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
Download Profile Sheet Download Flash Report Download Quarterly Review
Contact Us

Strategy overview

The portfolio managers discuss our International Small Cap strategy.

Portfolio managers

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

Performance

QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 4.9%-12.6%-11.5%8.2%2.8%6.6%
Strategy (net) 4.7%-13.0%-12.1%7.4%2.0%5.7%
MSCI ACWI ex USA Small Cap 3.1%-20.3%-22.2%5.6%2.6%5.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 4.9%-12.6%-11.5%8.2%2.8%6.6%
Strategy (net) 4.7%-13.0%-12.1%7.4%2.0%5.7%
MSCI ACWI ex USA Small Cap 3.1%-20.3%-22.2%5.6%2.6%5.0%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) -17.4%-16.7%-16.6%4.8%3.6%6.1%
Strategy (net) -17.5%-17.0%-17.1%4.1%2.8%5.2%
MSCI ACWI ex USA Small Cap -17.4%-22.7%-22.1%3.4%3.0%4.7%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) -17.4%-16.7%-16.6%4.8%3.6%6.1%
Strategy (net) -17.5%-17.0%-17.1%4.1%2.8%5.2%
MSCI ACWI ex USA Small Cap -17.4%-22.7%-22.1%3.4%3.0%4.7%
Fund 2021202020192018201720162015
Strategy (gross) 22.3%0.0%0.0%0.0%0.0%0.0%0.0%
Strategy (net) 21.5%0.0%0.0%0.0%0.0%0.0%0.0%
MSCI ACWI ex USA Small Cap 13.4%14.7%22.9%-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
2021202020192018201720162015
22.3%0.0%0.0%0.0%0.0%0.0%0.0%
21.5%0.0%0.0%0.0%0.0%0.0%0.0%
13.4%14.7%22.9%-17.9%32.1%4.3%3.0%

Portfolio (as of August 31, 2022)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 98.6%
Cash 1.4%
Strategy Characteristics
Strategy Benchmark
No. of holdings 130 4396
Weighted avg. market cap (US $MM) $1,797 $1,672
FY2 price/earnings 6.1 11.1
Price/book value 0.9 1.3
Dividend yield (%) 5.8 2.9
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Sojitz Corp. Japan 2.0%
POSCO INTERNATIONAL Corp. South Korea 1.9%
Electric Power Development Co., Ltd. Japan 1.9%
SSAB Sweden 1.9%
Interfor Canada 1.9%
SHIMAMURA Co., Ltd. Japan 1.8%
Canfor Canada 1.8%
ASR Nederland NV Netherlands 1.8%
Companhia Paranaense de Energia Brazil 1.7%
Simplo Technology Co., Ltd. Taiwan 1.7%

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
Industrials 15.7% 19.8%
Information Technology 15.0% 11.1%
Materials 13.3% 11.6%
Financials 11.7% 10.9%
Consumer Discretionary 9.2% 11.4%
Energy 8.8% 4.2%
Utilities 7.4% 3.7%
Real Estate 5.6% 10.4%
Consumer Staples 5.5% 6.2%
Health Care 3.6% 7.0%
Communication Services 2.8% 3.8%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 23.0% 20.4%
Canada 10.8% 7.7%
Taiwan 8.6% 5.4%
South Korea 8.3% 3.8%
Australia 6.9% 7.3%
United Kingdom 6.3% 10.4%
India 5.4% 6.3%
Brazil 4.3% 1.7%
Netherlands 3.3% 1.2%
Indonesia 2.7% 0.7%
Regional Allocation
  • PACIFIC RIM 33.2%
  • EMERGING ASIA 28.0%
  • OTHER EUROPE 11.1%
  • NORTH AMERICA 10.8%
  • EURO 7.9%
  • EMERGING LATIN AMERICA 4.7%
  • EMERGING EUROPE MIDDLE EAST AFRICA 2.8%
  • DEVELOPED MIDDLE EAST 0.0%

Commentary (As of August 31, 2022)

Highlights

  • Equity markets declined again in August in response to central banks’ commitment to tamp down inflation, despite apparent risks to global economic growth.
  • We currently expect inflation in the developed world to remain well above its near three-decades-long average for some time to come. The Covid pandemic highlighted the vulnerability of long and complex supply chains, and costly investment will be required as companies and their governments attempt to onshore critical production. As transitory inflation pressures have risen, stickier wage expectations will likely embed lasting inflationary pressures into developed economies.
  • Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average.

Portfolio attribution

The Portfolio outperformed the Index during the month, in part due to our overweight to small caps in EM, given the sizable outperformance of EM small caps over DM small caps mentioned previously. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. The strategy’s value factors delivered negative returns in August. Despite poor performance in the last two months, value remains the top-performing factor group over the year-to-date period and the last twelve months. The strategy’s earnings growth and technical alpha factors had positive monthly returns, and they have also generated meaningfully positive returns over the year-to-date period and the last twelve months. Our competitive strength factor category delivered negative returns for the month. These factors have a quality tilt and are designed to help us identify stocks that can perform well in inflationary and/or recessionary environments, among others. Though our country aggregate factors were negative indicators in August, our macroeconomic factors delivered positive returns as countries exhibiting superior top-down metrics outperformed those with relatively weaker characteristics. All factor group returns remain positive from inception of the Strategy (10/20/14) to the end of August.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite the recent value rally, the MSCI ACWI ex USA Small Cap Growth Index still traded at a 16.8x forward P/E multiple compared to 9.5x for the MSCI ACWI ex USA Small Cap Value Index as of August 31, 2022, a 77% premium. As of August 31, 2022, the Causeway International Small Cap portfolio traded at just 5.5x forward (next twelve months) earnings despite exhibiting higher embedded momentum and revisions characteristics relative to both the MSCI ACWI ex USA Small Cap Index and the Value version of the Index.

The sheer breadth and inefficiency of the International Small Cap (ISC) universe create the opportunity to build a portfolio without the typical tradeoffs in stock characteristics. We believe Causeway’s ISC strategy, harnessing multiple sources of alpha, has achieved an attractive combination of portfolio characteristics. Valuation matters, even in small caps, amidst global economic fears and rising interest rates. To learn more about our unique approach to International Small Cap portfolio construction, please read our recent publication “No Tradeoffs Required” available at www.causewaycap.com/insights.

 

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].