Market Overview - Commentary

Lazard International Equity Select Portfolio
                                                                                                                            3Q
Commentary                                                                                                                  2021

Market Overview
International stocks slipped from their September highs but nished the third quarter essentially at. After starting the summer
optimistically again, vaccination rates were rising in many places, and economies were reopening, it became clear in late summer
that there was a problem with the strong snapback in consumer demand. Supply chains across many di erent industries were
having trouble keeping up, and prices of many goods, including manufacturing inputs, were rising, impacting pro tability. In
addition, the Delta variant spread beyond India to the developed world and Asia, causing breakthrough infections even in
vaccinated people and prompting renewed lockdowns. Combine all of this with major central banks discussing how to normalize
policy by tapering and potentially raising rates, and it becomes clear that both companies and investors have faced a more
challenging environment. However, we believe there is a silver lining to the number of di erent forces a ecting markets: Stock
picking, as opposed to style, has become more important in determining performance.
   e most natural place to begin a dive into the performance of international equities is the progress of the pandemic. After all, the
COVID-19 trade has driven markets in one way or the other since early 2020. First, the fear trade. en the vaccine trade. en
the reopening trade. Now, things are a little more balanced. Shortly after the quarter ended, the number of COVID-19 cases
around the world topped ve million. More than half the global population is unvaccinated, with jabs slow to reach the poorest
countries in the world and vaccine hesitancy in the United States slowing uptake. Vaccination rates in Europe and Japan, despite
those countries getting a later start, have surpassed US levels. Despite the fact that vaccination rates improved dramatically in
Europe over the quarter, however, European equities still underperformed. Meanwhile, Asian markets such as China and Korea saw
renewed outbreaks.
However, increasing cases and the resulting economic slowdown was hardly the only reason Asia lagged. China continued
tightening the regulation of companies across many industries, including technology and internet-related companies, private
education, gaming, and more. e continuing and expanding campaign has unsettled investors in both Chinese and Asian equities.
Meanwhile, the breakdown at Chinese property developer Evergrande has also hit emerging markets equities hard, particularly in
China and Asia. e developer has missed several interest payments, and there is no indication that a bailout will be forthcoming.
   e upshot of all the turmoil in China is that the largest emerging markets stocks, which are primarily Chinese technology
companies, fell sharply. It was a sharp reversal from the previous quarter, when investors nervous about the implications of the
Delta variant went back to the large, expensive growth stocks that dominated during the worst of the COVID-19 lockdowns. e
swing provided a reminder of the dangers of investing passively in emerging markets as they currently stand: Nearly 40% of the
MSCI Emerging Markets Index consists of Chinese stocks, and of the top ve stocks by market capitalization, three are Chinese
technology giants (Alibaba, Meituan, and Tencent).
Equally troubling to markets as the developments in China were the aberrations in the global supply chain. e combined e ects of
abnormal demand patterns driven by the ebbs and ows of the pandemic, ongoing factory closures and lockdowns due to
outbreaks, a shortage of workers, and rising costs for important inputs such as energy meant that many sectors were having
di culty sourcing materials, transporting nished goods, and even sometimes operating at full capacity.
Finally, in the face of persistent headline in ation in the third quarter, markets began to grow nervous about the potential for major
central banks to raise interest rates. At its September meeting, the US Federal Reserve (Fed) indicated that it could slowly began
curtailing its bond purchases soon, and more members projected the rst rate hikes would come as soon as next year.
   e Bank of England has not gone so far as the Fed, but did say in September that the case for tightening has “strengthened.” e
European Central Bank has also indicated that it will trim emergency bond purchases in the coming quarter, but has stressed that it
is not tapering purchases with a view to ending them. e decision about if and how to wind down the bond-buying Pandemic
Emergency Purchase Programme was postponed at the central bank’s September meeting until December. In the emerging markets,
several central banks have already raised rates to combat in ation. In ation and the potential for interest rate increases is a
headwind for expensive growth stocks and, we believe, this was a key reason expensive growth stocks underperformed in the
quarter.
We see a silver lining in all of the major shifts happening in the international equities universe right now. Unlike most of the

quarters since late 2019, style and quality factors played a minor role in overall performance. A market that has been characterized
by sharp style swings appears to be moving back to a market in which fundamental factors are what matter. We believe that
fundamentals will become even more important in the coming months, as we will discuss in the outlook. is creates the
conditions for a market in which stock picking may have an advantage over style investing.

Portfolio Review
During the third quarter, style played a less important role in performance than it had in previous quarters, while stock selection
became more important. We anticipate this dynamic will continue into the future. As a result of the return to a more fundamental
market, overall stock selection was positive on sectoral basis with positive stock selection in the consumer discretionary sector.
Despite an underweight in Japan, which outperformed, stock selection drove positive relative performance. And while our
underweight of roughly 7% to emerging markets was bene cial to relative performance, stock-picking in the region was a headwind
as a result of owning some of the stocks discussed in the negative contributors section below.
Positives:
Shimano (1.8% weighting in the Portfolio) is a highly nancially productive Japanese company that is the dominant bicycle gear
manufacturer globally. e company is three times the size of its nearest competitor, which provides scale advantages in researching
new products, as well as marketing and manufacturing. e stock bene tted from a rebound in Japanese equities, which
outperformed the market by 5%, but more importantly, from continued strong demand for both traditional bicycles and newer e-
bikes. With bicycles in short supply on a global basis, we expect demand and pricing to remain robust, enabling the compounding
on the company’s strong return on invested capital (ROIC) to continue.
Aon (2.5% weighting) is a global insurance broker domiciled in Ireland with a capital-light business model that generates high
levels of nancial productivity. e rm’s core business continues to drive mid-single digit levels of growth as the global economy
expands. e US Department of Justice’s decision in March 2020 to litigate against Aon’s proposed acquisition of its competitor
Willis Towers Watson had weighed on the stock, but the companies agreed to part ways in the third quarter, removing the
regulatory overhang on the stock.
Makita (1.6% weighting) is a leading global supplier of power tools that is domiciled in Japan. e stock bene tted from a rebound
in Japanese equities, which outperformed the MSCI EAFE Index by 5%. Additionally, management remains upbeat about growing
demand in the professional segment, which should help o set any e ects of the wind-down of the booming locked-at-home
business that boosted the consumer segment for much of 2020. Pro tability should remain stable despite any pressure from raw
materials prices, as their investment in new products has peaked, removing some internal pressure on margins.
RELX (2.7% weighting) is a UK-based professional publisher that owns quality information assets and develops sophisticated
information-based analytics and decision tools, which are of high value to customers. ey are a market leader in science, technical,
and medical journals, which accounts for half of the company’s revenues. ey also have businesses in risk assessment and
mitigation, a legal platform, and an events business. e company has a highly pro table business model, fed by sticky, subscription
-based revenue. During the quarter, the company delivered slightly better-than-expected revenue growth, and we were encouraged
by positive momentum in the risk business after lagging in the recovery.
China Longyuan (1.7% weighting) designs, constructs, and manages wind farms that sell electricity to power grid utilities. It
currently controls approximately 8% of the wind market in China. e company is targeting aggressive capacity expansion as it
aims to hit China’s new 2060 net zero carbon emissions targets and transition away from coal which it also sells as a source of
power generation. As one of the few stocks in China left una ected by concerns about economic growth and the government’s
increasing regulatory oversight, China Longyuan outperformed in the quarter on a better-than-expected earnings report.
Negatives:
Autohome (0.9% weighting) is an online destination for auto consumers in China and becoming a more valuable data company.
We wrote about the stock last quarter, when it was also a drag on our performance. is quarter, two things weighed on the
valuation. First, some investors are concerned about increasing competition, a threat we think is overblown, but continue to

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monitor. Second, the continued increased regulatory oversight of the Chinese government on various industries a ected Autohome
and many other Chinese stocks. We continue to believe this company can structurally grow and that it should continue to maintain
its 40% margin and high return on invested capital (ROIC).
Alstom, (1.0% weighting) domiciled in France, is a pure play on the structural growth of the European rail market. e stock
continued to underperform due to problems with the contracts associated with the transportation division of Bombardier, which
Alstom acquired in January. On the existing Alstom business, we continue to believe margins should rise on the company’s mix of
business, with the higher-margin services and signaling businesses poised to grow faster than the rolling stock business. We continue
to believe that the troubled acquisition of Bombardier’s transportation division will ultimately resolve, albeit over a longer time
frame than we anticipated, and we believe that Alstom’s management team will be able to restore the margins of this business over a
period of several years. We will continue to closely monitor the situation for signs of clarity and improvement.
Enel (1.4% weighting) is an Italian utility with operations in Italy, Spain, and Latin America. It has reduced its sensitivity to higher
power prices, and demand from renewables should o er a solid runway for growth. With natural gas prices soaring, the Spanish
government implemented in mid-September a gas clawback law in an e ort to reduce end users’ bills. is clawback is supposed to
apply only in the fourth quarter of 2021 and the rst quarter of 2022. e stock underperformed as a result of this unexpected
regulatory development. Utility companies are suing to repeal the law, and we continue to monitor the developments.
Alibaba (0.5% weighting) is the largest e-commerce company in China and one of the largest in the world, providing online
marketplaces for the retail and wholesale trade in China. Similar to the highly pro table Amazon Web Services business, Alibaba is
the market leader in the development of the public cloud in China. In late 2020, the government shelved the IPO of Ant Financial,
the nancial services arm of Alibaba. e move set o an increased level of scrutiny and oversight by the Chinese government across
a number of industries, including technology. We continue to believe Alibaba is a highly pro table and fundamentally sound
business with signi cant growth prospects within China; yet, the valuation has come down substantially due to the government’s
increased oversight. We will continue to monitor the situation and are looking for signs of improvement.
Banco Bradesco (1.1% weighting) is a bank located in Brazil, which is a pro table market in which to run a bank. We believe the
company’s credit risk appetite is conservative, and it has a high proportion of fee income, which is more stable than net interest
income from lending. Bradesco’s insurance arm, Seguros, accounts for 30% of earnings. e company has a high return on equity
of nearly 20% and operates in a fairly consolidated market, which should continue to support strong returns. e stock
underperformed after a headline miss on quarterly earnings, resulting from lower trading and higher insurance claims. We view
these issues as transitory and believe that the underlying business remains in good shape.

Outlook
We see a positive path for stock picking ahead. We believe that potential risks from the COVID-19 pandemic are largely priced in,
as are any opportunities from either further outbreaks (stay-at-home winners) or an eventual recovery. We expect the market’s focus
to shift to labor shortages, supply chain interruptions, cost in ation, US tapering, and politics. We believe the cumulative e ect of
all of these trends will be nuanced, varying among individual companies, rather than across entire industries. Picking the winners
and losers will in our view become once again about stocks, rather than merely correctly identifying large blocks of the market that
will swing with the latest sentiment or pandemic development.
Meanwhile, the possible arrival of a period of sustained in ation, central bank discussions about tapering, and the potential for
interest rate increases have unsettled markets. e most important of these, in our view, is the market’s perception of the Fed’s
increasing hawkishness. However, we see the potential for rising rates as an important catalyst that could nally end the dominance
of expensive growth stocks, which have far outperformed any other market segment over the last several years. Growth stocks
depend much more on the value of future earnings and su er in the face of higher discount rates, which puts them at a serious
disadvantage in a rising-rate environment. For the last several years, low interest rates have encouraged investors to chase growth at
any cost, pushing tech and biopharmaceutical valuations, in particular, to sky-high levels. If rates continue to climb, investors may
take a closer look at the price tags when making decisions.
  ough Europe underperformed in the quarter, we see potential there going forward.         e continent’s largely successful vaccination

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campaign is slowing the wave of COVID-19 infections, meaning that life in some places is returning to normal. Denmark became
the rst EU country to lift all restrictions related to COVID-19 restrictions in early September, for example. We think there are
many interesting stock-speci c opportunities in both Europe and the emerging markets, both of which boast stronger forecasted
earnings while valuations sit at record lows relative to the US.
As for China, while risks exist in both the short and medium, we also think long-term opportunities may be opening up there. We
think that the equities sell-o has been overdone. China is still a large, liquid market in an economy that is growing very quickly
relative to other countries. In addition, there are areas of the market that are not at serious risk of additional government
intervention. e potential for contagion to the Chinese real estate sector is real, but our emerging markets debt analysts do not
foresee a more systemic wave of defaults among major property developers. Likewise, they do not believe this is a “Lehman
moment” for China, as some headlines have speculated, in part because Evergrande owes relatively little to Chinese banks, and the
government has a great deal of control over the nancial system in any event. However, the reaction of panicked investors means
there are more undervalued companies in China, or at least more attractive entry points for high-potential companies, than there
were before for patient investors. Companies with a domestic orientation and relatively low valuations look particularly interesting
right now.
Perhaps most importantly, we feel that the style extremes that have been driving international markets for many years are
dissipating. It is no longer so obvious which industries will broadly outperform and which will underperform, and forecasting the
performance of individual companies is an even more nuanced prospect. Performance is increasingly driven by a balance of multiple
factors rather than a single one, the course of the pandemic. We can already see the conviction in the growth-at-any-price mindset
starting to ebb as in ation and rates take center stage. Business fundamentals are beginning to drive performance once again, and
that creates the potential for careful, well-sourced stock pickers to outperform.

Important Information
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Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes
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The performance quoted represents past performance. Past performance does not guarantee future results. The current
performance may be lower or higher than the performance data quoted. An investor may obtain performance data
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is no assurance that any securities referenced herein are currently held in the portfolio or that securities sold have not been
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Lazard International Equity Select Portfolio

risks, such as less developed or less ef cient trading markets, a lack of company information, and differing auditing and legal
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