Global Small Cap

Portfolio attribution

The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs four bottom-up factor categories – valuation, earnings growth, technical indicators, and competitive strength – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. All of our alpha factor categories delivered positive returns in October. The strategy’s value factors produced positive returns in October, and value remains the best-performing factor in 2023 and over the last twelve months. Our earnings growth and technical factors also posted positive returns last month. Competitive strength generated the highest returns among our bottom-up alpha factor categories in October, and it is the second-best performing factor group over the year-to-date period. Our macroeconomic and country aggregate factors delivered positive monthly returns as countries exhibiting stronger metrics (such as Japan) outperformed those with relatively weaker characteristics (such as Australia). All factor groups remain positive on an inception-to-date basis.

Economic outlook

Excluding Australia, major Developed Market central banks, including the US Federal Reserve Bank, The Bank of England, The European Central Bank and The Bank of Japan, voted to leave rates unchanged at their most recent meetings. The global manufacturing output PMI slipped 0.9 points to 48.9 last month, a level consistent with a 0.5% annual rate contraction in factory output. The standout positive in the October PMIs was the US, with a rise in both the output (+0.5 points) and new orders (+1.4 points) indexes. However, China stepped down, and the Euro area PMI remains stuck at a recessionary level.

According to JP Morgan, mainland China’s global PMI slipped to 48.8 likely reflecting the ongoing drags from the real estate sector and domestic demand weakness and raising questions about the resilience of the end-of-third quarter momentum.

Investment outlook

Though we analyze many different stock selection factors in our alpha model, value factors receive the largest weight on average. As of the end of October, the MSCI ACWI ex USA Small Cap Growth Index traded at a 15.7x forward price-to-earnings (P/E) multiple compared to 9.6x for the MSCI ACWI ex USA Small Cap Value Index, a 63% premium, which is the smallest it has been all year.

Another attractive feature of global small caps is that they exhibit greater valuation dispersion than large caps on both a forward earnings yield and B/P basis. This indicates more information content in the valuation ratios of small caps. In addition to exhibiting greater valuation dispersion, small caps exhibit a higher long-term earnings per share growth trend.

International Small Cap

Portfolio Attribution

The Portfolio outperformed the Index during the month. To evaluate stocks in our investable universe, our multi-factor quantitative model employs five bottom-up factor categories – valuation, sentiment, technical indicators, quality, and corporate events – and two top-down factor categories assessing macroeconomic and country aggregate characteristics. The strategy’s value factors delivered positive returns in November, and value remains the best-performing factor group over the last twelve months. Our sentiment factors were also positive for the month, over the last twelve months, and year-to-date period. Our quality and technical factors also posted positive returns in the month, and the technical factor category has produced the highest returns year to date. Our corporate events factor, added at the end of February, was flat in November. Returns to our macroeconomic factors were negative as countries exhibiting more attractive characteristics (such as Korea and Sweden) underperformed those with relatively weaker characteristics. Our country aggregate factors were roughly flat in November. All factor groups remain positive on an inception to date basis.

Quarterly Investment Outlook

In the wake of the U.S. presidential election, some potentially significant policy shifts are expected from the next administration. In general, relative to their larger-cap peers, international small caps tend to derive a much higher percentage of revenue from their domestic market and should therefore be better protected from rising barriers to trade or tariffs. 

As global central banks continue cutting rates, improving liquidity should benefit small-cap stocks, especially with small-cap stocks (ACWI ex USA Small Cap Index) trading at a rare discount to their larger-cap (ACWI ex USA Index) peers on a forward P/E basis. In addition to the attractive relative valuation of the asset class overall, Causeway’s International Small Cap portfolio continues to trade at a substantial discount to the Index while, in our view, simultaneously exhibiting more favorable growth, quality, momentum, and positive estimate revisions than the Index. We believe that this highly attractive combination of characteristics better insulates our portfolio from future volatility.

October marked the 10-year anniversary of Causeway’s International Small Cap strategy, and we published The Power of Small Caps: Key Discoveries from a Decade in ISC to mark the occasion.

International Value Select

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the technology hardware & equipment, insurance, and consumer durables & apparel industry groups detracted from relative performance. Holdings in the capital goods and household & personal products industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and banking & financial services company, UniCredit S.p.A. (Italy). The top contributor to return was banking & financial services company, Barclays PLC (United Kingdom). Other notable contributors included print & publishing company, RELX Plc (United Kingdom), and tobacco products company, British American Tobacco plc (United Kingdom).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. We don’t know if China can avoid prolonged stagnation, but its stock market should see bursts of enthusiasm, especially in response to future stimulus. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. In the US, despite voter enthusiasm for fiscal spending, rising long-term bond yields should provide effective guardrails to government profligacy. Despite conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-term investors we remain committed to these tenets of fundamental value investing.

International Opportunities

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the software & services, insurance, and consumer durables & apparel industry groups detracted from relative performance. Holdings in the capital goods and household & personal products industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was paints & coatings producer, Akzo Nobel (Netherlands). Additional notable detractors included multinational luxury conglomerate, Kering SA (France), and beverage company, Anheuser-Busch InBev SA/NV (Belgium). The top contributor to return was banking & financial services company, Barclays PLC (United Kingdom). Other notable contributors included print & publishing company, RELX Plc (United Kingdom), and tobacco products company, British American Tobacco plc (United Kingdom).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. The People’s Bank of China (PBOC) cut the required reserve ratio for Chinese banks by 50 basis points, a larger reduction than most investors anticipated, freeing up approximately 1 trillion yuan for new lending. We believe additional interest rate cuts, and broader measures to support the Chinese real estate market, are likely. The PBOC also increased financing availability for stock repurchase activity, which we believe will support China’s financial markets. On the consumption side, several Chinese cities and provinces have announced vouchers to bolster spending in a variety of goods and services, including traveling, dine-in, and sports. The Portfolio remains overweight Chinese stocks due in part to valuation considerations. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. In the US, despite voter enthusiasm for fiscal spending, rising long-term bond yields should provide effective guardrails to government profligacy. Despite conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-term investors we remain committed to these tenets of fundamental value investing.

Emerging Markets Equity

Portfolio Attribution

The Portfolio outperformed the Index in November 2024. We use both bottom-up “stock-specific” and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio’s investable universe. Our bottom-up technical (price momentum), growth, competitive strength, valuation, and corporate events factors were positive indicators in November. Our top-down country/sector aggregate was a positive indicator, while macroeconomic and currency were negative indicators during the month.

Quarterly Investment Outlook

During the third quarter, the US Federal Reserve reduced its benchmark interest rate and indicated that additional interest rate cuts are likely. More accommodative central bank policy in the US, and the potential for a weaker US dollar, should be tailwinds for EM assets. Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. The People’s Bank of China (PBOC) cut the required reserve ratio for Chinese banks by 50 basis points, a larger reduction than most investors anticipated, freeing up approximately 1 trillion yuan for new lending. We believe additional interest rate cuts, and broader measures to support the Chinese real estate market, are likely. The PBOC also increased financing availability for stock repurchase activity, which we believe will support China’s financial markets. On the consumption side, several Chinese cities and provinces have announced vouchers to bolster spending in a variety of goods and services, including traveling, dine-in, and sports. The Portfolio was overweight Chinese stocks due in part to valuation considerations. For the first time in 50 years, South Korea’s President, Yoon Suk Yeol, declared martial law in early December. Hours later, 190 South Korean lawmakers, including 20 from President Yeol’s party, unanimously voted to request the withdrawal of martial law. President Yoon has ended martial law and faces an impeachment motion as his approval rating has been among the lowest of all South Korean presidents to date. The Portfolio remains overweight South Korean stocks due primarily to attractive valuations and we continue to monitor this very fluid situation.

Global Value Equity

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to country allocation (a byproduct of our bottom-up stock selection process). Portfolio holdings in the technology hardware & equipment industry group, along with an underweight position in the financial services and automobiles & components industry groups, detracted from relative performance. Holdings in the media & entertainment and banks industry groups, as well as an underweight position in the pharmaceuticals & biotechnology industry group, offset some of the underperformance compared to the Index. The largest detractor was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and multinational luxury conglomerate, Kering SA (France). The top contributor to return was media & entertainment conglomerate, The Walt Disney Co. (United States). Other notable contributors included business process outsourcing services provider, Genpact Ltd. (United States), and banking & financial services company, Barclays PLC (United Kingdom).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. We don’t know if China can avoid prolonged stagnation, but its stock market should see bursts of enthusiasm, especially in response to future stimulus. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. In the US, despite voter enthusiasm for fiscal spending, rising long-term bond yields should provide effective guardrails to government profligacy. Despite conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-term investors we remain committed to these tenets of fundamental value investing.

International Value Equity

Portfolio Attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the technology hardware & equipment, consumer durables & apparel, and banks industry groups detracted from relative performance. Holdings in the capital goods and household & personal products industry groups, as well as an underweight position in the automobiles & components industry group, offset some of the underperformance compared to the Index. The largest detractor was electronic equipment manufacturer, Samsung Electronics Co., Ltd. (South Korea). Additional notable detractors included paints & coatings producer, Akzo Nobel (Netherlands), and banking & financial services company, UniCredit S.p.A. (Italy). The top contributor to return was banking & financial services company, Barclays PLC (United Kingdom). Other notable contributors included print & publishing company, RELX Plc (United Kingdom), and rolling stock, signaling, & services provider for the rail industry, Alstom SA (France).

Quarterly Investment Outlook

Chinese authorities, recognizing the inadequacy of recent efforts, have introduced aggressive measures to stimulate their economy. We don’t know if China can avoid prolonged stagnation, but its stock market should see bursts of enthusiasm, especially in response to future stimulus. The European Central Bank cut rates by 25 basis points in September, after a June reduction, and the Federal Reserve followed with a 50 basis point cut. In France, an uneasy coalition is poised to address fiscal imbalances, including reversing some of President Macron’s 2017 corporate tax cuts. In the US, despite voter enthusiasm for fiscal spending, rising long-term bond yields should provide effective guardrails to government profligacy. Despite conflict in the Middle East, energy markets have thus far remained stable, likely due to China’s economic weakness.

We believe it is essential to remain valuation-focused and disciplined amid market gyrations. We aim to construct well-balanced Causeway client portfolios with structural winners, cyclical beneficiaries, and unique operational restructuring opportunities. These characteristics typically result in portfolio companies capable of reaccelerating earnings and cash flow growth. We designed our investment process to produce long-term performance independent of market noise, election outcomes, or short-term sentiment. We believe our ability to generate alpha over full market cycles comes from identifying valuation gaps and strong industry fundamentals, and assessing how companies adapt to changing market conditions. As long-term investors we remain committed to these tenets of fundamental value investing.