Global Small Cap

Portfolio attribution

The Portfolio 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. All of our alpha factor categories delivered positive returns in October. The strategy’s value factors produced positive returns in October, and value remains the best-performing factor in 2023 and over the last twelve months. Our earnings growth and technical factors also posted positive returns last month. Competitive strength generated the highest returns among our bottom-up alpha factor categories in October, and it is the second-best performing factor group over the year-to-date period. Our macroeconomic and country aggregate factors delivered positive monthly returns as countries exhibiting stronger metrics (such as Japan) outperformed those with relatively weaker characteristics (such as Australia). All factor groups remain positive on an inception-to-date basis.

Economic outlook

Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down, and the Euro area PMI remains stuck at a recessionary level.

According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.

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 price-to-earnings (P/E) multiple compared to 9.6x for the MSCI ACWI ex USA Small Cap Value Index, a 63% premium, which is the smallest it has been all year.

Another attractive feature of global small caps is that they exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term earnings per share growth trend.

International Small Cap

Portfolio Attribution

The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs five bottom-up factor categories – valuation, sentiment, technical indicators, quality (formerly labelled competitive strength), and corporate events – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our alpha factory categories generated positive returns in the first quarter. Our value factors delivered positive returns for the month and the first quarter in the higher interest rate environment. They are one of the best-performing factor groups over the last twelve months. The strategy’s sentiment factors also posted positive returns for the month and the quarter. Our technical factors generated slightly negative returns for March, but they were the best-performing alpha factor category in the quarter and they slightly edged out value as the top-performing factor group over the last twelve months. Our quality factors have also performed very well in the month, quarter, and trailing twelve months. Our macroeconomic and country aggregate factors delivered positive monthly and quarterly returns as countries exhibiting stronger metrics (such as Taiwan and Japan) outperformed those with relatively weaker characteristics (such as China and Germany). All alpha factor group returns remain positive on an inception to date basis. We will begin reporting on our new corporate events factor category, described below, next quarter.

Quarterly Investment Outlook

We made several enhancements to our alpha model in the first quarter, reflecting the efforts to continue the productivity of our research agenda. Within our newly-labelled Quality category, we added a variety of Financial Strength factors, including several bank-specific metrics, to complement our existing Competitive Strength factors. We also introduced a new factor category, Corporate Events, in late February. This new set of factors is intended to capture the typical market reaction to a wide range of corporate events including management changes, financing events, buyback/dividend changes, and delayed earnings/filings, among other events.

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. Federal Reserve begins cutting policy rates soon, interest rates are likely to remain elevated for some time, and a higher cost of capital should translate into a continued preference for value stocks. As of the end of March, the MSCI ACWI ex USA Small Cap Growth Index traded at a 17.9x forward price-to-earnings (P/E) multiple compared to 10.7x for the MSCI ACWI ex USA Small Cap Value Index, a 67% premium.

We believe another attractive feature of international small caps is that they exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term earnings per share growth trend.

International Value Select

Portfolio Attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, banks, and technology hardware & equipment industry groups contributed to relative performance. Holdings in the household & personal products, consumer durables & apparel, and pharmaceuticals & biotechnology industry groups offset some of the outperformance compared to the Index. The top contributor to return was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable contributors included electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and financial services provider, ING Groep NV (Netherlands). The largest detractor was multinational luxury conglomerate, Kering SA (France). Additional notable detractors included household & personal care products company, Reckitt Benckiser Group (United Kingdom), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).

Quarterly Investment Outlook

European equities, on a sector-neutral basis, are trading at valuation discounts to the US not seen since sovereign debt concerns roiled the region in 2011. We are increasing exposure to well-vetted European-listed stocks across various sectors, including information technology, materials, industrials, and consumer discretionary. Valuations in Japan have risen, catalyzed by earnings upgrades in certain export-related industries, capital inflows redirected away from Chinese markets, and optimism for improving corporate governance. Causeway’s investment team remains focused on identifying long-term winners in Japan’s efforts to improve shareholder returns, with six of our portfolio managers and analysts conducting research trips there in the early months of the year. However, the long-term challenges persist, namely, delivering consistently improving returns on capital.

We continue to identify companies we believe are creating value in their businesses through operational restructuring. Conservative assumptions and our interactions with company managements build our conviction in the share price upside from strengthening underearning businesses, generating more cash flow, and increasing profitability. In our clients’ fundamental portfolios, we aim to balance these restructuring holdings with competitively positioned companies, such as those operating in oligopolistic markets with sustained pricing power, trading at reasonable valuations. Given positive real interest rates in most regions, dividends and buybacks currently are an especially meaningful component of total return. Though we reduced client exposure to banks during the quarter, we hold those with the highest risk-adjusted returns and anticipate portfolios will continue to benefit from their capital return programs. Positive real interest rates should continue to support a value investment style underpinned by rigorous fundamental research.

International Opportunities

Portfolio Attribution

The Portfolio modestly underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the consumer durables & apparel, household & personal products, and materials industry groups detracted from relative performance. Holdings in the banks, capital goods, and software & services industry groups offset some of the underperformance compared to the Index. The largest detractor was multinational luxury conglomerate, Kering SA (France). Additional notable detractors included household & personal care products company, Reckitt Benckiser Group (United Kingdom), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan). The top contributor to return was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable contributors included financial services provider, ING Groep NV (Netherlands), and banking & financial services company, Barclays PLC (United Kingdom).

Quarterly Investment Outlook

European equities, on a sector-neutral basis, are trading at valuation discounts to the US not seen since sovereign debt concerns roiled the region in 2011. We are increasing exposure to well-vetted European-listed stocks across various sectors, including information technology, materials, industrials, and consumer discretionary. Valuations in Japan have risen, catalyzed by earnings upgrades in certain export-related industries, capital inflows redirected away from Chinese markets, and optimism for improving corporate governance. Causeway’s investment team remains focused on identifying long-term winners in Japan’s efforts to improve shareholder returns, with six of our portfolio managers and analysts conducting research trips there in the early months of the year. However, the long-term challenges persist, namely, delivering consistently improving returns on capital. We continue to identify companies we believe are creating value in their businesses through operational restructuring. Conservative assumptions and our interactions with company managements build our conviction in the share price upside from strengthening underearning businesses, generating more cash flow, and increasing profitability. In our clients’ fundamental portfolios, we aim to balance these restructuring holdings with competitively positioned companies, such as those operating in oligopolistic markets with sustained pricing power, trading at reasonable valuations. Given positive real interest rates in most regions, dividends and buybacks currently are an especially meaningful component of total return. Though we reduced client exposure to banks during the quarter, we hold those with the highest risk-adjusted returns and anticipate portfolios will continue to benefit from their capital return programs. Positive real interest rates should continue to support a value investment style underpinned by rigorous fundamental research.

Within EM, the South Korean government has introduced its Corporate Value-Up program with the goal of increasing valuations for companies trading significantly below book value. However, given the voluntary nature of the program, we believe the long-term efficacy of the initiative remains questionable. While the Portfolio was overweight in South Korean stocks at quarter-end, we have been reducing exposure due in part to valuation considerations. The Portfolio was also overweight Indian stocks at quarter-end, reflecting attractive bottom-up and top-down characteristics in the country. The Portfolio’s overweight to Indian small caps has contributed to relative performance over the trailing 12-months ended March 31st, attributable in part to optimism leading into the upcoming general election. Within EM more broadly, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks was near the high end of the historical range at quarter-end.

Emerging Markets Equity

Portfolio Attribution

The Portfolio performed in-line with the Index during the month. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio’s investable universe*. Our bottom-up valuation, growth, and corporate events factors were positive indicators in March. Our technical (price momentum) and competitive strength factors were negative indicators. Our top-down currency factor was positive while our macroeconomic and country/sector aggregate factors were negative indicators during the month.

Quarterly Investment Outlook

The South Korean government has introduced its Corporate Value-Up program with the goal of increasing valuations for companies trading significantly below book value. However, given the voluntary nature of the program, we believe the long-term efficacy of the initiative remains questionable. While the Portfolio was overweight in South Korean stocks at quarter-end, we have been reducing exposure due in part to valuation considerations. In Turkey, the central bank hiked its target interest rate by 500 basis points in March, signaling its commitment to reigning in inflation. This action helped to allay concerns that President Recep Erdogan would interfere with the central bank’s price stability objective in order to spur slowing growth. The Portfolio was overweight Turkish stocks at quarter-end as compelling bottom-up characteristics more than offset the country’s challenging, but improving, top-down headwinds.

The Portfolio was also overweight Indian stocks at quarter-end, reflecting attractive bottom-up and top-down characteristics in the country. The Portfolio’s overweight to Indian small caps has contributed to relative performance over the trailing 12-months ended March 31st, attributable in part to optimism leading into the upcoming general election. Within EM more broadly, we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks was near the high end of the historical range at quarter-end.

*The Causeway Emerging Markets strategy uses quantitative factors that can be grouped into eight categories: valuation, growth, technical indicators, competitive strength, macroeconomic, corporate events, country/sector aggregate, and currency. The return attributed to a factor is the difference between the equally-weighted average return of the highest ranked quintile of companies in the strategy’s emerging markets universe based on that factor and that of the lowest ranked quintile of companies. “Alpha” means performance exceeding the benchmark index.

Global Value Equity

Portfolio Attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, technology hardware & equipment, and capital goods industry groups contributed to relative performance. Holdings in the household & personal products and consumer durables & apparel industry groups, along with an underweight position in the semiconductors & semi equipment industry group, offset some of the outperformance compared to the Index. The top contributor to return was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable contributors included electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and global financial services giant, Citigroup, Inc. (United States). The largest detractor was multinational luxury conglomerate, Kering SA (France). Additional notable detractors included household & personal care products company, Reckitt Benckiser Group (United Kingdom), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).

Quarterly Investment Outlook

European equities, on a sector-neutral basis, are trading at valuation discounts to the US not seen since sovereign debt concerns roiled the region in 2011. We are increasing exposure to well-vetted European-listed stocks across various sectors, including information technology, materials, industrials, and consumer discretionary. Valuations in Japan have risen, catalyzed by earnings upgrades in certain export-related industries, capital inflows redirected away from Chinese markets, and optimism for improving corporate governance. Causeway’s investment team remains focused on identifying long-term winners in Japan’s efforts to improve shareholder returns, with six of our portfolio managers and analysts conducting research trips there in the early months of the year. However, the long-term challenges persist, namely, delivering consistently improving returns on capital.

We continue to identify companies we believe are creating value in their businesses through operational restructuring. Conservative assumptions and our interactions with company managements build our conviction in the share price upside from strengthening underearning businesses, generating more cash flow, and increasing profitability. In our clients’ fundamental portfolios, we aim to balance these restructuring holdings with competitively positioned companies, such as those operating in oligopolistic markets with sustained pricing power, trading at reasonable valuations. Given positive real interest rates in most regions, dividends and buybacks currently are an especially meaningful component of total return. Though we reduced client exposure to banks during the quarter, we hold those with the highest risk-adjusted returns and anticipate portfolios will continue to benefit from their capital return programs. Positive real interest rates should continue to support a value investment style underpinned by rigorous fundamental research.

International Value Equity

Portfolio Attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, banks, and technology hardware & equipment industry groups contributed to relative performance. Holdings in the household & personal products, consumer durables & apparel, and pharmaceuticals & biotechnology industry groups offset some of the outperformance compared to the Index. The top contributor to return was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable contributors included electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and financial services provider, ING Groep NV (Netherlands). The largest detractor was multinational luxury conglomerate, Kering SA (France). Additional notable detractors included household & personal care products company, Reckitt Benckiser Group (United Kingdom), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).

Quarterly Investment Outlook

European equities, on a sector-neutral basis, are trading at valuation discounts to the US not seen since sovereign debt concerns roiled the region in 2011. We are increasing exposure to well-vetted European-listed stocks across various sectors, including information technology, materials, industrials, and consumer discretionary. Valuations in Japan have risen, catalyzed by earnings upgrades in certain export-related industries, capital inflows redirected away from Chinese markets, and optimism for improving corporate governance. Causeway’s investment team remains focused on identifying long-term winners in Japan’s efforts to improve shareholder returns, with six of our portfolio managers and analysts conducting research trips there in the early months of the year. However, the long-term challenges persist, namely, delivering consistently improving returns on capital.

We continue to identify companies we believe are creating value in their businesses through operational restructuring. Conservative assumptions and our interactions with company managements build our conviction in the share price upside from strengthening underearning businesses, generating more cash flow, and increasing profitability. In our clients’ fundamental portfolios, we aim to balance these restructuring holdings with competitively positioned companies, such as those operating in oligopolistic markets with sustained pricing power, trading at reasonable valuations. Given positive real interest rates in most regions, dividends and buybacks currently are an especially meaningful component of total return. Though we reduced client exposure to banks during the quarter, we hold those with the highest risk-adjusted returns and anticipate portfolios will continue to benefit from their capital return programs. Positive real interest rates should continue to support a value investment style underpinned by rigorous fundamental research.