Lazard UK Smaller Companies Fund 2Q Commentary 2021

Market Overview UK small-cap equities rose over the second quarter, buoyed by a successful rollout of vaccines and continued signs of a broad-based economic rebound as the UK economy gradually reopened. Concerns about the pace of ination grew over the quarter, with market spectators divided over whether inationary pressures were likely to be transitory or longer lasting. e Bank of England’s Monetary Policy Committee (MPC) said it expected ination to overshoot its target only for a short period. e MPC kept interest rates steady over the quarter at a historic low of 0.1%. e unemployment rate continued to steadily decline over the period. Despite continued success with the COVID-19 vaccination rollout, uncertainty about the potential impact of the increasing prevalence of the Delta variant remained. In terms of sector performance, health care and industrials led the gains, while telecommunications and energy lagged.

Portfolio Review Stock selection in consumer discretionary, industrials, and nancials contributed positively to returns this month, but detracted in health care and energy. e largest single contributor to returns was LSL Property Services, which provides services related to residential property, such as estate agency, surveying, and valuations. It reported full-year results at the end of April which exceeded expectations, and provided forward guidance which was well received. With the shares up more than 40% during the second quarter, our overweight position performed very well. Magazine publisher Future also contributed positively, with its share price up more than 60%. First-half results showed earnings signicantly above the previous year, and guided that the remainder of the year would be materially ahead of expectations. Braemar Shipping Services was another strong performer. It provides a variety of services to the shipping industry, such and shipbroking, nancial services, and logistics. It reported preliminary results in early June, with underlying performance ahead of Covid-adjusted expectations. Looking forward, the company has refocused its strategy on the core shipbroking business and also reinstated the dividend. Our overweight position in Alpha Financial Markets Consulting also added to returns. It raised equity via a placing in May to fund the purchase of Lionpoint. is was taken positively, as it is seen to cement Alpha’s leading position, and also provides exposure to the fast growth on oer in the alternatives market. e largest detractor was Blue Prism, the robotic process automation business. It continued to underperform during the second quarter as the rate of revenue growth disappointed the market. We believe the company has a strong product, demonstrated by the increased spend from its top 50 customers, but the marketing strategy has been poor. Correcting this issue, which we believe is now being addressed, should give the market renewed condence over the next year. Clinigen also detracted, with the share price declining sharply after releasing a trading update. Covid-19’s impact on revenues for Clinigen has been substantial, with delayed oncology treatments and clinical trials reducing demand for its products. However, we expect these eects to be temporary. With very strong performance from key stocks in the benchmark this quarter, some of our largest detractors were stocks we did not own. ese included Investec, St. Modwen Properties, and Spire Healthcare. More positively, bathroom and kitchen components producer Norcros, issued a trading update stating that operating prots would be ahead of prior guidance, with revenues in its second half more than double the comparable period last year.

Current Positioning We have moved to a more overweight position in consumer discretionary during the quarter, with new positions in Made.com, Fulham Shore, and musicMagpie. is remains the largest overweight at the sector level. Lazard UK Smaller Companies Fund

Selling Equiniti and trimming our position in RWS Holdings moderated our overweight position in industrials. Financials remains the largest sector underweight, although this has narrowed slightly with the addition of Draper Esprit to the portfolio. We also remain underweight consumer staples and overweight technology.

Outlook Despite an initial reopening relief rally in some sectors, some businesses may start to nd that sustaining growth at these levels becomes challenging, especially when support packages are removed. Companies that have reinforced their market dominance during the past year, strengthened their balance sheets, and have a clear strategy for the next chapter of growth, are likely to be better positioned going forward. Understanding the mechanisms and channels for delivering future growth, and recognising when these drivers have been underestimated or overlooked by the market, will be critical to the success of active stock pickers in the months ahead. While there are numerous supportive factors and reasons to be positive on the outlook for UK equities, keeping up the current pace of vaccinations and the country’s preparedness in dealing with emerging variants and unresolved Brexit issues will be key. Market participants’ perception of whether the Bank of England is ahead of or behind the ination curve will also have important implications for stock prices. Overall, there remains a wide disparity of performance between industries and individual companies, rearming the importance of bottom-up, rigorous fundamental analysis as the UK economy recovers from the COVID-19 pandemic.

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