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, information technology, and materials sectors detracted the most from performance relative to the Index. Holdings in the health care, communication services, and energy 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 real estate developer and operator, Hammerson Plc (United Kingdom). Additional top detractors included, cement & concrete manufacturer, Huaxin Cement Co (China), electronics manufacturer, Radiant Opto-Electronics Corp. (Taiwan), semiconductor tester, King Yuan Electronics Co., Ltd. (Taiwan), and apparel company, Adastria Co., Ltd. (Japan). The largest contributor to performance was semiconductor services provider, BE Semiconductor Industries NV (Netherlands). Additional top contributors included human resource services provider, DIP Corp. (Japan), real estate developer, PSP Swiss Property AG (Switzerland), investment management firm, AGF Management (Canada), and arcade and online game company, International Games System Co., Ltd. (Taiwan).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite value’s relatively strong performance late in the year, value stocks still significantly underperformed growth stocks in 2019, both in developed and emerging markets. As of January 31, the MSCI ACWI ex USA Small Cap Growth Index traded at a 18.7x forward price-to-earnings multiple compared to 12.3x for the MSCI ACWI ex USA Small Cap Value Index. This 53% premium is well above the 27% average premium over the last 15 years. Given the valuations of growth stocks, which we believe are stretched, we feel comfortable with our meaningful active exposure to value factors.

The overall outlook for smaller cap equities remains favorable in our view. Improving market sentiment (due to potential progress on US-China trade negotiations and a steepening yield curve) could lead to stronger demand for risk assets including smaller market-cap stocks. Smaller cap equities are also 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.

We continue to observe a number of 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. In spite of 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.