Equity investors returned to emerging markets in the first quarter of 2012. Easing liquidity conditions by central banks globally drove the rally, strongest in January and February. Every emerging market posted positive returns for the period, led by the Middle East and Eastern Europe. Egypt was the top performing market, rebounding over 40% after losing nearly half of its value in 2011 amid political turmoil. Indonesia was among the weakest performers for the period. Investors likely are recognizing the economy’s rising inflationary pressures. The information technology and industrials sectors delivered the greatest gains for the quarter, as production cycles showed signs of recovery. Telecommunications stocks failed to keep pace, dragged down by Asian-domiciled integrated operators. Largely due to stock selection, Causeway Emerging Markets Composite outperformed the MSCI Emerging Markets Index (the “Index”) for the quarter.

We use a quantitative investment process to select stocks for the Fund, analyzing both “bottom-up” and “top-down” factors. Our bottom-up criteria, currently 75% of our model weight, place considerable emphasis on a company’s specific valuation characteristics and factors indicating superior earning growth. Our top-down criteria evaluate a company’s country, sector, and macroeconomic factors. Outperformance for the first quarter 2012 was driven by positive performance from our bottom-up valuation factors, as well as by a positive contribution from our top-down country and sector factors. Our top-down macroeconomic factors partially offset this relative outperformance.

Gains from stock selection in Taiwan, South Africa, and China boosted relative performance for the period, partially offset by negative stock selection in South Korea, Russia, and Turkey. From an industry group perspective, relative outperformance was driven by stock selection in the materials, telecommunication services, and automobiles & components industry groups, partially offset by weak relative performance from portfolio holdings in the diversified financials industry group, and underweights to the food beverage & tobacco and household & personal products industry groups. *

*The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described in this report do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or moutes@causewaycap.com.