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, and corporate events – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. The strategy’s value factors delivered positive returns in October, and value remains the best-performing factor group over the last twelve months. Our sentiment factors were positive for the month, over the last twelve months, and year-to-date. Our quality and technical factors also posted positive returns in the month, and the technical factor category has produced the highest returns year to date. Our Corporate Events factor, added at the end of February, was flat in October. Returns to our macroeconomic and country aggregate factors were positive as countries exhibiting more attractive characteristics (such as Canada) outperformed those with relatively weaker characteristics (such as Australia and the UK). All factor groups remain positive on an inception to date basis.

Quarterly Investment Outlook

In the wake of the U.S. presidential election, some potentially significant policy shifts are expected from the next administration. In general, relative to their larger-cap peers, international small caps tend to derive a much higher percentage of revenue from their domestic market and should therefore be better protected from rising barriers to trade or tariffs. In China, the Standing Committee of the National People’s Congress (NPC) is expected to announce more concrete fiscal stimulus measures following their meeting in early November. Although China is <3% of the ACWI ex-US Small Cap Index, we believe that the recent pivot toward monetary and fiscal stimulus will be supportive of global economic growth.

As global central banks continue cutting rates, improving liquidity should benefit small-cap stocks, especially with small-cap stocks (ACWI ex USA Small Cap Index) trading at a rare discount to their larger-cap (ACWI ex USA Index) peers on a forward P/E basis. In addition to the attractive relative valuation of the asset class overall, Causeway’s International Small Cap portfolio continues to trade at a substantial discount to the Index while, in our view, simultaneously exhibiting more favorable growth, quality, momentum, and positive estimate revisions than the Index. We believe that this highly attractive combination of characteristics better insulates our portfolio from future volatility.

October marked the 10-year anniversary of Causeway’s International Small Cap strategy, and we have released an interview with the strategy’s portfolio managers to mark the occasion.

International Value Select

Portfolio Attribution

The Portfolio modestly outperformed the Index during the month, due primarily to currency allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the capital goods, materials, and household & personal products industry groups contributed to relative performance. Holdings in the health care equipment & services, technology hardware & equipment, and pharmaceuticals & biotechnology industry groups offset some of the outperformance compared to the Index. The top contributor to return was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Other notable contributors included bank, Standard Chartered Plc (United Kingdom), and corrugated and paper packaging manufacturer, Smurfit WestRock Plc (United States). The largest detractor was multinational luxury conglomerate, Kering SA (France). Additional notable detractors included healthcare equipment & services provider, Koninklijke Philips NV (Netherlands), and electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. Whether China can avoid prolonged stagnation remains uncertain, but its stock market should see bursts of enthusiasm. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. The US presidential election will be important for global markets, given the differing policy prescriptions of both candidates. Despite escalating conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-long-term investors we remain committed to these tenets of fundamental value investing.

International Opportunities

Portfolio Attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, consumer durables & apparel, and household & personal products industry groups contributed to relative performance. Holdings in the health care equipment & services, energy, and pharmaceuticals & biotechnology industry groups offset some of the outperformance compared to the Index. The top contributor to return was integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan). Other notable contributors included rolling stock, signaling, & services provider for the rail industry, Alstom SA (France), and electronics contract manufacturer, Hon Hai Precision Industry Co., Ltd. (Taiwan). The largest detractor was healthcare equipment & services provider, Koninklijke Philips NV (Netherlands). Additional notable detractors included pharmaceutical & consumer healthcare company, GSK Plc (United Kingdom), and paints & coatings producer, Akzo Nobel (Netherlands).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. The People’s Bank of China (PBOC) cut the required reserve ratio for Chinese banks by 50 basis points, a larger reduction than most investors anticipated, freeing up approximately 1 trillion yuan for new lending. We believe additional interest rate cuts, and broader measures to support the Chinese real estate market, are likely. The PBOC also increased financing availability for stock repurchase activity, which we believe will support China’s financial markets. On the consumption side, several Chinese cities and provinces have announced vouchers to bolster spending in a variety of goods and services, including traveling, dine-in, and sports. The Portfolio remains overweight Chinese stocks due in part to valuation considerations. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. The US presidential election will be important for global markets, given the differing policy prescriptions of both candidates. Despite escalating conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions.

Emerging Markets Equity

Portfolio Attribution

The Portfolio outperformed the Index in October 2024. 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, technical (price momentum), and corporate events factors were positive indicators in October. Our valuation and competitive strength factors were negative indicators. Our top-down macroeconomic and country/sector aggregate were positive indicators, while currency was a negative indicator.

Quarterly Investment Outlook

During the third quarter, the US Federal Reserve reduced its benchmark interest rate and indicated that additional interest rate cuts are likely. More accommodative central bank policy in the US, and the potential for a weaker US dollar, should be tailwinds for EM assets. Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. The People’s Bank of China (PBOC) cut the required reserve ratio for Chinese banks by 50 basis points, a larger reduction than most investors anticipated, freeing up approximately 1 trillion yuan for new lending. We believe additional interest rate cuts, and broader measures to support the Chinese real estate market, are likely. The PBOC also increased financing availability for stock repurchase activity, which we believe will support China’s financial markets. On the consumption side, several Chinese cities and provinces have announced vouchers to bolster spending in a variety of goods and services, including traveling, dine-in, and sports. The Portfolio was overweight Chinese stocks due in part to valuation considerations. South Korean stocks represent one of the Portfolio’s largest country overweights. During the third quarter, the South Korean stock exchange announced the index constituents linked to its Value-Up program. The Index criteria are profitability, shareholder return, valuation, and capital efficiency. From a sector perspective, information technology and industrials are the largest sectors in the Index. The Portfolio is overweight South Korean stocks due primarily to attractive valuations. We include quality in our model and we believe the Portfolio’s South Korean investments will benefit if the Value-Up initiative gains traction.

Global Value Equity

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to currency allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the semiconductors & semi equipment, technology hardware & equipment, and consumer durables & apparel industry groups detracted from relative performance. Holdings in the pharmaceuticals & biotechnology, 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 electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and Asian life insurer, Prudential Plc (United Kingdom). The top contributor to return was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Other notable contributors included financial services technology company, Fiserv, Inc. (United States), and Bristol Myers Squibb Co. (United States).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. Whether China can avoid prolonged stagnation remains uncertain, but its stock market should see bursts of enthusiasm. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. The US presidential election will be important for global markets, given the differing policy prescriptions of both candidates. Despite escalating conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-long-term investors we remain committed to these tenets of fundamental value investing.

International Value Equity

Portfolio Attribution

The Portfolio performed in-line with the Index during the month, due primarily to currency allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the capital goods, materials, and household & personal products industry groups contributed to relative performance. Holdings in the health care equipment & services, pharmaceuticals & biotechnology, and technology hardware & equipment industry groups offset some of the outperformance compared to the Index. The top contributor to return was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Other notable contributors included bank, Standard Chartered Plc (United Kingdom), and corrugated and paper packaging manufacturer, Smurfit WestRock Plc (United States). The largest detractor was healthcare equipment & services provider, Koninklijke Philips NV (Netherlands). Additional notable detractors included multinational luxury conglomerate, Kering SA (France), and electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. Whether China can avoid prolonged stagnation remains uncertain, but its stock market should see bursts of enthusiasm. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. The US presidential election will be important for global markets, given the differing policy prescriptions of both candidates. Despite escalating conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-long-term investors we remain committed to these tenets of fundamental value investing.