The Causeway Concentrated International Value strategy uses the same fundamental research process as the flagship international value equity strategy without the volatility control and with a maximum of 35 holdings. We anticipate that, over time, the concentrated strategy should deliver higher returns with higher volatility than our traditional strategy.
Our investable universe is composed of companies with market capitalizations greater than $1 billion ($USD) located in 24 international markets (EAFE markets, Canada, Korea and Taiwan). This screen helps the team invest in companies with adequate liquidity, and reduces the universe to a more manageable subset of approximately 3,400 stocks.
We then screen for stocks with payout yields in excess of their local market averages and which have prospective earnings yields that exceed local ten-year government bond yields by an equity risk premium. This identifies companies that typically have relatively low reinvestment requirements. The second part of the screen examines price-to-cash flow within the relevant industry in conjunction with EPS Estimate Revisions. The screen identifies undervalued companies whose earnings are at a turning point. This part of the screening process identifies approximately 400 securities.
From this list of 400 securities, we identify a company's industry dynamics, financial strength and competition. Some measures of financial strength that we may use are: cumulative profitability, earnings stability, overall profitability, financial liquidity, asset size, ability to cover debt service, and risk with respect to leverage. After these components are analyzed, our universe is reduced to approximately 250 stocks.
Causeway's portfolio managers and research analysts conduct thorough company-specific fundamental analysis on these approximately 250 securities. This analysis includes extensive external and internal research, company visits and proprietary quantitative valuations. Fundamental factors that are analyzed may vary depending on each analyst and his or her level of conviction about the relevant industry. To validate investment assumptions, Causeway commonly interviews sell-side analysts, competitors and industry experts. The process culminates in a valuation estimate for the stock on a prospective two-year time horizon.
After a company has been screened and fundamentally researched by our portfolio managers and analysts, companies are then ranked from 1 (highest) to 150 (lowest) based on expected return. We rank these securities 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 between 20-35 stocks from this ranking for client portfolios.