Is Lazard Ltd (LAZ) A Smart Long-Term Buy?

Third Avenue Management, an investment management firm, published its “ Value Fund” fourth quarter 2020 investor letter – a copy of which can be downloaded here. A return of 35.84% was recorded by the fund in the fourth quarter of 2020, outperforming its MSCI World benchmark that delivered a 14.07% return. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

Third Avenue Management, in their Q4 2020 investor letter, mentioned Lazard Ltd (NYSE: LAZ) and emphasized their views on the company. Lazard Ltd is a Hamilton, Bermuda-based financial advisory and asset management firm that currently has a $4.7 billion market capitalization. Since the beginning of the year, LAZ delivered a 2.86% return, extending its 12-month gains to 84.68%. As of March 29, 2021, the stock closed at $43.31 per share.

Here is what Third Avenue Management has to say about Lazard Ltd in their Q4 2020 investor letter:

Lazard Ltd. (“Lazard”) – During the quarter, the Fund initiated a position in Lazard, which houses two distinct businesses – financial advisory and asset management. Lazard is one of the formidable competitors in the global financial advisory industry, though Lazard is not involved in investment banking lines of business which are balance sheet-intensive or those which take on credit risk. Lazard’s advisory business is the world’s fifth largest by revenues, putting the company’s advisory business on par with those of far larger companies, such as Bank of America and Citi. Meanwhile, Lazard’s advisory revenues are meaningfully larger than the likes of Credit Suisse and UBS. While advisory revenues represent a low single-digit percentage of revenues for those peers, the figure is slightly more than 50% for Lazard. One further point of attraction for Lazard’s advisory business is its sterling reputation in restructuring advisory, which often shines in challenging environments in which insolvencies and near-insolvencies rise. The remaining portion of Lazard’s revenue is derived from the company’s asset management business, which operates completely independent of the advisory business and at last report had approximately $248 billion of assets under management. Lazard’s assets under management are focused on several niches in active management commanding management fees at the higher end of the industry, and the performance of its strategies has been sufficiently strong to have generated inflows of late, an unusual accomplishment for an active manager. The company in total is very well-capitalized and has a long history of controlling the relationship between compensation, its primary expense, and revenue. We believe that our purchase price implies a modest multiple of current operating earnings and that the operating environment can certainly improve, most likely as M&A activity continues to accelerate, but from other sources as well. External to the company however, it is clear that there are a number of companies that would almost certainly be very eager to purchase one or both of Lazard’s businesses. Consolidation is rampant in the asset management industry and several purchases of asset management companies of similar size to Lazard, though arguably of lower quality, have been announced recently. Separately, several European investment banks, including ones named earlier in this paragraph, have publicly declared a desire to grow their advisory businesses, especially in cross-border M&A capabilities, which is a core competency within Lazard. Using conservative estimates of prices we believe could be realized in the sale of Lazard’s businesses, the current share price appears to meaningfully undervalue the company.”

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Our calculations show that Lazard Ltd (NYSE: LAZ) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Lazard Ltd was in 20 hedge fund portfolios, compared to 19 funds in the third quarter. AGX delivered a 4.66% return in the past 3 months.