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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 Year Since Inception
Gross % 3.6%18.5%29.1%2.4%7.2%5.1%
Net % 3.4%18.0%27.9%1.4%6.1%4.0%
MSCI Emerging Markets 5.3%17.3%27.9%2.0%4.9%3.1%

Portfolio

Asset Allocation as of 31 May 2017

Stocks 97.2%
Cash 2.8%

Characteristics as of 31 May 2017

Causeway MSCI Emerging Markets
No. of Holdings 144
Wtd. Avg. Market Cap (Mn $US)$43,669$0
NTM Price/Earnings9.20.0
Price/Book Value1.30.0
Dividend Yield (%)2.90.0
NTM EPS Revision (Wtd. Avg)8.60.0

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 31 May 2017

Information Technology29.23%
Financials23.67%
Energy9.87%
Industrials8.99%
Consumer Discretionary5.05%
Materials4.77%
Utilities3.40%
Consumer Staples3.25%
Telecommunication Services3.10%
Real Estate2.33%
Health Care1.88%
Equity Funds1.71%

(VS. Benchmark)

Information Technology25.60%
Financials23.71%
Energy6.82%
Industrials5.80%
Consumer Discretionary10.89%
Materials7.09%
Utilities2.64%
Consumer Staples7.01%
Telecommunication Services5.50%
Real Estate2.63%
Health Care2.31%
Equity Funds0.00%
Information Technology
Financials
Energy
Industrials
Consumer Discretionary
Materials
Utilities
Consumer Staples
Telecommunication Services
Real Estate
Health Care
Equity Funds
Other

TOP 10 COUNTRIES as of 31 May 2017

China27.85%
South Korea17.31%
Taiwan12.28%
India9.10%
Brazil5.80%
Russia5.31%
Thailand4.67%
South Africa3.08%
Malaysia1.97%
Poland1.71%
Multi-National Emerging (ETF)1.71%
Turkey1.67%
Indonesia1.43%
Mexico1.34%
United Arab Emirates1.09%
Hungary0.41%
Czech Republic0.36%
Multi-National Emerging (ETF)0.17%
Qatar0.16%
Chile0.00%
Colombia0.00%
Egypt0.00%
Greece0.00%
Philippines0.00%
Peru0.00%

(VS. Benchmark)

China27.66%
South Korea15.65%
Taiwan12.23%
India8.75%
Brazil6.85%
Russia3.38%
Thailand2.16%
South Africa6.81%
Malaysia2.44%
Poland1.29%
Multi-National Emerging (ETF)0.00%
Turkey1.11%
Indonesia2.51%
Mexico3.54%
United Arab Emirates0.71%
Hungary0.32%
Czech Republic0.18%
Multi-National Emerging (ETF)0.00%
Qatar0.73%
Chile1.17%
Colombia0.43%
Egypt0.13%
Greece0.38%
Philippines1.20%
Peru0.36%
China
South Korea
Taiwan
India
Brazil
Russia
Thailand
South Africa
Malaysia
Poland
Multi-National Emerging (ETF)
Turkey
Indonesia
Mexico
United Arab Emirates
Hungary
Czech Republic
Multi-National Emerging (ETF)
Qatar
Chile
Colombia
Egypt
Greece
Philippines
Peru
Other

TOP 10 ACTIVE HOLDINGS as of 31 May 2017

Security Country Industry Active Weight*
Taiwan Semiconductor Manufacturing Co., Ltd. Taiwan Semiconductors & Semi Equipment 3.5
Sberbank Russia OJSC Russia Banks 1.9
PTT Public Co., Ltd. Thailand Energy 1.8
China Petroleum & Chemical Corp. China Energy 1.7
Lukoil Russia Energy 1.6
Hon Hai Precision Industry Co., Ltd. Taiwan Technology Hardware & Equipment 1.5
Investimentos Itau Brazil Banks 1.4
Ping An Insurance (Group) Co. of China Ltd. China Insurance 1.1
China Communications Construction Co. Ltd. China Capital Goods 1.0
ICICI Bank Ltd. India Banks 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 31 May 2017


Emerging markets equities rose in May 2017. The asset class continued to garner inflows, as supportive monetary conditions and optimism for economic growth overcame geopolitical risks, including discord in Brazil and the Middle East. The MSCI Emerging Markets Index (“Index”), led by Asia, returned 2.5% in local currency terms for the month. US dollar weakness versus major emerging markets currencies provided US dollar-based investors an additional boost. The best performing sectors were real estate, consumer discretionary, and information technology. The energy, utilities, and materials sectors lagged. Greece, Hungary, and South Korea posted the biggest gains, and Russia, Brazil, and Qatar the greatest declines. Brazil, the largest market of these underperformers, suffered significant declines in its equity and currency markets as the corruption probe known as Lava Jato (“Car Wash”) entered a new chapter. A corporate executive recorded Brazil’s current president, Michel Temer, allegedly approving a “hush money” bribe to jailed former House speaker Eduardo Cunha. The recording triggered calls for Temer’s removal from office.

The Portfolio underperformed the Index for the month of May. 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. Of our bottom-up factors, earnings growth was the top performer, followed by valuation. The technical, or price momentum, factor returns were negative for the period. May’s bottom-up factor performance is consistent with a longer-term trend of investors rotating in and out of stocks in search of earnings growth. Our top-down factor performance was generally positive. Our country factors delivered the strongest returns, followed by our macroeconomic and currency factors. The sell-off in Brazil’s financial markets in May boosted performance of all three of these factor groups. Our sector factor returns were negative for the period, due in part to the underperformance of the energy sector and the outperformance of the consumer discretionary sector.

The largest country-level detractors from the Portfolio's relative performance versus the Index were the Portfolio's positions in India, South Korea, and Brazil. Portfolio positions in China, Turkey and Taiwan contributed to relative performance. The Portfolio's sector exposure to the consumer staples, financials, and industrials sectors detracted from relative performance, partially offset by contributions from the materials, information technology and telecommunication services sectors. The greatest stock-level detractors from Portfolio performance versus the Index were overweight positions in electric power company, Reliance Infrastructure Limited (India), financial services provider, Banco do Brasil S.A. (Brazil), financial services firm, Sberbank Russia OJSC (Russia), multinational food processing company, JBS SA (Brazil), and a zero-weight position in electronic & print media platform operator, Naspers Ltd. (South Africa). The top stock-level contributors to relative performance were overweight positions in plastics & textile-related products distributor, Sintex Industries Limited (India), financial products & services company, Ping An Insurance (Group) Company of China, Ltd. (China), bank, ICICI Bank Ltd. (India), and industrial conglomerate, Hyosung Corp. (South Korea), as well as a zero-weight 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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