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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 BofA ML 3M US TBill

Performance

Fund Quarter to Date Year to Date 1 Year3 Year5 Year10 Year Since Inception
Gross % 3.7%35.9%36.2%6.7%6.8%3.5%6.2%
Net % 3.6%34.7%35.0%5.7%5.7%2.5%5.1%
MSCI Emerging Markets 3.7%32.9%33.3%6.5%5.0%1.7%4.1%

Portfolio

Asset Allocation as of 30 Nov 2017

Stocks 97.4%
Cash 2.6%

Characteristics as of 30 Nov 2017

Causeway MSCI Emerging Markets
No. of Holdings 143 837
Wtd. Avg. Market Cap (Mn $US)$65,395$57,498
NTM Price/Earnings9.712.3
Price/Book Value1.51.8
Dividend Yield (%)2.72.2
NTM EPS Revision (Wtd. Avg)17.913.7

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 Nov 2017

Information Technology32.32%
Financials22.87%
Energy8.09%
Industrials7.61%
Materials6.40%
Consumer Discretionary6.24%
Telecommunication Services4.24%
Consumer Staples2.77%
Utilities2.55%
Real Estate2.54%
Health Care1.53%
Equity Funds0.21%

(VS. Benchmark)

Information Technology28.32%
Financials23.21%
Energy6.75%
Industrials5.27%
Materials7.18%
Consumer Discretionary10.51%
Telecommunication Services4.86%
Consumer Staples6.34%
Utilities2.46%
Real Estate2.72%
Health Care2.39%
Equity Funds0.00%
Information Technology
Financials
Energy
Industrials
Materials
Consumer Discretionary
Telecommunication Services
Consumer Staples
Utilities
Real Estate
Health Care
Equity Funds
Other

TOP 10 COUNTRIES as of 30 Nov 2017

China33.49%
South Korea16.78%
Taiwan10.65%
India9.48%
Brazil6.00%
Russia5.09%
Thailand4.46%
South Africa2.35%
Turkey2.28%
Malaysia2.14%
Poland1.23%
Indonesia0.95%
United Arab Emirates0.87%
Mexico0.78%
Czech Republic0.30%
Hungary0.29%
Multi-National Emerging (ETF)0.21%
Qatar0.03%
Multi-National Emerging (ETF)0.02%
Chile0.00%
Colombia0.00%
Pakistan0.00%
Philippines0.00%
Peru0.00%
Egypt0.00%
Greece0.00%

(VS. Benchmark)

China30.10%
South Korea15.63%
Taiwan11.42%
India8.64%
Brazil6.87%
Russia3.37%
Thailand2.24%
South Africa6.85%
Turkey0.98%
Malaysia2.15%
Poland1.29%
Indonesia2.18%
United Arab Emirates0.66%
Mexico3.07%
Czech Republic0.18%
Hungary0.33%
Multi-National Emerging (ETF)0.00%
Qatar0.51%
Multi-National Emerging (ETF)0.00%
Chile1.13%
Colombia0.40%
Pakistan0.09%
Philippines1.10%
Peru0.39%
Egypt0.12%
Greece0.30%
China
South Korea
Taiwan
India
Brazil
Russia
Thailand
South Africa
Turkey
Malaysia
Poland
Indonesia
United Arab Emirates
Mexico
Czech Republic
Hungary
Multi-National Emerging (ETF)
Qatar
Multi-National Emerging (ETF)
Chile
Colombia
Pakistan
Philippines
Peru
Egypt
Greece
Other

TOP 10 ACTIVE HOLDINGS as of 30 Nov 2017

Security Country Industry Active Weight*
Sberbank Russia OJSC Russia Banks 2.0
PTT Public Co., Ltd. Thailand Energy 2.0
China Construction Bank Corp. China Banks 1.9
Tencent Holdings Ltd. China Software & Services 1.6
SK hynix, Inc. South Korea Semiconductors & Semi Equipment 1.6
Investimentos Itau Brazil Banks 1.4
China Petroleum & Chemical Corp. China Energy 1.3
Hon Hai Precision Industry Co., Ltd. Taiwan Technology Hardware & Equipment 1.2
Ping An Insurance (Group) Co. of China Ltd. China Insurance 1.1
Lukoil Russia Energy 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 Oct 2017


After a brief setback in late September, emerging markets equities restarted their rally in October. The best performing region was emerging Asia, driven by outperformance from information technology stocks. The emerging Europe, Middle East, and Africa (“EMEA”) return was also positive. Latin America declined, as the region’s largest markets, Brazil and Mexico, and their currencies weakened over the period.

The Portfolio modestly outperformed the MSCI Emerging Markets Index (“Index”) for the month of October. 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 October. Our bottom-up technical (price momentum) and earnings growth factors fared better, delivering positive returns for the period. All of our top-down factors—country, currency, macroeconomic, and sector—were positive performance indicators over the month.

Portfolio exposures to the financials, materials, and information technology sectors were the top contributors to performance versus the Index. Portfolio exposures to energy, real estate, and health care detracted. The Portfolio's underweight to Latin America as well as its underlying currencies was the top regional contributor to return for the month. The Portfolio's positioning in emerging Asia and EMEA detracted from relative performance. The greatest stock-level contributors to return versus the Index were overweight positions in financial services firm, Ping An Insurance (Group) Company of China, Ltd. (China), electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea), and bank, China Construction Bank Corporation (China), and underweight positions in retailer, Magnit PJSC (Russia), and banking services provider, Itau Unibanco Holding S.A. (Brazil). The largest stock level detractor from relative return was an underweight position in electronic media firm Naspers (South Africa), which holds a one-third stake in Chinese internet stock, Tencent Holdings. Other significant detractors included overweight positions in financial & industrials holdings company, Itausa - Investimentos Itau S.A. (Brazil), bank, Turkiye Halk Bankasi Anonim Sirketi (Turkey), and for-profit educator, New Oriental Education & Technology Group, Inc. (United States), and an underweight position in energy & industrials holdings company, Reliance Industries Limited (India).*

*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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