The Causeway Global Value Fund (“Fund”), on a net asset value basis, outperformed the Index during the month, due primarily to stock selection. On a gross return basis, Fund holdings in the utilities and banks industry groups, as well as an underweight position in the semiconductors & semi equipment industry group, contributed to relative performance. Holdings in the capital goods, software & services, and technology hardware & equipment industry groups offset some of the outperformance compared to the Index. The top contributor to return was electric, gas & renewables power generation & distribution company, Enel SpA (Italy). Other notable contributors included banking & financial services company, UniCredit S.p.A. (Italy), and social media giant, Meta Platforms, Inc. (United States). The largest detractor was business services provider, Concentrix Corp. (United States). Additional notable detractors included HVAC manufacturer, Carrier Global Corp. (United States), and rolling stock, signaling, & services provider for the rail industry, Alstom SA (France).
The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate remains very low at 3.4%. Employers who suffered labor shortages during the pandemic may be reluctant to reduce staff. Data suggests the European Central Bank may have flexibility to slow its tightening policy. Although headline Eurozone inflation rose to 7% in April, the rate of core inflation—which removes the volatile food and energy price categories—declined for the first time in ten months, to 5.6%. In both the US and Europe, credit appears to be contracting after recent banking system shocks. As Europe and the US potentially near the end of their rate hike cycles, the Bank of Japan has yet to begin. We expect the Japanese central bank to continue its policy of monetary easing, conducted through yield curve control.
After a robust reopening from Covid lockdowns, Chinese manufacturing contracted in April; China’s official purchasing managers’ index (“PMI”) declined to 49.2. Our fundamental research corroborates this reading. In the materials sector, where China is the world’s largest customer and a critical link in supply chains, companies doing business with China are reporting a weaker recovery than past economic accelerations. Across developed markets, industrial production is declining from peak levels as companies work through backlogs accrued during the pandemic. Our team continues to value and vet industrials companies through our research process; we should be prepared to build exposure to select firms on share price pullbacks.
Amid signs of slowing economic activity, we seek to identify economically resilient companies at attractive valuations and avoid companies at cyclical earnings peaks. Consistent across industries is our preference for companies we see generating high levels of free cash flow and for managements willing to return excess capital to shareholders. Given the likelihood of recession, we want to see managements apply conservative financial approaches: paying down leverage, controlling expenses, and abstaining from shareholder-dilutive acquisitions. Although portfolio weights in more economically insulated sectors—consumer staples and utilities, for example—are toward the upper bounds of their historical ranges, we remain flexible in our positioning and aim to continue to exploit the full global equity opportunity set.
An ongoing significant valuation discount or “margin of safety” may support international equities’ continued outperformance versus the US as investors, anticipating multiple compression, grow increasingly wary of expensive stocks. Developed international stocks have only been cheaper than they are today for about 5% of the past fifty years, as measured by the nearly two standard deviation discount of the MSCI World ex-USA Index trailing price-to-earnings multiple versus the MSCI USA Index.
By year’s end, we expect some of the most significant returns in excess of the Index should be delivered by companies able to withstand effects of credit contraction, manage cost pressures, and improve productivity. We believe financial strength remains essential, especially in a higher-for-longer interest rate environment. Many of our portfolio companies are engaged in operational restructuring to improve earnings and cash flow. This implies these companies may deliver good news on a recovery in their growth, even as economic conditions remain sluggish. To identify investment candidates, our analysts are collaborating across their sectors to identify attractively valued portfolio candidates. Recent examples include Causeway consumer, industrials, and chemicals analysts valuing an ingredients company; and materials analysts studying a rare earth elements producer with input from automobile and technology analysts and members of our China research subsidiary. We believe understanding a company from multiple industry perspectives provides depth and rigor essential to determining its valuation.
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 April, the strategy’s value factors produced the highest returns among our alpha factor groups, and value is the best-performing factor YTD and over the last twelve months. Following a challenging first quarter, our earnings growth factors also posted positive returns last month. However, the strategy’s competitive strength and technical factors generated negative monthly returns. Our macroeconomic and country aggregate factors were also negative indicators in April as countries exhibiting superior top-down metrics generally underperformed those with relatively weaker characteristics. All factor group returns remain positive from inception of the Fund (10/20/14) to the end of April.
The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate is a low 3.4%. Employers who suffered labor shortages during the pandemic may be reluctant to reduce staff, even as demand weakens. In contrast, data suggests the European Central Bank may have flexibility to slow its tightening policy. Although headline Eurozone inflation rose to 7% in April, the rate of core inflation—which removes the volatile food and energy price categories—declined for the first time in ten months, to 5.6%. In both the US and Europe, credit appears to be contracting after recent banking system shocks. As Europe and the US potentially near the end of their rate hike cycles, the Bank of Japan has yet to begin. We expect the Japanese central bank to continue its policy of monetary easing, conducted through yield curve control.
After a robust reopening from Covid lockdowns, Chinese manufacturing contracted in April; China’s official purchasing managers’ index (“PMI”) declined to 49.2. Our fundamental research corroborates this reading. In the materials sector, where China is the world’s largest customer and a critical link in supply chains, companies doing business with China are reporting a weaker recovery than past economic accelerations. Across developed markets, industrial production is declining from peak levels as companies work through backlogs accrued during the pandemic.
The latest casualty in the US banking crisis was First Republic Bank, whose assets were seized by regulators and sold to JP Morgan. Outside of this incident, however, there has been relative calm in the banking sector, particularly outside of the US.
As of April 30, the Fund has a roughly 4.0% weight to banks, just slightly above the benchmark weight, and attribution was modestly positive for these positions in April.
Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Even if the U.S. Fed pauses future interest rate hikes following its May 3rd 25-bps hike, interest rates are likely to remain elevated for some time. A higher cost of capital should translate into a continued preference for value stocks. As of the end of April, the MSCI ACWI ex USA Small Cap Growth Index traded at a 17.1x forward P/E multiple compared to 10.0x for the MSCI ACWI ex USA Small Cap Value Index, a 71% premium.
International small caps exhibit greater valuation dispersion than large caps on both a forward earnings yield and price-to-book 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.
The Causeway International Opportunities Fund (“Fund”) on a net asset value basis, outperformed the Index during the month. On a gross return basis, fund holdings in the banks, materials, and utilities industry groups contributed to relative performance. Holdings in the capital goods, consumer durables & apparel, and financial services industry groups detracted from relative performance. The top individual contributors to absolute return were electric, gas & renewables power generation & distribution company, Enel SpA (Italy), banking & financial services company, UniCredit S.p.A. (Italy), and insurer, Prudential Plc (United Kingdom). The largest individual detractors from absolute return were integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan), robotics manufacturer, FANUC Corp. (Japan), and online services company, Tencent Holdings 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, macroeconomic, and risk aversion factors are negative for emerging markets.
The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate is a low 3.4%. Employers who suffered labor shortages during the pandemic may be reluctant to reduce staff, even as demand weakens. In contrast, data suggests the European Central Bank may have flexibility to slow its tightening policy. Although headline Eurozone inflation rose to 7% in April, the rate of core inflation—which removes the volatile food and energy price categories—declined for the first time in ten months, to 5.6%. In both the US and Europe, credit appears to be contracting after recent banking system shocks. As Europe and the US potentially near the end of their rate hike cycles, the Bank of Japan has yet to begin. We expect the Japanese central bank to continue its policy of monetary easing, conducted through yield curve control.
Macroeconomic data in China, the largest country within the EM universe, have been mixed. On the negative side, after a robust reopening from Covid lockdowns, Chinese manufacturing contracted in April; China’s official purchasing managers’ index (“PMI”) declined to 49.2. However, the country’s first quarter gross domestic product growth was 4.5%, exceeding most analyst estimates. Additionally, muted inflation near 2% should allow the Chinese government to engage in sufficient stimulus in order to meet its 5% growth target for 2023.
For the developed markets sleeve of the portfolio, our team continues to value and vet industrials companies through our research process; we should be prepared to build exposure to select firms on share price pullbacks. Amid signs of slowing economic activity, we seek to identify economically resilient companies at attractive valuations and avoid companies at cyclical earnings peaks. Consistent across industries is our preference for companies we see generating high levels of free cash flow and for managements willing to return excess capital to shareholders. Given the likelihood of recession, we want to see managements apply conservative financial approaches: paying down leverage, controlling expenses, and abstaining from shareholder-dilutive acquisitions. Although portfolio weights in more economically insulated sectors—consumer staples and utilities, for example—are toward the upper bounds of their historical ranges, we remain flexible in our positioning and aim to continue to exploit the full global equity opportunity set.
A valuation “margin of safety” may support international equities’ continued outperformance versus the US as investors, anticipating multiple compression, grow increasingly wary of expensive stocks. Developed international stocks have only been cheaper than they are today for about 5% of the past fifty years, as measured by the nearly two standard deviation discount of the MSCI World ex-USA Index trailing price-to-earnings multiple versus the MSCI USA Index.
By year’s end, we expect some of the most significant returns in excess of the Index should be delivered by companies able to withstand the effects of credit contraction, manage cost pressures, and improve productivity. We believe financial strength remains essential, especially in this higher-for-longer interest rate environment. Many of our portfolio companies are engaged in operational restructuring to improve earnings and cash flow. This implies these companies can deliver good news on a recovery in their growth, even as economic conditions remain sluggish. To identify investment candidates, our analysts are collaborating across their sectors to identify attractively valued portfolio candidates. Recent examples include Causeway consumer, industrials, and chemicals analysts valuing an ingredients company; and materials analysts studying a rare earth elements producer with input from automobile and technology analysts and members of our China research subsidiary. We believe understanding a company from multiple industry perspectives provides depth and rigor essential to determining its valuation.
Within emerging markets, earnings growth upgrades for EM equities continue to lag those in the ex-US developed markets. The EM countries with the weakest net upgrades in earnings forecasts included the externally-oriented economy of Taiwan, reflecting concerns that global growth is slowing. Net upgrades in Saudi Arabia and Qatar were also negative, reflecting falling energy prices. The smaller countries of Poland, Indonesia, and Turkey had positive net upgrades as they tend to be less impacted by slowing global growth than some of their EM peers. The sectors with the strongest net upgrades were communication services and consumer discretionary. Both sectors are dominated by Chinese stocks, which are benefitting from the country’s easing Covid-19 restrictions and solid growth outlook. The sectors with negative net upgrades included information technology and materials, both reflecting global growth pessimism.
The Causeway Emerging Markets Fund (“Fund”), on a net asset value basis, outperformed the Index in April 2023. 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 valuation factors were positive indicators during the month. Our technical (price momentum) and competitive strength factors were negative indicators. Of our top-down factors, country, sector, currency, and macroeconomic were negative indicators in April.
Economic data in the US are indicating that growth is falling and inflation is cooling. The March ISM Services Purchasing Managers Index, fell sharply in March to 46.3, its lowest level since May 2020. The latest casualty in the banking crisis was First Republic Bank, whose assets were seized by regulators and sold to JP Morgan. Outside of this incident, however, volatility in the banking sector fell in April relative to March. Financial conditions are improving as reflected in high yield credit spreads, which fell slightly in April after spiking in March. With risk aversion stabilizing and the US Federal Reserve (“Fed”) seemingly nearing the end of its interest rate hiking cycle, the outlook for EM assets is positive. Furthermore, macroeconomic data in China, the largest country within the EM Index, have been positive. The country’s first quarter gross domestic product growth was 4.5%, exceeding most analyst estimates. Additionally, muted inflation near 2% should allow the Chinese government to engage in sufficient stimulus in order to meet its 5% growth target for 2023. We are overweight Chinese stocks in the Fund due to a combination of favorable valuation, price momentum, and macroeconomic characteristics.
Earnings growth upgrades for EM equities continue to lag those in the ex-US developed markets. The EM countries with the weakest net upgrades included the externally-oriented economy of Taiwan, reflecting concerns that global growth is slowing. Net upgrades in Saudi Arabia and Qatar were also negative, reflecting falling energy prices. The smaller countries of Poland, Indonesia, and Turkey had positive net upgrades as they tend to be less impacted by slowing global growth than some of their EM peers. The sectors with the strongest net upgrades were communication services and consumer discretionary. Both sectors are dominated by Chinese stocks, which are benefitting from the country’s easing Covid-19 restrictions and solid growth outlook. The sectors with negative net upgrades included information technology and materials, both reflecting global growth pessimism. 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.
The Causeway International Value Fund (“Fund”), on a net asset value basis, outperformed the Index for the month, due primarily to stock selection. On a gross return basis, Fund holdings in the banks, materials, and utilities industry groups contributed to relative performance. Holdings in the capital goods and food beverage & tobacco industry groups, along with an overweight position in the technology hardware & equipment industry group, offset some of the outperformance compared to the Index. The top contributor to return was banking & financial services company, Unicredit (Italy). Other notable contributors included electric, gas & renewables power generation & distribution company, Enel SpA (Italy), and life insurer, Prudential Plc (United Kingdom). The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included robotics manufacturer, FANUC Corp. (Japan), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).
The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate remains very low at 3.4%. Employers who suffered labor shortages during the pandemic may be reluctant to reduce staff. Data suggests the European Central Bank may have flexibility to slow its tightening policy. Although headline Eurozone inflation rose to 7% in April, the rate of core inflation—which removes the volatile food and energy price categories—declined for the first time in ten months, to 5.6%. In both the US and Europe, credit appears to be contracting after recent banking system shocks. As Europe and the US potentially near the end of their rate hike cycles, the Bank of Japan has yet to begin. We expect the Japanese central bank to continue its policy of monetary easing, conducted through yield curve control.
After a robust reopening from Covid lockdowns, Chinese manufacturing contracted in April; China’s official purchasing managers’ index (“PMI”) declined to 49.2. Our fundamental research corroborates this reading. In the materials sector, where China is the world’s largest customer and a critical link in supply chains, companies doing business with China are reporting a weaker recovery than past economic accelerations. Across developed markets, industrial production is declining from peak levels as companies work through backlogs accrued during the pandemic. Our team continues to value and vet industrials companies through our research process; we should be prepared to build exposure to select firms on share price pullbacks.
Amid signs of slowing economic activity, we seek to identify economically resilient companies at attractive valuations and avoid companies at cyclical earnings peaks. Consistent across industries is our preference for companies we see generating high levels of free cash flow and for managements willing to return excess capital to shareholders. Given the likelihood of recession, we want to see managements apply conservative financial approaches: paying down leverage, controlling expenses, and abstaining from shareholder-dilutive acquisitions. Although portfolio weights in more economically insulated sectors—consumer staples and utilities, for example—are toward the upper bounds of their historical ranges, we remain flexible in our positioning and aim to continue to exploit the full global equity opportunity set.
An ongoing significant valuation discount or “margin of safety” may support international equities’ continued outperformance versus the US as investors, anticipating multiple compression, grow increasingly wary of expensive stocks. Developed international stocks have only been cheaper than they are today for about 5% of the past fifty years, as measured by the nearly two standard deviation discount of the MSCI World ex-USA Index trailing price-to-earnings multiple versus the MSCI USA Index.
By year’s end, we expect some of the most significant returns in excess of the Index should be delivered by companies able to withstand effects of credit contraction, manage cost pressures, and improve productivity. We believe financial strength remains essential, especially in a higher-for-longer interest rate environment. Many of our portfolio companies are engaged in operational restructuring to improve earnings and cash flow. This implies these companies may deliver good news on a recovery in their growth, even as economic conditions remain sluggish. To identify investment candidates, our analysts are collaborating across their sectors to identify attractively valued portfolio candidates. Recent examples include Causeway consumer, industrials, and chemicals analysts valuing an ingredients company; and materials analysts studying a rare earth elements producer with input from automobile and technology analysts and members of our China research subsidiary. We believe understanding a company from multiple industry perspectives provides depth and rigor essential to determining its valuation.
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