Portfolio attribution

Causeway International Small Cap Fund (“Fund”) underperformed 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 quality – and two top-down factor categories assessing macroeconomic and country aggregate characteristics.

From a sector perspective, fund holdings in the real estate, health care, and industrials sectors detracted most from performance relative to the Index. Holdings in the information technology, financials, and communication services sectors offset a portion of the underperformance. Relative performance for the month can be mostly attributed to stock selection. The largest detractor from performance was food and beverage distributor, Metcash (Australia). Additional top detractors included real estate developer, CORESTATE Capital Holding SA (Germany), solar energy company, Daqo New Energy (China), consumer electronics manufacturer, JVCKenwood Corp. (Japan), and real estate developer, PSP Swiss Property AG (Switzerland). The largest contributor to performance was consumer electronics store, JB Hi-Fi Ltd. (Australia). Additional top contributors included precious metals miner, Centamin Plc (United Kingdom), semiconductor services provider, BE Semiconductor Industries NV (Netherlands), biopharmaceutical company, Pharma Mar SA (Spain), and electronics manufacturer, Radiant Opto-Electronics Corp. (Taiwan).

Investment outlook

hough we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of April 30, the MSCI ACWI ex USA Small Cap Growth Index (“Growth Index”) traded at a 18.3x forward price-to-earnings multiple compared to 11.3x for the MSCI ACWI ex USA Small Cap Value Index (“Value Index”). This 62% premium is well above the 27% average premium over the last 15 years. We believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently, and feel comfortable with our large active exposure to value. However, the sheer breadth of the international small cap universe means that the typical tradeoffs in portfolio characteristics do not necessarily apply. In addition to value, we look for favorable growth, momentum, and quality characteristics. We believe that at most points in time our portfolio has exhibited more attractive metrics relative to the Index across all factor categories simultaneously.

Similarly, we observe an unusually large valuation premium for DM relative to EM smaller cap equities. DM smaller cap equities, as measured by the MSCI Worldex-USA Small Cap Index, currently trade at a 39% forward price-to-earnings multiple premium to EM smaller cap equities, as measured by the MSCI Emerging Markets Small Cap Index, much higher than the 10-year average of 29%. This premium partly explains the Fund’s overweight position in EM.Smaller cap equities are currently exhibiting a higher long-term earnings-per-share growth trend than larger cap equities. Additionally, international smaller cap equities have exhibited greater valuation dispersion than larger cap equities on both a forward-earnings-yield basis and a price-to-book value basis, indicating more information content in valuation ratios for these equities. This characteristic has allowed us to construct a portfolio with lower valuation ratios relative to the Index without, in our view, compromising quality.

Smaller cap equities are currently exhibiting a higher long-term earnings-per-share growth trend than larger cap equities. Additionally, international smaller cap equities have exhibited greater valuation dispersion than larger cap equities on both a forward-earnings-yield basis and a price-to-bookvalue basis, indicating more information content in valuation ratios for these equities. This characteristic has allowed us to construct a portfolio with lower valuation ratios relative to the Index without, in our view, compromising quality.

We continue to observe several intriguing features in the smaller cap landscape. We believe the intersection of international equities and smaller cap companies creates a recipe for inefficiency. Additionally, international smaller cap stocks are an underappreciated asset class that we believe can offer meaningful diversification benefits with the potential to reduce portfolio volatility. Finally, smaller cap stocks are typically less exposed to the potential risk of rising barriers to trade, given their home country revenue exposure. Despite the potential benefits, we believe many investors may be underallocated to the asset class despite its meaningful growth and diversification prospects. Causeway’s international small cap strategy combines the flexibility and breadth of quantitative analysis with our global industry knowledge, which we believe will benefit long-term investors in the Fund.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the fund holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. Any securities identified and described in this report 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. Diversification does not protect against market loss. Current and future holdings will be subject to risk. International and emerging markets investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets and smaller companies involve additional risks and higher volatility.