International Small Cap

Portfolio attribution

The Portfolio outperformed the Index during the month, in part due to our overweight to small caps in EM, given the sizable outperformance of EM small caps over DM small caps mentioned previously. 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. The strategy’s value factors delivered negative returns in August. Despite poor performance in the last two months, value remains the top-performing factor group over the year-to-date period and the last twelve months. The strategy’s earnings growth and technical alpha factors had positive monthly returns, and they have also generated meaningfully positive returns over the year-to-date period and the last twelve months. Our competitive strength factor category delivered negative returns for the month. These factors have a quality tilt and are designed to help us identify stocks that can perform well in inflationary and/or recessionary environments, among others. Though our country aggregate factors were negative indicators in August, our macroeconomic factors delivered positive returns as countries exhibiting superior top-down metrics outperformed those with relatively weaker characteristics. All factor group returns remain positive from inception of the Strategy (10/20/14) to the end of August.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite the recent value rally, the MSCI ACWI ex USA Small Cap Growth Index still traded at a 16.8x forward P/E multiple compared to 9.5x for the MSCI ACWI ex USA Small Cap Value Index as of August 31, 2022, a 77% premium. As of August 31, 2022, the Causeway International Small Cap portfolio traded at just 5.5x forward (next twelve months) 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.

The sheer breadth and inefficiency of the International Small Cap (ISC) universe create the opportunity to build a portfolio without the typical tradeoffs in stock characteristics. We believe Causeway’s ISC strategy, harnessing multiple sources of alpha, has achieved an attractive combination of portfolio characteristics. Valuation matters, even in small caps, amidst global economic fears and rising interest rates. To learn more about our unique approach to International Small Cap portfolio construction, please read our recent publication “No Tradeoffs Required” available at www.causewaycap.com/insights.

International Value Select

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, pharmaceuticals & biotechnology, materials, and software & services industry groups, along with an underweight position in the energy industry group, detracted from relative performance. Holdings in the transportation industry group, as well as an overweight position in the banks industry group and an underweight position in the semiconductors & semi equipment, consumer durables & apparel, and media & entertainment industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included life insurer, Prudential Plc (United Kingdom), pharmaceutical giant, Sanofi (France), healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), and rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). The top contributor to return was insurer, AXA SA (France). Other notable contributors included crude oil & natural gas company, BP Plc (United Kingdom), airport operator, Beijing Capital International Airport Co., Ltd. (China), banking & financial services company, UniCredit S.p.A. (Italy), and financial services company, Zurich Insurance Group (Switzerland).

Investment outlook

Inflationary pressures, rising interest rates, and concerns about a slowdown in global economic activity have hampered equity returns this year. The ongoing weakness in the Chinese economy just adds to the negative ramifications for the earnings of companies and industries globally. We believe central banks (other than the Bank of China) should continue raising interest rates and draining monetary liquidity from their respective financial systems, which will likely add downward pressures to valuation multiples. After a surge upward in the past 12 months, oil and gas stocks have moved down our risk-adjusted return ranking. As a result, we reduced exposure to the energy sector in favor of other economically sensitive stocks where we believe valuations offer more upside potential over the next two years. For European cyclicals in particular, rising inflation, monetary tightening, and currency weakness have weighed heavily on stock prices. However, we believe valuations are quite low, likely already discounting a recession. In our investable universe, we believe the best-positioned industrials, materials, financials, and consumer discretionary companies—those with, in our view, balance sheet strength and excellent management teams—should lead markets upward in the next stage of the economic cycle. Historically, cyclicals outperform as markets begin to discount recovery. We expect management teams of our portfolio companies to amplify profitability via leaner operations and greater efficiency (operational restructuring), creating the potential for even more uplift in their share prices.

International Opportunities

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, pharmaceuticals & biotechnology, insurance, health care equipment & services, and software & services industry groups detracted from performance relative to the Index. Holdings in the banks, diversified financials, semiconductors & semi equipment, and energy industry groups, as well as an underweight position in the consumer durables & apparel industry group, offset some of the underperformance versus the Index. The largest detractor from absolute performance was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Other notable detractors included life insurer, Prudential Plc (United Kingdom), pharmaceutical giant, Sanofi (France), healthcare equipment & services provider, Koninklijke Phillips NV (Netherlands), and rolling stock, signaling & services provider for the rail industry, Alstom SA (France). The top contributor to return was e-commerce platform, Pinduoduo (China). Additional top contributors included bank, Banco do Brasil SA (Brazil), online services company, Tencent Holdings Ltd. (China), oil & gas exploration company, Petroleo Brasileiro SA (Brazil), and insurer, AXA SA (France).

Investment outlook

Inflationary pressures, rising interest rates, and concerns about a slowdown in global economic activity have hampered developed market equity returns this year. The ongoing weakness in the Chinese economy just adds to the negative ramifications for the earnings of companies and industries globally. We believe central banks (other than the Bank of China) should continue raising interest rates and draining monetary liquidity from their respective financial systems, which will likely add downward pressures to valuation multiples. After a surge upward in the past 12 months, oil and gas stocks have moved down our risk-adjusted return ranking in the developed markets portion of the Portfolio. As a result, we reduced exposure to the energy sector in favor of other economically sensitive stocks where we believe valuations offer more upside potential over the next two years. For developed European cyclicals in particular, rising inflation, monetary tightening, and currency weakness have weighed heavily on stock prices. However, we believe valuations are quite low, likely already discounting a recession. In our investable universe, we believe the best-positioned developed market industrials, materials, financials, and consumer discretionary companies – those with, in our view, balance sheet strength and excellent management teams – should lead markets upward in the next stage of the economic cycle. Historically, cyclicals outperform as markets begin to discount recovery. We expect management teams of our portfolio companies to amplify profitability via leaner operations and greater efficiency (operational restructuring), creating the potential for even more uplift in their share prices.

Regarding the EM portion of the Portfolio, earnings growth upgrades for EM equities continue to lag those in developed markets. From a country perspective, South Korea, South Africa, and Brazil had the weakest net upgrades. South Korea reflects slowing global growth via the country’s exposure to the information technology sector. South Africa and Brazil are commodity-oriented economies that have been impacted by falling commodity prices. The countries with the strongest net upgrades were Indonesia, Saudi Arabia, and United Arab Emirates, in part reflecting relatively strong oil and coal prices. 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 provides outperformance potential looking forward.

Emerging Markets Equity

Portfolio attribution

The Portfolio outperformed the Index in August 2022. 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 growth and technical factors were positive indicators during the month. Our valuation and competitive strength factors were negative indicators. Of our top-down factors, our country and sector factors were positive indicators while our macroeconomic and currency factors were negative indicators in August.

Investment outlook

Earnings growth upgrades for EM equities continue to lag those in developed markets. From a country perspective, South Korea, South Africa, and Brazil had the weakest net upgrades. South Korea reflects slowing global growth via the country’s exposure to the information technology sector. South Africa and Brazil are commodity-oriented economies that have been impacted by falling commodity prices. We are overweight South Korean and Brazilian stocks in the Portfolio due to a combination of valuation, price momentum, and macroeconomic considerations. The countries with the strongest net upgrades were Indonesia, Saudi Arabia, and United Arab Emirates, in part reflecting relatively strong oil and coal prices. The EM sectors with the weakest upgrades were real estate, materials, and information technology. Real estate is primarily driven by slowing growth in the Chinese real estate sector, which is less impactful for China overall as the relative size of the sector has declined. Materials and information technology reflect the falling commodity prices resulting from a slowing global economy. The sectors with the strongest earnings growth upgrades were energy, consumer discretionary, and consumer staples. Energy companies continue to benefit from relatively high oil prices. The positive outlook for consumer discretionary companies reflects the encouraging results of Chinese online consumer companies. Consumer staples, a defensively-oriented sector, reflects the growing concern over an economic slowdown. 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 provides outperformance potential looking forward.

Global Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, insurance, consumer services, and utilities industry groups, along with an underweight position in the energy industry group, detracted from relative performance. Holdings in the media & entertainment and software & services industry groups, as well as an overweight position in the banks industry group and an underweight position in the semiconductors & semi equipment and consumer durables & apparel industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included life insurer, Prudential Plc (United Kingdom), airport & rail station concessionaire, SSP Group Plc (United Kingdom), pharmaceutical giant, Sanofi (France), and defense & information technology services provider, Leidos Holdings, Inc. (United States). The top contributor to return was travel & tourism technology company, Sabre Corp. (United States). Other notable contributors included media & entertainment conglomerate, The Walt Disney Co. (United States), insurer, AXA SA (France), social media giant, Meta Platforms, Inc. (United States), and banking & financial services company, UniCredit S.p.A. (Italy).

Investment outlook

Inflationary pressures, rising interest rates, and concerns about a slowdown in global economic activity have hampered equity returns this year. The ongoing weakness in the Chinese economy just adds to the negative ramifications for the earnings of companies and industries globally. We believe central banks (other than the Bank of China) should continue raising interest rates and draining monetary liquidity from their respective financial systems, which will likely add downward pressures to valuation multiples. After a surge upward in the past 12 months, oil and gas stocks have moved down our risk-adjusted return ranking. As a result, we reduced exposure to the energy sector in favor of other economically sensitive stocks where we believe valuations offer more upside potential over the next two years. For European cyclicals in particular, rising inflation, monetary tightening, and currency weakness have weighed heavily on stock prices. However, we believe valuations are quite low, likely already discounting a recession. In our investable universe, we believe the best-positioned industrials, materials, financials, and consumer discretionary companies—those with, in our view, balance sheet strength and excellent management teams—should lead markets upward in the next stage of the economic cycle. Historically, cyclicals outperform as markets begin to discount recovery. We expect management teams of our portfolio companies to amplify profitability via leaner operations and greater efficiency (operational restructuring), creating the potential for even more uplift in their share prices.

International Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, pharmaceuticals & biotechnology, insurance, and materials industry groups, along with an underweight position in the energy industry group, detracted from relative performance. Holdings in the transportation industry group, as well as an overweight position in the banks industry group and an underweight position in the semiconductors & semi equipment, consumer durables & apparel, and media & entertainment industry groups, offset some of the underperformance compared to the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included life insurer, Prudential Plc (United Kingdom), pharmaceutical giant, Sanofi (France), healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), and rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). The top contributor to return was insurer, AXA SA (France). Other notable contributors included crude oil & natural gas company, BP Plc (United Kingdom), banking & financial services company, UniCredit S.p.A. (Italy), airport operator, Beijing Capital International Airport Co., Ltd. (China), and tobacco products company, British American Tobacco plc (United Kingdom).

Investment outlook

Inflationary pressures, rising interest rates, and concerns about a slowdown in global economic activity have hampered equity returns this year. The ongoing weakness in the Chinese economy just adds to the negative ramifications for the earnings of companies and industries globally. We believe central banks (other than the Bank of China) should continue raising interest rates and draining monetary liquidity from their respective financial systems, which will likely add downward pressures to valuation multiples. After a surge upward in the past 12 months, oil and gas stocks have moved down our risk-adjusted return ranking. As a result, we reduced exposure to the energy sector in favor of other economically sensitive stocks where we believe valuations offer more upside potential over the next two years. For European cyclicals in particular, rising inflation, monetary tightening, and currency weakness have weighed heavily on stock prices. However, we believe valuations are quite low, likely already discounting a recession. In our investable universe, we believe the best-positioned industrials, materials, financials, and consumer discretionary companies—those with, in our view, balance sheet strength and excellent management teams—should lead markets upward in the next stage of the economic cycle. Historically, cyclicals outperform as markets begin to discount recovery. We expect management teams of our portfolio companies to amplify profitability via leaner operations and greater efficiency (operational restructuring), creating the potential for even more uplift in their share prices.