Seeking value primarily in the non-US developed markets

The International Value Select portfolio is constructed from an equity universe composed of companies with market capitalizations typically greater than $5 billion located in non-US developed and emerging market countries. The strategy uses our international value equity strategy with two distinctions: the select portfolio has greater liquidity (by way of investing in larger capitalization companies) and fewer holdings. We believe that concentrating the holdings can compensate for the loss of small/mid cap exposure. The investment process comprises three stages: quantitative screening and initial analysis, fundamental research, and portfolio construction.

Benchmark
MSCI EAFE
Inception
March 31, 2005

Strategy overview

The portfolio managers discuss our International Value Select strategy.

Portfolio managers

Chief Executive Officer
Fundamental Portfolio Manager
President
Head of Fundamental Research
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager
Fundamental Portfolio Manager

Performance

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -5.1%5.0%-10.1%4.9%0.9%8.0%5.6%
Strategy (net) -5.1%4.9%-10.4%4.5%0.5%7.6%5.2%
MSCI EAFE -1.9%8.0%-5.3%6.3%1.8%6.7%4.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -5.1%5.0%-10.1%4.9%0.9%8.0%5.6%
Strategy (net) -5.1%4.9%-10.4%4.5%0.5%7.6%5.2%
MSCI EAFE -1.9%8.0%-5.3%6.3%1.8%6.7%4.7%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 10.6%10.6%-4.9%8.0%2.5%11.0%6.1%
Strategy (net) 10.5%10.5%-5.2%7.6%2.1%10.6%5.6%
MSCI EAFE 10.1%10.1%-3.2%7.8%2.8%9.5%4.9%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 10.6%10.6%-4.9%8.0%2.5%11.0%6.1%
Strategy (net) 10.5%10.5%-5.2%7.6%2.1%10.6%5.6%
MSCI EAFE 10.1%10.1%-3.2%7.8%2.8%9.5%4.9%
Fund 2018201720162015201420132012201120102009
Strategy (gross) -17.5%29.7%1.6%-1.3%-4.3%27.2%24.7%-9.5%13.5%34.6%
Strategy (net) -17.8%29.2%1.3%-1.7%-4.7%26.8%24.3%-9.9%13.0%34.0%
MSCI EAFE -14.3%22.1%5.7%-5.2%-4.9%23.6%18.4%-11.6%3.8%35.1%
Strategy (gross)
Strategy (net)
MSCI EAFE
2018201720162015201420132012201120102009
-17.5%29.7%1.6%-1.3%-4.3%27.2%24.7%-9.5%13.5%34.6%
-17.8%29.2%1.3%-1.7%-4.7%26.8%24.3%-9.9%13.0%34.0%
-14.3%22.1%5.7%-5.2%-4.9%23.6%18.4%-11.6%3.8%35.1%

Portfolio (as of May 31, 2019)

Benchmark: MSCI EAFE
Asset Allocation
Strategy
Stocks 98.6%
Cash 1.4%
Strategy Characteristics
Strategy Benchmark
No. of holdings 54 924
Weighted avg. market cap (US $MM) $54,980 $49,969
FY2 price/earnings 9.8 12.3
Price/book value 1.2 1.5
Dividend yield (%) 4.1 3.6
Net assets $0 -
TOP 10 HOLDINGS
Security Country Percent
Volkswagen AG Germany 4.7%
Takeda Pharmaceutical Co., Ltd. Japan 3.9%
Linde Plc Germany 3.7%
UniCredit S.p.A. Italy 3.1%
Prudential Plc United Kingdom 3.0%
KDDI Corp. Japan 3.0%
ABB Ltd. Switzerland 3.0%
British American Tobacco plc United Kingdom 3.0%
BASF SE Germany 2.9%
China Mobile Ltd. China 2.7%

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. The FY2 P/E ratio is a forward P/E ratio using a next-twenty-four months EPS estimate in the denominator.

Holdings are subject to change.

SECTOR WEIGHTS
Sector Strategy Benchmark
Financials 21.2% 19.0%
Industrials 15.2% 14.7%
Communication Services 11.5% 5.6%
Health Care 10.9% 11.0%
Materials 9.9% 7.2%
Energy 9.6% 5.6%
Consumer Discretionary 7.9% 10.9%
Information Technology 5.8% 6.6%
Consumer Staples 4.4% 12.0%
Utilities 2.1% 3.7%
Real Estate 0.0% 3.7%
TOP 10 COUNTRIES
Country Strategy Benchmark
United Kingdom 31.6% 17.1%
Germany 14.4% 8.6%
Japan 13.9% 24.0%
Switzerland 8.5% 8.9%
Canada 6.7% 0.0%
China 6.0% 0.0%
France 4.5% 11.3%
South Korea 4.4% 0.0%
Netherlands 3.6% 3.6%
Italy 3.6% 2.4%
Regional Allocation
  • Europe – other 68.0%
  • Pacific 19.2%
  • North America 6.1%
  • Emerging Asia 5.5%
  • Emerging Europe, Middle East, Africa 0.3%

Commentary (As of May 31, 2019)

Highlights

  • Equity markets declined during the month as trade negotiations between the US and China deteriorated and import tariff rates increased. Stocks in industries sensitive to economic growth (cyclicals) suffered greatly during the month versus those in defensive industries.

Portfolio attribution

The Portfolio underperformed the Index during the month, due primarily to stock selection. Portfolio holdings in the media & entertainment, banks, energy, food beverage & tobacco, and insurance industry groups detracted from relative performance. Holdings in the automobiles & components and consumer durables & apparel industry groups, as well as an overweight position in the telecommunication services industry group and an underweight position in the semiconductors & semi equipment and diversified financials industry groups, offset some of the underperformance. The largest detractor was internet services provider, Baidu - ADR (China). Additional notable detractors included banking & financial services company, UniCredit S.p.A. (Italy), oil & natural gas producer, Encana (Canada), diversified chemicals manufacturer, BASF SE (Germany), and life insurer, Prudential Plc (United Kingdom). The top contributor to return was telecommunication services provider, KDDI Corp. (Japan). Other notable contributors included pharmaceutical & consumer healthcare products producer, Novartis AG (Switzerland), major passenger railway operator, East Japan Railway Co. (Japan), property & casualty insurer, Sompo Holdings, Inc. (Japan), and print & publishing company, RELX NV (United Kingdom).

Investment outlook

The anticipated “quality and safety” associated with economically defensive stocks attracted even more buying in May, stretching the valuation premium of defensive stocks compared to cyclical stocks to near historic highs. We believe the undervaluation in many of these cyclical industries such as US and European banks, global oil and gas, global industrials, consumer discretionary, and materials seems extreme, as our analysis indicates the valuations already discount recessionary economic conditions. In May, in particular, trade tensions have amplified risk aversion. And trade relief should do just the opposite, which would likely drive up bond yields and attract investors back to undervalued stocks. However, our price targets do not depend on economic recovery. To the degree managements of our portfolio companies succeed in making significant operational improvements, their equity valuations should benefit and become less macroeconomic dependent. The value style does not rely on an economic environment; it tends to outperform growth when interest rates rise. Although we would welcome a value tailwind, we aim to build a portfolio that seeks to outperform even if investors crowd into long duration, growth equities. We have a preference for companies able to reward shareholder patience with dividends and share buybacks.

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.