Seeking diversified exposure to international small cap companies

The international small cap strategy invests primarily in common stocks of companies with smaller market capitalizations located in developed and emerging markets outside the US. The portfolio normally invests at least 80% of its total assets in equity securities of companies with smaller market capitalizations. Smaller market capitalization companies are companies with market capitalizations that do not exceed the highest market capitalization of a company within the portfolio’s benchmark, the MSCI ACWI ex USA Small Cap Index (Gross), at the time of purchase. Some of these companies, although small by US standards, might be large companies in their local markets. The portfolio may continue to hold securities of a company that appreciate above the smaller market capitalization threshold and thus may from time to time hold less than 80% of its total assets in equity securities of companies with smaller market capitalizations. The portfolio may invest in a wide range of industries.

Benchmark
MSCI AC World ex USA Small Cap
Inception
November 30, 2014

Strategy overview

The portfolio managers discuss our International Small Cap strategy.

Portfolio managers

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

Performance

QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 11.3%-22.6%-12.0%-3.3%-0.2%2.4%
Strategy (net) 11.1%-22.8%-12.6%-4.1%-1.1%1.4%
MSCI ACWI ex USA Small Cap 19.0%-15.4%-2.9%-0.7%1.8%3.3%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 11.3%-22.6%-12.0%-3.3%-0.2%2.4%
Strategy (net) 11.1%-22.8%-12.6%-4.1%-1.1%1.4%
MSCI ACWI ex USA Small Cap 19.0%-15.4%-2.9%-0.7%1.8%3.3%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) -30.4%-30.4%-24.5%-5.5%-0.7%0.4%
Strategy (net) -30.5%-30.5%-25.1%-6.3%-1.6%-0.5%
MSCI ACWI ex USA Small Cap -28.9%-28.9%-20.8%-4.5%-0.4%0.1%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) -30.4%-30.4%-24.5%-5.5%-0.7%0.4%
Strategy (net) -30.5%-30.5%-25.1%-6.3%-1.6%-0.5%
MSCI ACWI ex USA Small Cap -28.9%-28.9%-20.8%-4.5%-0.4%0.1%
Fund 20192018201720162015
Strategy (gross) 21.6%-20.4%36.4%4.6%6.1%
Strategy (net) 20.7%-21.2%35.1%3.6%5.0%
MSCI ACWI ex USA Small Cap 22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
20192018201720162015
21.6%-20.4%36.4%4.6%6.1%
20.7%-21.2%35.1%3.6%5.0%
22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of May 31, 2020)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.5%
Cash 1.5%
Strategy Characteristics
Strategy Benchmark
No. of holdings 133 4167
Weighted avg. market cap (US $MM) $1,558 $1,781
FY2 price/earnings 8.7 13.8
Price/book value 1.1 1.3
Dividend yield (%) 3.8 2.4
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Pharma Mar SA Spain 2.2%
HASEKO Corp. Japan 1.9%
JB Hi-Fi Ltd. Australia 1.9%
ASR Nederland NV Netherlands 1.8%
Radiant Opto-Electronics Corp. Taiwan 1.8%
Huaxin Cement Co China 1.8%
Centamin Plc United Kingdom 1.7%
Simplo Technology Co., Ltd. Taiwan 1.7%
Metcash Ltd. Australia 1.6%
King Yuan Electronics Co., Ltd. Taiwan 1.5%

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. The FY2 P/E ratio is a forward P/E ratio using a next-twenty-four months EPS estimate in the denominator.

*Active defined as Portfolio weight minus MSCI ACWI ex USA Small Cap Index weight. Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Information Technology 16.5% 12.5%
Industrials 13.8% 18.8%
Health Care 13.4% 8.9%
Financials 12.8% 9.5%
Consumer Discretionary 10.4% 11.5%
Real Estate 10.1% 11.4%
Consumer Staples 6.7% 6.7%
Materials 6.0% 10.7%
Communication Services 4.7% 4.4%
Utilities 3.6% 3.3%
Energy 0.4% 2.2%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 19.5% 23.6%
United Kingdom 10.7% 11.4%
Taiwan 9.0% 4.8%
Sweden 8.5% 5.1%
Australia 6.4% 6.0%
China 6.3% 2.2%
Netherlands 6.0% 1.5%
Switzerland 5.6% 4.2%
Brazil 4.1% 1.4%
India 3.8% 2.4%
Regional Allocation
  • Europe – other 38.2%
  • Pacific 28.3%
  • Emerging Asia 22.4%
  • Emerging Latin America 5.2%
  • North America 2.7%
  • Emerging Europe, Middle East, Africa 1.7%

Commentary (As of May 31, 2020)

Highlights

  • Equity markets continued to rally in May, likely responding to massive monetary and fiscal stimulus. International smaller capitalization (“cap”) equities, as measured by the MSCI ACWI ex USA Small Cap Index (“Index”), outperformed international large caps in May as risk tolerance continued to increase.
  • Though global fiscal and monetary authorities’ quick action to cushion the economic blow is encouraging, stimulus should end later this year. In the next several months, we expect the private sector in most regions to resume hiring, tap bank credit for resumption of operations, and boost capital expenditures. These actions are likely to push up prices, mitigating the deflationary impact of the lockdowns and lower oil prices.
  • As of May 31, the Small Cap Growth Index traded at a 21.0x forward price-to-earnings multiple compared to 13.1x for the Small Cap Value Index. This 61% premium is well above the 27% average premium over the last 15 years. We believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently, and feel comfortable with our large active exposure to value.

Portfolio attribution

The Portfolio underperformed 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 quality –and two top-down factor categories assessing macroeconomic and country aggregate characteristics.

From a sector perspective, Portfolio holdings in the financials, information technology, and health care sectors detracted most from performance relative to the Index. An overweight allocation to the energy sector as well as holdings in the utilities sector offset a portion of the underperformance. Relative performance for the month can be mostly attributed to stock selection. The largest detractor from performance was semiconductor tester, King Yuan Electronics Co., Ltd. (Taiwan). Additional top detractors included electrical power financier, Power Finance Corp. Ltd. (India), circuit board manufacturer, Daeduck Electronics Co., Ltd. (South Korea), airline, Dart Group Plc (United Kingdom), and real estate developer, China Overseas Grand Oceans Group Ltd. (China). The largest contributor to performance was biopharmaceutical company, Pharma Mar SA (Spain). Additional top contributors included real estate developer, Open House Co., Ltd. (Japan), IT services provider, NEC Networks & System Integration Corp. (Japan), real estate developer & operator, HASEKO Corp. (Japan), and electric utility, Companhia Paranaense de Energia (Brazil).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of May 31, the Small Cap Growth Index traded at a 21.0x forward price-to-earnings multiple compared to 13.1x for the Small Cap Value Index. This 61% premium is well above the 27% average premium over the last 15 years. We believe that value’s relative performance should improve once COVID-19 uncertainty abates, especially given the discount offered by value stocks currently, and feel comfortable with our large active exposure to value. However, the sheer breadth of the international small cap universe means that the typical tradeoffs in portfolio characteristics do not necessarily apply. In addition to value, we look for favorable growth, momentum, and quality characteristics. We believe that at most points in time our portfolio has exhibited more attractive metrics relative to the Index across all factor categories simultaneously. Smaller cap equities are currently exhibiting a higher long-term earnings-per-share growth trend than larger cap equities. Additionally, international smaller cap equities have exhibited greater valuation dispersion than larger cap equities on both a forward-earnings-yield basis and a price-to-book value basis, indicating more information content in valuation ratios for these equities. This characteristic has allowed us to construct a portfolio with lower valuation ratios relative to the Index without, in our view, compromising quality.

We continue to observe several intriguing features in the smaller cap landscape. We believe the intersection of international equities and smaller cap companies creates a recipe for inefficiency. Additionally, international smaller cap stocks are an underappreciated asset class that we believe can offer meaningful diversification benefits with the potential to reduce portfolio volatility. Finally, smaller cap stocks are typically less exposed to the potential risk of rising barriers to trade, given their home country revenue exposure. Despite the potential benefits, we believe many investors may be underallocated to the asset class despite its meaningful growth and diversification prospects. Causeway’s international small cap strategy combines the flexibility and breadth of quantitative analysis with our global industry knowledge, which we believe will benefit long-term investors in the strategy.

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 [email protected].