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The Lazard US Convertibles Portfolio experienced underperformance against its benchmark, the ICE BofA All US Convertibles Index, in the first quarter. This was primarily due to a challenging equity market environment, influenced by geopolitical tensions, an uncertain interest rate outlook, and shifts in artificial intelligence (AI) sentiment. Despite these headwinds, AI-related holdings, particularly in computer hardware and industrial energy solutions, positively contributed to both absolute and relative returns. Lazard maintains an optimistic view on convertible bonds, expecting their sector and market-cap biases to remain advantageous. The firm anticipates continued robust issuance of convertibles throughout 2026, driven by companies' refinancing needs in a higher interest rate environment, which should sustain attractive convexity and yield opportunities.

The first quarter of 2026 presented a complex landscape for the US equity market, characterized by various external pressures. Geopolitical instabilities cast a shadow, contributing to investor uncertainty. Simultaneously, the unpredictable trajectory of interest rates added another layer of complexity, influencing market sentiment and investment decisions. The evolving narrative surrounding artificial intelligence, fluctuating between enthusiasm and caution, further impacted market dynamics. These factors collectively shaped an environment where the Lazard US Convertibles Portfolio faced significant challenges, leading to its underperformance relative to its established benchmark. The market's overall downturn underscored the pervasive influence of these macroeconomic and technological shifts.

Portfolio Challenges and AI's Role in Q1 Performance

In the initial quarter, the Lazard US Convertibles Portfolio encountered difficulties, leading to its underperformance relative to the ICE BofA All US Convertibles Index. This was largely attributable to a tumultuous US equity market, which grappled with geopolitical uncertainties, a fluctuating interest rate outlook, and changing investor perceptions regarding artificial intelligence. Despite the overall market headwinds, specific investments tied to AI, notably within computer hardware and energy solutions in the industrial sector, proved to be positive contributors. These AI-driven holdings demonstrated resilience and provided a significant boost to both the absolute and relative performance of the portfolio, highlighting the strategic value of targeted technology exposures even in a challenging market.

The first quarter of 2026 was marked by a challenging equity market, stemming from a confluence of global and economic factors. Geopolitical tensions created a climate of uncertainty, prompting investors to adopt a cautious stance. Concurrently, the ambiguous path of interest rates added to market volatility, making it difficult to predict future economic conditions. The shifting narrative around artificial intelligence, moving between periods of heightened optimism and skepticism, also played a crucial role in shaping market sentiment. Within this turbulent environment, the Lazard US Convertibles Portfolio faced considerable pressure, resulting in its benchmark underperformance. However, the portfolio's strategic allocation to AI-related assets, particularly in computer hardware and industrial energy solutions, proved to be a notable success. These investments not only showcased the potential of AI to drive growth but also helped mitigate some of the broader market downturns, illustrating the importance of selective, high-growth sector exposure in a diversified portfolio.

Outlook for Convertible Bonds: Opportunities Ahead

Lazard maintains an optimistic perspective on the convertible bond sector, anticipating that its inherent biases towards certain sectors and market capitalizations will continue to offer a competitive edge. The firm projects sustained robust issuance of convertible bonds throughout 2026, driven by a landscape where companies are increasingly seeking to address refinancing needs in an environment characterized by higher interest rates. This expected wave of new issues is poised to create abundant opportunities for investors, ensuring attractive convexity and appealing yield potentials within the convertible market. The unique structural characteristics of convertible bonds, combining features of both equity and debt, position them favorably to navigate and capitalize on the evolving financial landscape.

Looking forward, Lazard expresses strong confidence in the continued appeal and performance of convertible bonds. The firm believes that the sector's characteristic leanings towards specific growth-oriented industries and companies of particular market sizes will remain advantageous, offering a strategic positioning for outperformance. A significant driver of this positive outlook is the anticipated surge in convertible bond issuance throughout 2026. As the global economy adjusts to a higher interest rate environment, many corporations will find it necessary to refinance existing debts or raise new capital. Convertible bonds offer an attractive solution, blending the stability of fixed-income with the upside potential of equity, thereby drawing both issuers and investors. This increased supply is expected to bolster market liquidity and create a fertile ground for investors to discover compelling opportunities with favorable convexity and yield profiles. Consequently, Lazard envisions a dynamic and rewarding period for participants in the convertible bond market, underpinned by strategic sector exposure and robust issuance activity.