Our international opportunities strategy is a blend of Causeway’s best skill sets, combining our international value (bottom-up, fundamental, developed international markets) and emerging markets (quantitatively managed with a targeted tracking error of 5%) equity strategies. Our quantitative research team developed a multi-factor model that gauges the relative attractiveness of emerging markets, and guides the portfolio managers in tactically allocating between the developed and emerging portfolio segments.

Our developed markets exposure aims to add value through intensive fundamental research implemented via a disciplined value approach. Our emerging markets exposure is the result of a quantitative strategy tailored to the unique growth, momentum, and risk characteristics of developing markets. Our proprietary tactical allocation model is designed to add additional value.

The Causeway International Opportunities portfolio is a fully invested, 120-200 stock portfolio. Allocation between developed and emerging markets is typically within +/-5 percentage points of the allocation of the MSCI All Country World Index ex-US, but is scalable to clients’ desired parameters.

Inception Date 06/30/2007

Fuelled by additional doses of quantitative easing, the first two months of calendar 2012 proved to be a complete reversal of the latter half of 2011 (especially the July through October 2011 period). The euphoria waned in March, however, as investors rotated out of cyclical stocks to more economically-defensive holdings. Despite these shifts, and due primarily to superior stock selection, the Portfolio outperformed the MSCI All Country World Index ex US (ACWI ex US) this quarter. The top performing markets in ACWI ex US included Egypt, Turkey, Hungary, Philippines, and Thailand. The biggest laggards included Spain, Portugal, Morocco, Canada, and the United Kingdom. Top performing sectors in ACWI ex US included the following economically cyclical sectors: consumer discretionary, information technology, financials, industrials, and materials, while four of the five biggest laggards were traditional defensives: telecommunication services, health care, utilities, energy, and health care as well as consumer staples. Relative performance was strengthened by portfolio holdings in the transportation, energy, materials, capital goods, and insurance industry groups. Meanwhile, holdings in the food & staples retailing, consumer durables & apparel, media, and consumer services industry groups as well as an underweight to diversified financials industry group detracted from relative performance. *

We operate a proprietary quantitative equity allocation model that assists the portfolio managers in determining the weight of emerging and developed markets in the combined portfolio.  In constructing the model, we identified five primary factors as most indicative of the ideal allocation target: macroeconomic, earnings growth, financial strength, valuation, and risk aversion.  The model’s overall outlook for emerging markets is currently negative.  Our macroeconomic factor, which measures the slope of the global yield curve, indicates that the two asset classes are equally attractive.  The global yield curve is an important indicator for emerging markets as it reflects global growth prospects as well as tightness/looseness of monetary conditions.  Our other factors are demonstrating bearish signals, however, for emerging markets.  Our valuation factor shows that the asset class is fully priced when compared to developed markets.  Our risk aversion factor, which looks at the emerging markets bond yield spread over U.S. Treasuries as well as the CBOE Volatility Index (VIX), is indicating complacency—another negative signal for emerging markets.  Our earnings growth factor is also negative, which means that the near-term earnings revisions profile of the emerging markets looks less favorable than that of the developed markets.  Lastly, our financial strength metrics, which include such measures as interest coverage and return on equity, are also currently negative on emerging markets. 

*The securities identified and described above 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.