Quick Take: The Causeway International Value/Inv (CIVVX) is relatively young, but its managers are not new to foreign investing.
The three-member team is part of a group of people who launched Causeway Capital Management LLC, International Value’s investment adviser, and the fund three years ago. Before that, they had been picking international stocks for the Hotchkis & Wiley division of Merrill Lynch Investment Managers since the early 1990s. These days, Causeway oversees more than $8 billion in assets.
Portfolio manager James Doyle and his colleagues look for undervalued shares of financially sound mid-sized and large companies located almost exclusively in developed countries.
The $760-million fund (the institutional version of the fund had $987.8 million in assets at the end of September), which started operations in October 2001, was up 10.3% this year through September, versus a gain of 3.3% for the average international equity fund, according to data from Standard & Poor’s. Causeway International returned 45.5% last year, versus 37.4% for its peers.
The Full Interview:
The team overseeing the Causeway International Value Fund looks for stocks that are cheap based on a variety of measurements, like share price relative to a company’s earnings or cash flow.
“We aren’t married to any single way of valuing a company,” says James Doyle, one of the portfolio’s three managers. “We use whatever approach we feel is the most economically justifiable.”
Multiples aside, Doyle and his colleagues, Harry Hartford and Sarah Ketterer, look for companies with healthy balance sheets, little debt, and good prospects for fattening their bottom lines. They will buy companies that aren’t profitable, however, if they think that condition is only temporary.
“We like companies to grow their earnings as much as anyone else,” Doyle says. “We just don’t want to be caught in the position of paying a whole lot for growth that more often than not doesn’t end up coming through.”
A company needn’t pay dividends or buy back its shares to gain entry to the portfolio, but the managers like those that do, because they’ve found that these types of “cash returns” to shareholders can be a “very significant part” of total returns in the international investing arena, Doyle says.
The 60-80 stocks that go into the fund have market caps of $1 billion or more. Lately, the managers been leaning more towards big companies than they did five or six years ago, because this group’s shares have gotten beaten down to the point where they appear attractive, Doyle says. Although they will invest in Korea, the managers generally avoid developing markets because of economic and political risks there.
Rather than first deciding which countries they want representation in, and then picking stocks there, the managers base their buying and selling decisions on the merits of individual companies.
A typical investment for the fund, Doyle says, is Unilever, the Anglo-Dutch consumer products supplier. (The fund owns shares of the British and the Dutch companies.)
Although Unilever has aggressively bought companies to increase earnings in the past, the fund managers expect it to tone down its buying sprees and instead pay dividends and repurchase its stock, Doyle says. The company looks good, too, because its margins, while pressured somewhat this year, remain strong, as do its finances, he says.
Another company that illustrates the fund’s investment approach is Honda Motor, the Japanese car and truck manufacturer. Unlike many of its competitors, Honda has been able to generate good returns on capital, primarily of its success in North America, Doyle says. Honda has always been well positioned in the passenger car market in that part of the world, and over the last few years it has been increasingly successful in penetrating the light truck segment, he says.
A recent addition to the fund, Doyle says, is Vodafone Group, the British provider of mobile telecommunications services. Vodafone’s balance sheet is among the best of major telecommunications companies throughout the world, andit also features operations throughout the world, according to Doyle.
The portfolio’s investments in a given country or industry sector are a result of the manager’s individual stock picks. Causeway International Value now has about 30% of its assets in the U.K., and another 12% in Japan.
It has been finding values in financial services companies in both places, Doyle says. It’s holdings include banking concerns Lloyds TSB Group and Royal Bank of Scotland, and Japanese consumer money lenders Takefuji Corp. and Promise.
Just as the fund will move into a company that looks to be bargain priced, it will cut back or eliminate investments whose shares become too pricey.
For example, the managers unloaded Swire Pacific earlier this year when its stock reached the price target that had been set for it. The fund had bought the company, a Hong Kong-based conglomerate that has interests in real estate and Cathay Pacific Airways Ltd., last year when the stock was depressed because of the SARS scare in Asia, Doyle says.
But Causeway International Value tends to hold stocks longer than similar funds. It had a turnover ratio of 32.3% last year, compared to 88.6% for the average global equity fund.
Contact Bob Keane with questions or comments at: [email protected].