Causeway fund looks for value in Europe and Asia.
It's not that unusual when a fund manager leaves a large firm to set up his or her own shop. But it does turn a few more heads when 22 people, from compliance attorneys to administrative assistants, follow a core international investment management team out the door. The story gets even more interesting when the fund they start grows from $10 million to $670 million by the time it reaches its second birthday.
Los Angeles-based Causeway Capital Management, the investment advisor to the Causeway International Value Fund, was launched in mid-2001 by fund veterans Harry Hartford, Sarah Ketterer and James Doyle. During the 1990s, Ketterer and Hartford co-managed Hotchkis and Wiley's Mercury International Value fund, while Doyle headed the international equity research department. They continued in those roles when Merrill Lynch purchased the firm in 1996 and re-named the fund to reflect new ownership.
In late 2000, when Merrill put out feelers for a buyer for Hotchkis and Wiley, the trio decided that one ownership change was enough. They started Causeway Capital Management in June 2001 with seed capital from themselves and a few investors. In October of that year, they launched Causeway International Value Fund, which focuses on undervalued stocks in established European and Asian markets. Today, the firm has over $5 billion in assets under management, including the fund, and 28 employees.
A falling dollar and temperamental foreign markets have made for a rocky, but ultimately profitable, post-launch period. Over the last year, favorable currency translation from a weaker dollar and rebounding markets have given foreign stock funds a shot in the arm that many haven't felt in years. "Local currency returns for European markets in 2003 were around 15%," says Hartford. "But in dollar terms, those gains were close to 30%." Causeway International capitalized on the surge in 2003 with a 26% increase in the second quarter, and a 40% year-to-date return as of mid-December.
The fund's revival followed a rough break from the starting gate. After enjoying a short rally in the last three months of 2001, shareholders suffered a setback in 2002 with a 22% plunge in the third quarter and an 11% loss for the year.
Morningstar analyst William Samuel Rocco cautions that despite its attention to risk, the fund "is still vulnerable to cyclical market swings, evidenced by big losses in mid-2002 and big gains in mid-2003." Hartford says that more recently, the fund's beta has modified as it shifts out of stocks that have had a strong run-up, including those in the technology and financial sectors, and moves the proceeds into higher-yielding but tamer laggards in the capital goods and energy sectors.
Companies, Not Countries
With their bottoms-up approach, the fund managers initially focused on companies, not countries. "We're less concerned about where a company trades, and more concerned about what it does, who it competes against, and whether or not it is a good value," says Hartford. "Our geographic distribution is a byproduct of a search for undervalued companies."
A willingness to make big geographic and sector breaks from its benchmark to find companies that sell at discounted prices means that the fund can behave differently than many of its peers, says Rocco. "Its value bias could be a burden in go-go growth rallies, and its willingness to build big sector overweights and to hold atypical country weights will backfire at times," he observes. "But it has gotten off to a terrific start, and its managers are proven winners."
The biggest geographic bet right now is in the U.K., where the fund has a hefty 30% of its assets. By contrast, Japan has only a 13% weighting, about 40% below the benchmark MSCI EAFE index. The fund's underweight position in Japan worked against it in the third quarter, when the yen strengthened against the dollar and the country's stocks rebounded. But hefty gains in several European and Asian holdings, such as Dutch temporary staffing services company Vedior and Hong Kong residential property developer Henderson Land, tipped the balance favorably.
Hartford remains cautious about Japan's market recovery. "The equity markets in Japan are highly cyclical," he says. "And the companies there have lots of financial and operational leverage and a poor return on equity. Some businesses have strong cash flow, but it is being reinvested poorly or hoarded by the companies at the expense of minority shareholders." Yet he sees pockets of opportunity in some Japanese stocks, such as Honda, that have so far been left behind in the rally. "Unlike some of its competitors in the U.S., Honda has been able to gain market share without offering significant buyer incentives," says Hartford. "And it is still trading at a single-digit price-earnings multiple."