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) 5.8%-2.4%3.1%-0.9%6.3%6.2%
Strategy (net) 5.7%-3.0%2.4%-1.7%5.4%5.2%
MSCI ACWI ex USA Small Cap 10.8%7.1%12.5%3.7%8.3%7.2%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 5.8%-2.4%3.1%-0.9%6.3%6.2%
Strategy (net) 5.7%-3.0%2.4%-1.7%5.4%5.2%
MSCI ACWI ex USA Small Cap 10.8%7.1%12.5%3.7%8.3%7.2%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 11.9%-7.7%2.2%-2.2%6.2%5.3%
Strategy (net) 11.7%-8.3%1.5%-3.0%5.3%4.4%
MSCI ACWI ex USA Small Cap 10.6%-3.3%7.4%1.3%7.2%5.5%
QTD YTD 1 year3 years5 years Since inception
Strategy (gross) 11.9%-7.7%2.2%-2.2%6.2%5.3%
Strategy (net) 11.7%-8.3%1.5%-3.0%5.3%4.4%
MSCI ACWI ex USA Small Cap 10.6%-3.3%7.4%1.3%7.2%5.5%
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 October 31, 2020)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 97.8%
Cash 2.2%
Strategy Characteristics
Strategy Benchmark
No. of holdings 135 4046
Weighted avg. market cap (US $MM) $1,715 $1,704
FY2 price/earnings 9.1 14.1
Price/book value 1.2 1.3
Dividend yield (%) 3.6 2.3
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Radiant Opto-Electronics Corp. Taiwan 2.2%
GungHo Online Entertainment, Inc. Japan 2.1%
Capcom Co., Ltd. Japan 1.9%
JB Hi-Fi Ltd. Australia 1.9%
Granules India Ltd. India 1.9%
Huaxin Cement Co China 1.8%
Pharma Mar SA Spain 1.8%
Metcash Ltd. Australia 1.7%
Daqo New Energy China 1.7%
General Interface Solution (GIS) Holding 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
Information Technology 15.1% 12.5%
Industrials 14.7% 19.9%
Health Care 12.6% 7.9%
Consumer Discretionary 12.0% 12.6%
Financials 11.6% 9.6%
Consumer Staples 8.7% 6.2%
Communication Services 8.1% 4.5%
Materials 6.1% 10.4%
Real Estate 6.1% 11.2%
Utilities 2.3% 3.3%
Energy 0.5% 2.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 18.1% 22.3%
United Kingdom 9.7% 11.9%
Taiwan 9.2% 5.2%
Sweden 8.4% 5.3%
China 6.8% 2.8%
South Korea 6.2% 4.0%
Netherlands 5.6% 1.6%
Australia 5.2% 6.2%
Canada 4.0% 6.6%
India 4.0% 2.8%
Regional Allocation
  • Europe – other 36.4%
  • Emerging Asia 27.6%
  • Pacific 26.0%
  • North America 4.0%
  • Emerging Latin America 2.8%
  • Emerging Europe, Middle East, Africa 1.0%

Commentary (As of October 31, 2020)

Highlights

  • Optimism surrounding additional fiscal stimulus packages in the US and Europe bolstered equity markets in the first half of October; however, renewed coronavirus lockdowns in several European countries and a surge in cases in the US weakened investor sentiment and developed markets finished the month in negative territory. International smaller capitalization (“cap”) equities, as measured by the MSCI ACWI ex USA Small Cap Index (“Index”), underperformed international large caps in October, as investors dialed back risk slightly after strong small cap performance since the March lows.
  • In the UK, the deadline to negotiate a Brexit deal marches closer without a resolution. Ultimately, we believe that a deal will be reached to prevent a further dampening of the UK economy in the face of the pandemic-induced recession.
  • 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.

Portfolio attribution

The Portfolio modestly outperformed 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 information technology, communications services, and healthcare contributed the most to performance relative to the Index. Portfolio holdings in the materials, financials, and industrials sectors offset a portion of the performance. Relative performance for the month can be mostly attributed to stock selection. The largest contributor to performance was solar energy company, Daqo New Energy (China). Additional top contributors included video game developer, GungHo Online Entertainment, Inc. (Japan), plastics & polymers manufacturer, Korea Petrochemical Co., Ltd.(South Korea), specialty retailer, Nishimatsuya Chain Co., Ltd. (Japan), and lithium battery producer, Simplo Technology Co., Ltd. (Taiwan). The top detractor from performance was precious metals miner, Centamin Plc (United Kingdom). Additional top detractors included insurance & banking services company, Unipol Gruppo SpA (Italy), insurance group, ASR Nederland NV (Netherlands), real estate developer & operator, HASEKO Corp. (Japan), and cement & concrete manufacturer, Huaxin Cement Co (China).

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of October 31, the Small Cap Growth Index traded at a 21.6x forward price-to-earnings multiple compared to 13.3x for the Small Cap 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. 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].