Diversified exposure to emerging markets, capturing value and growth

The Emerging Markets strategy invests primarily in common stocks of emerging markets companies. The strategy combines 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).

Benchmark
MSCI Emerging Markets
Inception
March 29, 2007

Strategy overview

The portfolio managers discuss our Emerging Markets Equity strategy.

Portfolio managers

Head of Quantitative Research
Quantitative Portfolio Manager
Quantitative Portfolio Manager
Quantitative Portfolio Manager

Performance

QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
QTDYTD1 year3 years5 years10 yearsSince inception
Strategy (gross)-4.2%5.1%-3.9%6.0%2.3%5.9%4.4%
Strategy (net)-4.4%4.4%-4.8%5.0%1.3%4.8%3.4%
MSCI Emerging Markets-4.1%6.2%-1.6%6.4%2.7%3.7%3.0%
Fund20182017201620152014201320122011201020092008
Strategy (gross)-16.9%41.4%10.5%-15.0%3.4%-1.2%27.5%-17.0%28.0%90.5%-57.8%
Strategy (net)-16.9%41.4%10.5%-15.0%3.4%-1.3%6.6%-14.6%34.5%119.0%-54.3%
MSCI Emerging Markets-17.9%39.8%9.2%-16.0%2.1%-2.6%25.8%-18.1%26.3%88.1%-58.4%
Strategy (gross)
Strategy (net)
MSCI Emerging Markets
20182017201620152014201320122011201020092008
-16.9%41.4%10.5%-15.0%3.4%-1.2%27.5%-17.0%28.0%90.5%-57.8%
-16.9%41.4%10.5%-15.0%3.4%-1.3%6.6%-14.6%34.5%119.0%-54.3%
-17.9%39.8%9.2%-16.0%2.1%-2.6%25.8%-18.1%26.3%88.1%-58.4%

Portfolio (as of September 30, 2019)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks99.0%
Cash1.0%
Strategy Characteristics
StrategyBenchmark
No. of holdings 140 1201
Weighted avg. market cap (US $MM)$61,887$51,469
NTM price/earnings9.311.8
Price/book value1.31.6
Dividend yield (%)3.72.9
NTM EPS revision (wtd. avg)0.6-0.1
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
China Construction Bank Corp.China1.9%
Tencent Holdings Ltd.China1.8%
Investimentos ItauBrazil1.6%
Samsung Electronics Co., Ltd.South Korea1.5%
JBS SABrazil1.4%
Gazprom PJSCRussia1.3%
LukoilRussia1.2%
SberbankRussia1.1%
Ping An Insurance (Group) Co. of China Ltd.China1.1%
Anhui Conch Cement Co., Ltd.China1.0%

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.

*Active defined as Portfolio weight minus MSCI EM Index weight. Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Financials24.1%24.7%
Information Technology18.1%15.1%
Communication Services11.8%11.6%
Consumer Discretionary11.4%13.1%
Energy9.2%7.7%
Consumer Staples6.7%6.9%
Materials5.4%7.3%
Industrials4.8%5.4%
Real Estate2.4%2.9%
Equity Funds2.2%0.0%
Health Care2.0%2.6%
Utilities1.0%2.8%
TOP 10 COUNTRIES
Country Strategy Benchmark
China34.9%31.9%
South Korea14.1%12.2%
Taiwan11.6%11.5%
India9.4%8.9%
Brazil9.1%7.6%
Russia7.2%4.0%
Thailand3.1%2.9%
Mexico2.1%2.5%
South Africa1.6%4.7%
Indonesia1.1%2.1%
Regional Allocation
  • Emerging Asia 74.7%
  • Emerging Latin America 12.2%
  • Emerging Europe, Middle East, Africa 12.1%

Commentary (As of September 30, 2019)

Highlights

  • While slowing growth and US-China trade tensions weighed on emerging market (“EM”) equities in July and August, the asset class rebounded in September.
  • While challenges remain, the macroeconomic backdrop for EM assets is improving. In addition to supportive monetary policies, fiscal stimulus is increasing in select EM countries.
  • Compared to developed markets, September’s value rally in EM was more modest. In many developed markets, inverted yield curves and negative interest rates have become the norm and any hint of normalizing monetary policy can lead to sharp value rallies. In contrast, EM central banks are pursuing relatively orthodox monetary policies and EM yield curves are still positively sloped.

Portfolio attribution

The Portfolio outperformed the Index in September 2019. We use both bottom-up and top-down factor categories to seek to forecast alpha for the stocks in the Portfolio's investable universe. Despite rebounding in September, our value factor was the weakest bottom-up indicator during the quarter and the year-to-date (“YTD”) period. While positive for the quarter and YTD periods, our earnings growth and price momentum factors were both negative indicators in September. Of our top-down factors, country and sector factors were positive indicators during the month. The macroeconomic and currency factors were negative in September.We believe our portfolios are well-positioned to benefit from a return to favor of value and cyclicality. If economically sensitive stocks outperform, we intend to use that opportunity to lower portfolio expected volatility with bargains from less cyclical sectors.

Investment outlook

Despite rebounding in September, EM value stocks have underperformed YTD. Compared to developed markets, September’s value rally in EM was more modest. In many developed markets, inverted yield curves and negative interest rates have become the norm and any hint of normalizing monetary policy can lead to sharp value rallies. In contrast, EM central banks are pursuing relatively orthodox monetary policies and EM yield curves are still positively sloped. EM value stocks trade at significant discounts to EM growth stocks while offering attractive dividend yields. We continue to emphasize value factors in our investment process, which should benefit the portfolio if EM value stocks rebound, which we believe they ultimately will.

We are also overweight EM small cap stocks within the Portfolio. This has been a headwind for performance as the MSCI Emerging Markets Small Cap Index has lagged the MSCI Emerging Markets Large Cap Index each year since 2016. In addition to our small cap overweight, our contextual weighting approach has contributed to underperformance YTD. When calculating a stock’s expected alpha, we first classify it as value, growth, or momentum and then assign weights that we believe are appropriate for that classification. Despite recent underperformance, we remain confident in this methodology, which we believe has benefitted the strategy compared to an equal-weighted approach since the strategy's inception in 2007.

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.