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Lazard Global Thematic Equity
Performance (Gross of fees; through 31 January 2014) Performance reported gross of fees. Past performance is not necessarily indicative of future performance. Benchmark returns MSCI net official numbers. Source: MSCI. Based on a representative account.
Commentary
Market Overview
Equity markets swooned in January. The emerging markets fell most as capital outflows accelerated
and their currencies weakened. Concerns about the possible impact of continued tapering in the
United States and slowing economic growth in China were behind the decline in developed-world
equity markets as well. The US dollar strengthened (the inverse of emerging-country currency
declines). Despite this, the price of gold rose. Gold and US government bonds were the main hiding
places from these very broad declines.
The contrast between broadly positive predictions from most market commentators at the end of 2013 and actual market outcomes in January was marked. Perhaps this was just a healthy market correction after long periods of rising markets. After all, the continuous rise in the S&P 500 Index is one of the longest on record. However, we have been reminded that US monetary policy is set for domestic US economic conditions and not for the conditions prevailing in other countries, which may loosely link their currencies to the US dollar. Calls from India, for example, for the United States to remember global “responsibilities” have so far fallen on deaf ears. The latest statement by the US Federal Reserve (the Fed) at the end of January did not make references to conditions anywhere outside the United States. The famous quote from the Reagan era, “It’s our dol ar and your problem” sums it up nicely. Authorities in emerging countries face tricky policy choices. If interest rates are raised (as they have been in many countries, most notably in Turkey and Brazil) in an attempt to stem capital outflows, slower economic activity could possibly follow. This is an unattractive political choice. The alternative would be declining reserves and inflation, an equally unattractive choice. Arguments about the relatively sound fundamental conditions of emerging country balance sheets may be reasonable, but market challenges are about liquidity, not credit. Emerging-market exchange-traded funds probably are not helping because they link countries and stocks in the wave of basket selling, where there may be fundamental differences. The question, as we have said before, is whether growth causes interest rates to rise in its wake or whether markets, by pushing up interest rates, stifle growth. Taking one side or the other in this question is risky. The evidence for economic growth is very mixed, although there is a bounce from very low levels of growth in developed countries. In addition, political factors are evident as emerging countries face tricky policy choices. Rising geopolitical and domestic tensions are evident in Asia, the Middle East, and Central Europe. The contrast between domestic US monetary policy and the dol ar’s role as the global reserve currency is also evident. It should also be mentioned that there is political opposition in the United States to the proposed Atlantic and Pacific trade pacts. More polarised politics in the developed countries may be explained by the fact that household
finances are now having to take the strain of slow economic activity, while the pressure, for now, is
off sovereign finances and financial systems.
Company results in January were mixed and were not indicative of broadly based revenue growth.
Most notable was how sensitive share prices were to short-term quarterly metrics. There was little
evidence of the increased capital spending which might convey greater confidence in economic
recovery.
The sell-off in January was broadly based. Nonetheless, we believe that the United States has real
structural advantages, for instance, low energy prices. In addition, Japan, although the country
performed poorly in January, has policy autonomy.
We have not seen market conditions related to the process of exit from extreme easy monetary
policy before. There is no direct parallel with the momentum markets that led up to and created the
technology, media, and telecoms (TMT) bubble. However, it may be that another market transition
is coming, albeit delayed by the extreme extent and duration of easy monetary policy. Our views
about quantitative easing (QE) are consistent with our belief that a new long-cycle may be about
slow growth, efficiency not scale as the driver of wealth creation, investment in public goods, and
other inter-societal and inter-generational transfers. We believe it is unlikely that the old cycle driven
by asset leveraging and increasing consumption will be revived.
We are nervous of the QE world. Our strategic view has been maintained consistently while QE
remains in effect. We think of risk in terms of capital preservation. Portfolio strategic positioning is
designed to preserve capital should circumstances require it. In the meantime a cost to relative
returns has been incurred. While we are not optimistic for the current market conjuncture, we are
very optimistic about the prospects for wealth-creative investments, which are scarce and which will
be valuable after a long period without capital investment since the financial crisis. The themes
Managing Complexity, Simplifying Structure, Internet Giants, Information over Capital, US
Renaissance, and Gas & Oil are designed to achieve this. The emerging markets are also likely to
be wealth creative in the long-run. Subdued portfolio exposure is maintained under the National
Platforms theme.
Portfolio Review
The portfolio declined in value, slightly underperforming the MSCI World ex-Australia Index.
The main rising themes were Gold & Precious Metals, US Renaissance, and Simplifying Structure.
The main themes that detracted from performance were Japan, National Platforms, and Secure
Streams of Income.
The rising bullion price was a significant factor in the returns of the Gold & Precious Metals theme.
All holdings except Newmont Mining rose, supporting our view that the sector may now have
bottomed. Newmont Mining fell, however, given managements’ apparently less-disciplined
approach to the use of capital. Under US Renaissance, Union Pacific rose on good results. Dow
Chemical also rose on good results and the entry of an activist shareholder demanding structural
change. DuPont fell, despite excellent results. Under Simplifying Structure, AstraZeneca and
Amgen rose, both on promising pipeline developments. Mead Johnson and AbbVie fell, the former
because of worries about its important business in China.

Under Japan, Seven & I Holdings rose as the retail environment in Japan continued to improve.
Mitsubishi Estate, Mitsui Fudosan, and Sumitomo Realty & Development declined with the market.
Robot exporter Fanuc declined as the yen strengthened. Under National Platforms, insurers
Prudential and AIA fell, although operations performed robustly. China Shenhua Energy and Hong
Kong & China Gas fell in weak markets. Emerging markets exposure in the portfolio has been
reduced and we are comfortable with current levels. Under Secure Streams of Income, industrial
gas producers Air Liquide and Linde fell, as revenues are seen to be subject to the effects of weaker
emerging markets currencies. Oil majors Chevron and Exxon Mobil declined as results showed
slow production growth. Balance sheets are solid.
Recent Activity and Trade Rationale
Transactions during the month included the sale, under Simplifying Structure, of pharmaceutical
company AbbVie, which we believe to be at risk in its monolithic drug portfolio. It was replaced by
the purchase of Eli Lilly, where we believe there to be interesting opportunities in its drug pipeline
after a long fallow period. Under Managing Complexity, Wal-Mart was eliminated due to slowing
activities and its regulatory challenges outside the United States. It was replaced by a position in
discounter Costco, where we are attracted by its focused business model. Under Other, Entergy
was reduced due to challenges of its nuclear generating capacity from low gas prices. The proceeds
were allocated to increasing the position in Exelon, also held under Other. We consider Exelon to be
out of favour and in position to benefit from strong asymmetry in the case of an increase in natural
gas prices which should yield large benefits to its bottom line.
*Total will not add to 100%. The balancing item is cash. Theme weights are as at 31 January 2014. Allocations and security selection are subject to change. Based on a representative account. Portfolio Holdings by Sector and Country By Country/Region
Allocations and security selection are subject to change. Total may not add to 100% due to rounding. India, Taiwan and China, which represent 0.4%, 1.4% and 2.1% of the portfolio respectively, are included as part of the Asia ex-Japan exposure due to the nature of the product. Based on a By Sector
Allocations and security selection are subject to change. Total may not add to 100% due to rounding. Based on a representative account. Disclaimer
The information in this commentary was prepared by Lazard Asset Management Pacific Co ABN 13 064 523 619, AFS Licence 238432 (“Lazard Pacific”). The purpose of this commentary is to update clients on changes to the portfolio we manage for them and to provide a commentary on securities which may or may not be held in these portfolios, or on topics of interest, to illustrate Lazard Pacific’s investment process. Securities and themes mentioned in this commentary are presented to illustrate companies and themes in which the portfolio may invest. Holdings are subject to change daily. The information contained herein has been obtained or derived from sources believed by Lazard Pacific to be reliable, but Lazard Pacific makes no representation or warranty as to its accuracy and accepts no liability for loss arising from the use of this material unless liability arises under specific statute. The opinions and estimates contained in this commentary are subject to change and should not be considered a recommendation or solicitation to purchase or sell these securities. It should not be assumed that any investment was, or will be profitable. Lazard Asset Management Pacific Co. • Level 39, 1 Macquarie Place • Sydney, NSW 2000 • www.lazardassetmanagement.com.au

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