Diversified exposure to emerging markets, capturing value and growth

The Emerging Markets strategy invests primarily in common stocks of emerging markets companies. The strategy combines value and growth, and bottom-up and top-down factors. Our quantitative stock selection process is focused on attractively valued companies with superior earnings prospects and positive market sentiment; these companies should produce consistent returns across investment cycles. We use the same approach to select sectors and countries, comparing valuation against earnings growth and market sentiment. At the country level, we also consider the health of the macro-economy. Our quantitative process seeks to combine these factors while attempting to avoid undue sources of risk, which for this strategy we define as tracking error (a measurement of dispersion from a benchmark index).

Benchmark
MSCI Emerging Markets
Inception
March 29, 2007

Strategy overview

The portfolio managers discuss our Emerging Markets Equity strategy.

Portfolio managers

Head of Quantitative Research
Quantitative Portfolio Manager
Quantitative Portfolio Manager
Quantitative Portfolio Manager

Performance

QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net)12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets11.9%18.9%18.9%12.0%6.0%4.0%3.9%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net)12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets11.9%18.9%18.9%12.0%6.0%4.0%3.9%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net)12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets11.9%18.9%18.9%12.0%6.0%4.0%3.9%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)12.4%18.1%18.1%11.5%5.4%6.0%5.3%
Strategy (net)12.1%17.1%17.1%10.5%4.4%5.0%4.3%
MSCI Emerging Markets11.9%18.9%18.9%12.0%6.0%4.0%3.9%
Fund201920182017201620152014201320122011201020092008
Strategy (gross)18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
Strategy (net)17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
MSCI Emerging Markets18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%
Strategy (gross)
Strategy (net)
MSCI Emerging Markets
201920182017201620152014201320122011201020092008
18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%

Portfolio (as of December 31, 2019)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks98.7%
Cash1.3%
Strategy Characteristics
StrategyBenchmark
No. of holdings 130 1403
Weighted avg. market cap (US $MM)$92,997$80,073
NTM price/earnings10.212.6
Price/book value1.41.7
Dividend yield (%)3.22.6
NTM EPS revision (wtd. avg)7.31.7
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp.China2.0%
Samsung Electronics Co., Ltd.South Korea1.7%
Investimentos ItauBrazil1.7%
LukoilRussia1.3%
Tencent Holdings Ltd.China1.2%
Gazprom PJSCRussia1.2%
Anhui Conch Cement Co., Ltd.China1.2%
JBS SABrazil1.1%
SberbankRussia1.1%
Ping An Insurance Group Co OfChina1.1%

A "weighted average” measures a characteristic by the market capitalization of each stock. Price/book ratio is the weighted average of the price/book ratios of all the stocks in a portfolio. The P/B ratio of a company is calculated by dividing the market price of its stock by the company’s per-share book value. The price/earnings ratio is the weighted average of the price/earnings ratios of the stocks in a portfolio. “Earnings-per-share” is the portion of a company’s profit allocated to each outstanding share of common stock. “Earnings-per-share year-over-year estimate growth (next 12 months)” is the average next-twelve-month earnings-per-share estimate from one year ago for an individual company compared with that estimate today; note that this calculation is done on a company by company basis and is aggregated through a weighted average based on the individual company’s weight in the corresponding index. Also note that this characteristic is supplied directly by MSCI.

*Active defined as Portfolio weight minus MSCI EM Index weight. Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Financials23.0%24.2%
Information Technology19.7%15.7%
Consumer Discretionary12.6%14.2%
Communication Services11.1%11.0%
Energy9.4%7.4%
Consumer Staples5.8%6.3%
Materials5.5%7.4%
Industrials3.9%5.3%
Real Estate2.6%3.0%
Equity Funds2.2%0.0%
Health Care2.1%2.8%
Utilities0.8%2.6%
TOP 10 COUNTRIES
Country Strategy Benchmark
China36.4%34.3%
South Korea13.8%11.7%
Taiwan13.0%11.7%
Brazil9.9%7.5%
India8.0%8.6%
Russia7.6%3.9%
Thailand2.4%2.6%
Mexico1.7%2.3%
South Africa1.4%4.7%
Turkey1.0%0.5%
Regional Allocation
  • Emerging Asia 74.5%
  • Emerging Latin America 12.4%
  • Emerging Europe, Middle East, Africa 11.8%
  • Multi Region Emerging (ETF) 0.0%

Commentary (As of December 31, 2019)

Highlights

  • Buoyed by optimism surrounding the US-China trade deal, emerging markets (“EM”) equities outperformed developed markets in December.
  • The US-China trade dispute took a positive step forward as both sides agreed on a phase one deal, which is scheduled to be formally signed on January 15th. In addition to bolstering Chinese equities, US-China trade optimism helped push the yield on the 10-Year US Treasury Note higher. An upward sloping yield curve generally indicates a positive macroeconomic backdrop for EM assets.
  • While our value factor lagged in 2019, it has outperformed in recent months. Interestingly, the MSCI Emerging Markets Value Index underperformed the MSCI Emerging Markets Growth Index during the fourth quarter. The return differential between our value factor and the MSCI indices can be attributed in part to the strong performance of a few large cap growth stocks.

Portfolio attribution

The Portfolio performed in-line with the Index in December 2019. 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 value factor was our strongest performing bottom-up indicator in December, but it has been the weakest indicator over the year-to-date (“YTD”) period. Our bottom-up price momentum and earnings growth factors were both positive indicators in December and the YTD period. Of our top-down factors, macroeconomic and sector were positive indicators during the month. While our country and currency factors were negative during the month, our four top-down factors were all positive indicators in 2019.

Investment outlook

MSCI EM small capitalization (“cap”) stocks underperformed their large cap peers in 2019, continuing their multi-year underperformance since 2016. Our overweight to mid-and small cap stocks in the Portfolio has detracted from relative performance. Despite rebounding late in the year,our contextual weighting scheme also underperformed in 2019. When calculating a stock’s expected alpha, our model assigns the relative weight to each bottom-up stock-specific factor for a particular company depending on its classification. We remain confident in this approach, which we believe has benefitted the strategy compared to a uniform weighting scheme since the strategy's inception in 2007.

While our value factor lagged in 2019, it has outperformed in recent months. Interestingly, the MSCI Emerging Markets Value Index underperformed the MSCI Emerging Markets Growth Index during the fourth quarter. The return differential between our value factor and the MSCI indices can be attributed in part to the strong performance of a few large cap growth stocks. While the Index is capitalization-weighted, we use equally-weighted returns for our factor in order to avoid assigning a handful of stocks a disproportionate weight. Secondly, our value factor has a sector-relative component while MSCI’s style classification schemes do not include sector adjustments. We continue to emphasize value factors in our investment process, and the Portfolio's three largest country underweights – South Africa, Saudi Arabia, and Indonesia – are all attributable in part to valuation considerations.

The market commentary expresses the portfolio managers’ views as of the date of this report and should not be relied on as research or investment advice regarding any stock. These views and the portfolio holdings and characteristics are subject to change. There is no guarantee that any forecasts made will come to pass. The securities identified and described above do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. Past performance does not guarantee future results. For a description of our performance attribution methodology, or to obtain a list showing every holding's contribution to the overall account's performance during the quarter, please contact our product manager, Kevin Moutes, at 310-231-6116 or moutes@causewaycap.com.