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 in USD
Inception
March 29, 2007
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    Strategy overview

    The portfolio managers discuss our Emerging Markets Equity strategy.

    Portfolio managers

    Joe Gubler, CFA

    Quantitative Portfolio Manager

    Mr. Gubler is a quantitative portfolio manager at Causeway. He joined the firm in 2005 and has been a portfolio manager since January 2014. In addition to managing quantitative portfolios and conducting alpha research, Mr. Gubler also leads the efforts to maintain and enhance Causeway’s proprietary risk models. He is also a member of the operating committee.

    From 1999 to 2005, Mr. Gubler worked as a software engineer, with employers ranging from startups to established businesses such as Monster.com. From 1998 to 1999, Mr. Gubler worked as a staff scientist for News Corporation, conducting studies on the RF propagation of broadcast signals. While studying astrophysics at UC San Diego, Mr. Gubler worked as a graduate research assistant in the Jet Propulsion Laboratory's stellar interferometry group.

    Mr. Gubler earned a BS, cum laude, in physics from UC Irvine, an MS in physics from UC San Diego, and an MBA from the UCLA Anderson Graduate School of Management. Mr. Gubler is a CFA charterholder.

    Arjun Jayaraman, PhD, CFA

    Head of Quantitative Research
    Quantitative Portfolio Manager

    Dr. Jayaraman is a director, quantitative portfolio manager and head of the quantitative research at Causeway and has been with the firm since January 2006. Dr. Jayaraman’s responsibilities and research include stock selection, asset allocation, risk model development, and portfolio construction.

    From 2004 to 2005, Dr. Jayaraman was a portfolio manager at PanAgora Asset Management. He was the lead portfolio manager on the non-U.S. large cap core equity portfolios and was the co-portfolio manager on the global large cap core equity portfolios. From 2000 to 2004, Dr. Jayaraman managed the same portfolios at Putnam Investments, in addition to working closely with the teams that managed Putnam's traditional non-U.S. strategies. From 1998 to 2000, Dr. Jayaraman worked as a quantitative analyst at Harborview Trading Associates.

    Dr. Jayaraman earned a PhD from New York University at the Stern School of Business and a BA in economics from Columbia University. Dr. Jayaraman is a CFA charterholder.

    MacDuff Kuhnert, CFA

    Quantitative Portfolio Manager

    Mr. Kuhnert is a director and a quantitative portfolio manager at Causeway and has been with the firm since its inception in June 2001. Mr. Kuhnert’s responsibilities and research include stock selection, asset allocation, risk model development, and portfolio construction.
     
    From 1996 to 2001, Mr. Kuhnert worked for the international team of the Hotchkis & Wiley division of Merrill Lynch Investment Managers (HW-MLIM) as a quantitative research associate. During his tenure at HW-MLIM, Mr. Kuhnert created and developed advanced quantitative models used in the international value investment process. He also helped develop the team’s first equity risk model.

    Mr. Kuhnert earned a BA in chemistry from Dartmouth College. He is a CFA charterholder, a member of the CFA Society of Los Angeles, and a member of the Chicago Quantitative Alliance.

    Ryan Myers

    Quantitative Portfolio Manager

    Mr. Myers is a quantitative portfolio manager at Causeway. He joined the firm in June 2013 and has been a portfolio manager since January 2021. His responsibilities include alpha research, stock selection, and portfolio construction.
     
    From 2010 to 2012, Mr. Myers served as chief investment officer of Iron Castle Asset Management, an investment partnership focused on mid-cap U.S. equities. From 2007 to 2008, Mr. Myers worked as an analyst at Canyon Partners, where he covered the cable, media, telecom and satellite sectors. From 2005 to 2007, Mr. Myers was an associate for Oaktree Capital Management in the distressed opportunities group. Mr. Myers began his professional career in 2003 as an investment banking analyst at Goldman Sachs in the technology, media and telecom group.

    Mr. Myers earned a BA, magna cum laude, in economics from Harvard University, where he was elected to Phi Beta Kappa. He earned an MBA from the Stanford Graduate School of Business, where he was an Arjay Miller Scholar. Mr. Myers currently serves on the Board of Trustees of the Yosemite Conservancy, an organization dedicated to supporting projects and programs that preserve Yosemite National Park and enrich the visitor experience.

    Performance

    QTD YTD 1 year3 years5 years10 years Since inception
    Strategy (gross) 5.8%16.8%12.1%3.1%2.4%4.4%4.6%
    Strategy (net) 5.7%16.2%11.2%2.2%1.5%3.4%3.6%
    MSCI Emerging Markets 6.3%11.7%8.8%1.9%2.1%3.9%3.3%
    QTD YTD 1 year3 years5 years10 years Since inception
    Strategy (gross) 5.8%16.8%12.1%3.1%2.4%4.4%4.6%
    Strategy (net) 5.7%16.2%11.2%2.2%1.5%3.4%3.6%
    MSCI Emerging Markets 6.3%11.7%8.8%1.9%2.1%3.9%3.3%
    QTD YTD 1 year3 years5 years10 years Since inception
    Strategy (gross) 5.0%10.4%7.0%4.2%1.7%4.0%4.2%
    Strategy (net) 4.8%9.9%6.1%3.3%0.8%3.0%3.2%
    MSCI Emerging Markets 1.0%5.1%2.2%2.7%1.3%3.3%2.9%
    QTD YTD 1 year3 years5 years10 years Since inception
    Strategy (gross) 5.0%10.4%7.0%4.2%1.7%4.0%4.2%
    Strategy (net) 4.8%9.9%6.1%3.3%0.8%3.0%3.2%
    MSCI Emerging Markets 1.0%5.1%2.2%2.7%1.3%3.3%2.9%
    Fund 20242023202220212020201920182017201620152014201320122011201020092008
    Strategy (gross) N/AN/A-21.9%-0.3%18.1%18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
    Strategy (net) N/AN/A-22.6%-1.2%17.1%17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
    MSCI Emerging Markets N/AN/A-19.7%-2.2%18.7%18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%
    Strategy (gross)
    Strategy (net)
    MSCI Emerging Markets
    20242023202220212020201920182017201620152014201320122011201020092008
    N/AN/A-21.9%-0.3%18.1%18.1%-16.8%41.1%10.5%-15.1%3.4%-1.3%27.5%-17.0%28.0%90.5%-57.8%
    N/AN/A-22.6%-1.2%17.1%17.1%-17.5%39.8%9.4%-16.0%2.4%-2.3%26.2%-17.9%26.7%88.7%-58.2%
    N/AN/A-19.7%-2.2%18.7%18.9%-14.2%37.8%11.6%-14.6%-1.8%-2.3%18.6%-18.2%19.2%79.0%-53.2%

    Account returns for the Causeway Emerging Markets Composite (“Emerging Markets Composite”) are calculated daily. Monthly account returns are calculated by geometrically linking the daily returns. The return of the Emerging Markets Composite is calculated monthly by weighting monthly account returns by the beginning market values. Valuations and returns are computed and stated in US dollars. Returns include the reinvestment of interest, dividends and any capital gains. Returns are calculated gross of withholding taxes on dividends, interest income, and capital gains. Past performance is no guarantee of future performance. Gross-of-fees returns are presented before management, performance and custody fees but after trading expenses. Net-of-fees returns are presented after the deduction of actual management fees, performance-based fees, and all trading expenses, but before custody fees. Causeway’s basic management fee schedules are described in its firm brochure pursuant to Part 2 of Form ADV. A complete list and description of firm composites is available upon request. This information supplements the composite presentation at Composite Performance. Investing involves risk including loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Diversification does not prevent all investment losses.

    Portfolio (as of July 31, 2023)

    Benchmark: MSCI Emerging Markets
    Asset Allocation
    Strategy
    Stocks 97.6%
    Cash 2.4%
    Strategy Characteristics
    Strategy Benchmark
    No. of holdings 191 1422
    Weighted avg. market cap (US $MM) $62,087 $72,514
    NTM price/earnings 7.4 12.5
    Price/book value 1.1 1.7
    Dividend yield (%) 4.4 3.0
    NTM EPS revision (wtd. avg) 5.9 -5.5
    TOP 10 HOLDINGS
    Security Country Active weight*
    Kia Corp. South Korea 1.8%
    Banco do Brasil SA Brazil 1.8%
    China Construction Bank Corp. China 1.6%
    PetroChina Co., Ltd. China 1.6%
    Vipshop Holdings China 1.2%
    Agricultural Bank Of China China 1.1%
    Gerdau SA Brazil 1.1%
    ITC Ltd. India 1.1%
    PDD Holdings China 1.1%
    Novatek Microelectronics Corp. Taiwan 1.1%

    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
    Information Technology 22.0% 20.3%
    Financials 16.6% 21.6%
    Industrials 12.7% 6.4%
    Consumer Discretionary 12.3% 14.2%
    Communication Services 9.3% 9.9%
    Energy 7.8% 5.1%
    Consumer Staples 6.8% 6.2%
    Health Care 3.5% 3.8%
    Materials 3.0% 8.3%
    Utilities 2.8% 2.6%
    Real Estate 0.7% 1.8%
    TOP 10 COUNTRIES
    Country Strategy Benchmark
    China 33.5% 30.7%
    Taiwan 17.9% 14.8%
    South Korea 15.8% 12.4%
    India 13.8% 14.2%
    Brazil 5.1% 5.5%
    Mexico 2.3% 2.8%
    Indonesia 1.9% 1.9%
    Saudi Arabia 1.7% 4.1%
    Turkey 1.6% 0.6%
    Thailand 1.2% 2.0%
    Regional Allocation
    • Emerging Asia 84.1%
    • Emerging Latin America 8.1%
    • Emerging Europe, Middle East, Africa 5.4%

    Commentary (As of July 31, 2023)

    Highlights

    • Led by the emerging Europe, Middle East, and Africa (“EMEA”) region group, emerging market equities posted positive returns in July.
    • Despite a challenging macroeconomic environment, we remain overweight Chinese stocks in the portfolio due in part to, in our view, compelling valuations. The Portfolio is also overweight Taiwanese stocks, which we believe offer attractive valuations and top-down characteristics. The Portfolio’s investments in Taiwanese information technology stocks have benefited from the continued optimism around generative artificial intelligence.
    • Smaller cap EM companies have generally outperformed larger cap companies year-to-date and we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks was near the high end of the historical range at month-end.
    Download Flash Report

    Portfolio attribution

    The Portfolio underperformed the Index in July 2023. 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 competitive strength, valuation, and technical (price momentum) factors were negative indicators during the month. Our bottom-up growth factor was a positive indicator. Of our top-down factors, macroeconomic, country, sector, and currency were positive indicators in July.

    Economic outlook

    After pausing in June, the US Federal Reserve (“Fed”) continued its interest rate hiking trajectory in July, bringing the federal funds target rate to its highest level since 2007. While core and headline inflation in the US continue to moderate, they remain elevated relative to the Fed’s target. The Fed appears to be nearing the end of its rate hiking cycle, but further rate increases are possible. The US labor market remains strong as the private sector added nearly 500,000 jobs in June, according to ADP. In China, economic data continue to suggest the country's emergence from the zero Covid policy remains lackluster. Inflation has been subdued, indicating a lack of demand, and China’s Manufacturing Purchasing Manager’s Index remains in contractionary territory. On the positive side, the manageable inflation data imply that Chinese authorities have ample room to stimulate growth in the economy. Despite a challenging macroeconomic environment, we remain overweight Chinese stocks in the portfolio due in part to, in our view, compelling valuations. The Portfolio is also overweight Taiwanese stocks, which we believe offer attractive valuations and top-down characteristics. The Portfolio’s investments in Taiwanese information technology stocks have benefited from the continued optimism around generative artificial intelligence. The Portfolio has exposure to companies from across the artificial intelligence supply chain, including chip foundry, chip design, and hardware and components manufacturing.

    Investment outlook

    Earnings growth upgrades for EM equities continue to lag those in ex-US developed markets. The EM countries with the weakest net upgrades include Taiwan, Saudi Arabia, and Brazil. Export-oriented Taiwan reflects slowing global growth while the outlook for Saudi Arabian stocks has been impacted by the fall in energy and fertilizer prices. On the positive side are Greece, Indonesia, and Turkey. Within EM, smaller cap companies have generally outperformed larger cap companies year-to-date and we continue to identify, in our view, attractive investment opportunities in small cap companies. Historically, our investment process has uncovered EM small cap stocks with alpha potential. The Portfolio’s allocation to small cap stocks was near the high end of the historical range at month-end.

    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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