Arnaud Brossard, Portfolio Manager/Analyst on European equities, covers the technology, staples and basic resources sectors. He manages the Lazard Innovation strategy. In this article, Arnaud shares his vision of innovation.
Why focus on innovation? How can it generate performance?
We see innovation as a springboard for generating significant, sustainable and non-cyclical value.
Identifying and correctly evaluating sources of innovation can be a challenge, but buying into undervalued innovation is a genuine performance driver.
Our ability to identify successful differentiation and innovative, undervalued companies lies in our fundamental approach, our work organisation and our process, which is shaped by intensive research and ongoing interaction within our team.
What makes your approach different?
Our approach stands out because we believe innovation is possible in all sectors of activity and because we adhere to a multifaceted concept of innovation.
Many mainstream approaches are narrowly focused on product innovation and almost exclusively on the technology sector.
We see innovation as being equally possible in:
- Processes, via innovative methods of production and distribution. For instance, adopting a low-cost strategy, a premium market positioning, or thanks to digitization, among others, companies can market a pre-existing product or service differently.
- Marketing, through changes to the design, packaging, placement, promotion and price of the product or service. Examples of this include:
- Sportswear brands that enter the fashion clothing segment;
- In eyewear, lenses manufacturers that partner with frame makers to improve product offering and boost market access;
- Forklift truck manufacturers that acquire automation systems so they can offer fully integrated services to warehousing operators in need of modernisation to meet growth in the online market;
- Motorway concessions operators that use dynamic toll pricing to manage traffic flows.
- Organisation, by adopting innovative in-house practices, workplace organisation or third-party relationships. Examples of this include: The world’s largest brewer implementing the zero-base budget approach across all its units; An external R&D group recycling intellectual property previously developed with existing customers.
What prompted this approach?
This approach emerged naturally. The members of our close-knit team are constantly sharing and discussing research, fundamental analysis, thoughts on recent meetings with the companies they cover or with sector experts, views on business models and so on.
This type of interaction is fostered by our team members’ dual fund manager–analyst role. As analysts, we conduct fundamental analysis on our respective sectors and share our best ideas with the rest of the team. As fund managers, we seek out, in conjunction with fellow team members, companies that are good fits for our investment strategies.
Our expertise and close interaction create an environment conducive to identifying innovation.
The way our team operates and is organised favours the selection of innovative companies with significant potential to create value.
Given that investing in these companies can entail greater uncertainty or demand more patience than usual, we decided to create a strategy especially for our strongest convictions: Lazard Innovation.
Is this a good time to invest in innovation?
Innovation can pay off at any stage of the economic cycle: by nature, it breaks free of the cycle by creating value that is company specific and immune to the economic backdrop.
For this reason, whatever the macroeconomic outlook, it can always be a good time to invest in an innovative company as its competitive advantage will spearhead growth, no matter what.
In recent years, growth names have significantly outperformed value names. For some, the growth category may have run its course and innovative companies usually occupy the growth space.
Our unique approach reshuffles the cards: the innovation we seek can exist in all sectors and take many forms, as long as we believe the market is undervaluing its potential. The companies we identify do not all fall into the growth category: they are a mix of various styles.
In a nutshell, how would you describe your approach?
We are not constrained by a narrow concept of innovation: for us, innovation goes further than technology, the Internet, robots, green energy, and so on.
We invest in undervalued companies across all sectors of activity, as long as they operate differently and better than comparable names and derive a significant and sustainable competitive advantage as a result.
These are often companies that strike a special chord with us and are our strongest convictions, but are not necessarily a good fit with our other investment strategies because they require more patience and their outlooks are less clear-cut than those of the companies we usually pick.
The Lazard Innovation strategy has been created especially for these exceptional companies.
The opinion expressed above is dated 17 September 2019 and is liable to change. Latest available data is used.
This document is non-contractual. It is provided for information purposes. The analyses and/or descriptions contained in this document should not be construed as advice or recommendations from Lazard Frères Gestion SAS. This document does not constitute a recommendation to buy or to sell and neither is it an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS. LAZARD FRERES GESTION – S.A.S au capital de 14.487.500€ – 352 213 599 RCS Paris 25, RUE DE COURCELLES – 75008 PARIS, FRANCE
