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

QTDYTD1 year3 yearsSince inception
Strategy (gross)4.4%14.5%4.6%7.4%6.8%
Strategy (net)4.3%13.8%3.9%6.4%5.8%
MSCI ACWI ex USA Small Cap4.1%15.2%9.2%7.4%5.9%
QTDYTD1 year3 yearsSince inception
Strategy (gross)4.4%14.5%4.6%7.4%6.8%
Strategy (net)4.3%13.8%3.9%6.4%5.8%
MSCI ACWI ex USA Small Cap4.1%15.2%9.2%7.4%5.9%
QTDYTD1 year3 yearsSince inception
Strategy (gross)-2.2%9.7%-8.9%5.8%6.0%
Strategy (net)-2.4%9.1%-9.5%4.9%5.0%
MSCI ACWI ex USA Small Cap-1.1%10.7%-5.2%5.0%5.1%
QTDYTD1 year3 yearsSince inception
Strategy (gross)-2.2%9.7%-8.9%5.8%6.0%
Strategy (net)-2.4%9.1%-9.5%4.9%5.0%
MSCI ACWI ex USA Small Cap-1.1%10.7%-5.2%5.0%5.1%
Fund2018201720162015
Strategy (gross)-20.4%36.4%4.6%6.1%
Strategy (net)-21.2%35.1%3.6%5.0%
MSCI ACWI ex USA Small Cap-17.9%32.1%4.3%3.0%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
2018201720162015
-20.4%36.4%4.6%6.1%
-21.2%35.1%3.6%5.0%
-17.9%32.1%4.3%3.0%

Portfolio (as of October 31, 2019)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks98.1%
Cash1.9%
Strategy Characteristics
StrategyBenchmark
No. of holdings 147 4172
Weighted avg. market cap (US $MM)$1,592$1,778
FY2 price/earnings8.913.7
Price/book value1.21.4
Dividend yield (%)4.32.7
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
ASR Nederland NVNetherlands1.9%
HASEKO Corp.Japan1.8%
Radiant Opto-Electronics Corp.Taiwan1.8%
C&C Group PlcUnited Kingdom1.8%
King Yuan Electronics Co., Ltd.Taiwan1.7%
Charter Hall GroupAustralia1.6%
JB Hi-Fi Ltd.Australia1.6%
Huaxin Cement Co., Ltd.China1.5%
Adastria Co., Ltd.Japan1.5%
Unipol Gruppo SpAItaly1.5%

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
Real Estate16.0%12.7%
Industrials14.5%19.3%
Financials13.1%10.2%
Information Technology12.6%10.7%
Consumer Discretionary11.0%12.4%
Health Care8.6%7.2%
Materials6.3%10.0%
Consumer Staples6.1%6.2%
Communication Services4.1%4.7%
Utilities2.8%3.4%
Energy2.2%3.1%
Equity Funds0.7%0.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan18.8%23.0%
United Kingdom12.1%12.9%
Australia9.2%5.4%
Taiwan8.8%4.2%
Sweden6.7%4.1%
China5.3%2.2%
Netherlands4.4%2.0%
Canada4.2%6.8%
South Korea3.9%3.1%
Brazil3.8%1.9%
Regional Allocation
  • Europe – other 35.2%
  • Pacific 29.6%
  • Emerging Asia 21.8%
  • Emerging Latin America 4.9%
  • North America 4.2%
  • Emerging Europe, Middle East, Africa 1.9%
  • Multi Region All Country 0.4%

Commentary (As of September 30, 2019)

Highlights

  • After contracting in July and August, developed equity markets rebounded in September, likely responding to a significant move upward in global bond yields. In September, momentum-driven “quality-growth” stocks ceded market leadership to stocks with strong value and cyclicality characteristics.
  • With low-to-no cost of financing, governments in Europe and elsewhere may decide to amplify fiscal spending. Without fiscal intervention, a vicious cycle of nil return in savings forces aging European and Japanese populations to save even more, adding to demand for fixed income, and pushing interest rates lower.
  • 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 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.

The largest detractor from performance was mining company, Resolute Mining Ltd. (Australia). Additional top detractors included commercial property investment company, Charter Hall Group (Australia), construction services provider, Royal BAM Groep NV (Netherlands), healthcare conglomerate, SHIP HEALTHCARE HOLDINGS, INC. (Japan), and mining company, African Rainbow Minerals Ltd. (South Africa). The largest contributor to performance was apparel company, Adastria Co., Ltd. (Japan). Additional top contributors included property investor and developer, Hammerson Plc (United Kingdom), real estate developer and operator, HASEKO Corp. (Japan), multi-line insurance company, ASR Nederland NV (Netherlands), and cement & concrete manufacturer, Huaxin Cement Co., Ltd. (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 September 30, the MSCI ACWI ex USA Small Cap Growth Index traded at a 17.6x forward price-to-earnings multiple compared to 11.9x for the MSCI ACWI ex USA Small Cap Value Index. This 48% 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. 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 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 barriers to trade, given their home country revenue exposure. In spite of 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.

 

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.