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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 % 6.4%27.7%26.9%4.0%7.6%4.4%5.7%
Net % 6.4%27.0%25.7%3.0%6.5%3.4%4.7%
MSCI Emerging Markets 6.0%25.8%25.3%2.8%5.1%2.3%3.7%

Portfolio

Asset Allocation as of 31 Jul 2017

Stocks 96%
Cash 4%

Characteristics as of 31 Jul 2017

Causeway MSCI Emerging Markets
No. of Holdings 145 843
Wtd. Avg. Market Cap (Mn $US)$51,463$47,455
NTM Price/Earnings9.712.6
Price/Book Value1.41.7
Dividend Yield (%)2.82.3
NTM EPS Revision (Wtd. Avg)8.12.6

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 Jul 2017

Information Technology30.58%
Financials23.05%
Energy8.88%
Industrials8.17%
Consumer Discretionary5.94%
Materials5.10%
Telecommunication Services3.69%
Consumer Staples3.21%
Utilities3.04%
Real Estate2.33%
Health Care1.49%
Equity Funds0.54%

(VS. Benchmark)

Information Technology26.91%
Financials23.71%
Energy6.54%
Industrials5.58%
Consumer Discretionary10.48%
Materials7.27%
Telecommunication Services5.27%
Consumer Staples6.53%
Utilities2.61%
Real Estate2.83%
Health Care2.26%
Equity Funds0.00%
Information Technology
Financials
Energy
Industrials
Consumer Discretionary
Materials
Telecommunication Services
Consumer Staples
Utilities
Real Estate
Health Care
Equity Funds
Other

TOP 10 COUNTRIES as of 31 Jul 2017

China30.45%
South Korea16.87%
Taiwan11.70%
India8.77%
Brazil5.57%
Thailand4.74%
Russia4.61%
South Africa2.56%
Malaysia2.41%
Turkey1.89%
Poland1.63%
Indonesia1.28%
United Arab Emirates1.09%
Mexico1.08%
Multi-National Emerging (ETF)0.54%
Hungary0.37%
Czech Republic0.33%
Qatar0.14%
Multi-National Emerging (ETF)0.11%
Chile0.00%
Colombia0.00%
Pakistan0.00%
Philippines0.00%
Peru0.00%
Egypt0.00%
Greece0.00%

(VS. Benchmark)

China28.55%
South Korea15.26%
Taiwan11.98%
India8.98%
Brazil6.96%
Thailand2.11%
Russia3.08%
South Africa6.67%
Malaysia2.27%
Turkey1.18%
Poland1.30%
Indonesia2.33%
United Arab Emirates0.75%
Mexico3.64%
Multi-National Emerging (ETF)0.00%
Hungary0.33%
Czech Republic0.18%
Qatar0.67%
Multi-National Emerging (ETF)0.00%
Chile1.20%
Colombia0.44%
Pakistan0.12%
Philippines1.14%
Peru0.37%
Egypt0.13%
Greece0.38%
China
South Korea
Taiwan
India
Brazil
Thailand
Russia
South Africa
Malaysia
Turkey
Poland
Indonesia
United Arab Emirates
Mexico
Multi-National Emerging (ETF)
Hungary
Czech Republic
Qatar
Multi-National Emerging (ETF)
Chile
Colombia
Pakistan
Philippines
Peru
Egypt
Greece
Other

TOP 10 ACTIVE HOLDINGS as of 31 Jul 2017

Security Country Industry Active Weight*
China Construction Bank Corp. China Banks 1.9
PTT Public Co., Ltd. Thailand Energy 1.7
Hon Hai Precision Industry Co., Ltd. Taiwan Technology Hardware & Equipment 1.5
China Petroleum & Chemical Corp. China Energy 1.5
Sberbank Russia OJSC Russia Banks 1.4
Investimentos Itau Brazil Banks 1.2
SK hynix, Inc. South Korea Semiconductors & Semi Equipment 1.1
Lukoil Russia Energy 1.0
Ping An Insurance (Group) Co. of China Ltd. China Insurance 1.0
NEW Oriental Education & Techn China Consumer Services 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 31 Jul 2017


Emerging markets equities continued their ascent in July, boosted by US dollar weakness. Every emerging region appreciated over the month. Latin America posted the greatest gains, led by Brazil. Investors applauded the conviction and sentencing of former President Luiz Inacio Lula da Silva on corruption charges. A benchmark interest rate cut by Brazil’s central bank further supported the equity market and currency. Within Asia, China—which comprises nearly 30%of the MSCI Emerging Markets Index (“Index”)—was the top performer. The Chinese market reached two-year highs on robust economic data and strong performance from stocks in the information technology sector. The only market in negative territory in US dollar terms for July was Pakistan.

The Portfolio outperformed the Index for the month of July. 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. Our bottom-up earnings growth and technical factors posted the best performance for the month. After positive performance in the first half of 2017, the performance of our bottom-up value factor and all of our top-down factors—macroeconomic, country, sector, and currency—were negative for July.

Portfolio exposures in every emerging markets region, particularly Asia, contributed to outperformance versus the Index for the month of July. The top sector drivers of relative performance were exposures to the consumer staples, consumer discretionary, and financials sectors, partially offset by exposures to the information technology, energy, and real estate sectors. The greatest stock-level contributors to return versus the Index were overweight positions in power generation & construction company, Tekfen Holding Anonim Sirketi (Turkey), social entertainment platform, YY,Inc. (China), financial services firm, Sberbank Russia OJSC (Russia), financial products & services company, Ping An Insurance (Group) Company of China, Ltd. (China), and electronic components manufacturer, Flexium Interconnect, Inc. (Taiwan). The largest individual detractors were underweight positions in internet services provider, Baidu, Inc. (China) and electronic & print media platform, Naspers Limited (South Africa), and overweight positions in oil & gas exploration & production company, China Petroleum & Chemical Corporation (China), pharmaceutical company, Shanghai Pharmaceuticals Holding Co., Ltd. (China), and digital display developer & manufacturer, LG Display Co., Ltd. (South Korea).*

*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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