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

QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -5.3%3.1%-11.5%9.7%1.9%7.8%4.4%
Strategy (net) -5.5%2.7%-12.3%8.7%0.9%6.7%3.4%
MSCI Emerging Markets -5.3%4.2%-8.3%10.3%2.2%5.4%3.0%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) -5.3%3.1%-11.5%9.7%1.9%7.8%4.4%
Strategy (net) -5.5%2.7%-12.3%8.7%0.9%6.7%3.4%
MSCI Emerging Markets -5.3%4.2%-8.3%10.3%2.2%5.4%3.0%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 8.9%8.9%-11.4%10.6%4.2%12.1%4.9%
Strategy (net) 8.7%8.7%-12.2%9.5%3.2%11.0%3.9%
MSCI Emerging Markets 10.0%10.0%-7.1%11.1%4.1%9.3%3.5%
QTD YTD 1 year3 years5 years10 years Since inception
Strategy (gross) 8.9%8.9%-11.4%10.6%4.2%12.1%4.9%
Strategy (net) 8.7%8.7%-12.2%9.5%3.2%11.0%3.9%
MSCI Emerging Markets 10.0%10.0%-7.1%11.1%4.1%9.3%3.5%
Fund 20182017201620152014201320122011201020092008
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 May 31, 2019)

Benchmark: MSCI Emerging Markets
Asset Allocation
Strategy
Stocks 97.8%
Cash 2.2%
Strategy Characteristics
Strategy Benchmark
No. of holdings 139 1197
Weighted avg. market cap (US $MM) $53,493 $46,668
NTM price/earnings 9.2 11.5
Price/book value 1.3 1.6
Dividend yield (%) 3.5 2.8
NTM EPS revision (wtd. avg) -2.4 -5.1
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Tencent Holdings Ltd. China 6.6%
China Construction Bank Corp. China 3.3%
Investimentos Itau Brazil 2.0%
Lukoil Russia 2.0%
Banco do Brasil SA Brazil 1.5%
Gazprom PJSC Russia 1.9%
Samsung Electronics Co., Ltd. South Korea 4.4%
Anhui Conch Cement Co., Ltd. China 1.3%
Ping An Insurance (Group) Co. of China Ltd. China 2.3%
JBS SA Brazil 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
Financials 25.4% 25.5%
Information Technology 14.9% 13.7%
Communication Services 13.1% 11.6%
Energy 10.4% 8.1%
Consumer Discretionary 8.4% 13.0%
Materials 7.0% 7.6%
Industrials 6.6% 5.4%
Consumer Staples 5.4% 6.7%
Health Care 2.3% 2.7%
Real Estate 2.0% 3.0%
Utilities 1.2% 2.7%
Equity Funds 1.1% 0.0%
TOP 10 COUNTRIES
Country Strategy Benchmark
China 33.2% 33.0%
South Korea 15.2% 13.0%
India 10.8% 9.2%
Brazil 9.2% 7.2%
Taiwan 8.9% 11.3%
Russia 5.6% 3.8%
Thailand 3.1% 2.3%
Mexico 2.1% 2.7%
South Africa 1.8% 5.9%
Indonesia 1.2% 2.2%
Regional Allocation
  • Emerging Asia 73.8%
  • Emerging Latin America 12.4%
  • Emerging Europe, Middle East, Africa 11.7%

Commentary (As of April 30, 2019)

Highlights

  • Buoyed by an increasingly dovish US Federal Reserve and optimism surrounding US-China trade negotiations, emerging markets equities posted positive returns in March.

Portfolio attribution

The Portfolio outperformed the Index in March 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. Our earnings growth factor was the top performing bottom-up category during the month, rebounding from a weak start to the year. Our value factor category was a neutral indicator during the month while our price momentum category was modestly negative. Our macroeconomic factor was the only top-down category in positive territory during the month. Our country, sector, and currency factors posted negative returns.

Investment outlook

After underperforming in 2018, our momentum factor has continued to lag this year. We acknowledge that the momentum factor’s performance can be volatile and the current environment may be particularly challenging for this approach. In the late stages of a market and economic cycle characterized by uncertain Fed policy, US-China trade tensions, and Brexit-related issues, trends may be fleeting and overwhelmed by investors’ desires to harvest short-term profits. This has presented a difficult environment for the momentum factor. We are researching momentum’s recent underperformance to determine whether this phenomenon is cyclical, structural, or attributable to natural volatility. However, we continue to believe that adding momentum to a value-based strategy helps minimize value traps and enhances the Portfolio's risk-adjusted return profile over the long term.

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.