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
MSCIAC World ex USA Small Cap
Inception
November 30, 2014

Strategy overview

The portfolio managers discuss our International Small Cap strategy.

Portfolio managers

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

Performance

QTD YTD 1 year3 years Since inception
Strategy (gross) -4.6%6.9%-13.8%6.7%5.9%
Strategy (net) -4.7%6.6%-14.5%5.7%4.9%
MSCI ACWI ex USA Small Cap -2.9%7.1%-12.0%5.6%4.8%
QTD YTD 1 year3 years Since inception
Strategy (gross) -4.6%6.9%-13.8%6.7%5.9%
Strategy (net) -4.7%6.6%-14.5%5.7%4.9%
MSCI ACWI ex USA Small Cap -2.9%7.1%-12.0%5.6%4.8%
QTD YTD 1 year3 years Since inception
Strategy (gross) 12.1%12.1%-12.2%8.7%7.3%
Strategy (net) 11.9%11.9%-12.9%7.6%6.2%
MSCI ACWI ex USA Small Cap 10.4%10.4%-9.1%7.4%5.7%
QTD YTD 1 year3 years Since inception
Strategy (gross) 12.1%12.1%-12.2%8.7%7.3%
Strategy (net) 11.9%11.9%-12.9%7.6%6.2%
MSCI ACWI ex USA Small Cap 10.4%10.4%-9.1%7.4%5.7%
Fund 2018201720162015
Strategy (gross) -20.1%36.4%4.6%6.1%
Strategy (net) -20.1%36.5%4.7%6.0%
MSCI ACWI ex USA Small Cap -21.1%34.7%3.3%4.7%
Strategy (gross)
Strategy (net)
MSCI ACWI ex USA Small Cap
2018201720162015
-20.1%36.4%4.6%6.1%
-20.1%36.5%4.7%6.0%
-21.1%34.7%3.3%4.7%

Portfolio (as of May 31, 2019)

Benchmark: MSCI ACWI ex USA Small Cap
Asset Allocation
Strategy
Stocks 97.6%
Cash 2.4%
Strategy Characteristics
Strategy Benchmark
No. of holdings 145 4210
Weighted avg. market cap (US $MM) $1,351 $1,575
FY2 price/earnings 8.0 12.3
Price/book value 1.1 1.4
Dividend yield (%) 4.6 2.8
TOP 10 ACTIVE HOLDINGS
Security Country Active weight*
Huaxin Cement Co., Ltd. China 2.2%
Radiant Opto-Electronics Corp. Taiwan 1.8%
EVRAZ Plc United Kingdom 1.8%
C&C Group Plc United Kingdom 1.8%
Adastria Co., Ltd. Japan 1.7%
Yuexiu Property Co., Ltd. China 1.7%
GungHo Online Entertainment, Inc. Japan 1.7%
HASEKO Corp. Japan 1.6%
Makalot Industrial Co., Ltd. Taiwan 1.6%
ASR Nederland NV Netherlands 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 14.4% 19.3%
Financials 12.9% 10.9%
Real Estate 12.0% 12.1%
Consumer Discretionary 12.0% 12.5%
Information Technology 10.2% 9.9%
Materials 8.7% 9.9%
Health Care 7.5% 7.4%
Consumer Staples 5.9% 6.4%
Communication Services 4.9% 4.9%
Energy 4.4% 3.4%
Equity Funds 3.2% 0.0%
Utilities 1.6% 3.4%
TOP 10 COUNTRIES
Country Strategy Benchmark
Japan 17.5% 22.1%
United Kingdom 12.9% 13.7%
Taiwan 9.1% 4.0%
Australia 6.9% 5.3%
Sweden 6.2% 3.9%
Norway 5.7% 1.6%
Canada 4.8% 6.7%
China 4.7% 2.6%
South Korea 4.6% 3.6%
India 2.9% 3.3%
Regional Allocation
  • Europe – other 37.8%
  • Pacific 24.6%
  • Emerging Asia 22.1%
  • Emerging Latin America 5.4%
  • North America 4.7%
  • Emerging Europe, Middle East, Africa 3.0%

Commentary (As of April 30, 2019)

Highlights

  • Increasingly dovish commentary from the US Federal Reserve and European Central Bank, along with progress on US-China trade negotiations, supported equity markets in March.

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 quality – and two top-down factor categories assessing macroeconomic and country aggregate characteristics.

The largest contributor to performance was apparel company, Adastria Co., Ltd. (Japan). Additional top contributors included lithium battery producer, Simplo Technology Co., Ltd. (Taiwan), steel & iron distribution company, EVRAZ plc (United Kingdom), apparel manufacturer, Makalot IndustrialCo, Ltd. (Taiwan), and property developer, China Aoyuan Group Ltd. (China). The largest detractor to performance was coal company, New Hope Corp. Ltd. (Australia). Additional top detractors included financial services company, Just Group plc (United Kingdom), power generation & construction company, Tekfen Holding AS (Turkey), insurance company, ASR Nederland NV (Netherlands), and transportation company, Nobina AB (Sweden).

Investment outlook

We continue to observe a number of intriguing features in the smaller cap landscape. We believe the intersection of international equities and smaller cap companies creates a recipe for inefficiency. Additionally, international smaller cap stocks are an underappreciated asset class that we believe can offer meaningful diversification benefits with the potential to reduce portfolio volatility. Finally, smaller cap stocks are typically less exposed to the potential risk of rising barriers to trade, given their home country revenue exposure. In spite of the potential benefits, we believe many investors may be underallocated to this asset class despite its meaningful growth and diversification prospects. Causeway’s international small cap strategy combines the flexibility and breadth of quantitative analysis with our global industry knowledge, which we believe will benefit long-term investors.

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.