Ryan runs the Global Equity Income fund at Lazard, a strategy that has existed since October 2007.
He says it is too difficult to make a “hard macro call” because of the amount of stress in the economic system and because this is not in the style of Lazard anyway. “We are trying to find companies that will survive if we have a multi-year period of tough times, or a recovery and the markets go up. We are not betting on the market direction—simply putting together a portfolio of defensives and offensives.
“We have been pleased with how this has worked so far and will continue to add to this.”
Most recently, he says traditional defensives have become unappealing as high inflows have, in a time of uncertainty, pushed up valuations. Instead, Ryan has been looking to alternative areas of the market that are not traditionally deemed as defensive but do provide some earnings resilience.
Infrastructure companies fall into this category, says Ryan, and Macquarie Infrastructure is the biggest holding on the fund at 3.3% [according to the May 2009 factsheet].
“Infrastructure companies were the market darlings two years ago—everybody wanted to be involved and private equity was all over it. But they were hit hard during the market downturn as they were highly levered. It is appropriate to lever up when cash flows are resistant, but the downturn meant people wanted companies with no debt.”
However, Ryan adds, infrastructure companies offer tangible assets that are manageable and have stable demand. The fund has most of its infrastructure exposure in toll roads, and Macquarie’s largest asset is the 407 route in Toronto.
“It [the company] was up about 1% last year as it is one of the companies that have real pricing power. The only real risks are regulatory—not the economy.”
Another area he is favouring is gaming, as he argues that people continue to play the lottery and bet on sports even in recessions, and again the primary risk is regulatory—not economics.
Other “hidden defensives” include those in emerging markets areas.
“Emerging markets doesn’t typically leap to mind when the economy is deteriorating, but there are attractive businesses with dominant market shares.”
Examples of this include HTC, a handset maker in Taiwan, Diamond Offshore, a deepwater driller, and Redecard, a Mastercard processor in Brazil.
“If the dire economic forecasts come true then these stocks are likely to languish, but they won’t go bust and they also have potential, particularly in a rebound.”