Fund Spy

A Proven Team Runs This Undiscovered World Stock Fund

Connor Young
The following is our latest Fund Analyst Report for Causeway Global Value (CGVIX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Causeway Global Value boasts a well-resourced team and disciplined approach. Despite above-average fees, the strategy earns a Morningstar Analyst Rating of Silver.

Sarah Ketterer and Harry Hartford have led this fund since its 2008 inception, and they’ve executed the approach through a separate account--Causeway Global Value Equity--since 2001. The duo is backed by six additional comanagers, each of whom have been with the team for more than a decade, and a deep bench of analysts.

The team seeks firms facing operational, but not financial distress, and it combines qualitative and quantitative analyses to identify the most attractive opportunities. Fundamental analysts assign each prospective holding a two-year price target, while the quantitative team weighs expected returns against potential volatility. Management then buys the names with superior long-term, risk-adjusted prospects. Nonetheless, this is an aggressive approach.

A contrarian stance has contributed to the strategy's long-term success, but it has made for an uneven ride. Indeed, the strategy finished in the top or bottom quartile of the world large stock Morningstar Category in seven of nine full calendar years since its inception. It had a bottom-quartile showing in 2017, and Advance Auto Parts (AAP)--which lost more than one third of its market value during the year--was the primary culprit. Yet, management has demonstrated an ability to endure short-term pain while its contrarian theses play out, and it stood pat as other investors fled. For the year to date through November, the strategy topped most rivals, and Advance Auto Parts was the largest contributor to results.

Over the long term, the team’s stock picks have proved right. Indeed, the strategy has beaten the MSCI ACWI and MSCI ACWI Value Indexes since its 2008 inception, despite headwinds from its value tilt and light stake in U.S. stocks. These solid results under adverse conditions speak to the skill of the management team. Fees could be lower, but the strategy remains an excellent choice for those who share the team's patience and ability to withstand above-average volatility.

Process Pillar: Positive| Connor Young 12/04/2018
This disciplined and well-managed approach merits a Positive Process rating.

Management seeks firms around the world that are facing operational, but not financial, distress. The team combines fundamental and quantitative analyses in executing this aggressive approach. After stock screens narrow the investment universe to stocks that may look cheap, the firm’s fundamental analysts--arranged in six sector/industry clusters--conduct in-depth research on prospective holdings.

Ultimately, the appropriate cluster team rigorously vets each prospective holding and assigns it a two-year price target. After the firm's quant team conducts a detailed risk analysis, it assigns each stock a risk-adjusted return ranking, which weighs the two-year price target versus its potential risks. The comanagers make final portfolio decisions, ideally holding the highest-rated stocks on a risk-adjusted basis. This ranking system also helps the team identify sell candidates; it trims or sells when a stock’s risk-adjusted ranking declines.

The strategy is slightly more concentrated than its Gold-rated sibling, Causeway International Value (CIVIX), holding around 50 stocks. To offset stock-specific risk, position sizes are capped at 5% of assets. The team also tactically hedges currency exposure when a country's risk characteristics look poor. Still, the high-conviction and contrarian portfolio tends to have elevated volatility.

Consistent with the value emphasis, the portfolio had lower price multiples such as price/equity and price/book than the MSCI ACWI Index as of September 2018, and it had a higher dividend yield.

The portfolio's 9% exposure to communication services was more than the index's 4% weighting. In addition, it had a large stake in pharmaceuticals. These tend to be relatively stable parts of the market; because the strategy keeps cash to a minimum, such investments help dampen volatility. Still, management had plenty of bold picks. For example, it increased the portfolio's position in UniCredit (UCG) as the stock tumbled 30% for the year to date through November. The Italian bank with a Morningstar Fair Value Uncertainty Rating of Very High was a top-five holding. On the flip side, the portfolio had a 4-percentage-point underweighting in consumer defensive stocks.

The team increased its U.K. exposure following the Brexit vote in June 2016. As of September 2018, the U.K. allocation stood at 19% of assets, compared with the index’s 5%. Management notes the majority of its U.K. holdings are large global companies such as British American Tobacco (BATS) and Prudential (PRU) , helping to offset country-specific risk. Also, the team has increased the portfolio’s exposure to China in recent years: It currently stands at 6% of assets, up from 0% at the end of 2011.

Performance Pillar: Positive | Connor Young 12/04/2018
The strategy has a respectable long-term record, earning a Positive Performance rating.

From the strategy’s April 2008 inception through November 2018, its 4.8% annualized gain topped the 4.6% and 3.5% respective gains of the MSCI ACWI Index and MSCI ACWI Value Index. It has also been consistent: In the 92 rolling three-year periods since inception, the strategy outperformed the MSCI ACWI and MSCI ACWI Value Indexes 67% and 72% of the time, respectively. The team's aggressive approach led to higher volatility than its bogies' (as measured by standard deviation), so risk-adjusted results were less impressive but still decent. Investors here should be comfortable with volatility.

The strategy has struggled in recent years. During the trailing five-year period, its 4.5% annualized gain lagged the 6.2% and 4.6% respective gains of the MSCI ACWI Index and MSCI ACWI Value Index, and it fell behind more than two thirds of world large-stock peers. The overweighting to--and poor stock selection in--the relatively poor performing U.K. market weighed on results. Its value bent and light stake in rallying U.S. stocks were also headwinds. The team is sticking to its knitting, so the strategy should rebound. For the year to date through November, it topped most rivals, owing to solid U.S. picks such as Advance Auto Parts and  Eli Lilly (LLY)(). It remains a steadfast long-term option.

People Pillar:Positive| Connor Young 12/04/2018
The strategy benefits from a deep and experienced management team, earning it a Positive People rating.

Lead managers Sarah Ketterer and Harry Hartford left Hotchkis & Wiley to establish Causeway in 2001. Comanagers James Doyle and Jonathan Eng, both of whom have worked with the duo since 1997, also joined Causeway at that time. Four additional comanagers--each of whom have been with the team for more than a decade--round out the management team.

The firm has steadily grown its investment team to 32 members. There are six sector/industry clusters; Ketterer and Hartford oversee the greater team, and the other six managers each lead a cluster. For example, Doyle heads the technology and telecom cluster, and Eng leads industrials and manufacturing. The firm’s nine fundamental senior research analysts are typically members of at least two clusters. The goal of this structure is to have multiple people covering the same companies, which helps increase collaboration and reduce key-person risk. Eight quantitative specialists and seven research analysts on two- to four-year contracts support the team.

The 100% employee-owned firm has lost only one portfolio manager in its history, Kevin Durkin, in 2016.

Manager ownership is fairly weak, with Ketterer the only one holding a position in the fund worth more than $1 million.

Parent Pillar:Positive | 03/20/2018
Causeway's strong investment culture merits a Positive Parent rating.

Sarah Ketterer and Harry Hartford left Hotchkis & Wiley to co-found Causeway in 2001. Current portfolio managers James Doyle and Jonathan Eng, both of whom worked with the co-founders going back to 1997, also joined Causeway at that time. The Los Angeles-based firm has since experienced robust growth: As of December 2017, it had 86 employees--30 of whom were investment professionals--and $60 billion in assets under management.

Causeway has two investment teams, fundamental and quantitative. While the fundamental team is responsible for 80% of the firm's assets, the two teams work in complementary fashion. For instance, the quant team provides a risk overlay on the fundamental strategies while the fundamental team provides a check on the quant models.

The firm has done an excellent job of retaining talent, losing just one portfolio manager in its history. The near-perfect retention record owes in good measure to the breadth of employee ownership. Indeed, all 11 portfolio managers own equity in the firm. Ketterer and Hartford have proactively spread the wealth, selling a sizable portion of their shares to employees since 2014.

Causeway has also been judicious with its product development. It has launched only one new strategy in the past five years, Causeway International Small Cap (CIISX) in October 2014.

Price Pillar:Negative | Connor Young 12/04/2018
This fund is expensive, so it earns a Negative Price rating.

More than 95% of this fund's assets are in the Institutional share class, which charges 1.05% and earns a Morningstar Fee Level of Above Average. For comparison, the median net expense ratio for the world-stock institutional peer group is 0.94%.

The remaining assets are in the no-load Investor share class, which charges 1.30% and also earns an Above Average fee level. This compares with the world-stock no-load peer group's 1.12% median expense ratio.

Connor Young does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.