Concentrated Equity Fund

Portfolio attribution

The Causeway Concentrated Equity Fund (“Fund”) outperformed the Index during the month, due primarily to stock selection. Fund holdings in the software & services, banks, and food & staples retailing industry groups, as well as an overweight position in the capital goods industry group and an underweight position in the retailing industry group, contributed to relative performance. Holdings in the insurance, pharmaceuticals & biotechnology, and semiconductors & semi equipment industry groups, along with an underweight position in the energy and technology hardware & equipment industry groups, offset some of the outperformance compared to the Index. The top contributor to return was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Other notable contributors included banking & financial services company, UniCredit S.p.A. (Italy), business software & services provider, SAP SE (Germany), consumer retailer, Carrefour SA (France), and jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). The largest detractor was life insurer, Prudential Plc (United Kingdom). Additional notable detractors included products & services provider for the electronic components industry, SK hynix, Inc. (South Korea), robotics manufacturer, FANUC Corp. (Japan), technology conglomerate, Alphabet, Inc. (United States), and pharmaceuticals & biotechnology company, Roche Holding AG (Switzerland).

Investment outlook

We believe that valuations for international equities, regardless of region, are increasingly promising for investors with a multi-year investment horizon. Currency slippage versus the US dollar should reverse, at least in part, as the interest rate differential between the US and Europe (for example) closes over the upcoming 12-18 months. Cyclical European equities incurred waves of selling after Russia’s invasion of Ukraine in February. That investor exodus has brought some, in our view, world-class companies, in sectors such as materials, industrials, and consumer discretionary, into our buying range. We expect another area of meaningful alpha potential to come from developed markets stocks afflicted by China’s zero-Covid policy. We used the pessimism from delayed China reopening to gain exposure to, in our view, a broad array of competitively well-positioned companies that generate 10% or more of their respective revenues from the Chinese market. Typical of what Causeway seeks for its holdings, these companies have not wasted time while their China sales are weak; they have implemented operational restructuring to improve efficiency and lower costs in anticipation of a return to revenue expansion. Reopening, albeit gradual and without a precise timeframe, is inevitable in our view. Governments that asphyxiate their economies and cause social instability typically do not remain in power. We are convinced that China is no exception.

Global Value Fund

Portfolio attribution

The Causeway Global Value Fund (“Fund”) outperformed the Index during the month, due primarily to stock selection. Fund holdings in the software & services, banks, capital goods, and media & entertainment industry groups, as well as an underweight position in the retailing industry group, contributed to relative performance. Holdings in the insurance, health care equipment & services, and pharmaceuticals & biotechnology industry groups, along with an underweight position in the energy and technology hardware & equipment industry groups, offset some of the outperformance compared to the Index. The top contributor to return was banking & financial services company, UniCredit S.p.A. (Italy). Other notable contributors included jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), rolling stock, signaling, & services provider for the rail industry, Alstom SA (France), business software & services provider, SAP SE (Germany), and power & healthcare conglomerate, General Electric Co. (United States). The largest detractor was life insurer, Prudential Plc (United Kingdom). Additional notable detractors included healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), robotics manufacturer, FANUC Corp. (Japan), online services company, Tencent Holdings Ltd. (China), and metals & mining company, Rio Tinto Plc (United Kingdom).

Investment outlook

We believe that valuations for international equities, regardless of region, are increasingly promising for investors with a multi-year investment horizon. Currency slippage versus the US dollar should reverse, at least in part, as the interest rate differential between the US and Europe (for example) closes over the upcoming 12-18 months. Cyclical European equities incurred waves of selling after Russia’s invasion of Ukraine in February. That investor exodus has brought some, in our view, world-class companies, in sectors such as materials, industrials, and consumer discretionary, into our buying range. We expect another area of meaningful alpha potential to come from developed markets stocks afflicted by China’s zero-Covid policy. We used the pessimism from delayed China reopening to gain exposure to, in our view, a broad array of competitively well-positioned companies that generate 10% or more of their respective revenues from the Chinese market. Typical of what Causeway seeks for its holdings, these companies have not wasted time while their China sales are weak; they have implemented operational restructuring to improve efficiency and lower costs in anticipation of a return to revenue expansion. Reopening, albeit gradual and without a precise timeframe, is inevitable in our view. Governments that asphyxiate their economies and cause social instability typically do not remain in power. We are convinced that China is no exception.

International Small Cap Fund

Portfolio attribution

The Causeway International Small Cap Fund (“Fund”) outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. In October, the strategy’s value factors delivered the highest returns among our alpha categories. The strategy’s earnings growth and technical alpha factors also had positive monthly returns. All three factor categories have generated strongly positive returns YTD and over the past twelve months. Our competitive strength factor category delivered slightly negative returns for the month. These factors have a quality tilt and we expect them to help us identify stocks that can perform well in inflationary and/or recessionary environments, among others. Our country aggregate factors and macroeconomic factors were negative indicators in October as countries exhibiting superior top-down metrics outperformed those with relatively weaker characteristics. All factor group returns remain positive from inception of the Fund (10/20/14) to the end of October.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of the end of October, the MSCI ACWI ex USA Small Cap Growth Index traded at a 15.7x forward P/E multiple compared to 9.1x for the MSCI ACWI ex USA Small Cap Value Index, a 72% premium. As of 10/31/2022, the Causeway ISC portfolio traded at just 5.4x forward (NTM) earnings despite exhibiting higher embedded momentum and revisions characteristics relative to both the MSCI ACWI ex-USA Small Cap Index and the Value version of the Index.

International small caps exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis, indicating more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term EPS growth trend.

International Opportunities Fund

Portfolio Attribution

The Causeway International Opportunities Fund (“Fund”) outperformed the Index during the month, due primarily to stock selection. Fund holdings in the banks, transportation, food beverage & tobacco, retailing, and materials industry groups contributed to performance relative to the Index. Holdings in the energy, health care equipment & services, semiconductors & semi equipment, automobiles & components, and diversified financials industry groups offset some of the outperformance versus the Index. The top contributor to return was banking & financial services company, UniCredit S.p.A. (Italy). Additional top contributors included jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), rolling stock, signaling & services provider for the rail industry, Alstom SA (France), business software & services provider, SAP SE (Germany), and industrial gas provider, Air Liquide (France). The largest detractor from absolute performance was online services company, Tencent Holdings Ltd. (China). Other notable detractors included integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan), healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), life insurer, Prudential Plc (United Kingdom), and internet commerce company, Alibaba Group Holding Ltd. (China).

We use a proprietary quantitative equity allocation model that assists the portfolio managers in determining the weight of emerging versus developed markets in the Fund. Our allocation relative to the weight of emerging markets in the Index is currently underweight. We identify five primary factors as most indicative of the ideal allocation target: valuation, quality, earnings growth, macroeconomic, and risk aversion. Valuation is currently positive for emerging markets in our model. Our quality metrics, which include such measures as profit margins and return on equity, are negative. Our earnings growth factor is negative, and our macroeconomic factor is negative for emerging markets. Lastly, our risk aversion factor is positive in our model.

Investment Outlook

We believe that valuations for international equities, regardless of region, are increasingly promising for investors with a multi-year investment horizon. Currency slippage versus the US dollar should reverse, at least in part, as the interest rate differential between the US and Europe (for example) closes over the upcoming 12-18 months. Cyclical European equities incurred waves of selling after Russia’s invasion of Ukraine in February. That investor exodus has brought some, in our view, world-class developed market companies, in sectors such as materials, industrials, and consumer discretionary, into our buying range. We expect another area of meaningful alpha potential to come from developed markets stocks afflicted by China’s zero-Covid policy. We used the pessimism from delayed China reopening to gain exposure to, in our view, a broad array of competitively well-positioned companies that generate 10% or more of their respective revenues from the Chinese market. Typical of what Causeway seeks for its holdings, these companies have not wasted time while their China sales are weak; they have implemented operational restructuring to improve efficiency and lower costs in anticipation of a return to revenue expansion. Reopening, albeit gradual and without a precise timeframe, is inevitable in our view. Governments that asphyxiate their economies and cause social instability typically do not remain in power. We are convinced that China is no exception.

Within the EM portion of the Fund, we adjusted our earnings growth factor to, in our view, better reflect sentiment for commodity-related stocks. Based on our research, sell-side analyst earnings revisions for this cohort of stocks may be inconsistent with the price movement of the underlying commodities. In some cases, analysts are slow to update estimates, while in other cases, analysts base their forecasts on foward contracts, which adjust with a lag compared to spot prices. Additionally, extreme movements in commodity prices are often met with supply and demand responses, resulting in price reversals. For these reasons, we believe that adjusting our earnings growth factor for commodity-related stocks can potentially improve the Fund’s risk-adjusted returns. Overall, earnings growth upgrades for EM equities continue to lag those in ex-US developed markets. The EM sectors with the weakest net upgrades were materials, communication services, and industrials. Slowing global growth has contributed to lower expectations for industrials, which reflect weakness in the shipping sector, and materials companies. Communication services is primarily driven by the Chinese internet and technology companies, which have been impacted by the country’s slowing growth. Sectors with positive net upgrades were financials and energy. Financials are benefitting from positive credit cycles in India and Brazil, countries where we are identifying attractive investment opportunities in banks. The energy sector has been buoyed by oil, coal, and natural gas prices, which remain relatively strong. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. With a balance of favorable valuation, growth, and price momentum characteristics relative to the Index, we believe the portfolio offers attractive risk-adjusted return potential looking forward.

 

Emerging Markets Fund

Portfolio attribution

The Causeway Emerging Markets Fund (“Fund”) outperformed the Index in October 2022. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Fund’s investable universe. Our bottom-up growth and technical factors were positive indicators during the month. Our valuation and competitive strength factors were negative. Of our top-down factors, sector was a positive indicator. Our currency, macroeconomic, and country factors were negative indicators in October.

Investment outlook

Earnings growth upgrades for EM equities continue to lag those in ex-US developed markets. The EM sectors with the weakest net upgrades were materials, communication services, and industrials. Slowing global growth has contributed to lower expectations for industrials, which reflect weakness in the shipping sector, and materials companies. Communication services is primarily driven by the Chinese platform companies, which have been impacted by the country’s slowing growth. Sectors with positive net upgrades were financials and energy. Financials are benefitting from positive credit cycles in India and Brazil, countries where we are identifying attractive investment opportunities in banks. The energy sector has been buoyed by oil, coal, and natural gas prices, which remain relatively strong. From a country perspective, South Korea, South Africa, and China had the weakest net upgrades. The export-dependent, technology-oriented South Korean economy has been impacted by slowing global growth. South Africa is a commodity-oriented economy and reflects the falling commodity prices. Covid-19 restrictions continue to slow growth in China. While we incorporate growth expectations into our multi-factor investment process, we continue to emphasize valuation in our approach. With a balance of favorable valuation, growth, and price momentum characteristics relative to the Index, we believe the portfolio offers attractive risk-adjusted return potential looking forward.

In October, we adjusted our earnings growth factor to, in our view, better reflect sentiment for commodity-related stocks. Based on our research, sell-side analyst earnings revisions for this cohort of stocks may be inconsistent with the price movement of the underlying commodities. In some cases, analysts are slow to update estimates, while in other cases, analysts base their forecasts on forward contracts, which adjust with a lag compared to spot prices. Additionally, extreme movements in commodity prices are often met with supply and demand responses, resulting in price reversals. For these reasons, we believe that adjusting our earnings growth factor for commodity-related stocks can potentially improve the Fund’s risk-adjusted returns.

International Value Fund

Portfolio attribution

The Causeway International Value Fund (“Fund”) outperformed the Index during the month, due primarily to stock selection. Fund holdings in the banks, materials, transportation, capital goods, and food beverage & tobacco industry groups contributed to performance relative to the Index. Holdings in the consumer services, health care equipment & services, and semiconductors & semi equipment industry groups, along with an underweight position in the energy and automobiles & components industry groups, offset some of the outperformance versus the Index. The top contributor to return was banking & financial services company, UniCredit S.p.A. (Italy). Additional top contributors included rolling stock, signaling & services provider for the rail industry, Alstom SA (France), jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom), electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and business software & services provider, SAP SE (Germany). The largest detractor from absolute performance was integrated resort developer & operator, Sands China Ltd. (Hong Kong). Other notable detractors included healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), life insurer, Prudential Plc (United Kingdom), robotics manufacturer, FANUC Corp. (Japan), and beverage producer, Pernod Ricard SA (France).

Investment outlook

We believe that valuations for international equities, regardless of region, are increasingly promising for investors with a multi-year investment horizon. Currency slippage versus the US dollar should reverse, at least in part, as the interest rate differential between the US and Europe (for example) closes over the upcoming 12-18 months. Cyclical European equities incurred waves of selling after Russia’s invasion of Ukraine in February. That investor exodus has brought some, in our view, world-class companies, in sectors such as materials, industrials, and consumer discretionary, into our buying range. We expect another area of meaningful alpha potential to come from developed markets stocks afflicted by China’s zero-Covid policy. We used the pessimism from delayed China reopening to gain exposure to, in our view, a broad array of competitively well-positioned companies that generate 10% or more of their respective revenues from the Chinese market. Typical of what Causeway seeks for its holdings, these companies have not wasted time while their China sales are weak; they have implemented operational restructuring to improve efficiency and lower costs in anticipation of a return to revenue expansion. Reopening, albeit gradual and without a precise timeframe, is inevitable in our view. Governments that asphyxiate their economies and cause social instability typically do not remain in power. We are convinced that China is no exception.