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 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, Portfolio holdings in the health care, communications services, and financials contributed the most to performance relative to the Index. Portfolio holdings in the consumer discretionary, real estate, and information technology sectors offset a portion of the performance. Relative performance for the month can be mostly attributed to stock selection. The largest contributor to performance was pharmaceutical company, Granules India Ltd. (India). Additional top contributors included biopharmaceutical company, Pharma Mar SA (Spain), plastics & polymers manufacturer, Korea Petrochemical Ind. Co., Ltd. (South Korea), recreational products company, Capcom Co., Ltd. (Japan), and social and professional networking company, Mixi, Inc. (Japan). The top detractor from performance was electronics retailer, JB Hi-Fi Ltd. (Australia). Additional top detractors included semiconductor services provider, BE Semiconductor Industries NV (Netherlands), food distributor, Metcash Ltd. (Australia), lithium battery producer, Simplo Technology Co., Ltd. (Taiwan), and gaming company, NetEnt AB (Sweden).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of September 30, the Small Cap Growth Index traded at a 22.8x forward price-to-earnings multiple compared to 14.0x for the Small Cap Value Index. This 63% 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. Notably our value alpha factors performed well in September despite the Small Cap Value Index underperforming the Small Cap Growth Index. 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. 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.

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 strategy.

International Value Select

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, and pharmaceuticals & biotechnology industry groups, along with an overweight position in the banks industry group and an underweight position in the health care equipment & services industry group, detracted from performance relative to the Index. Holdings in the technology hardware & equipment, food beverage & tobacco, and materials industry groups, as well as an overweight position in the semiconductors & semi equipment industry group and an underweight position in the diversified financials industry group, offset some of the underperformance versus the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included four banking & financial services companies: UniCredit S.p.A. (Italy), BNP Paribas SA (France), Barclays Plc (United Kingdom), and ING Groep NV (Netherlands). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included robotics manufacturer, FANUC Corp. (Japan), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), British American Tobacco plc (United Kingdom), and semiconductor company, Infineon Technologies AG (Germany).

Investment outlook

This year’s dominance of growth and momentum stocks over value stocks has surpassed the peak reached during the technology, media, and telecommunications (“TMT”) bubble in the early 2000s. The biggest winners in this bifurcated market are companies exhibiting top-line growth, regardless of whether this translates to near-term profitability. The trends of passive investing and algorithmic trading have exacerbated a concentration of performance—the bulk of equity returns in a number of region-based indices during the year-to-date period derive from just five companies, with the effect most pronounced in the US and emerging markets. Growth stock valuations are so stretched relative to history that we believe any abatement of pandemic-related uncertainty—namely efficacious vaccines or therapies that facilitate economic reopening—could spark a shift in investor sentiment towards economically cyclical companies. We believe that the cyclical component of value should also benefit from further fiscal spending by Western governments in infrastructure. In our view, the most compelling companies in the value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops. We continue to engage with portfolio company management teams to hold them accountable to meet their earnings and cash flow goals. For example, in a lower-for-longer interest rate environment, we expect certain bank stock managements to grow fee-based and trading-based franchises that are not reliant on a rise in rates. While much of our fundamental research is dominated by cyclical stocks, we also seek opportunities in defensive sectors that have also been impacted by the coronavirus lockdowns. The considerable undervaluation in stocks across a range of industries has led us to experience far more investment opportunities than we have capital to deploy. We believe that, by mid-2021, the earnings, cash flow, and dividend prognosis for many of these undervalued stocks should improve demonstrably. Markets anticipate events well in advance. In our view, this should translate into better performance, perhaps amplified by valuation multiple upgrades as confidence in these companies rises post-pandemic.

International Opportunities

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, capital goods, transportation, and retailing industry groups, along with an overweight position in the insurance industry group, detracted from performance relative to the Index. Holdings in the technology hardware & equipment, materials, and food beverage & tobacco industry groups, as well as an overweight position in the semiconductors & semi equipment industry group and an underweight position in the diversified financials industry group, offset some of the underperformance versus the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), banking & financial services company, BNP Paribas SA (France), financial services provider, ING Groep NV (Netherlands), and banking & financial services company, Barclays Plc (United Kingdom). The top contributor to return was robotics manufacturer, FANUC Corp. (Japan). Other notable contributors included electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), British American Tobacco plc (United Kingdom), and integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan).

Investment outlook

This year’s dominance of growth and momentum stocks over value stocks has surpassed the peak reached during the technology, media, and telecommunications (“TMT”) bubble in the early 2000s. The biggest winners in this bifurcated market are companies exhibiting top-line growth, regardless of whether this translates to near-term profitability.The trends of passive investing and algorithmic trading have exacerbated a concentration of performance—the bulk of equity returns in a number of region-based indices during the year-to-date period derive from just five companies, with the effect most pronounced in the US and emerging markets. Growth stock valuations are so stretched relative to history that we believe any abatement of pandemic-related uncertainty—namely efficacious vaccines or therapies that facilitate economic reopening—could spark a shift in investor sentiment towards economically cyclical companies. We believe that the cyclical component of value should also benefit from further fiscal spending by Western governments in infrastructure. In our view, the most compelling companies in the developed market value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops. We continue to engage with portfolio company management teams to hold them accountable to meet their earnings and cash flow goals. For example, in a lower-for-longer interest rate environment, we expect certain developed market bank stock managements to grow fee-based and trading-based franchises that are not reliant on a rise in rates. While much of our fundamental research is dominated by cyclical stocks, we also seek opportunities in defensive sectors that have also been impacted by the coronavirus lockdowns. The considerable undervaluations in stocks across a range of industries has led us to experience far more investment opportunities than we have capital to deploy. We believe that, by mid-2021, the earnings, cash flow, and dividend prognosis for many of these undervalued stocks should improve demonstrably. Markets anticipate events well in advance. In our view, this should translate into better performance, perhaps amplified by valuation multiple upgrades as confidence in these companies rises post-pandemic.

Regarding the emerging markets (“EM”) portion of the Portfolio, uncertainty surrounding the COVID-19 pandemic has continued to weigh on EM value stocks. We continue to emphasize value factors in our multi-factor investment process and we believe that EM value stocks are poised to rebound once there is a reduction in COVID-19 uncertainty given the discount relative to EM growth stocks.

Emerging Markets Equity

Portfolio attribution

The Portfolio outperformed the Index in September 2020. 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 earnings growth and price momentum factors were positive indicators during the month. Our bottom-up value factor was a negative indicator in September and it has lagged over most recent periods. Of our top-down factors, our currency and country factors were positive indicators during the month. Our macroeconomic and sector factors were negative indicators.

Investment outlook

Earnings growth prospects have been improving for many EM companies. Earnings growth upgrades exceed downgrades in more than half of the EM sectors according to analyst forecasts. The sectors experiencing net upgrades include consumer discretionary, communication services, information technology, and materials. Information technology companies have experienced the strongest net upgrades as increased reliance on technology during the pandemic and strong 5G demand have buoyed earnings. Information technology is the Portfolio’s largest sector overweight due to favorable earnings growth and price momentum characteristics. From a country perspective, companies in the technology-oriented economies of South Korea and Taiwan experienced the strongest net upgrades. Russian companies also experienced strong net upgrades despite declining oil prices. This was primarily attributable to improvement relative to a low baseline as downgrades for many Russian companies were quite pronounced earlier this year. On the negative side, companies in Thailand experienced substantial net downgrades as tourism has been halted.

Uncertainty surrounding the COVID-19 pandemic has continued to weigh on EM value stocks. Following a poor 2019, the MSCI Emerging Markets Value Index trails the MSCI Emerging Markets Growth Index by 28 percentage points on a local currency basis over the year-to-date period. The MSCI Emerging Markets Value Index is trading near record low valuations based on both price-to-earnings and price-to-book value ratios. We continue to emphasize value factors in our multi-factor investment process and we believe that EM value stocks are poised to rebound once there is a reduction in COVID-19 uncertainty given the discount relative to EM growth stocks. A catalyst for value’s resurgence could be the dissemination of one or more COVID-19 vaccines, many of which are in Phase III trials. We believe that a reduction in other sources of uncertainty, including the US election, should also support value stocks.

Global Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, banks, transportation, real estate, and consumer services industry groups detracted from performance relative to the Index. Holdings in the technology hardware & equipment, semiconductors & semi equipment, food beverage & tobacco, insurance, and automobiles & components industry groups offset some of the underperformance versus the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), global financial services giant, Citigroup, Inc. (United States), multinational airline holding company, International Consolidated Airlines Group SA (United Kingdom), and airliner manufacturer, Airbus SE (France). The top contributor to return was parcel transportation & delivery company, FedEx Corp. (United States). Other notable contributors included design-to-distribution business process services technology company, SYNNEX Corp. (United States), electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), robotics manufacturer, FANUC Corp. (Japan), and British American Tobacco plc (United Kingdom).

Investment outlook

This year’s dominance of growth and momentum stocks over value stocks has surpassed the peak reached during the technology, media, and telecommunications (“TMT”) bubble in the early 2000s. The biggest winners in this bifurcated market are companies exhibiting top-line growth, regardless of whether this translates to near-term profitability.The trends of passive investing and algorithmic trading have exacerbated a concentration of performance—the bulk of equity returns in a number of region-based indices during the year-to-date period derive from just five companies, with the effect most pronounced in the US and emerging markets. Growth stock valuations are so stretched relative to history that we believe any abatement of pandemic-related uncertainty—namely efficacious vaccines or therapies that facilitate economic reopening—could spark a shift in investor sentiment towards economically cyclical companies. We believe that the cyclical component of value should also benefit from further fiscal spending by Western governments in infrastructure. In our view, the most compelling companies in the value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops. We continue to engage with portfolio company management teams to hold them accountable to meet their earnings and cash flow goals. For example, in a lower-for-longer interest rate environment, we expect certain bank stock managements to grow fee-based and trading-based franchises that are not reliant on a rise in rates. While much of our fundamental research is dominated by cyclical stocks, we also seek opportunities in defensive sectors that have also been impacted by the coronavirus lockdowns. The considerable undervaluation in stocks across a range of industries has led us to experience far more investment opportunities than we have capital to deploy. We believe that, by mid-2021, the earnings, cash flow, and dividend prognosis for many of these undervalued stocks should improve demonstrably. Markets anticipate events well in advance. In our view, this should translate into better performance, perhaps amplified by valuation multiple upgrades as confidence in these companies rises post-pandemic.

International Value Equity

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the capital goods, transportation, retailing, and pharmaceuticals & biotechnology industry groups, along with an overweight position in the banks industry group, detracted from performance relative to the Index. Holdings in the technology hardware & equipment, food beverage & tobacco, and materials industry groups, as well as an overweight position in the semiconductors & semi equipment industry group and an underweight position in the diversified financials industry group, offset some of the underperformance versus the Index. The largest detractor was jet engine manufacturer, Rolls-Royce Holdings Plc (United Kingdom). Additional notable detractors included four banking & financial services companies: UniCredit S.p.A. (Italy), BNP Paribas SA (France), ING Groep NV (Netherlands), and Barclays Plc (United Kingdom). The top contributor to return was robotics manufacturer, FANUC Corp. (Japan). Other notable contributors included electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan), British American Tobacco plc (United Kingdom), and luxury goods manufacturer & retailer, Compagnie Financiere Richemont (Switzerland).

Investment outlook

This year’s dominance of growth and momentum stocks over value stocks has surpassed the peak reached during the technology, media, and telecommunications (“TMT”) bubble in the early 2000s. The biggest winners in this bifurcated market are companies exhibiting top-line growth, regardless of whether this translates to near-term profitability.The trends of passive investing and algorithmic trading have exacerbated a concentration of performance—the bulk of equity returns in a number of region-based indices during the year-to-date period derive from just five companies, with the effect most pronounced in the US and emerging markets. Growth stock valuations are so stretched relative to history that we believe any abatement of pandemic-related uncertainty—namely efficacious vaccines or therapies that facilitate economic reopening—could spark a shift in investor sentiment towards economically cyclical companies. We believe that the cyclical component of value should also benefit from further fiscal spending by Western governments in infrastructure. In our view, the most compelling companies in the value universe are those engaged in operational restructuring, using the disruption of the pandemic to lean out their cost bases and shed non-core assets. This ensuing boost in operating leverage may position these forward-thinkers well for an upturn in revenues as recovery develops. We continue to engage with portfolio company management teams to hold them accountable to meet their earnings and cash flow goals. For example, in a lower-for-longer interest rate environment, we expect certain bank stock managements to grow fee-based and trading-based franchises that are not reliant on a rise in rates. While much of our fundamental research is dominated by cyclical stocks, we also seek opportunities in defensive sectors that have also been impacted by the coronavirus lockdowns. The considerable undervaluation in stocks across a range of industries has led us to experience far more investment opportunities than we have capital to deploy. We believe that, by mid-2021, the earnings, cash flow, and dividend prognosis for many of these undervalued stocks should improve demonstrably. Markets anticipate events well in advance. In our view, this should translate into better performance, perhaps amplified by valuation multiple upgrades as confidence in these companies rises post-pandemic.