Analysts seeing further cutbacks in Lazard’s future

Despite cost-cutting measures taken last year, more asset management jobs could be on the chopping block at Lazard Ltd. due to growing pressures on profitability caused by the coronavirus pandemic, analysts say.

Pauline V. Bell, an equity research analyst at CFRA Research, New York, said if the firm's financial performance continues on its current trajectory, "in Q3 or Q4, I definitely see them doing further (job) cuts in their asset management unit and cutting down on the number of investment strategies."

The firm is likely to be positioned for "a resurgence in M&A in 2021," which would make it harder for Lazard to reduce head count within its advisory business, Ms. Bell added.

"The place where they do have that flexibility is asset management. I see asset management being the most vulnerable," Ms. Bell said.

Despite some analysts' concerns, Nathan Paul, the New York-based chief business officer at Lazard Asset Management LLC, said in a May 6 phone interview that the firm currently had "no plans to lay off staff" and was "focused on ensuring that our employees and their families remain safe and healthy" amid the pandemic.

In October, Lazard announced that it was closing three financial advisory offices in Mumbai; Lima, Peru; and Perth, Australia. The firm's asset management unit, which generates nearly half of the company's revenue, separately closed six investment strategies that accounted for $300 million to $400 million in assets under management and eliminated about 7% of its workforce, or about 60 people.

Lazard had $193 billion in assets under management as of March 31, down 22.2% from Dec. 31 and 17.8% lower year-over-year, the company's first-quarter earnings release said.

Ms. Bell said continued outflows also are a concern, particularly from Lazard's emerging markets strategies. Lazard had $27.7 billion in emerging markets equity AUM as of March 31, down 31.8% from Dec. 31 and down 38.6% from March 31, 2019. Assets in emerging markets fixed-income strategies declined 20.6% to $11.4 billion for the quarter and dropped 25.4% for the year, the earnings release showed.

Evan L. Russo, chief financial officer of Lazard, said during the company's April 30 earnings call that $4.9 billion in firmwide net outflows in the first quarter came primarily from emerging markets equity and debt strategies, and some local equity strategies.

CFRA's Ms. Bell sees first-quarter redemptions in emerging markets fixed income "as the first wave of outflows," with "more to come because of the deterioration of fundamentals" as the coronavirus pandemic continues to affect the supply chain, including commodities from China, she added.

"We think that the asset management unit is bound to take a hit, with AUM expected to be lower this year, which means revenues are bound to go down," Ms. Bell said. "Market depreciation in Q1 will take asset levels lower in 2020, especially in their emerging markets equities platform. This will be driven lower primarily by institutional investors."

According to Mr. Paul at Lazard, the asset management unit, which has about 900 employees, has "no specific plans to make changes to our (investment) strategies," along with no plans for layoffs.

In addition to continued investments in technology, the money manager is exploring opportunities for inorganic growth through potential acquisitions of small investment teams, he said.

Mr. Paul added that he was confident about how the firm is positioned to emerge from the volatile market environment caused by the health crisis. "The recent dislocation in the market will highlight the value of active management. There's going to be a tremendous dispersion in which some companies and industries are going to do well, and some are not" — which will provide an opportunity for active managers to spot winners and losers via stock selection, he said.

Strategies that institutions are showing interest in amid the current market environment include concentrated active alpha strategies, alternative strategies, convertible bonds, volatility-oriented products and sustainability-focused strategies, according to Mr. Paul. The manager has also seen an interest in custom solutions that include multiasset and thematic investment strategies, he said.

Michael Brown, an analyst at Keefe, Bruyette & Woods Inc. in New York, said that while it's still too early to say how Lazard Asset Management will address "the new reality of what this revenue environment means" for its business, he ultimately anticipates "deeper cuts may have to be made, given we could be in this environment for the foreseeable future."

Regarding expenses, Mr. Brown expects Lazard Asset Management to "control what they can in the near future," pulling back on their discretionary bonus pools and other costs associated with marketing and travel to avoid job cuts.

In the first quarter, Lazard's adjusted non-compensation expense was $113 million, 3% lower than the first quarter of 2019, primarily reflecting lower travel and business development expenses, which were partly offset by higher technology investments, the company's earnings release said.

On April 8, Moody's Investors Service Inc., New York, changed its outlook for parent company Lazard to negative from positive, stating in an analyst note that it expected the coronavirus pandemic to lead to "further deterioration in Lazard's profitability, cash flow generation and debt service metrics over the near term, and that the high level of uncertainty regarding the magnitude and duration of the economic and market shocks caused by the pandemic increases the risk that this deterioration could be significant and longer lasting."

The report also said a decline in market valuations will put pressure on Lazard's asset management revenues, and the unit will face increased competition from alternative and passive money managers, "which could further pressure the profitability of that business."

In March, Moody's also downgraded its outlook for global money managers to negative from stable, noting in a report that the global spread of the coronavirus would strain asset managers' revenue and cash flow, which are highly correlated to movements in financial markets indexes, and limit net flows into the industry due to rising economic uncertainty.