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 December 31, 2019)
Asset Allocation
| Strategy | |
|---|---|
| Stocks | 98.7% |
| Cash | 1.3% |
Strategy Characteristics
| Strategy | Benchmark | |
|---|---|---|
| No. of holdings | 148 | 4210 |
| Weighted avg. market cap (US $MM) | $1,621 | $1,863 |
| FY2 price/earnings | 9.4 | 14.6 |
| Price/book value | 1.2 | 1.5 |
| Dividend yield (%) | 4.1 | 2.6 |
TOP 10 ACTIVE HOLDINGS
| Security | Country | Active weight* |
|---|---|---|
| ASR Nederland NV | Netherlands | 1.8% |
| HASEKO Corp. | Japan | 1.8% |
| Radiant Opto-Electronics Corp. | Taiwan | 1.8% |
| Huaxin Cement Co | China | 1.7% |
| Qualicorp Consultoria e Corretora de Seguros SA | Brazil | 1.6% |
| King Yuan Electronics Co., Ltd. | Taiwan | 1.6% |
| Hammerson Plc | United Kingdom | 1.6% |
| JB Hi-Fi Ltd. | Australia | 1.5% |
| Unipol Gruppo SpA | Italy | 1.5% |
| DIP Corp. | Japan | 1.4% |
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 | 15.9% | 19.7% |
| Information Technology | 15.0% | 11.1% |
| Financials | 13.5% | 10.4% |
| Real Estate | 13.5% | 12.3% |
| Consumer Discretionary | 10.6% | 12.5% |
| Health Care | 9.2% | 7.3% |
| Materials | 6.3% | 9.9% |
| Consumer Staples | 5.3% | 5.9% |
| Communication Services | 3.4% | 4.3% |
| Utilities | 3.1% | 3.2% |
| Energy | 2.6% | 3.3% |
| Equity Funds | 0.4% | 0.0% |
TOP 10 COUNTRIES
| Country | Strategy | Benchmark |
|---|---|---|
| Japan | 21.6% | 21.9% |
| United Kingdom | 10.1% | 13.5% |
| Taiwan | 8.2% | 4.2% |
| Australia | 6.8% | 5.4% |
| Sweden | 6.0% | 4.4% |
| China | 5.8% | 2.2% |
| Netherlands | 5.0% | 1.9% |
| Brazil | 4.8% | 2.2% |
| South Korea | 4.8% | 3.2% |
| Germany | 4.0% | 4.5% |
Regional Allocation
- Europe – other 34.5%
- Pacific 30.4%
- Emerging Asia 21.7%
- Emerging Latin America 6.0%
- North America 3.7%
- Emerging Europe, Middle East, Africa 2.3%
Commentary (As of December 31, 2019)
Highlights
Portfolio attribution
The Portfolio 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.
Portfolio holdings in the real estate, utilities and materials sectors contributed most to performance relative to the Index. Holdings in the information technology, financials, and health care 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 electric utility, Companhia Paranaense de Energia (Brazil). Additional top contributors included precious metal miner, Centamin Plc (United Kingdom), healthcare insurance company, Qualicorp Consultoria e Corretora de Seguros SA (Brazil), real estate developer, China Overseas Grand Oceans Group Ltd. (China), and energy exploration and production company, Parex Resources (Canada). The largest detractor from performance was airline operator, SAS (Sweden). Additional top detractors included, information technology services provider, Net One Systems Co., Ltd. (Japan), food distributor, Metcash Ltd. (Australia), insurance & banking services company, Unipol Gruppo SpA (Italy), and electronics components manufacturer, Compeq Manufacturing Co., Ltd. (Taiwan).
Investment outlook
Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. Despite value’s relatively strong performance late in the year, value stocks still significantly underperformed growth stocks in 2019, both in developed and emerging markets. As of December 31, the MSCI ACWI ex USA Small Cap Growth Index traded at a 19.2x forward price-to-earnings multiple compared to 12.6x for the MSCI ACWI ex USA Small Cap Value Index. This 52% premium is well above the 27% average premium over the last 15 years. Given the valuations of growth stocks, which we believe are stretched, we feel comfortable with our meaningful active exposure to value factors.
The overall outlook for smaller cap equities remains favorable in our view. Improving market sentiment (due to potential progress on US-China trade negotiations and a steepening yield curve) could lead to stronger demand for risk assets including smaller market-cap stocks. Smaller cap equities are also 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 a number of 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 barriersinvestorstomaytrade,be givenunderallocatedtheir hometo thecountryassetrevenueclass despiteexposure.itsIn spitemeaningfulof thegrowthpotentialandbenefits,diversificationwe 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 Portfolio.
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.