Lazard Japanese Strategic Equity Fund 2Q Commentary 2021

Market Overview Japanese equity markets saw a weak start to the quarter as new scal year forecasts were short of heightened expectations even though most companies saw better than expected scal fourth quarter nancial performance. e market saw a recovery in May and June thanks to a depreciating yen and continued strength in global economic data despite a re-emergence of pandemic concerns as mutations of COVID-19 have aected many nations. In addition, value indices started to struggle after a strong rst quarter as the market tilted toward a more transitory view of the current strong ination data leading to a signicant attening of the US yield curve.

Portfolio Review e portfolio outperformed the benchmark during the second quarter. Stock selection of electric appliances, overweight of mining, and stock selection of securities & commodity futures sectors were top contributors to performance. In contrast, the underweight and stock selection of transportation equipment, stock selection of chemicals, and overweight and stock selection of machinery sectors were negative During the quarter, the top positive contributors to relative performance included: • Hitachi, a leading industrial conglomerate, reported better than expected scal fourth quarter earnings and continued to see share price strength following its Investor Day which was taken positively as the market further embraced Hitachi’s mid-term vision • JAFCO Group, Japan's leading venture capital company, saw strong gains thanks to an upgrade by a large broker in addition to favorable IPO of one of its holdings • Inpex, Japan’s largest energy exploration and production company, performed well as crude oil prices continue to rise from $63 to $75 for a barrel of Brent over the quarter • Makita, a leading global manufacturer of power tools, reported better than expected scal fourth quarter earnings • Dai-ichi Life Holdings, a leading life insurance company, reported better than expected full year earnings as well as strong guidance. In addition, the company started a large share repurchase program Conversely, the largest detractors to relative performance included: • Komatsu, a major heavy equipment manufacturer, declined after China reported disappointing heavy equipment demand • Nitto Denko, a leading electronic materials company, reported better than expected earnings but forecasts did not exceed heightened expectations • Kansai Electric Power, a major utility, declined with the announcement of a disappointing mid-term plan where earnings are expected remain under short-term pressure • Sundrug, a domestic drugstore chain, reporting weaker than expected earnings and conservative guidance for the new scal year. e company saw a further decline as major competitor, Sugi, reported disappointing earnings as well • SoftBank Group, a technology investment rm, declined despite reporting record earnings as the company failed to announce another large share repurchase program

Portfolio Activity Seibu Holdings, a private rail and hotel operator, was newly added to the portfolio during the month. Seibu Holdings is moving to an asset light business model which will result in more business focus and faster re-development of marquee properties leading to accelerated earnings growth. Inpex, Kansai Electric Power, Sundrug, and SoftBank Group, were raised during the month. Inpex, Japan’s largest energy exploration and production company, was raised on increased conviction of higher shareholder returns. Kansai Electric Power, one of Japan’s largest utilities, and Sundrug, a domestic drugstore chain, were raised following a period of underperformance. SoftBank Group, a technology investment company, was raised following a period of underperformance and as the NAV discount widened. Hitachi, JAFCO Group, Komatsu, Nintendo, and Tokyu Fudosan Holdings were reduced during the month. Hitachi, an industrial conglomerate, was trimmed following a period of strong outperformance. JAFCO Group, Japan's leading venture capital company, was reduced following a period of strong performance after announcing a major share buyback. Komatsu, a leading maker of construction and mining equipment, was trimmed to reect potential slowing in Chinese demand. Nintendo, a leading maker of video games, was reduced following a long period of outperformance. Tokyu Fudosan Holdings, a mid-tier real estate developer, was reduced following a period of outperformance thanks to re-opening expectations.

Outlook e outlook for the upcoming quarter for Japan will be quite interesting. Prime Minister Suga is facing two challenges which may lead to either his downfall or a rapid rebound in his approval ratings. e rst involves how Japan is positioned to deal with the pandemic. e second depends on the success of the soon to begin Tokyo Olympics. In both cases how the government handles these challenges will largely determine the prospects for the LDP in future elections. With a revitalized Shinzo Abe waiting in the wings for another shot at being PM, the outlook for Suga is questionable, however there could be some positive developments. Meanwhile news that the government was used to pressure investors over the Toshiba AGM in 2020 is weighing on support for the current administration. As for the critical two issues of the pandemic and the Olympics, let’s start with an update on the pandemic. Japan was very slow to build an adequate infrastructure to deliver vaccines for its citizens. e Suga administration has come under intense pressure for their lack of enthusiasm to get vaccines out to the public. However, in recent weeks the number of vaccines has risen exponentially. At month end, some 25% of eligible citizens had received at least one dose. Given the current pace Japan is now on, the number of vaccines administered should reach half of citizens by the end of August. Japan is well known for its hygiene. ere are no outdoor shoes allowed in a home. People bow rather than shake hands. Evening baths are a standard ritual. e wearing of masks is an accepted norm so there is limited opposition to masks. Consequently, and given the speed of vaccinations today, Japan has a legitimate chance to achieve herd immunity by the end of the year. is should prove to be unequivocally positive for the Suga administration. Turning to the Tokyo Olympics, contrary to overwhelming opposition to holding the Olympics (80% against), the government seems determined to host the games. e infrastructure has been in place for a year. So, what will the games be like with venues almost exclusively dedicated to Japanese fans? While the lack of broad fanfare that most of us witnessed with previous games, the athletes will play their parts and the events should be competitive and lead to victories for many sides. One should never underestimate the ability of US media to doctor up a major competition and make television viewers feel like they are part of the action. If worse comes to worse, viewing sports competitions in Japanese may well prove to be the preferred option. One need only go to a major marathon or World Cup event to see the passion of Japanese sportscasters. By the time September rolls around Japan’s economy could well be benetting from a proper re-opening, particularly in the service sector. With manufacturing already performing well due a pickup in demand across technology and automotive sectors, a meaningful revival in services could benet the broad economy quite a lot. With the Olympic Games behind them, the prospect for a more upbeat attitude towards the successes that Japan has achieved will rise. It is quite possible that the view towards Suga’s leadership will improve meaningfully. Also, the constraint on manufacturing has led to meaningful rises in everything from steel, to semiconductors and even container transport. Should this feed through to proper inationary outcomes, the seemingly poorly positioned nancial sector will also see some benet. As mentioned at the outset, this coming quarter may prove to be pivotal for the Japanese economy. e ongoing pandemic and

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upcoming Olympics may become catalysts for a true revival in economic fortunes. at would be an outcome unexpected by most investors.

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