Causeway: Three Roads to Global Gains

06/08/2015 9:00 am EST

Focus: GLOBAL

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Causeway has been a leading name in international equity investing for mutual fund investors for more than a decade, explains fund expert Mark Salzinger, editor of No-Load Fund Investor.

The firm launched its flagship Causeway International Value Fund (CIVVX) in 2001. Since then, its original investors would have tripled their money by now, despite a 42% loss in 2008 during the height of the global financial crisis.

On the fundamental side, Causeway is a large-cap value investor, though not a deep value stock picker that is willing to wait for as long as it takes for a company to recover.

Instead, the company’s fundamental investing team seeks out temporarily downtrodden companies that it expects to recover within two years.

To help winnow the field, Causeway employs screens to identify attractive foreign equity markets by comparing the dividend and earnings yields of countries with the bond yields of their local markets.

The second hurdle compares stocks within industries for value, based on the total market value (equity plus debt) as compared to a measure of cash flows, and then for the strength of their per-share earnings revisions.

International Value is almost entirely invested in stocks within developed markets. The team favors Europe, which recently made up more than 70% of assets in International Value.

In 2007, the firm launched Causeway Emerging Markets (CEMVX), which gained 6.6% annually in the five-year period ended April 30, 2015, beating the average annualized return of emerging market stock funds by more than four percentage points.

While Causeway’s fundamental investing team is heavily focused on the value style of investing, the quantitative team behind Emerging Markets is less centered on finding absolutely cheap stocks.

Their system incorporates three main bottom-up factors: valuation, earnings, and price momentum, favoring companies with profits that are growing at an accelerating pace.

The team currently favors emerging Asia over Latin America, in which it has considerably less than the benchmark; South Korea and Taiwan seem especially attractive on a top-down basis.

Investors who like the idea of owning both International Value and Emerging Markets don’t actually have to buy shares in each fund. Instead, they could buy Causeway International Opportunities (CIOVX), the assets of which are divided among the two strategies.

To decide how much to put in each, Causeway compares valuations, risk, and financial strength of emerging versus developed foreign markets and will put a maximum of 25% of the fund in emerging markets positions. Currently, emerging accounts for about 20% of assets.

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