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.
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.
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.
The Portfolio outperformed the Index during the month. To evaluate stocks in our investible 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. Most alpha factor categories delivered positive returns in February. Among our bottom-up factor groups, our technical, sentiment, and corporate events factors posted the most positive monthly returns, and technical is the best-performing factor group over the last twelve months. Value was also slightly positive. Quality, which is the only factor group with negative returns over the last twelve months, also posted negative returns in February. Returns to our macroeconomic and country aggregate factors were positive in February as countries exhibiting more attractive characteristics (such as Japan and Canada) outperformed those with relatively weaker characteristics (such as Australia). All factor groups remain positive on an inception-to-date basis.
From a sector perspective, Portfolio holdings in the industrials, financials, and health care contributed to relative performance. Holdings in the consumer staples, along with an overweight position in the communication services and an underweight position in the materials, offset some of the outperformance compared to the Index. Performance for the month was primarily driven by stock selection. The top contributor to return was gold and copper miner, Oceanagold (Canada). Other notable contributors included electronic components manufacturer, LG Innotek Co., Ltd. (South Korea), and business conglomerate, Hanwha Corp. (South Korea). The largest detractor was semiconductor component distributor, Supreme Electronics Co (Taiwan). Additional notable detractors included multinational tourism company, TUI AG (Germany), and game developer, XD, Inc. (China).
International small caps (ACWI ex USA Small Cap Index) trade at a similar multiple as their larger-cap (ACWI ex USA Index) peers on a forward P/E basis despite typically trading at a premium. 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 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.
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. We continue to monitor the fluid conflict in the Middle East and the Portfolio remains underweight stocks in the EMEA and Developed Middle East regions due primarily to bottom-up considerations.
The Portfolio performed in-line with the Index during the month, due primarily to industry group allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the pharmaceuticals & biotechnology, banks, and materials industry groups detracted from relative performance compared to the Index. Holdings in the semiconductors & semi equipment, technology hardware & equipment, and health care equipment & services industry groups offset some of the underperformance compared to the Index. The largest detractor was global healthcare company, Novo Nordisk A/S (Denmark). Additional notable detractors included information technology services and consulting company, Capgemini SE (France), and specialty chemicals company, Syensqo NV (Belgium). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included semiconductor company, Renesas Electronics Corp. (Japan), and pneumatic controls manufacturer, SMC Corporation (Japan).
In the absence of a prolonged geopolitical conflict in the Middle East, sustained earnings growth and abundant global liquidity could lift global equity market levels into 2026. While inflation progress remains uneven, G-7 central banks face mounting political and economic pressure to prioritize growth, suggesting an accommodative bias in monetary policy. In the United States, assuming no material escalation in tariffs and inflation, favorable tax and regulatory conditions should underpin continued economic expansion. We expect AI-driven capital expenditures to broaden beyond graphics processing units (GPUs) into power infrastructure, data center development, cooling, and networking. Accessible credit and a less restrictive regulatory backdrop appear also likely to drive a surge in M&A activity across major developed markets, supporting both public and private asset valuations. Europe and Japan could attract increased global capital flows if deregulation efforts persist and Europe advances toward deeper single-market integration and institutional coordination. Political polarization and potential voter backlash remain risks to the pace and durability of reform in both the US and Europe, especially if inflation re-accelerates or AI-related employment concerns intensify.
With conflict-induced spikes in market volatility, stock selection remains paramount. We expect some of the portfolio’s most attractive opportunities to come from companies undergoing operational restructuring, where capable management teams can re-accelerate cash flow growth—often in currently unpopular areas such as industrials and consumer staples. In health care, we are focused on businesses with durable pricing power, established franchises, and underappreciated pipelines, viewing periodic setbacks as potential entry points. We also see improving prospects among technology laggards, particularly where we believe cyclical challenges are being misread as structural. Our research seeks to distinguish permanent impairment from temporary disruption, especially in IT Services, enterprise software, and analog semiconductors, while carefully assessing the implications of rising Chinese competition.
Periods of market volatility may lead to short-term price dislocations. As active managers, we view such volatility as both a risk to be managed and a potential opportunity to initiate or add to high-conviction positions at attractive valuations, provided our fundamental thesis remains intact.
As leadership broadens across global equity markets, we see an expanding opportunity set for disciplined, valuation-based active management. By focusing on cash flow trajectory, balance sheet strength, and management execution, we seek to identify mispriced securities where we believe long-term fundamentals are not fully reflected in current valuations.
The Portfolio underperformed the Index during the month. Portfolio holdings in the materials and pharmaceuticals & biotechnology industry groups, along with an overweight position in the software & services industry group, detracted from relative performance. Holdings in the semiconductors & semi equipment and health care equipment & services industry groups, as well as an overweight position in the technology hardware & equipment industry group, offset some of the underperformance compared to the Index. The largest detractor was global healthcare company, Novo Nordisk A/S (Denmark). Additional notable detractors included online services company, Tencent Holdings Ltd. (China), and information technology services and consulting company, Capgemini SE (France). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included integrated circuit manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd. (Taiwan), and semiconductor company, Renesas Electronics Corp. (Japan).
In the absence of a prolonged geopolitical conflict in the Middle East, sustained earnings growth and abundant global liquidity could lift global equity market levels into 2026. While inflation progress remains uneven, G-7 central banks face mounting political and economic pressure to prioritize growth, suggesting an accommodative bias in monetary policy. Europe and Japan could attract increased global capital flows if deregulation efforts persist and Europe advances toward deeper single-market integration and institutional coordination. With conflict-induced spikes in market volatility, stock selection remains paramount. In the developed markets portion of the portfolio, we expect some of the portfolio’s most attractive opportunities to come from companies undergoing operational restructuring, where capable management teams can re-accelerate cash flow growth—often in currently unpopular areas such as industrials and consumer staples.
The US Federal Reserve recently lowered its target interest rate and announced quantitative easing measures to maintain supportive financial conditions. After strong performance in 2025, we believe the 2026 outlook for EM equities is supported by stable to falling US interest rates. From a country perspective, we are identifying attractive investment opportunities in South Korea. Strong earnings growth in the South Korean semiconductor sector, corporate governance reforms, and robust demand for goods in sectors with strategic importance such as defense, nuclear, power transformers, and shipbuilding have bolstered Korean stocks. We believe these tailwinds will persist in 2026. We were overweight South Korean stocks in the Portfolio as of year-end. We continue to monitor the fluid conflict in the Middle East and the Portfolio remains underweight stocks in the emerging Europe, Middle East, and Africa region due primarily to bottom-up considerations.
The Portfolio outperformed the Index in February 2026. We use both bottom-up “stock-specific” and top-down factor categories to forecast alpha for the stocks in the Portfolio’s investable universe. Our bottom-up technical (price momentum), growth, and valuation factors were positive indicators in February. Our competitive strength and corporate events factors were negative indicators. Our top-down currency, macroeconomic, and country/sector aggregate were positive indicators during the month.
The US Federal Reserve recently lowered its target interest rate and announced quantitative easing measures to maintain supportive financial conditions. After strong performance in 2025, we believe the 2026 outlook for EM equities is supported by stable to falling US interest rates. From a country perspective, we are identifying attractive investment opportunities in South Korea. Strong earnings growth in the South Korean semiconductor sector, corporate governance reforms, and robust demand for goods in sectors with strategic importance such as defense, nuclear, power transformers, and shipbuilding have bolstered Korean stocks. We believe these tailwinds will persist in 2026. We were overweight South Korean stocks in the Portfolio as of year-end. We continue to monitor the fluid conflict in the Middle East and the Portfolio remains underweight stocks in the EMEA region due primarily to bottom-up considerations.
Within EM, 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 year-end.
The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the semiconductors & semi equipment and pharmaceuticals & biotechnology industry groups, as well as an underweight position in the consumer discretionary distribution & retail industry group, contributed to relative performance. Holdings in the materials and banks industry groups, along with an underweight position in the energy industry group, offset some of the outperformance compared to the Index. The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included semiconductor company, Renesas Electronics Corp.(Japan), and pharmaceutical company, AstraZeneca PLC (United Kingdom). The largest detractor was technology consulting and outsourcing company, Cognizant Technology Solutions Corp. (United States). Additional notable detractors included paper -based packaging solutions company, Graphic Packaging Holding Co. (United States), and online services company, Tencent Holdings Ltd. (China).
In the absence of a prolonged geopolitical conflict in the Middle East, sustained earnings growth and abundant global liquidity could lift global equity market levels into 2026. While inflation progress remains uneven, G-7 central banks face mounting political and economic pressure to prioritize growth, suggesting an accommodative bias in monetary policy. In the United States, assuming no material escalation in tariffs and inflation, favorable tax and regulatory conditions should underpin continued economic expansion. We expect AI-driven capital expenditures to broaden beyond graphics processing units (GPUs) into power infrastructure, data center development, cooling, and networking. Accessible credit and a less restrictive regulatory backdrop appear also likely to drive a surge in M&A activity across major developed markets, supporting both public and private asset valuations. Europe and Japan could attract increased global capital flows if deregulation efforts persist and Europe advances toward deeper single-market integration and institutional coordination. Political polarization and potential voter backlash remain risks to the pace and durability of reform in both the US and Europe, especially if inflation re-accelerates or AI-related employment concerns intensify.
With conflict-induced spikes in market volatility, stock selection remains paramount. We expect some of the portfolio’s most attractive opportunities to come from companies undergoing operational restructuring, where capable management teams can re-accelerate cash flow growth—often in currently unpopular areas such as industrials and consumer staples. In health care, we are focused on businesses with durable pricing power, established franchises, and underappreciated pipelines, viewing periodic setbacks as potential entry points. We also see improving prospects among technology laggards, particularly where we believe cyclical challenges are being misread as structural. Our research seeks to distinguish permanent impairment from temporary disruption, especially in IT Services, enterprise software, and analog semiconductors, while carefully assessing the implications of rising Chinese competition.
Periods of market volatility may lead to short-term price dislocations. As active managers, we view such volatility as both a risk to be managed and a potential opportunity to initiate or add to high-conviction positions at attractive valuations, provided our fundamental thesis remains intact.
As leadership broadens across global equity markets, we see an expanding opportunity set for disciplined, valuation-based active management. By focusing on cash flow trajectory, balance sheet strength, and management execution, we seek to identify mispriced securities where we believe long-term fundamentals are not fully reflected in current valuations.
The Portfolio modestly underperformed the Index during the month, due primarily to currency allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the pharmaceuticals & biotechnology, banks, and materials industry groups detracted from relative performance compared to the Index. Holdings in the semiconductors & semi equipment, technology hardware & equipment, and health care equipment & services industry groups offset some of the underperformance compared to the Index. The largest detractor was global healthcare company, Novo Nordisk A/S (Denmark). Additional notable detractors included information technology services and consulting company, Capgemini SE (France), and specialty chemicals company, Syensqo NV (Belgium). The top contributor to return was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Other notable contributors included pneumatic controls manufacturer, SMC Corporation (Japan), and semiconductor company, Renesas Electronics Corp. (Japan).
In the absence of a prolonged geopolitical conflict in the Middle East, sustained earnings growth and abundant global liquidity could lift global equity market levels into 2026. While inflation progress remains uneven, G-7 central banks face mounting political and economic pressure to prioritize growth, suggesting an accommodative bias in monetary policy. In the United States, assuming no material escalation in tariffs and inflation, favorable tax and regulatory conditions should underpin continued economic expansion. We expect AI-driven capital expenditures to broaden beyond graphics processing units (GPUs) into power infrastructure, data center development, cooling, and networking. Accessible credit and a less restrictive regulatory backdrop appear also likely to drive a surge in M&A activity across major developed markets, supporting both public and private asset valuations. Europe and Japan could attract increased global capital flows if deregulation efforts persist and Europe advances toward deeper single-market integration and institutional coordination. Political polarization and potential voter backlash remain risks to the pace and durability of reform in both the US and Europe, especially if inflation re-accelerates or AI-related employment concerns intensify.
With conflict-induced spikes in market volatility, stock selection remains paramount. We expect some of the portfolio’s most attractive opportunities to come from companies undergoing operational restructuring, where capable management teams can re-accelerate cash flow growth—often in currently unpopular areas such as industrials and consumer staples. In health care, we are focused on businesses with durable pricing power, established franchises, and underappreciated pipelines, viewing periodic setbacks as potential entry points. We also see improving prospects among technology laggards, particularly where we believe cyclical challenges are being misread as structural. Our research seeks to distinguish permanent impairment from temporary disruption, especially in IT Services, enterprise software, and analog semiconductors, while carefully assessing the implications of rising Chinese competition.
Periods of market volatility may lead to short-term price dislocations. As active managers, we view such volatility as both a risk to be managed and a potential opportunity to initiate or add to high-conviction positions at attractive valuations, provided our fundamental thesis remains intact.
As leadership broadens across global equity markets, we see an expanding opportunity set for disciplined, valuation-based active management. By focusing on cash flow trajectory, balance sheet strength, and management execution, we seek to identify mispriced securities where we believe long-term fundamentals are not fully reflected in current valuations.
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