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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
Benchmark MSCI Emerging Markets

Performance

Fund Quarter to Date Year to Date 1 Year3 Year5 Year10 Year Since Inception
Gross % -2.3%-0.1%21.4%5.7%5.7%4.4%6.3%
Net % -2.4%-0.4%20.3%4.7%4.6%3.3%5.2%
MSCI Emerging Markets -0.4%1.0%22.1%6.4%5.1%2.5%4.4%

Portfolio

Asset Allocation as of 30 Apr 2018

Stocks 97.1%
Cash 2.9%

Characteristics as of 30 Apr 2018

Causeway MSCI Emerging Markets
No. of Holdings 141 845
Wtd. Avg. Market Cap (Mn $US)$65,339$56,954
NTM Price/Earnings9.312.0
Price/Book Value1.51.8
Dividend Yield (%)2.82.3
NTM EPS Revision (Wtd. Avg)1.4-2.2

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 Apr 2018

Information Technology29.15%
Financials25.09%
Energy8.87%
Industrials8.12%
Materials7.75%
Consumer Discretionary5.70%
Real Estate3.25%
Telecommunication Services3.01%
Consumer Staples2.31%
Utilities2.09%
Health Care1.61%
Equity Funds0.12%

(VS. Benchmark)

Information Technology27.30%
Financials23.83%
Energy7.31%
Industrials5.31%
Materials7.56%
Consumer Discretionary9.49%
Real Estate2.88%
Telecommunication Services4.63%
Consumer Staples6.56%
Utilities2.40%
Health Care2.73%
Equity Funds0.00%
Information Technology
Financials
Energy
Industrials
Materials
Consumer Discretionary
Real Estate
Telecommunication Services
Consumer Staples
Utilities
Health Care
Equity Funds
Other

TOP 10 COUNTRIES as of 30 Apr 2018

China33.16%
South Korea17.12%
India9.43%
Taiwan9.32%
Brazil6.61%
Thailand4.67%
Russia4.28%
South Africa3.25%
Malaysia2.91%
Turkey2.03%
Mexico1.48%
Poland0.81%
Indonesia0.56%
United Arab Emirates0.54%
Peru0.48%
Czech Republic0.29%
Multi-National Emerging (ETF)0.12%
Chile0.00%
Colombia0.00%
Pakistan0.00%
Philippines0.00%
Egypt0.00%
Greece0.00%
Hungary0.00%
Qatar0.00%
Multi-National Emerging (ETF)-0.12%

(VS. Benchmark)

China30.10%
South Korea15.60%
India8.48%
Taiwan11.23%
Brazil7.20%
Thailand2.42%
Russia3.34%
South Africa6.69%
Malaysia2.50%
Turkey0.88%
Mexico3.00%
Poland1.23%
Indonesia1.95%
United Arab Emirates0.61%
Peru0.42%
Czech Republic0.18%
Multi-National Emerging (ETF)0.00%
Chile1.22%
Colombia0.47%
Pakistan0.08%
Philippines0.99%
Egypt0.14%
Greece0.36%
Hungary0.32%
Qatar0.58%
Multi-National Emerging (ETF)0.00%
China
South Korea
India
Taiwan
Brazil
Thailand
Russia
South Africa
Malaysia
Turkey
Mexico
Poland
Indonesia
United Arab Emirates
Peru
Czech Republic
Multi-National Emerging (ETF)
Chile
Colombia
Pakistan
Philippines
Egypt
Greece
Hungary
Qatar
Multi-National Emerging (ETF)
Other

TOP 10 ACTIVE HOLDINGS as of 30 Apr 2018

Security Country Industry Active Weight*
China Petroleum & Chemical Corp. China Energy 2.0
China Construction Bank Corp. China Banks 1.9
PTT Public Co., Ltd. Thailand Energy 1.9
Investimentos Itau Brazil Banks 1.6
SK hynix, Inc. South Korea Semiconductors & Semi Equipment 1.5
Anhui Conch Cement Co., Ltd. China Materials 1.3
Ping An Insurance (Group) Co. of China Ltd. China Insurance 1.2
Sberbank Russia Banks 1.2
Tencent Holdings Ltd. China Software & Services 1.2
KB Financial Group, Inc. South Korea Banks 1.0

*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 Apr 2018


Supported by solid company earnings and the potential for easing geopolitical Korean tensions, emerging market equities rose in April as the MSCI Emerging Markets Index (“Index”) returned 1.18% in local currency terms during the month. However, the US dollar’s strong rally in April versus most emerging market currencies resulted in negative returns for US dollar-based investors. Russia was one of the worst performing countries in the Index as the United States announced new sanctions on April 6th targeting Russian individuals and companies. Within Asia, South Korea, the second largest country weight in the Index behind China, outperformed the broader market as optimism surrounding easing Korean geo political tensions benefitted companies in the region. Buoyed by rising commodity prices, the materials and energy sectors outperformed the broader market during the month. Underperforming sectors included health care and information technology.

The Portfolio underperformed the Index in April. We use both bottom-up and top-down factor categories to forecast alpha (return in excess of the Index) for the stocks in the Portfolio's investable universe. After underperforming earnings growth and price momentum factors in the first quarter of 2018, our bottom-up value factor category was the best indicator of share price performance in April. The earnings growth factor category also delivered positive returns during the month while price momentum, as measured by our technical factors, was a weak indicator. Of our top-down factors, our macroeconomic, currency and sector factors performed well during the month while our country factor posted negative returns.

Over the month, Portfolio positioning in the emerging Europe, Middle East, and Africa (“EMEA”) region, specifically stock selection in Russia and an overweight position in Turkey, detracted from the Portfolio's relative performance versus the Index. Within the emerging Asia region, stock selection in Taiwan and India detracted from relative performance while positive stock selection in China and South Korea partially offset this effect. The Latin American region modestly detracted from relative performance, driven by underweight positions in Mexico and Colombia. From a sector perspective, financials, information technology, and telecommunication services were the largest detractors from relative performance versus the Index. The top sector contributors to relative performance were materials, health care, and industrials. The largest stock-level detractors from return versus the Index were overweight positions in financial services firm, Sberbank Russia OJSC (Russia), bank, Banco do Brasil S.A. (Brazil), and financial & industrial holdings company, Investimentos Itau (Russia), along with underweight positions in internet services provider, Baidu, Inc. (China) and information technology services provider, Tata Consultancy Services (India). The greatest stock-level contributors to relative performance were overweight positions in oil & gas exploration & production company, China Petroleum & Chemical Corporation (China), cement manufacturer, Anhui Conch Cement Company Limited (China), steelmaker,POSCO (South Korea), and pulp & paper producer, Suzano Papel e Celulose S.A. (Brazil), as well as an underweight position in bank, Banco Bradesco S.A. (Brazil).*

*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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