Relative Value Investing

For more than two decades, many Lazard Asset Management equity strategies have maintained an investment philosophy based on fundamental analysis. This philosophy has been implemented by assessing the relationship between financial productivity and valuation. We refer to this philosophy as “Relative Value” investing and see it as the foundation of value creation and investment opportunities.

In the past, we have shown that while there is indeed a positive relationship between firms’ return on capital and their share prices over the long term, combining an analysis of returns on capital with a strong valuation discipline should help deliver more attractive and sustainable investment returns¹. In addition, we have also stressed the importance of identifying high return on capital companies that are able to reinvest their cash flow at similar or even higher rates of return.

Now, our analysis covers the global market by examining financial productivity, valuation, and shareholder returns since 1996 with compelling results. Our study of global equity markets has helped strengthen our belief in our Relative Value investment philosophy. It suggests that a firm’s financial productivity is a critical driver of its share price. Furthermore, over time, a portfolio of companies with industry-leading levels of financial productivity should outperform a global index.

We have observed that gaining insights into future financial productivity is extremely powerful from an investment perspective. These insights enable us to identify two types of companies that our studies show tend to significantly outperform the market. These are firms that deliver and sustain high levels of financial productivity (Compounders) and those that offer a material improvement in their financial productivity profile (Improvers). It also suggests that companies with sustainably low financial productivity relative to their industry (Structural Losers) tend to significantly underperform.