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)4.4%9.8%6.0%8.9%2.9%5.7%4.7%
Strategy (net)4.2%8.8%5.1%7.9%1.9%4.7%3.7%
MSCI Emerging Markets4.1%10.6%7.7%9.4%3.5%3.7%3.3%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)4.4%9.8%6.0%8.9%2.9%5.7%4.7%
Strategy (net)4.2%8.8%5.1%7.9%1.9%4.7%3.7%
MSCI Emerging Markets4.1%10.6%7.7%9.4%3.5%3.7%3.3%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
Fund20182017201620152014201320122011201020092008
Strategy (gross)-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
Strategy (net)-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
MSCI Emerging Markets-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
20182017201620152014201320122011201020092008
-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
-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 November 30, 2019)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks98.2%
Cash1.8%
Strategy Characteristics
StrategyBenchmark
No. of holdings 130 1409
Weighted avg. market cap (US $MM)$72,829$61,911
NTM price/earnings9.612.1
Price/book value1.41.6
Dividend yield (%)3.42.7
NTM EPS revision (wtd. avg)9.13.2
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp.China2.0%
Samsung Electronics Co., Ltd.South Korea1.7%
Investimentos ItauBrazil1.6%
LukoilRussia1.3%
Gazprom PJSCRussia1.3%
Tencent Holdings Ltd.China1.3%
JBS SABrazil1.2%
Anhui Conch Cement Co., Ltd.China1.1%
Ping An Insurance (Group) Co. of China Ltd.China1.1%
SberbankRussia1.0%

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
Financials23.6%24.4%
Information Technology19.3%15.3%
Consumer Discretionary12.0%14.3%
Communication Services11.0%11.0%
Energy9.3%7.4%
Consumer Staples6.4%6.6%
Materials5.1%7.3%
Industrials4.2%5.4%
Real Estate2.5%2.9%
Equity Funds2.2%0.0%
Health Care2.1%2.8%
Utilities0.8%2.7%
TOP 10 COUNTRIES
Country Strategy Benchmark
China35.4%34.0%
South Korea13.5%11.6%
Taiwan12.7%11.7%
Brazil9.1%7.1%
India8.5%9.1%
Russia7.4%3.9%
Thailand2.9%2.7%
Mexico1.9%2.3%
South Africa1.4%4.6%
Turkey1.1%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

  • With growth slowing in most emerging market (“EM”) countries, EM equities posted muted returns in November.
  • Growth has been slowing for most EM countries. According to Bloomberg consensus estimates, gross domestic product (“GDP”) growth for EM countries is expected to be 3.7% in 2019 and 3.8% in 2020. Both of these estimates have been lowered over the past three months.
  • Despite slowing growth, earnings upgrades continue to be strong within EM equities compared to other regions. EM is the only major region that has experienced net positive earnings upgrades over the past three months. In addition to favorable earnings upgrades, EM countries also look compelling from a valuation perspective as EM equities have underperformed most regions YTD.

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.