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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 % 14.4%14.4%20.9%3.2%3.7%4.8%
Net % 14.1%14.1%19.8%2.2%2.7%3.7%
MSCI Emerging Markets 11.5%11.5%17.7%1.5%1.2%2.6%

Portfolio

Asset Allocation as of 31 Mar 2017

Stocks 97.2%
Cash 2.8%

Characteristics as of 31 Mar 2017

Causeway MSCI Emerging Markets
No. of Holdings 144 830
Wtd. Avg. Market Cap (Mn $US)$37,162$36,148
NTM Price/Earnings9.212.0
Price/Book Value1.21.6
Dividend Yield (%)2.92.4
NTM EPS Revision (Wtd. Avg)12.74.0

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 Mar 2017

Information Technology27.64%
Financials23.75%
Energy11.10%
Industrials8.59%
Materials5.31%
Consumer Discretionary5.12%
Utilities3.80%
Consumer Staples3.79%
Telecommunication Services3.12%
Health Care2.55%
Real Estate2.29%
Equity Funds0.09%

(VS. Benchmark)

Information Technology24.48%
Financials24.05%
Energy7.31%
Industrials5.92%
Materials7.47%
Consumer Discretionary10.39%
Utilities2.84%
Consumer Staples6.94%
Telecommunication Services5.64%
Health Care2.40%
Real Estate2.56%
Equity Funds0.00%
Information Technology
Financials
Energy
Industrials
Materials
Consumer Discretionary
Utilities
Consumer Staples
Telecommunication Services
Health Care
Real Estate
Equity Funds
Other

TOP 10 COUNTRIES as of 31 Mar 2017

China26.42%
South Korea17.71%
Taiwan12.34%
India9.64%
Brazil7.18%
Russia5.41%
Thailand4.64%
South Africa3.64%
Malaysia1.89%
Indonesia1.72%
Turkey1.50%
Poland1.37%
Mexico1.25%
United Arab Emirates1.16%
Qatar0.45%
Hungary0.40%
Czech Republic0.35%
Multi-National Emerging (ETF)0.10%
Multi-National Emerging (ETF)0.09%
Peru0.00%
Egypt0.00%
Greece0.00%
Philippines0.00%
Chile0.00%
Colombia0.00%

(VS. Benchmark)

China26.90%
South Korea15.07%
Taiwan12.27%
India8.86%
Brazil7.62%
Russia3.81%
Thailand2.26%
South Africa6.64%
Malaysia2.44%
Indonesia2.51%
Turkey1.04%
Poland1.21%
Mexico3.69%
United Arab Emirates0.75%
Qatar0.80%
Hungary0.28%
Czech Republic0.18%
Multi-National Emerging (ETF)0.00%
Multi-National Emerging (ETF)0.00%
Peru0.37%
Egypt0.13%
Greece0.32%
Philippines1.16%
Chile1.25%
Colombia0.43%
China
South Korea
Taiwan
India
Brazil
Russia
Thailand
South Africa
Malaysia
Indonesia
Turkey
Poland
Mexico
United Arab Emirates
Qatar
Hungary
Czech Republic
Multi-National Emerging (ETF)
Multi-National Emerging (ETF)
Peru
Egypt
Greece
Philippines
Chile
Colombia
Other

TOP 10 ACTIVE HOLDINGS as of 31 Mar 2017

Security Country Industry Active Weight*
China Petroleum & Chemical Corp. China Energy 1.8
PTT Public Co., Ltd. Thailand Energy 1.8
Bank of China Ltd. China Banks 1.7
Investimentos Itau Brazil Banks 1.6
Lukoil Russia Energy 1.4
Hon Hai Precision Industry Co., Ltd. Taiwan Technology Hardware & Equipment 1.2
Sberbank Russia OJSC Russia Banks 1.1
Samsung Electronics Co., Ltd. South Korea Technology Hardware & Equipment 1.1
Korea Electric Power Corp. South Korea Utilities 1.1
China Communications Construction Co. Ltd. China Capital Goods 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 Mar 2017


Emerging markets equities increased their gains in March 2017. The MSCI Emerging Markets Index (“Index”) returned 2.6% in USD terms, more than double the return of the MSCI World Index. Economic growth within the asset class is improving, and valuations lured investors, particularly given the brightening earnings outlooks for many emerging markets companies. In the Index, nearly every sector appreciated over the period. The top performers were the information technology, industrials, and telecommunication services sectors. The health care, materials, and financials sectors lagged the Index. From a country perspective, Mexico, Chile, and India appreciated the most over the month. Egypt, Brazil, and Hungary were the weakest performers.

The Portfolio outperformed the Index for the month of March. 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, value and earnings growth continued to post positive returns. Our bottom-up technical factors, which measure share price momentum, have been weak for the past twelve months, indicating rotation within the asset class. Of our top-down factors, our currency and macroeconomic factors were effective for the period. Our country and sector factors posted negative returns.

The Portfolio's positioning in emerging Asia provided the greatest regional contributions to outperformance versus the Index, most notably from stock selection in China and South Korea. Portfolio exposure to Latin America also contributed to relative return, while exposure to the emerging Europe, Middle East, and Africa (EMEA) region detracted. Industrials and real estate were the largest sector-level contributors to outperformance versus the Index, partially offset by the Portfolio's positioning in the consumer staples and consumer discretionary sectors. The top individual contributors to relative performance were overweight positions in for-profit educator, New Oriental Education & Technology Group, Inc.(China), semiconductor foundry operator, Taiwan Semiconductor Manufacturing co., Ltd. (Taiwan), crude oil refiner, Polski Koncern Naftowy ORLEN S.A. (Poland), and low-cost air carrier service, AirAsia Bhd. (Malaysia), and a zero-weight position in banking services provider, Itau Unibanco Holding SA (Brazil). The top relative detractors were overweight positions in financial & industrial holdings company, Itausa - Investimentos Itau SA (Brazil), multinational food processing company, JBS S.A (Brazil), retail & commercial bank, Bank of China Ltd. (China), and internet services provider, NetEase.com (China), and a zero-weight position in electronic & print media platform operator, Naspers Ltd. (South Africa).*

*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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