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Emerging Markets Equity

Strategy Profile

We believe the best way to exploit the investment opportunities in emerging markets equities is through a combination of value and growth, and bottom-up and top-down factors. Our quantitative stock selection process is focused on attractively valued companies with superior earnings prospects and positive market sentiment; these companies should produce consistent returns across investment cycles. We use the same approach to select sectors and countries, comparing valuation against earnings growth and market sentiment. At the country level, we also consider the health of the macro-economy. Our quantitative process seeks to combine these factors while attempting to avoid undue sources of risk, which for this strategy we define as tracking error (a measurement of dispersion from a benchmark index).

Inception Date29 Mar 2007
BenchmarkMSCI Emerging Markets

Performance

Fund Quarter to Date Year to Date 1 Year3 Year5 Year10 Year Since Inception
Gross % 9.2%31.0%26.2%5.9%6.8%3.7%5.9%
Net % 8.9%30.1%25.1%4.9%5.7%2.7%4.9%
MSCI Emerging Markets 8.0%28.1%22.9%5.3%4.4%1.7%3.8%

Portfolio

Asset Allocation as of 30 Sep 2017

Stocks 97.2%
Cash 2.8%

Characteristics as of 30 Sep 2017

Causeway MSCI Emerging Markets
No. of Holdings 146 839
Wtd. Avg. Market Cap (Mn $US)$56,912$51,020
NTM Price/Earnings9.612.5
Price/Book Value1.51.7
Dividend Yield (%)2.82.3
NTM EPS Revision (Wtd. Avg)17.59.9

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. “Earnings-per-Share” is the portion of a company’s profit allocated to each outstanding share of common stock. “Earnings-per-Share year-over-year estimate growth (Next 12 Months)” is the average next-twelve-month earnings-per-share estimate from one year ago for an individual company compared with that estimate today; note that this calculation is done on a company by company basis and is aggregated through a weighted average based on the individual company’s weight in the corresponding index. Also note that this characteristic is supplied directly by MSCI.

SECTOR WEIGHTS as of 30 Sep 2017

Information Technology30.84%
Financials23.37%
Energy8.07%
Industrials7.55%
Materials5.81%
Consumer Discretionary5.39%
Telecommunication Services4.27%
Consumer Staples3.05%
Real Estate2.81%
Utilities2.71%
Equity Funds2.03%
Health Care1.30%

(VS. Benchmark)

Information Technology27.59%
Financials23.40%
Energy6.79%
Industrials5.40%
Materials7.22%
Consumer Discretionary10.29%
Telecommunication Services5.09%
Consumer Staples6.48%
Real Estate2.88%
Utilities2.57%
Equity Funds0.00%
Health Care2.28%
Information Technology
Financials
Energy
Industrials
Materials
Consumer Discretionary
Telecommunication Services
Consumer Staples
Real Estate
Utilities
Equity Funds
Health Care
Other

TOP 10 COUNTRIES as of 30 Sep 2017

China31.84%
South Korea15.90%
Taiwan10.82%
India8.18%
Brazil6.28%
Russia5.28%
Thailand4.71%
Malaysia2.43%
Turkey2.34%
South Africa2.22%
Multi-National Emerging (ETF)2.03%
Poland1.47%
Indonesia1.12%
United Arab Emirates1.01%
Mexico0.90%
Hungary0.30%
Czech Republic0.27%
Qatar0.07%
Peru0.00%
Pakistan0.00%
Philippines0.00%
Chile0.00%
Colombia0.00%
Egypt0.00%
Greece0.00%
Multi-National Emerging (ETF)-0.03%

(VS. Benchmark)

China29.55%
South Korea14.97%
Taiwan11.51%
India8.41%
Brazil7.56%
Russia3.41%
Thailand2.22%
Malaysia2.28%
Turkey1.11%
South Africa6.37%
Multi-National Emerging (ETF)0.00%
Poland1.31%
Indonesia2.27%
United Arab Emirates0.71%
Mexico3.46%
Hungary0.33%
Czech Republic0.18%
Qatar0.58%
Peru0.39%
Pakistan0.10%
Philippines1.13%
Chile1.26%
Colombia0.44%
Egypt0.12%
Greece0.32%
Multi-National Emerging (ETF)0.00%
China
South Korea
Taiwan
India
Brazil
Russia
Thailand
Malaysia
Turkey
South Africa
Multi-National Emerging (ETF)
Poland
Indonesia
United Arab Emirates
Mexico
Hungary
Czech Republic
Qatar
Peru
Pakistan
Philippines
Chile
Colombia
Egypt
Greece
Multi-National Emerging (ETF)
Other

TOP 10 ACTIVE HOLDINGS as of 30 Sep 2017

Security Country Industry Active Weight*
Sberbank Russia OJSC Russia Banks 2.2
China Construction Bank Corp. China Banks 1.9
PTT Public Co., Ltd. Thailand Energy 1.7
Investimentos Itau Brazil Banks 1.5
SK hynix, Inc. South Korea Semiconductors & Semi Equipment 1.5
China Petroleum & Chemical Corp. China Energy 1.4
Hon Hai Precision Industry Co., Ltd. Taiwan Technology Hardware & Equipment 1.3
NEW Oriental Education & Techn China Consumer Services 1.0
Lukoil Russia Energy 1.0
Ping An Insurance (Group) Co. of China Ltd. China Insurance 0.9

*Active defined as Portfolio weight minus MSCI EM Index weight. Holdings are subject to change.

Approach

We believe the best way to exploit the investment opportunities in emerging markets equities is through a combination of value and growth, and bottom-up and top-down factors. Our quantitative stock selection process is focused on attractively valued companies with superior earnings prospects and positive market sentiment; these companies should produce consistent returns across investment cycles. We use the same approach to select sectors and countries, comparing valuation against earnings growth and market sentiment. At the country level, we also consider the health of the macro-economy. Our quantitative process seeks to combine these factors while attempting to avoid undue sources of risk, which for this strategy we define as tracking error (a measurement of dispersion from a benchmark index).

The investment process begins with a liquidity screen on emerging markets equities. Our multi-factor alpha-model creates a return forecast for every stock in the investable universe. We optimize the portfolio weights to maximize alpha(return in excess of benchmark), targeting a 5% tracking error relative to the benchmark MSCI Emerging Markets Index, and subject to additional relative constraints (sector, country, stock and currency). The Emerging Markets Portfolio is a fully invested portfolio of typically 110-150 stocks, with an average 85% annual turnover. Typically, the portfolio is undervalued relative to the benchmark on a number of metrics, with greater earnings growth expectations.

Commentary

PERFORMANCE REVIEW for the month ended 30 Sep 2017


Emerging markets equities retreated in late-September, following the US Federal Reserve’s (“Fed’s”) announcement that it intends to slim its balance sheet. The Fed’s decision spurred a rally in the US 10-year Treasury yield, which in turn helped the trade-weighted USD index (“DXY”) post gains. Against this backdrop, emerging markets underperformed developed markets in September. Both defensive value (e.g., dividend yield) and cyclical value (e.g., price-to-book value) stocks underperformed stocks with attractive growth characteristics. The currencies of inexpensive markets, such as the Turkish lira and South Korean won, declined, as did high beta (market sensitivity) currencies including the South African rand. The materials, telecommunication services, and financials sectors experienced the greatest declines. Real estate, health care, and energy were the top performing sectors, in positive territory. Russia, with substantial exposure to energy stocks, was the top performing market for the month. Brazil also outperformed, buoyed by central bank support. Greece and Turkey were the weakest performing markets.

The Portfolio underperformed the MSCI Emerging Markets Index (“Index”) for the month of September. We use both bottom-up and top-down factors to forecast alpha (return in excess of the Index) for the stocks in the Portfolio's investable universe. Although our bottom-up value factors have performed well over longer year-to-date and twelve-month periods, they were weak in September. Our top-down sector factors also were negative for the period. Macroeconomic and earnings growth factors proved to be the best indicators for performance over the month. Our top-down country and currency factors, and bottom-up technical (momentum) factors also delivered positive returns.

Portfolio exposures in emerging Asia, particularly stock selection in Taiwan and India, detracted from relative performance versus the Index. Exposures to the emerging Europe, Middle East, and Africa (“EMEA”) and Latin America regions contributed. The top sector-level detractors from relative performance were the Portfolio's positioning in the information technology and industrials sectors, partially offset by contributions from stock selection in the consumer discretionary sector and an underweight position in the materials sector. The largest stock level detractors from return versus the Index were overweight positions in electronics contract manufacturer, Hon Hai Precision Industry Co., Ltd.(Taiwan), oil refiner & transportation company, Hindustan Petroleum Corporation Limited (India), bank, Turkiye Halk Bankasi Anonim Sirketi (Turkey), electronic component manufacturing company, Catcher Technology Co., Ltd. (Taiwan), as well as a zero weight position in internet services provider, Baidu, Inc. (United States). The greatest stock-level contributors to return versus the Index were overweight positions in products & services provider for the electronic components industry, SK hynix Inc. (South Korea), financial services firm, Sberbank Russia OJSC (Russia), industrial operations & investment firm, Fosun International Limited (China), financial & industrial holdings company, Investimentos Itau S.A. (Brazil), and social entertainment platform, YY, Inc. (United States).*

*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 in this report 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.

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