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Emerging Markets Equity

Strategy Profile

We believe the best way to exploit the investment opportunities in emerging markets equities is through a combination of 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).

Inception Date29 Mar 2007
Benchmark MSCI Emerging Markets

Performance

Fund Quarter to Date Year to Date 1 Year3 Year5 Year10 Year Since Inception
Gross % 9.0%9.0%-16.4%14.8%5.7%13.1%5.0%
Net % 8.9%8.9%-17.2%13.7%4.7%12.0%4.0%
MSCI Emerging Markets 8.8%8.8%-13.9%15.3%5.2%10.0%3.4%

Portfolio

Asset Allocation as of 31 Jan 2019

Stocks 97.3%
Cash 2.7%

Characteristics as of 31 Jan 2019

Causeway MSCI Emerging Markets
No. of Holdings 143 1123
Wtd. Avg. Market Cap (Mn $US)$57,259$51,403
NTM Price/Earnings8.911.6
Price/Book Value1.31.6
Dividend Yield (%)3.32.7
NTM EPS Revision (Wtd. Avg)-21.9-21.5

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.

SECTOR WEIGHTS as of 31 Jan 2019

Financials25.18%
Information Technology15.74%
Communication Services12.71%
Energy11.04%
Materials7.78%
Consumer Discretionary7.56%
Industrials6.51%
Consumer Staples4.52%
Health Care2.12%
Real Estate1.83%
Utilities1.45%
Equity Funds0.88%

(VS. Benchmark)

Financials24.84%
Information Technology14.28%
Communication Services14.16%
Energy8.09%
Materials7.34%
Consumer Discretionary10.87%
Industrials5.45%
Consumer Staples6.54%
Health Care2.73%
Real Estate3.08%
Utilities2.62%
Equity Funds0.00%
Financials
Information Technology
Communication Services
Energy
Materials
Consumer Discretionary
Industrials
Consumer Staples
Health Care
Real Estate
Utilities
Equity Funds
Other

TOP 10 COUNTRIES as of 31 Jan 2019

China30.93%
South Korea17.33%
India10.33%
Brazil9.64%
Taiwan8.15%
Russia5.59%
Thailand3.49%
Mexico2.77%
South Africa2.38%
Turkey1.52%
Malaysia1.38%
Peru1.06%
Poland0.94%
Indonesia0.88%
Saudi Arabia0.62%
Czech Republic0.30%
Multi-National Emerging (ETF)0.16%
Multi-National Emerging (ETF)0.01%
United Arab Emirates0.00%
Pakistan0.00%
Philippines0.00%
Qatar0.00%
Hungary0.00%
Chile0.00%
Colombia0.00%
Egypt0.00%
Greece0.00%

(VS. Benchmark)

China31.08%
South Korea13.98%
India8.47%
Brazil8.04%
Taiwan10.66%
Russia3.87%
Thailand2.45%
Mexico2.81%
South Africa6.44%
Turkey0.69%
Malaysia2.27%
Peru0.42%
Poland1.22%
Indonesia2.31%
Saudi Arabia0.00%
Czech Republic0.17%
Multi-National Emerging (ETF)0.00%
Multi-National Emerging (ETF)0.00%
United Arab Emirates0.72%
Pakistan0.04%
Philippines1.11%
Qatar1.05%
Hungary0.32%
Chile1.12%
Colombia0.42%
Egypt0.13%
Greece0.21%
China
South Korea
India
Brazil
Taiwan
Russia
Thailand
Mexico
South Africa
Turkey
Malaysia
Peru
Poland
Indonesia
Saudi Arabia
Czech Republic
Multi-National Emerging (ETF)
Multi-National Emerging (ETF)
United Arab Emirates
Pakistan
Philippines
Qatar
Hungary
Chile
Colombia
Egypt
Greece
Other

TOP 10 ACTIVE HOLDINGS as of 31 Jan 2019

Security Country Industry Active Weight*
Investimentos Itau Brazil Banks 2.0
China Construction Bank Corp. China Banks 1.9
Samsung Electronics Co., Ltd. South Korea Technology Hardware & Equipment 1.5
Tencent Holdings Ltd. China Media & Entertainment 1.5
China Petroleum & Chemical Corp. China Energy 1.4
Banco do Brasil SA Brazil Banks 1.3
Lukoil Russia Energy 1.2
SK hynix, Inc. South Korea Semiconductors & Semi Equipment 1.1
Anhui Conch Cement Co., Ltd. China Materials 1.1
Gazprom PJSC Russia Energy 1.0

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

Approach

We believe the best way to exploit the investment opportunities in emerging markets equities is through a combination of 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).

The investment process begins with a liquidity screen on emerging markets equities. Our multi-factor alpha-model creates a return forecast for every stock in the investable universe. We optimize the portfolio weights to maximize alpha(return in excess of benchmark), targeting a 5% tracking error relative to the benchmark MSCI Emerging Markets Index, and subject to additional relative constraints (sector, country, stock and currency). The Emerging Markets Portfolio is a fully invested portfolio of typically 110-150 stocks, with an average 85% annual turnover. Typically, the portfolio is undervalued relative to the benchmark on a number of metrics, with greater earnings growth expectations.

Commentary

PERFORMANCE REVIEW for the month ended 31 Dec 2018


Geopolitical tensions and concerns of a broader slowdown in global economic growth fueled stock market volatility in December and weighed on emerging market (“EM”) equities. The MSCI Emerging Markets Index (“Index”) returned -2.46% in local currency terms during the month. Economic data in China suggested continued slowing growth, which pressured Chinese equities and the broader emerging Asia region. Emerging Latin America also posted negative returns. Led by South Africa, the emerging Europe, Middle East, and Africa (“EMEA”) region ended the month in positive territory. Health care, consumer discretionary, and energy were the weakest performing sectors within the Index in local currency terms. Utilities, consumer staples, and materials were the top performing sectors during the month.

The Portfolio underperformed the Index in December 2018. We use both bottom-up and top-down factor categories to forecast alpha (return in excess of the Index) for the stocks in the Portfolio's investable universe. Our bottom-up value factor category was a positive indicator in December and the factor is now outperforming over most recent periods. The earnings growth factor category also delivered positive returns during the month. The price momentum factor category, as measured by our technical factors, was the top performing bottom-up factor in December, but it has been the weakest performer during the year. Of our top-down factors, the macroeconomic and country factors were negative indicators during the month. The sector and currency factors delivered positive returns during the month and were strong performers during the year.

Over the month, Portfolio positioning in emerging Asia detracted from performance versus the Index, primarily driven by negative stock selection in South Korea and Taiwan. Within the EMEA region, an underweight position in South Africa, the top performing country within the Index in local currency terms, detracted from relative performance. Positioning in the emerging Latin America region was neutral for performance. From a sector perspective, the largest detractors from relative performance were information technology, energy, and materials. Positioning in the financials, industrials, and consumer discretionary sectors contributed to relative performance. The largest stock-level detractors from relative performance included overweight positions in oil & gas exploration & production company, China Petroleum & Chemical Corp. (China), services provider for the electronic components industry, SK hynix Inc. (South Korea), electronic component manufacturing company, Catcher Technology Co. Ltd. (Taiwan), pharmaceutical & healthcare products manufacturer, Sinopharm Group Co., (China), and pharmaceuticals manufacturer, Shanghai Pharmaceutical Holding Co., Ltd. (China). The greatest stock-level contributors to relative performance included overweight positions in mortgage lender, Indiabulls Housing Finance Ltd. (India), bank, Banco do Brasil SA (Brazil), materials conglomerate Alfa SAB de CV (Mexico), and automobile manufacturer, Kia Motors Corp. (South Korea), as well as an underweight position in internet commerce company, Alibaba Group Holding Ltd. (China).*

*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 in this report 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.

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