return for the MSCI World Core Infrastructure (USD Hedged) Index and underperformed the return for the MSCI World Index. (Portfolio returns are measured net of fees and in US dollar terms.)
Renewable energy player Atlantica Sustainable Infrastructure (AY) (0.5% weighting in the Portfolio) added to performance after a private company controlled by Energy Capital Partners (ECP) and a consortium, offered to buy 100% of the shares of AY for US$22/share, a nearly 19% premium to the closing price prior to the speculation. The deal comes with support from its largest shareholder, Algonquin Power & Utilities (AQN), also owned in our portfolio. AY expects the transaction to close in fourth quarter 2024E or early first quarter 2025E subject to a raft of regulatory approvals. While we wait, as part of the deal, we are being paid US$0.445 per share in dividends each quarter, representing more than 8% p.a. at the offer price.
American Electric Power (AEP) (4.6% weighting) rose after it reported solid first quarter earnings. Earnings per share grew 14.4% compared to the prior year, while commercial load increased 10.5%, driven by demand from new data centers in Ohio and Texas. AEP is expected to increase its load growth forecasts for the coming years based on further data center developments in its service territories.
French toll road operator Vinci’s shares (4.9% weighting) reacted negatively to the announcement of two acquisitions. The first acquisition was for the Northwest Parkway that forms part of the ring road around the city of Denver, Colorado in the US. While we believe the acquisition has an attractive pricing structure and the concession is very long dated, the upfront multiple suggests that this will be a very long payback investment. The second acquisition was a 50.01% stake in Edinburgh airport. While this is a fully unregulated and fully owned asset, in our view, the economics rely on generous traffic and pricing assumptions. We believe this is challenging as low-cost carriers represent over two thirds of the traffic at the airport. Vinci also suffered as a result of the political uncertainty created by the French President calling snap elections. With extreme parties leading the polls, our view is that the market is concerned about the heightened sovereign risk. We believe the extreme left is likely to question concession contracts and its policies could lead to an economic shock in the country. However, we continue to see the French motorway contracts as having a high degree of legal protection.
US freight railways Norfolk Southern (NSC, 8.1% weighting) and CSX (4.8% weighting) detracted from performance during the quarter. All Class 1 freight railroads recorded share price declines in the first quarter, with the market focused on IT and high-beta sectors. At Norfolk Southern, the proxy contest with an activist investor ended with the appointment of three new board members, all of whom have extensive railroading or regulatory experience. The contest also resulted in support for existing CEO Alan Shaw and the election of former Canadian National CEO Claude Mongeau as Chair. We view the outcome favourably, as the board has strengthened its railroading knowledge and new operating ratio targets appear achievable. Norfolk Southern also reached agreement on a consent decree to resolve all federal claims and investigations in relation to the East Palestine derailment. In late May, CSX was able to resume full export operations at the Port of Baltimore, after deep channel repairs were completed following the earlier tragic collapse of the Francis Scott Key Bridge.
UK diversified utility National Grid (NGG, 8.5% weighting) tumbled after the announcement of a £7 billion rights issue. The equity raise was not a sign of financial distress, rather to finance an increase in organic investment. With greater clarity on the scope of offshore transmission investments in the UK and a clear plan set out by its US regulators, the company aimed to maintain a strong balance sheet during this investment phase. The timing of the announcement was unfortunate, with UK elections being called the day before. We believe its successful equity raising paves the way for continuous growth in the asset base. We believe that operational delivery will be crucial for the company to deliver earnings at the top end or in excess of the 6%-8% p.a. growth target.
Outlook
The combination of volatile equity markets and our conservative approach leads us to view current market conditions cautiously. We see some pockets of attractive value opportunities, particularly in Europe. inflation has been running strong in most developed countries, resulting in increases in interest rates from historic lows. While we are starting to see signs of inflation moderating, we believe inflation will remain above most central bank target ranges for a number of years ahead. High bursts of inflation have positive cashflow implications for toll roads, airports, railways and non-US utilities. In contrast, the implications of higher inflation for US utilities are likely negative.
For a long time, we have cautioned investors about the valuation of the US utility sector. Lazard’s Global Listed Infrastructure strategy has been underweight this sector for some time. We remain cautious on the US utilities sector as a whole; however, we are beginning to see some specific stock opportunities within the sector. We may seek to take advantage of these opportunities in the months ahead.
The scarce valuation opportunities have led to a relatively concentrated portfolio where we believe the risk/return trade-off is favourable, however this brings a higher degree of stock-specific risk. In our opinion, the only way to generate returns that properly compensate for the risk taken is through highly selective stock-picking. We caution investors to expect increased volatility in the short to medium term. Value is emerging now and on a 5-year view and valuations look more attractive on a risk/return basis. We believe returns available in the strategy look relatively attractive at this time when compared to a passive investment in infrastructure indices, bonds or in broader equity markets. We believe the preferred infrastructure characteristics we seek for all our investments will continue to serve our investors well over the longer term.
Important Information Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. For more complete information about The Lazard Funds, Inc. and current performance, you may obtain a prospectus or summary prospectus by calling 800-823-6300 or going to www.lazardassetmanagement.com. Read the prospectus or summary prospectus carefully before you invest. The prospectus and summary prospectus contain investment objectives, risks, charges, expenses, and other information about the Portfolio and The Lazard Funds that may not be detailed in this document. The Lazard Funds are distributed by Lazard Asset Management Securities LLC. Information and opinions presented have been obtained or derived from sources believed by Lazard Asset Management LLC or its affiliates (“Lazard”) to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of the published date and are subject to change. Allocations and security selection are subject to change. Please click here for standardized returns: https://www.lazardassetmanagement.com/us/en_us/funds/mutual-funds/lazard-global-listed-infrastructure-portfolio/F265/S29/ The performance quoted represents past performance. Past performance does not guarantee future results. The current performance may be lower or higher than the performance data quoted. An investor may obtain performance data current to the most recent month-end online at www.lazardassetmanagement.com. The investment return and principal value of the Portfolio will fluctuate; an investor’s shares, when redeemed, may be worth more or less than their original cost. Different share classes may have different returns and different investment minimums. Mention of these securities should not be considered a recommendation or solicitation to purchase or sell the securities. It should not be assumed that any investment in these securities was, or will prove to be, profitable, or that the investment decisions we make in the future will be profitable or equal to the investment performance of securities referenced herein. There is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been repurchased. The securities mentioned may not represent the entire portfolio. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities Page 2 Lazard Global Listed Infrastructure Portfolio in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries. Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors. The MSCI World Core Infrastructure Index captures large and mid-cap securities across the 23 Developed Markets (DM) countries. The Index is designed to represent the performance of listed companies within the developed markets that are engaged in core industrial infrastructure activities. The index is unmanaged and has no fees. One cannot invest directly in an index. The MSCI World Index is a free-float-adjusted market capitalization index that is designed to measure global developed market equity performance comprised of developed market country indices. The index is unmanaged and has no fees. One cannot invest directly in an index. Certain information included herein is derived by Lazard in part from an MSCI index or indices (the “Index Data”). However, MSCI has not reviewed this product or report, and does not endorse or express any opinion regarding this product or report or any analysis or other information contained herein or the author or source of any such information or analysis. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any Index Data or data derived therefrom. Certain information contained herein constitutes “forward-looking statements” which can be identified by the use of forward- looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “intent,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. |
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