“Typical investor behavior is to want to own things coincidental to success, so there are plenty of investors out there who will bail at any sign of disappointment. By extending our time horizon out three to five years, we’re trying to take advantage of bargains that result when negative news and twitchy investors drive stock prices down.” --Â Sarah Ketterer
Unlike many other gurus, Sarah Ketterer (Trades, Portfolio) of Causeway Capital does not have a high profile; she is not often found among search engine results, she is apparently not interviewed often, nor has she published any books.
Regardless, she has outperformed many of those prominent guru investors, staying ahead of benchmarks before the crash of 2008 and in the years since. That has won her confidence among investors, and a portfolio now worth $46 billion.
Who is Ketterer?
The CEO and fundamental portfolio manager at Causeway was a co-founder of the firm in 2001 along with Harry W. Hartford, the firm’s president.
According to the firm's website, Ketterer earned a Bachelor of Arts in economics and political science at Stanford and an MBA from Dartmouth College.
She was a portfolio manager at Hotchkis and Wiley (a firm co-founded by her father John, and a division of Merrill Lynch Investment Managers) from 1990 to 1996. While in that position, she founded the firm's International Equity portfolio. Over the following five years, she was a managing director and co-head of the firm's International and Global Value team.
With a background in management and international investment, Ketterer went on to co-found a company of her own, a company with a strong interest in international value investing.
What is Causeway Capital Management?
In an undated interview with Forbes magazine, Ketterer said her Irish-born partner, Hartford, named the firm after the Giant's Causeway in Northern Ireland, a 50 billion-year-old rock formation that makes a set of giant steps into the sea. According to Ketterer, the name fit because it implied something rock-solid and long-lasting. The firm is based in Los Angeles, California.
Causeway Capital Management LLC reports, via its Form ADV Part 2A, that it offers international, global and emerging markets analysis to institutional clients. Those clients include pension plans and mutual funds. Ketterer and Hartford are listed as the “ultimate control persons.” It also offers mutual funds to individual investors through brokerages.
According to the Form ADV, the firm had $46.09 billion of assets under management as of March 24.
Six mutual funds are available to the public, according to information at Causeway’s website (with fund AUMs from Yahoo! Finance):
- Global Value Fund (CGVVX): $116.22 million.
- International Value Fund (CIVVX): $8.26 billion.
- Emerging Markets Fund (CEMVX): $4.38 billion.
- International Opportunities Fund (CIOVX): $137.66 million.
- International Small Cap Fund (CVISX): $12.12 million.
- Global Absolute Return Fund (CGAVX): $47.19 million.
With more than $46 billion of assets under management, this guru and firm are major forces in the investment management field. While primarily serving institutional clients, they also offer individual investors access through their mutual funds.
Investment strategy
The Causeway approach varies, to some extent, from fund to fund (including private funds), as laid out in the Form ADV Part 2A. For the biggest mutual fund, International Value, it starts with the objective of seeking long-term capital growth and income through the stocks of companies in developed countries (80%) outside the U.S. Up to 20% of its investments may come from emerging markets, but the emphasis is common stock from developed countries.
Additionally, most investments go into companies that either pay dividends or buy back their shares.
Beyond that, the focus turns to value investing: fundamental research and quantitative analysis. They use quant screens to narrow the field of candidates, using market cap and valuation criteria. Next, they do fundamental research, including company-specific details gathered through company visits, interviews with suppliers, customers and competitors.
In addition, they use a proprietary, quantitative risk model, which helps them adjust their return forecasts. After analysis, the firm aims to buy stocks selling below their intrinsic value. Their strategy description refers to companies currently out of favor, but financially sound.
Causeway and Ketterer look for these characteristics:
- Low price-earnings ratio compared to other companies in the sector.
- High yield when compared with the market.
- Low price-book value ratio.
- Low price-cash flow ratio.
- Financial strength.
Turning to specifics, some of the firm’s thinking can be gleaned from an Insight article on its website: “Harnessing Changes in Chinese Healthcare”.
Causeway analysts Arjun Jayamaraman and Fusheng Li explain the opportunities in Chinese health care, a massive market.
They say the central government understands there are problems in the state system and welcomes private funding to help pay for improvements.
For example, the sales, and markup, of drugs had been a source of revenue for hospitals, but the government wants to change that. It sees consolidation leading to greater efficiency in areas such as drug distribution. Compared to the U.S., the Chinese distribution system is highly fragmented, but the government hopes to reduce that fragmentation (and cost) by bringing in companies with access to working capital, especially low-cost capital.
Jayamaraman says, "As China’s behemoth healthcare sector grows and reshapes, we rely heavily on our integrated fundamental and quantitative research to identify investment opportunities. Our quantitative analysis seeks to uncover attractive combinations of valuation, growth, and momentum within this vast landscape."
While the firm does not list any companies that might be in line to become consolidators, it is an interesting prospect. China has a population three times as large and a health care system that is much less efficient. Such investments appear to offer a good fit with Ketterer’s vision of international investing.
Holdings
The main sectors, as shown in this chart from the International Value Fund’s Fact Sheet, offer a well diversified portfolio:
These are the top 10 holdings in the fund:
These are the countries in which the fund has invested most heavily:
On the issue of Volkswagen AG (VOW, Financial), Causeway became interested even before the emissions scandal. In a Value Investor Insight article, Hartford said they initially became interested when it appeared investors were overly pessimistic because they expected a slowdown in China, where Volkswagen earns some 3 million euros ($3.49 million) a year in annual cash flow from a joint venture.
Many well-known names among the top 10 holdings, but nothing that suggests Chinese health care is in the mix, although it may be embedded in the pharmaceuticals and biotechnology holdings. Otherwise, a relatively conventional set of holdings for a developed country portfolio.
Performance
As this chart from Morningstar shows, Ketterer's fund has outperformed both its category group and its benchmark over the past five years. The blue line shows the fund’s performance:
The chart’s data align with the fact sheet’s assertion the fund has outperformed the benchmark since inception: 7.73% for the International Value Fund vs. 6.76% for the MSCI EAFE since October 2001 (stats for the 16-year period ending Sept. 30).
This GuruFocus table shows the fund beat the S&P 500 in seven of the 10 years between 2002 and 2010:
Ketterer has consistently outperformed the international benchmark in recent years, and the S&P 500 for the nine years after the firm’s founding. It is the kind of solid, long-term growth that will inspire confidence among long-term investors.
Conclusion
Lack of public attention has not hurt Ketterer or Hartford. There are no spectacular results in the International Value Fund’s history. But, quite consistently, they have brought in positive results and beaten the benchmarks.
They use a combination of international and global investing, risk management and value principles to take care of investors who want solid results, not lectures. In addition, they have a bias toward companies paying dividends or repurchasing shares. Good dividend payments that have been reinvested help them compound and grow their clients’ net wealth.
Ketterer’s strategy and picks for the International Value Fund are worth studying and even emulating.
Disclosure: I own no shares in companies mentioned in this article, and do not expect to buy any in the next 72 hours.
