Seeking value primarily in the non-US developed markets

The international value portfolio is constructed from an equity universe composed of companies with market capitalizations typically greater than $1 billion located throughout the non-US developed and emerging market countries. Through rigorous, bottom-up company analysis, we seek to identify undervalued stocks with upside potential. The investment process comprises three stages: quantitative screening and initial analysis, fundamental research and portfolio construction.

Benchmark
MSCI EAFE
Inception
June 11, 2001
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Strategy overview

The portfolio managers discuss our International Value strategy.

Portfolio managers

Fundamental Portfolio Manager
Fundamental Portfolio Manager
President
Head of Fundamental Research
Fundamental Portfolio Manager
Chief Executive Officer
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager

Performance

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 4.5%20.2%23.0%20.4%5.8%6.7%7.8%
Strategy (net) 4.5%20.0%22.6%20.0%5.4%6.2%7.4%
MSCI EAFE 2.9%11.8%9.0%12.2%4.1%5.3%5.5%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 4.5%20.2%23.0%20.4%5.8%6.7%7.8%
Strategy (net) 4.5%20.0%22.6%20.0%5.4%6.2%7.4%
MSCI EAFE 2.9%11.8%9.0%12.2%4.1%5.3%5.5%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 14.9%14.9%12.3%22.0%5.5%6.6%7.6%
Strategy (net) 14.8%14.8%11.9%21.6%5.1%6.2%7.2%
MSCI EAFE 8.6%8.6%-0.9%13.5%4.0%5.5%5.4%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 14.9%14.9%12.3%22.0%5.5%6.6%7.6%
Strategy (net) 14.8%14.8%11.9%21.6%5.1%6.2%7.2%
MSCI EAFE 8.6%8.6%-0.9%13.5%4.0%5.5%5.4%
Fund 202220212020201920182017201620152014201320122011201020092008200720062005200420032002
Strategy (gross) -7.2%10.5%6.1%22.5%-18.0%28.6%1.1%-1.9%-4.6%27.6%24.6%-10.2%13.9%37.7%-43.0%9.8%27.5%9.0%29.5%48.4%-8.9%
Strategy (net) -7.6%10.1%5.6%22.0%-18.4%28.0%0.7%-2.3%-5.0%27.1%24.1%-10.5%13.4%37.1%-43.2%9.4%27.0%8.5%29.0%47.8%-9.2%
MSCI EAFE -14.0%11.8%8.3%22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%-43.1%11.6%26.9%14.0%20.7%39.2%-15.7%
Strategy (gross)
Strategy (net)
MSCI EAFE
202220212020201920182017201620152014201320122011201020092008200720062005200420032002
-7.2%10.5%6.1%22.5%-18.0%28.6%1.1%-1.9%-4.6%27.6%24.6%-10.2%13.9%37.7%-43.0%9.8%27.5%9.0%29.5%48.4%-8.9%
-7.6%10.1%5.6%22.0%-18.4%28.0%0.7%-2.3%-5.0%27.1%24.1%-10.5%13.4%37.1%-43.2%9.4%27.0%8.5%29.0%47.8%-9.2%
-14.0%11.8%8.3%22.7%-13.4%25.6%1.5%-0.4%-4.5%23.3%17.9%-11.7%8.2%32.5%-43.1%11.6%26.9%14.0%20.7%39.2%-15.7%

Portfolio (as of April 30, 2023)

Benchmark: MSCI EAFE
Asset Allocation
Strategy
Stocks 97.4%
Cash 2.6%
Strategy Characteristics
Strategy Benchmark
No. of holdings 64 794
Weighted avg. market cap (US $MM) $72,305 $74,632
FY2 price/earnings 12.1 12.6
Price/book value 1.9 1.7
Dividend yield (%) 2.9 3.1
TOP 10 HOLDINGS
Security Country Percent
Rolls-Royce Holdings Plc United Kingdom 4.7%
Samsung Electronics Co., Ltd. South Korea 3.4%
Enel SpA Italy 3.3%
Reckitt Benckiser Group United Kingdom 2.9%
UniCredit S.p.A. Italy 2.9%
SAP SE Germany 2.9%
Roche Holding AG Switzerland 2.7%
Prudential Plc United Kingdom 2.7%
Danone France 2.7%
Ryanair Holdings Plc - ADR Ireland 2.4%

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.

Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Industrials 18.4% 15.5%
Financials 18.0% 17.8%
Health Care 14.8% 13.5%
Consumer Staples 12.7% 10.7%
Information Technology 12.4% 8.1%
Consumer Discretionary 6.6% 12.0%
Utilities 5.9% 3.5%
Materials 4.4% 7.4%
Communication Services 2.4% 4.5%
Energy 1.7% 4.6%
Real Estate 0.0% 2.4%
TOP 10 COUNTRIES
Country Strategy Benchmark
United Kingdom 27.5% 15.1%
France 14.1% 12.8%
Germany 9.0% 8.7%
Japan 7.8% 21.1%
Switzerland 6.7% 10.3%
Italy 6.2% 2.5%
Spain 6.1% 2.6%
Netherlands 5.9% 4.4%
South Korea 4.7% 0.0%
Canada 2.9% 0.0%
Regional Allocation
  • Europe – other 79.4%
  • Pacific 13.4%
  • North America 2.9%
  • Emerging Asia 1.1%
  • Emerging Latin America 0.7%

Commentary (As of April 30, 2023)

Highlights

  • Developed equity markets continued to rise in April, with international markets outpacing the US. The energy sector recovered from March lows to lead MSCI EAFE Index (“Index”) sector performance for the month.
  • The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate remains very low at 3.4%.
  • Amid signs of slowing economic activity, we seek to identify economically resilient companies at attractive valuations and avoid companies at cyclical earnings peaks. Consistent across industries is our preference for companies we see generating high levels of free cash flow and for managements willing to return excess capital to shareholders.

Portfolio attribution

The Portfolio outperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the banks, materials, and utilities industry groups contributed to relative performance. Holdings in the capital goods and food beverage & tobacco industry groups, along with an overweight position in the technology hardware & equipment industry group, offset some of the outperformance compared to the Index. The top contributor to return was banking & financial services company, UniCredit S.p.A. (Italy). Other notable contributors included electric, gas & renewables power generation & distribution company, Enel SpA (Italy), and life insurer, Prudential Plc (United Kingdom). The largest detractor was rolling stock, signaling, & services provider for the rail industry, Alstom SA (France). Additional notable detractors included robotics manufacturer, FANUC Corp. (Japan), and electronic components manufacturer, Murata Manufacturing Co. Ltd. (Japan).

Economic outlook

The US economy may have already entered a stagflation period, likely exacerbated by tightening credit conditions and price rises embedded in wages, goods, and services. Despite headline-generating layoff announcements, payroll figures have been resilient, and the nationwide unemployment rate remains very low at 3.4%. Employers who suffered labor shortages during the pandemic may be reluctant to reduce staff. Data suggests the European Central Bank may have flexibility to slow its tightening policy. Although headline Eurozone inflation rose to 7% in April, the rate of core inflation—which removes the volatile food and energy price categories—declined for the first time in ten months, to 5.6%. In both the US and Europe, credit appears to be contracting after recent banking system shocks. As Europe and the US potentially near the end of their rate hike cycles, the Bank of Japan has yet to begin. We expect the Japanese central bank to continue its policy of monetary easing, conducted through yield curve control.

After a robust reopening from Covid lockdowns, Chinese manufacturing contracted in April; China’s official purchasing managers' index ("PMI") declined to 49.2. Our fundamental research corroborates this reading. In the materials sector, where China is the world’s largest customer and a critical link in supply chains, companies doing business with China are reporting a weaker recovery than past economic accelerations. Across developed markets, industrial production is declining from peak levels as companies work through backlogs accrued during the pandemic. Our team continues to value and vet industrials companies through our research process; we should be prepared to build exposure to select firms on share price pullbacks.

Investment outlook

Amid signs of slowing economic activity, we seek to identify economically resilient companies at attractive valuations and avoid companies at cyclical earnings peaks. Consistent across industries is our preference for companies we see generating high levels of free cash flow and for managements willing to return excess capital to shareholders. Given the likelihood of recession, we want to see managements apply conservative financial approaches: paying down leverage, controlling expenses, and abstaining from shareholder-dilutive acquisitions. Although portfolio weights in more economically insulated sectors—consumer staples and utilities, for example—are toward the upper bounds of their historical ranges, we remain flexible in our positioning and aim to continue to exploit the full global equity opportunity set.

An ongoing significant valuation discount or “margin of safety” may support international equities’ continued outperformance versus the US as investors, anticipating multiple compression, grow increasingly wary of expensive stocks. Developed international stocks have only been cheaper than they are today for about 5% of the past fifty years, as measured by the nearly two standard deviation discount of the MSCI World ex-USA Index trailing price-to-earnings multiple versus the MSCI USA Index.

By year’s end, we expect some of the most significant returns in excess of the Index should be delivered by companies able to withstand the effects of credit contraction, manage cost pressures, and improve productivity. We believe financial strength remains essential, especially in a higher-for-longer interest rate environment. Many of our portfolio companies are engaged in operational restructuring to improve earnings and cash flow. This implies these companies may deliver good news on a recovery in their growth, even as economic conditions remain sluggish. To identify investment candidates, our analysts are collaborating across their sectors to identify attractively valued portfolio candidates. Recent examples include Causeway consumer, industrials, and chemicals analysts valuing an ingredients company; and materials analysts studying a rare earth elements producer with input from automobile and technology analysts and members of our China research subsidiary. We believe understanding a company from multiple industry perspectives provides depth and rigor essential to determining its valuation.

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].