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
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 International Small Cap Composite (“International Small Cap Composite”) are calculated daily. Monthly account returns are calculated by geometrically linking the daily returns. The return of the International Small 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 April 30, 2020)
Asset Allocation
| Strategy | |
|---|---|
| Stocks | 98.0% |
| Cash | 2.0% |
Strategy Characteristics
| Strategy | Benchmark | |
|---|---|---|
| No. of holdings | 131 | 4170 |
| Weighted avg. market cap (US $MM) | $1,426 | $1,607 |
| FY2 price/earnings | 8.1 | 12.7 |
| Price/book value | 1.0 | 1.2 |
| Dividend yield (%) | 4.1 | 2.7 |
TOP 10 ACTIVE HOLDINGS
| Security | Country | Active weight* |
|---|---|---|
| Pharma Mar SA | Spain | 2.0% |
| King Yuan Electronics Co., Ltd. | Taiwan | 1.9% |
| Huaxin Cement Co | China | 1.8% |
| ASR Nederland NV | Netherlands | 1.8% |
| HASEKO Corp. | Japan | 1.8% |
| Radiant Opto-Electronics Corp. | Taiwan | 1.8% |
| JB Hi-Fi Ltd. | Australia | 1.8% |
| Simplo Technology Co., Ltd. | Taiwan | 1.7% |
| Centamin Plc | United Kingdom | 1.7% |
| BE Semiconductor Industries NV | Netherlands | 1.6% |
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 | 17.6% | 12.3% |
| Industrials | 14.2% | 18.8% |
| Health Care | 13.2% | 8.7% |
| Real Estate | 12.1% | 11.8% |
| Financials | 11.7% | 9.6% |
| Consumer Discretionary | 8.4% | 11.4% |
| Consumer Staples | 6.7% | 6.8% |
| Materials | 6.1% | 10.6% |
| Communication Services | 4.1% | 4.3% |
| Utilities | 3.5% | 3.4% |
| Energy | 0.4% | 2.3% |
TOP 10 COUNTRIES
| Country | Strategy | Benchmark |
|---|---|---|
| Japan | 19.4% | 21.4% |
| United Kingdom | 10.8% | 12.6% |
| Taiwan | 8.3% | 4.5% |
| China | 6.0% | 2.5% |
| Netherlands | 5.8% | 1.9% |
| Sweden | 5.7% | 4.7% |
| Brazil | 5.2% | 2.1% |
| Germany | 4.8% | 4.4% |
| Australia | 4.8% | 5.4% |
| Canada | 4.7% | 6.8% |
Regional Allocation
- Europe – other 37.2%
- Pacific 27.5%
- Emerging Asia 23.4%
- Emerging Latin America 5.0%
- North America 3.1%
- Emerging Europe, Middle East, Africa 1.7%
Commentary (As of April 30, 2020)
Highlights
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 real estate, health care, and industrials sectors detracted most from performance relative to the Index. Holdings in the information technology, financials, and communication services sectors offset a portion of the underperformance. Relative performance for the month can be mostly attributed to stock selection. The largest detractor from performance was food and beverage distributor, Metcash (Australia). Additional top detractors included real estate developer, CORESTATE Capital Holding SA (Germany), property developer, Hammerson Plc (United Kingdom), solar energy company, Daqo New Energy (China), and consumer electronics manufacturer, JVCKenwood Corp. (Japan). The largest contributor to performance was consumer electronics store, JB Hi-Fi Ltd. (Australia). Additional top contributors included precious metals miner, Centamin Plc (United Kingdom), semiconductor services provider, BE Semiconductor Industries NV (Netherlands), biopharmaceutical company, Pharma Mar SA (Spain), and electronics manufacturer, Radiant Opto-Electronics Corp. (Taiwan).
Investment outlook
Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of April 30, the MSCI ACWI ex USA Small Cap Growth Index (“Growth Index”) traded at a 18.3x forward price-to-earnings multiple compared to 11.3x for the MSCI ACWI ex USA Small Cap Value Index (“Value Index”). This 62% 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.
Similarly, we observe an unusually large valuation premium for DM relative to EM smaller cap equities. DM smaller cap equities, as measured by the MSCI Worldex-USA Small Cap Index, currently trade at a 39% forward price-to-earnings multiple premium to EM smaller cap equities, as measured by the MSCI Emerging Markets Small Cap Index, much higher than the 10-year average of 29%. This premium partly explains the Portfolio's overweight position in EM.
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-bookvalue 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.
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].