Specialty Manager of 2022: Lazard

Despite the lingering global pandemic, a continued reduction in travel and rising supply chain issues, the Lazard Global Listed Infrastructure Fund managed a return of 19.87% in 2021, beating its benchmark by more than 2 percentage points.

Yet in many ways it was due to the unwinding of the pandemic that helped Edward Keating, Lazard director and portfolio manager, and his team’s performance to excel in 2021.

Winning the Asset Manager of the Year award in the Specialty category, the first time one has been given in the category since 2017, Keating credited their typical three- to five-year investment horizon, and the rebound, especially from 2020, from the COVID shutdowns.

Because prices were depressed on many of those stocks in 2020, Lazard was able to scoop them up or add to holdings cheaply, and when the world began opening again, those prices rose.

Three key areas of 2021’s success included the railway sector, United Kingdom utilities and toll roads. As Envestnet analysts wrote, the “value-oriented portfolio [is] made up of the stocks … that exhibit high revenue and profit certainty due to their usually regulated and monopolistic market positioning and long-term, inflation-linked contracts.”

For many years Lazard had been trimming their holdings in the railroad sector, but the impact by COVID on travel logistics and shipping lanes and routes made them think differently.

“[In the third quarter] we viewed the impact on the railroad companies in an overblown manner, and saw the share prices fall double digits over the course of just a few weeks, which allowed us to [buy] or invest further capital in companies that while already attractive, became more attractive, and … those companies performed quite strongly in the fourth quarter,” Keating explained.

U.K. utilities was another area in which the market seemed “overly pessimistic,” Keating said. Therefore, there was some softness to the market, and “we were able to increase our positions in several specific investments in the U.K.”

Further, “utility companies have some very strong inflation pass-through mechanisms by way of regulation, and as inflation started to pick up near the second half of 2000 to 2021,” more investors were looking for that type of stock, he noted.

The pandemic reined in driving, which definitely hit toll road stocks. As Keating explained, a simple calculation to determine revenues is number of cars multiplied by the tolls. And during the pandemic, global traffic fell by 75%, “which were incredible figures around the world.”

But as COVID restrictions fell and traffic increased, these stocks rose. In the United States, most toll roads are owned by public entities, like a municipality or the federal government, Keating said. But that’s not the case in Europe and Australia, where Lazard owns stock in Australian, Italian and French toll road companies, some which own assets in other countries, including the United States.

One of the key challenges is these assets have “very, very long-dated asset contracts in which these companies sign with governments to maintain operational ownership of the assets,” he said. “They could be 50 to 75, or as long as 99 yearlong contracts. And it’s challenging in this market [today] to think that far out. But we believe that’s where much of the value is in infrastructure investing.”

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Edward Keating

Title: Manager; Years with firm: 20; Years in financial services: 20; Investment/Asset Class Focus: Specialty; Asset management firm: Lazard; Year firm founded: 1848; Number of employees: 900+; AUM as of March 31, 2022: $220.9 billion