Our investable universe comprises approximately 3,000 companies throughout the MSCI World Index universe, plus South Korea, with market capitalizations greater than $750 million for non-U.S. and U.S. companies.
Using two rigorously tested sets of screening criteria we perform an initial evaluation of the companies in the universe. We screen for stocks that have a payout yield in excess of their local market average and a prospective earnings yield that exceeds the local ten-year government bond yield by an equity risk premium. This identifies companies that typically have relatively low reinvestment requirements. We also screen companies based on industry price-to-cash flow in conjunction with EPS estimate revisions. The screen identifies undervalued companies whose earnings are at a turning point. These screens typically yield a subset of approximately 500 securities.
From the list of approximately 500 securities, we assess the industry dynamics that the companies are operating under, their financial strength and competitive position. Some measures of financial strength that we may use include: cumulative profitability, earnings stability, overall profitability, financial liquidity, asset size, ability to cover debt service, and risk with respect to leverage. Our universe is typically reduced to approximately 300 stocks following this assessment.
Causeway's portfolio managers and research analysts conduct thorough company-specific fundamental analysis on the approximately 300 securities that remain. This analysis includes extensive external and internal research, company visits and proprietary quantitative valuations. To validate investment assumptions, Causeway commonly interviews suppliers, competitors, industry experts and sell-side analysts. The process culminates in a valuation and estimate for the stock on a prospective two-year time horizon.
Analysts present their company specific valuations and estimates, the assumptions used to analyze the company’s future prospects and the financial models underpinning their analysis to a group (cluster) for review. The purpose of this review is to ensue that the assumptions and valuation methodology used are as complete as possible. We also use these meetings to ensure that pertinent information from other industries, that may impact the company’s prospects are also considered.
After a company has been screened and fundamentally researched by our portfolio managers and analysts, companies are measured according to their marginal contribution to utility. Causeway defines utility as a risk-adjusted, liquidity-adjusted, expected return. Each stock is then ranked from 1 (highest) to 150 (lowest) based on its marginal contribution to utility. We rank these securities based on our risk/return format in order to: 1) establish our eligible purchase list, and 2) monitor and maintain stocks in the portfolios based on fluctuations in share prices and fundamental data.
The portfolio managers select approximately 35-55 stocks from this ranking for client portfolios.