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Global Absolute Return

Strategy Profile

Causeway's Global Absolute Return (GAR) strategy is designed for investors who want equity-like returns with lower volatility and low equity market correlation. The strategy invests in global developed markets equities and may invest in emerging markets, using swap agreements or direct investments to obtain long and short exposures to equity securities.

Inception Date28 Feb 2011
BenchmarkMSCI World

Performance

Fund Quarter to Date Year to Date 1 Year3 Year5 Year Since Inception
Gross % -4.4%-10.0%-4.3%-0.5%2.4%3.7%
Net % -4.7%-10.6%-5.8%-2.0%0.9%2.2%
BofAML 90 T Bill 0.1%0.2%0.5%0.2%0.2%0.1%

Portfolio

Position Details as of 31 May 2017

Cash66,141,087
Market Value Long96,444,998
Market Value Short-99,955,578
Net Positional Value-3,510,580
NAV62,630,508
Net Exposure-5.61%
Leverage3.14
Long Positions 50
Short Positions 125
Total175

Characteristics as of 31 May 2017

Long Portfolio Short Portfolio MSCI World
No. of Exposures 50 125 1626
Wtd Avg Mkt Cap (Mn $US)$77,129$39,403$106,701
FY2 Price/Earnings12.816.315.7
Price/Book Value1.71.92.3
Return on Equity (%)13.76.816.1

Sector Exposure as of 31 May 2017

Long Exposure (%)Short Exposure (%)Net Exposure (%)
Telecommunication Services15.33-7.507.83
Energy17.48-10.906.58
Health Care22.20-17.284.92
Industrials23.30-21.252.05
Information Technology28.71-29.22-0.51
Utilities1.36-1.94-0.58
Financials25.23-27.67-2.44
Real Estate1.92-4.98-3.06
Materials3.99-8.22-4.23
Consumer Discretionary11.41-16.56-5.15
Consumer Staples4.05-15.51-11.46

Country Exposure as of 31 May 2017

Long Exposure (%)Short Exposure (%)Net Exposure (%)
United Kingdom33.69-23.3610.33
Switzerland14.74-5.798.95
Netherlands3.990.003.99
China3.130.003.13
Italy3.07-0.232.84
Spain1.920.001.92
Germany4.40-3.291.11
Japan14.05-13.660.39
Hong Kong8.42-8.50-0.08
South Korea6.84-6.95-0.11
Denmark0.00-0.30-0.30
France4.45-5.04-0.59
Canada3.12-4.67-1.55
Sweden0.00-1.69-1.69
Norway0.00-1.83-1.83
Finland0.00-3.13-3.13
Australia0.00-3.79-3.79
Singapore0.00-5.30-5.30
Belgium0.00-5.63-5.63
United States53.19-67.86-14.67

TOP 10 Positions as of 31 May 2017

Top Ten Long PositionsTop Ten Short Positions
CompanyEnding Weight (%)CompanyEnding Weight (%)
Royal Dutch Shell Plc4.79%Nokia Oyj-3.13%
Citigroup, Inc.4.65%China Overseas Land & Investment Ltd.-3.13%
China Mobile Ltd.4.53%Ford Motor Co.-3.12%
Volkswagen AG4.40%American International Group, Inc.-3.09%
Novartis AG4.38%Saga Plc-3.08%
Oracle Corp.4.37%Molson Coors Brewing Co.-3.07%
Microsoft Corp.4.31%Visa, Inc.-3.06%
East Japan Railway Co.4.17%Toyota Motor Corp.-3.05%
KDDI Corp.4.12%Berkshire Hathaway, Inc.-3.05%
Prudential Plc4.11%The Kraft Heinz Co.-3.05%

Holdings are subject to change. Weights are notional exposures over net assets.

Approach

Causeway's Global Absolute Return (GAR) strategy is designed for investors who want equity-like returns with lower volatility and low equity market correlation. The strategy invests in global developed markets equities and may invest in emerging markets, using swap agreements or direct investments to obtain long and short exposures to equity securities.

Causeway uses its fundamental global value equity strategy to manage the long exposures and its quantitative investment strategy to manage the short exposures. Both the long and short portfolios seek to add alpha(return in excess of index), which is amplified by leverage up to 4x, with a target of 3x.

The GAR strategy seeks to mitigate risk in a number of ways: on the short side, qualitative risk may be captured by a fundamental review of short positions, and short exposures are constrained. Unrealized gains or losses through swap agreements are also constrained, limiting counterparty risk. There are approximately twice as many short exposures as long, mitigating idiosyncratic risk in the short portfolio.

The GAR portfolio typically has 85-180 long/short exposures. The dollar amount of the long exposures is generally within 10 percentage points of the dollar amount of the short exposures, but the portfolio may have sector or regional biases.

Commentary

PERFORMANCE REVIEW for the month ended 31 May 2017


Causeway Global Absolute Return Portfolio (“Portfolio”) underperformed the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index in the month of May. The Portfolio’s underperformance was driven by both the long and short portfolios: The long portfolio underperformed the MSCI World Index (“World Index”), and the short portfolio outperformed the World Index, also contributing negatively to overall performance.

Global equities continued their ascent in May, buoyed by demand for growth stocks and by evidence of a recovery in European economies. The top performing markets in our investable universe included Portugal, Austria, and South Korea. The worst performing markets included Australia, New Zealand, and Ireland. The best performing sectors in the World Index were financials, information technology, and consumer discretionary. The worst performing sectors were telecommunications services, real estate, and utilities.

The Portfolio takes long and short notional exposures to securities under swap agreements. We use our fundamental value approach to select securities exposures for the long portfolio. The long portfolio underperformed the World Index during the period, due primarily to stock selection. Exposures to the consumer discretionary, energy, and information technology industry groups contributed most to relative underperformance. Exposures to the healthcare, financials, and telecommunications services industry groups offset some of the relative underperformance. The largest detractor was retailer, Signet Group (United States). Additional detractors included oil and gas exploration and production company, SM Energy (United States), oil and gas exploration and production company, PDC Energy, Inc.(United States), global entertainment company, Viacom, Inc. (United States), and auto parts retailer, Advanced Auto Parts, Inc. (United States). The top contributor to performance was pharmaceutical & biotechnology company, AstraZeneca Plc. (United Kingdom), telecommunications services provider, Vodafone (United Kingdom), transportation company, East Japan Railway Co. (Japan), integrated energy company, Royal Dutch Shell (United Kingdom), and energy utility, ENGIE SA (France).

We use a quantitative approach to select securities for the short portfolio. Our process seeks to obtain short exposures to stocks which we believe are overvalued and have deteriorating earnings growth dynamics, poor technical price movements, and insolvency risk and/or inferior quality of earnings. During the month of May, our technical and quality factor categories demonstrated predictive power. Companies with weak technical indicators and those demonstrating potential insolvency and/or accounting chicanery underperformed the broader market, as anticipated. However, returns to our value and growth factors were negative. Companies with expensive valuations and those with worsening earnings growth dynamics outperformed the broader market, contrary to expectations.

From an industry group perspective, short-side attribution effects were weakest in the technology hardware & equipment, materials, and banks industry groups. Short-side attribution effects were strongest in the diversified financials, pharmaceuticals & biotechnology, and commercial & professional services industry groups. At the stock exposure level, short exposures that detracted from the Portfolio’s performance included software & services provider, Autodesk, Inc. (United States), technology hardware &equipment manufacturer, Nokia Oyj (Finland), auto manufacturer, Hyundai Motor Co., Ltd. (South Korea), electric utility, TERNA Rete Elettrica Nazionale SpA (Italy), and telecommunication services provider, China Unicom Ltd. (Hong Kong). Successful shorts included financial services provider, Element Financial (Canada), health care equipment and services company, Acadia Healthcare Co., Inc. (United States), real estate investment trust, Simon Property Group (United States), lighting and building management solution provider, Acuity Brands, Inc. (United States), and consumer apparel company, Nike, Inc. (United States).*

*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 above 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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