Thursday, 16 January 2014

As other funds hew benchmarks, Causeway looks afield

NEW YORK (Reuters) – Portfolio manager James Doyle has pulled off a rare trick over the last twelve months: posting some of the highest returns among foreign stock funds while largely sidestepping one of the world’s hottest markets.

Doyle, a co-manager of the $4.9 billion Causeway International Value Fund (CIVIX.O), invested approximately 12 percent of his portfolio in Japanese equities in 2013, or roughly half the 21.6 percent of assets in the benchmark MSCI EAFE index. The Nikkei index rallied 56.7 percent in yen terms and 26.7 percent in dollars over that same period.

Despite that underweighting, Doyle’s fund returned 22.8 percent over the last year, placing it in the top 10 percent of the 790 funds in its category, according to Morningstar. Over the past three years, the fund has returned an annualized 10.2 percent a year, a performance that puts it among the top 5 percent in its category and 2.7 percentage points above the benchmark.

The push away from Japan and into European companies – such as Dutch chemicals maker Akzo Nobel (AKZO.AS), Dutch publisher Reed Elsevier (REL.L) and German industrial company Siemens AG (SIEGn.DE) – is not out of the ordinary for a fund that often wades far ashore from its benchmark.

The fund currently has 75 percent of its assets in European stocks compared with a 50 percent allotment in its benchmark. It is completely avoiding Australian stocks despite the roughly 6 percent weighting in its benchmark out of concerns that they are too expensive.

“We like to take a value, or even contrarian, view on things, and we’re comfortable enough with our process that we don’t mind ignoring the benchmark weightings to go where we think we can find the best values,” Doyle said. Overall, his fund includes approximately 60 large-cap companies, with the largest bet on any one of them taking up approximately 4 percent of assets.

Investors in the fund should brace themselves for periods of underperformance due to the fund’s out-of-the-box portfolio, said Kevin McDevitt, an analyst who covers the fund at Morningstar. Yet its track record suggests that its extra volatility has been worth it, he said.


Doyle and his team of co-managers like to focus on companies that are undergoing some sort of short-term crisis or down cycle that is weighing on shares.

They begin by first screening companies based on quantitative factors such as a company’s earnings yield relative to its country’s bond yield, its historical return compared to its recent performance and its price to book ratio, all in the hope of finding once-strong companies whose shares have fallen off recently.

Next, the team begins a qualitative process that evaluates company management, looking chiefly at whether its executives have a track record of allocating capital wisely.

“Everyone likes to brag about their screens, but really it’s just a way to flag stocks that are cheap so you can do more research into them,” Doyle said.

Doyle is especially interested when strong performers go through a rough patch. He recently added to his position in British American Tobacco (BATS.L), whose shares are down slightly over the last year despite a rally in the European market because approximately half of its revenues come from emerging markets with weaker currencies. The cash-rich company has also fallen amid a selloff in dividend payers whose returns could fall if interest rates rise.

Yet Doyle likes that the company has pricing power, an attribute that he finds increasingly rare in the global marketplace.

“Tobacco is a great business and it’s a growing business,” he said.

Shares trade at a forward price to earnings ratio of 14.2 – lower than the 17.5 ratio of spirits maker Diageo (DGE.L), another highly-regulated ‘vice’ stock that gets a significant portion of its revenues from emerging markets – and pay a dividend yield of 4.9 percent.

Though he is not making a big bet on Japan overall, Doyle recently added Japanese camera maker Nikon Corp (7731.T) to his portfolio. The company’s shares have fallen 4 percent in the last 12 months in large part because of a drop-off in its point and shoot digital camera business and concerns that so-called mirrorless cameras will eat into the company’s highly profitable digital single lens reflex camera line.

But Doyle said he was attracted after disappointing mirrorless camera sales at Fujifilm Holdings (4901.T) and Panasonic Corp (6752.T) suggested that customers have not been wooed by a mid-tier product that offers an image quality that is somewhat better than the camera on their phone yet not as good as the high-end SLR cameras that Nikon is known for. What’s more, the bulky cameras have also become a status symbol in emerging market countries, Doyle said.

“It’s seen like a purchase of a Rolex, a way to show off your wealth,” Doyle said.

Shares of Nikon are trading at a forward price to earnings ratio of 13.8, slightly less than competitors Canon (7751.T) and Konica Minolta, and come with a dividend yield of 1.2 percent.

Investors who are attracted to Doyle’s process will pay an annual expense ratio of $1.20 per $100 invested, a fee level that Morningstar considers average. The fund pays a dividend yield of 1.1 percent.

(Reporting by David Randall; editing by Linda Stern, G Crosse)

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