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“Our UK best ideas portfolio” is how manager Alan Custis describes the make-up of the Lazard UK Omega Fund he has run since 2005. Seeking to provide investors with a relatively small selection of high conviction positions, Custis oversees a team of 18 analysts constantly scouring the UK market for investment opportunities.
Holding anywhere between 25 and 35 companies at any one time means the Select 50 fund is kept concentrated intentionally so these ideas have the ability to meaningfully influence the performance of the fund.
For a company to make it into the portfolio the manager has to see a minimum of a 20% upside potential in its future, using a variety of valuation techniques to identify these opportunities. Custis argues that having a bank of ideas and so few available spots in the fund means there is no lazy capital floating around - every idea has to constantly justify its inclusion.
Custis believes having a world view is important when focusing on the large cap end of the market, as many of his UK names will have a truly global reach away from what UK investors will naturally associate with what they consider core businesses. To inform his decision-making he draws upon the global Lazard network, making use of the firm’s international footprint and knowledge base.
An example of a company typifying this characteristic and process is big-four supermarket Tesco.
Custis explains: “We like Tesco because we see the competitive environment in the UK stabilising, allowing both like-for-like sales growth and margins to continue to recover due to the fact the German discounters have seen their profits under pressure as well.
“The balance sheet has been repaired and the recently announced moves to sell their Thailand business should provide a short-term catalyst for the stock.
“On-line grocery sales continue to grow and Tesco has a 40% market share versus 27% of the total grocery market. They see on-line sales reaching some 15% of their total sales in the medium term, and this growth will see overall revenue accelerate. The valuation remains undemanding as it trades at a 20% discount to its five year average price to earnings ratio, with an attractive dividend yield of just under 4%.”
More on the Lazard UK Omega Fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. This fund may use financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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