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
Portfolio managers
Arjun Jayaraman, PhD, CFA
Quantitative Portfolio Manager
Dr. Jayaraman is a director, quantitative portfolio manager and head of the quantitative research at Causeway and has been with the firm since January 2006. Dr. Jayaraman’s responsibilities and research include stock selection, asset allocation, risk model development, and portfolio construction.
From 2004 to 2005, Dr. Jayaraman was a portfolio manager at PanAgora Asset Management. He was the lead portfolio manager on the non-U.S. large cap core equity portfolios and was the co-portfolio manager on the global large cap core equity portfolios. From 2000 to 2004, Dr. Jayaraman managed the same portfolios at Putnam Investments, in addition to working closely with the teams that managed Putnam's traditional non-U.S. strategies. From 1998 to 2000, Dr. Jayaraman worked as a quantitative analyst at Harborview Trading Associates.
Dr. Jayaraman earned a PhD from New York University at the Stern School of Business and a BA in economics from Columbia University. Dr. Jayaraman is a CFA charterholder.
MacDuff Kuhnert, CFA
Mr. Kuhnert is a director and a quantitative portfolio manager at Causeway and has been with the firm since its inception in June 2001. Mr. Kuhnert’s responsibilities and research include stock selection, asset allocation, risk model development, and portfolio construction.
From 1996 to 2001, Mr. Kuhnert worked for the international team of the Hotchkis & Wiley division of Merrill Lynch Investment Managers (HW-MLIM) as a quantitative research associate. During his tenure at HW-MLIM, Mr. Kuhnert created and developed advanced quantitative models used in the international value investment process. He also helped develop the team’s first equity risk model.
Mr. Kuhnert earned a BA in chemistry from Dartmouth College. He is a CFA charterholder, a member of the CFA Society of Los Angeles, and a member of the Chicago Quantitative Alliance. Mr. Kuhnert co-authored “To Hedge or Not to Hedge: Factor Dependence and Skill among Hedge Funds” published in The Journal of Alternative Investments.
Joe Gubler, CFA
Mr. Gubler is a quantitative portfolio manager at Causeway. He joined the firm in 2005 and has been a portfolio manager since January 2014. In addition to managing quantitative portfolios and conducting alpha research, Mr. Gubler also leads the efforts to maintain and enhance Causeway’s proprietary risk models. He is also a member of the operating committee.
From 1999 to 2005, Mr. Gubler worked as a software engineer, with employers ranging from startups to established businesses such as Monster.com. From 1998 to 1999, Mr. Gubler worked as a staff scientist for News Corporation, conducting studies on the RF propagation of broadcast signals. While studying astrophysics at UC San Diego, Mr. Gubler worked as a graduate research assistant in the Jet Propulsion Laboratory's stellar interferometry group.
Mr. Gubler earned a BS, cum laude, in physics from UC Irvine, an MS in physics from UC San Diego, and an MBA from the UCLA Anderson Graduate School of Management. Mr. Gubler is a CFA charterholder.
Performance
Account returns for the Causeway Emerging Markets Composite (“Emerging Markets Composite”) are calculated daily. Monthly account returns are calculated by geometrically linking the daily returns. The return of the Emerging Markets Composite is calculated monthly by weighting monthly account returns by the beginning market values. Valuations and returns are computed and stated in US dollars. Returns include the reinvestment of interest, dividends and any capital gains. Returns are calculated gross of withholding taxes on dividends, interest income, and capital gains. Past performance is no guarantee of future performance. Gross-of-fees returns are presented before management, performance and custody fees but after trading expenses. Net-of-fees returns are presented after the deduction of actual management fees, performance-based fees, and all trading expenses, but before custody fees. Causeway’s basic management fee schedules are described in its firm brochure pursuant to Part 2 of Form ADV. A complete list and description of firm composites is available upon request. The information in the downloadable Composite Performance report supplements the performance presented. Investing involves risk including loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Diversification does not prevent all investment losses.
Portfolio (as of November 30, 2019)
Asset Allocation
| Strategy | |
|---|---|
| Stocks | 98.2% |
| Cash | 1.8% |
Strategy Characteristics
| Strategy | Benchmark | |
|---|---|---|
| No. of holdings | 130 | 1409 |
| Weighted avg. market cap (US $MM) | $72,829 | $61,911 |
| NTM price/earnings | 9.6 | 12.1 |
| Price/book value | 1.4 | 1.6 |
| Dividend yield (%) | 3.4 | 2.7 |
| NTM EPS revision (wtd. avg) | 9.1 | 3.2 |
TOP 10 ACTIVE HOLDINGS
| Security | Country | Active weight* |
|---|---|---|
| China Construction Bank Corp. | China | 2.0% |
| Samsung Electronics Co., Ltd. | South Korea | 1.7% |
| Investimentos Itau | Brazil | 1.6% |
| Lukoil | Russia | 1.3% |
| Gazprom PJSC | Russia | 1.3% |
| Tencent Holdings Ltd. | China | 1.3% |
| JBS SA | Brazil | 1.2% |
| Anhui Conch Cement Co., Ltd. | China | 1.1% |
| Ping An Insurance (Group) Co. of China Ltd. | China | 1.1% |
| Sberbank | Russia | 1.0% |
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 |
|---|---|---|
| Financials | 23.6% | 24.4% |
| Information Technology | 19.3% | 15.3% |
| Consumer Discretionary | 12.0% | 14.3% |
| Communication Services | 11.0% | 11.0% |
| Energy | 9.3% | 7.4% |
| Consumer Staples | 6.4% | 6.6% |
| Materials | 5.1% | 7.3% |
| Industrials | 4.2% | 5.4% |
| Real Estate | 2.5% | 2.9% |
| Equity Funds | 2.2% | 0.0% |
| Health Care | 2.1% | 2.8% |
| Utilities | 0.8% | 2.7% |
TOP 10 COUNTRIES
| Country | Strategy | Benchmark |
|---|---|---|
| China | 35.4% | 34.0% |
| South Korea | 13.5% | 11.6% |
| Taiwan | 12.7% | 11.7% |
| Brazil | 9.1% | 7.1% |
| India | 8.5% | 9.1% |
| Russia | 7.4% | 3.9% |
| Thailand | 2.9% | 2.7% |
| Mexico | 1.9% | 2.3% |
| South Africa | 1.4% | 4.6% |
| Turkey | 1.1% | 0.5% |
Regional Allocation
- Emerging Asia 74.1%
- Emerging Europe, Middle East, Africa 12.1%
- Emerging Latin America 12.0%
- Multi Region Emerging (ETF) 0.0%
Commentary (As of November 30, 2019)
Highlights
Portfolio attribution
The Portfolio outperformed the Index in November 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 November, 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 negative indicators in November. Of our top-down factors, macroeconomic, country, and currency were positive indicators during the month. Our sector factor was neutral.
Investment outlook
In November, the MSCI Emerging Markets Value Index underperformed the MSCI Emerging Markets Growth Index by 1.1%, further widening the discount for value stocks. In contrast, our value factor was positive during the month. This disconnect is primarily attributable to two factors. First, the strong performance of a few large cap growth stocks buoyed the Growth Index. While the Index is capitalization-weighted, we use equally-weighted returns for our value 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.
MSCI EM small capitalization (“cap”) stocks underperformed their large cap peers in November and the YTD period, continuing their multi-year underperformance since 2016. We have been overweight mid- and small cap stocks in our Portfolio, which has detracted from relative performance. On the positive side, our contextual weighting scheme continued to rebound in November. When calculating a stock’s expected alpha, the relative weight assigned to each bottom-up stock-specific factor for a particular company differs depending on its classification. While this methodology has underperformed a uniform-weighted approach YTD, we remain confident in our contextual weighting scheme and are encouraged by the recent rebound in performance.
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.