Seeking diversified exposure to international small cap companies
The international small cap strategy invests primarily in common stocks of companies with smaller market capitalizations located in developed and emerging markets outside the US. The portfolio normally invests at least 80% of its total assets in equity securities of companies with smaller market capitalizations. Smaller market capitalization companies are companies with market capitalizations that do not exceed the highest market capitalization of a company within the portfolio’s benchmark, the MSCI ACWI ex USA Small Cap Index (Gross), at the time of purchase. Some of these companies, although small by US standards, might be large companies in their local markets. The portfolio may continue to hold securities of a company that appreciate above the smaller market capitalization threshold and thus may from time to time hold less than 80% of its total assets in equity securities of companies with smaller market capitalizations. The portfolio may invest in a wide range of industries.
- Benchmark
- MSCI AC World ex USA Small Cap
- Inception
- November 30, 2014
Portfolio managers
Joe Gubler, CFA
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
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
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
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
Account returns for the Causeway International Small Cap Composite (“International Small Cap Composite”) are calculated daily. Monthly account returns are calculated by geometrically linking the daily returns. The return of the International Small 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)
Asset Allocation
| Strategy | |
|---|---|
| Stocks | 97.9% |
| Cash | 2.1% |
Strategy Characteristics
| Strategy | Benchmark | |
|---|---|---|
| No. of holdings | 156 | 4391 |
| Weighted avg. market cap (US $MM) | $2,478 | $1,961 |
| FY2 price/earnings | 7.1 | 12.0 |
| Price/book value | 0.9 | 1.4 |
| Dividend yield (%) | 4.8 | 2.9 |
TOP 10 HOLDINGS
| Security | Country | Active weight* |
|---|---|---|
| Power Finance Corp. Ltd. | India | 2.2% |
| Centrica | United Kingdom | 2.1% |
| Mitsubishi Motors Corp. | Japan | 1.9% |
| Sojitz Corp. | Japan | 1.9% |
| Bper Banca | Italy | 1.9% |
| KPIT Technologies Ltd. | India | 1.8% |
| Hello Group | China | 1.7% |
| Banco BPM SpA | Italy | 1.6% |
| Electric Power Development Co., Ltd. | Japan | 1.6% |
| National Aluminium Co. Ltd. | India | 1.6% |
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.
*Active defined as Portfolio weight minus MSCI ACWI ex USA Small Cap Index weight. Holdings are subject to change.
SECTOR WEIGHTS
| Sector | Strategy | Benchmark |
|---|---|---|
| Industrials | 19.4% | 20.7% |
| Financials | 15.4% | 11.0% |
| Consumer Discretionary | 14.0% | 11.9% |
| Materials | 11.7% | 11.9% |
| Information Technology | 10.3% | 11.7% |
| Utilities | 6.9% | 3.2% |
| Consumer Staples | 4.7% | 6.0% |
| Real Estate | 4.3% | 8.9% |
| Communication Services | 4.0% | 3.9% |
| Energy | 2.7% | 4.0% |
| Health Care | 2.7% | 6.9% |
| Equity Funds | 1.7% | 0.0% |
TOP 10 COUNTRIES
| Country | Strategy | Benchmark |
|---|---|---|
| Japan | 23.7% | 20.6% |
| United Kingdom | 9.2% | 9.8% |
| India | 6.7% | 6.9% |
| Italy | 6.6% | 2.3% |
| South Korea | 6.5% | 4.4% |
| Taiwan | 6.2% | 5.9% |
| Canada | 5.9% | 7.2% |
| Australia | 5.2% | 6.3% |
| Sweden | 3.1% | 3.5% |
| Turkey | 3.0% | 0.5% |
Regional Allocation
- Pacific 30.9%
- Europe – other 29.0%
- Emerging Asia 24.9%
- North America 5.9%
- Emerging Europe, Middle East, Africa 4.3%
- Multi Region All Country 1.7%
- Emerging Latin America 1.1%
Commentary (As of July 31, 2023)
Highlights
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. In July, the strategy’s value factors produced positive returns, and value remains the best-performing factor in 2023 and over the last twelve months. Our earnings growth factors posted negative returns last month, though returns remain positive over the last twelve months. The strategy’s technical factors generated slightly positive monthly returns in July, though returns are negative for the year-to-date period due to a particularly challenging January. Competitive Strength generated negative returns in July, though it is the second-best performing factor group year to date. Our macroeconomic factors were positive indicators in July due, in part, to correct calls on Turkey and China. However, our country aggregate factors were negative indicators as countries exhibiting superior metrics, Japan in particular, generally underperformed those with relatively weaker characteristics. All factor groups remain positive from inception of the strategy (10/20/14) to the end of July.
Economic outlook
The Federal Reserve’s rate-hiking cycle may be ending, but the lagged effect of sharp rate rises, inverted yield curves, and negative money supply growth should weigh on the US economy in 2024. Monetary tightening may be felt more deeply in Europe, given its greater credit demand sensitivity to variable interest rates (including through mortgages). Higher borrowing costs for European governments and corporations create spending headwinds for the region's economic objectives. Recession looms in the UK, where stubborn inflation has prompted unrelenting rate hikes. The Bank of Japan modestly relaxed its yield curve control, allowing yields to rise to 1% (from a prior ceiling of 0.5%), but appears committed to ultra-loose monetary policy for the near term. In China, policy makers announced measures to boost production of consumer goods and showed support for the nation’s ailing property market.
Economic data from China suggests the surge of consumer spending that led the economy’s Covid reopening has subsided. Chinese industrial activity also has slowed: the June reading of China’s official manufacturing purchasing managers’ index fell to 49, indicating contraction. The People’s Bank of China cut policy interest rates in June and the government currently appears likely to deploy targeted fiscal stimulus, but real gross domestic product growth in China may slow to 3% or less in 2024.
Investment outlook
We believe that international small caps, and international small cap value stocks in particular, still have some “catching up” to do with larger cap and growth stocks from a valuation perspective. On a forward price to earnings basis, international small caps have traded at a median 1.3x multiple premium to large caps over the last 20 years. As of the end of last month, however, international small caps are still trading at a slight discount despite outperforming in July. During similar periods historically, small caps have gone on to outperform over the following twelve months. Within our international small cap alpha model, value factors receive the largest weight on average. The MSCI ACWI ex US Small Cap Growth Index traded at a 17.6x forward P/E multiple compared to 10.2x for the MSCI ACWI ex US Small Cap Value Index as of 7/31/2023, a 73% premium. Even if the U.S. Fed is near the end of its interest rate hikes, interest rates should remain elevated for some time. A higher cost of capital should translate into a continued preference for value stocks.
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.