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Lazard: pension fund's international holdings up sharply but trail benchmark because of quality tilt
Summary
At the Sept. 24 Sarasota City Firefighters' Pension Plan board meeting, Lazard representatives reported strong year-to-date gains in the plan's international equity sleeve but said the manager is trailing its benchmark due to a persistent high-quality investment style and tariff and currency effects.
Michael Powers, a portfolio representative from Lazard, and Frank Spizzato, a Lazard portfolio manager, told the Sarasota City Firefighters' Pension Plan Board of Trustees on Sept. 24 that the plan's international equity allocation has produced strong year-to-date returns but has lagged its benchmark because Lazard maintains a high-quality, lower-risk bias.
The presentation, covering performance through the second quarter and year-to-date figures, said the international sleeve was "close to 20% year to date," a level the presenters described as unusually strong for global equities. Spizzato said the firm's portfolios emphasize "very high quality stocks, very financially productive, low debt, sustainable earnings" and that this quality focus has cost the portfolio relative performance when low-quality stocks have rallied.
Why it matters: The board's international allocation is a meaningful portion of the portfolio and the recent performance swing affects the plan's near-term returns and risk profile. Trustees asked whether Lazard planned to change strategy; the firm said it would not alter its quality-first approach.
Lazard outlined three primary reasons for the relative underperformance this year: (1) the manager's emphasis on high-quality companies rather than lower-quality stocks that briefly outperformed; (2) tariff pressures that have weighed on large European exporters; and (3) prior currency and dollar moves that historically hurt U.S. investors in international stocks but this year have provided a tailwind as the dollar weakened. Spizzato said the firm has begun to see quality stocks outperforming again in the most recent period.
On portfolio construction, Lazard said its international exposure is a blue-chip, quality-weighted portfolio with lower indebtedness than the market and a historically higher return-on-capital profile. The presenters said the emerging markets sleeve has shifted from being a drag to an outperformer over the past five years and that the overall allocation is benefiting from a combination of improving international earnings and currency moves.
The presenters told trustees there have been no ownership or investment team disruptions that would affect day-to-day management. The firm announced a new chief executive of its asset management division, Chris Hobebin, who was reported to start in December; Lazard said the change is at the corporate leadership level and does not alter the portfolio team.
Trustees and the Lazard representatives discussed tariffs and the dollar: Lazard said tariffs have hurt large exporters in Europe and that the recent weaker dollar has helped international returns for U.S.-based investors. The firm also emphasized that a company's exposure to U.S. markets versus other markets determines how tariffs and currency moves affect results.
No formal board action or vote followed the Lazard presentation; the trustees moved on to the next investment manager review at the end of the session.
