Our latest research confirms that over the past 25 years—a period that covered a wide range of market environments including “growth” booms and busts, commodity super-cycles, three significant equity market corrections, a global pandemic, and war—the most financially productive1 companies outperformed consistently.
In our latest research we put quality investing to the test by examining the relationship between companies’ financial productivity and their share prices over the last 25 years. We believe this speaks not just to the power of quality investing but also to the importance of taking an active, forward-looking approach. The results?
Companies with the highest financial productivity can beat the market by an impressive amount. In our study of performance over the past 10 years, they outperformed the global equity market2 by an average of 250 basis points (bps) annually.
Index Decile of Financial Productivity
Index Decile: Productivity (equally weighted portfolio vs. equally weighted index)
As of 31 December 2022
Source: Lazard
Our research was not just about looking back. We wanted to know what happened to future returns if an investor had correctly identified which companies would sustain high levels of financial productivity in any given year. What we discovered was striking: Outperformance was even greater at 500 bps on average for the highest quality companies.
Index Decile of Financial Productivity with Foresight
Index Decile: Productivity + Foresight (equally weighted portfolio vs. equally weighted index)
As of 31 December 2022
Source: Lazard, Credit Suisse, FactSet, MSCI
Investors should be wary of buying the most expensive, high-quality companies—you can overpay, even for a fundamentally robust company, and you may be punished for doing so. At the same time, investors should be aware of the dangers of being seduced by very cheap valuations—often companies are cheap for a reason.
Returns by Decile of Valuation
Return of top three deciles by decile of valuation
As of 31 December 2022
Source: Lazard, Credit Suisse, FactSet, MSCI
We use deep fundamental analysis to understand what drives financial productivity, including:
How does a company generate high returns?
How long can it sustain those returns?
How will management invest cash to grow?
How long must the returns be sustained to justify the valuation?
The reason we seek companies with persistently high financial productivity and reinvestment opportunities is because, in combination, they drive a compounding effect on cashflows and profits.
Lazard Global Quality Growth and Lazard International Quality Growth embody our philosophy and approach to quality investing. Both seek out companies with high financial productivity that we believe are able to reinvest back into their businesses, sustaining their financial productivity—and remaining at the top of their industries over time.
MSCI All Country World Index
MSCI All Country World ex-US Index
At Lazard, we take a bottom-up, fundamental approach to investing, examining all the information available that can reveal a company’s financial health. Seeking out companies with high levels of financial productivity based on this analysis is integral to many of our equity strategies.
MSCI World Index
S&P 500 Index
S&P 500 Index
MSCI All Country World Index
S&P 500 Index
MSCI All Country World Index
Access our latest thought leadership.
1 As measured by cash flow return on investment or return on equity
2 Represented by the MSCI All Country World Index (ACWI)
This information is provided for information purposes only. Nothing herein constitutes investment advice or a recommendation relating to any security, commodity, derivative, investment management service or investment product. Investments in securities, derivatives and commodities involve risk, will fluctuate in price, and may result in losses. Certain assets held in Lazard’s investment portfolios, in particular alternative investment portfolios, can involve high degrees of risk and volatility when compared to other assets. Similarly, certain assets held in Lazard’s investment portfolios may trade in less liquid or efficient markets, which can affect investment performance. Past performance is not a reliable indicator of future results. The value of investments and the income from them can fall as well as rise and you may not get back the amount you invested.
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