Harry W. Hartford doesn’t shy away from buying shares of companies that are in turmoil if he thinks they’ll come out the other end making money for his Causeway International Value Fund.
CIVVX, -0.65% The mutual fund CIVVX, -0.65% which has $8.6 billion in assets, has as its top holding Volkswagen AG, the German car company still mired in the so-called dieselgate scandal. The No. 2 holding is London-based cigarette maker British American Tobacco PLC. And another company he favors, Japan’s Takeda Pharmaceutical Co., is “going through a significant restructuring” under a new management team, he said in an interview Feb. 7.
Hartford, unlike many average investors, is used to volatility. He says they better get used to the price swings that rocked global stocks in the past week.
After years of high returns supported by “generous” monetary policy among central banks around the world, the better-than-expected U.S. employment numbers on Feb. 2 were enough to spook investors afraid of rising interest rates.
“Markets don’t like surprises, [and] as we revert to more normal monetary policy, it is inevitable that you get some reversal” of low volatility, he said.
Hartford discussed his investment strategy for the Causeway International Value Fund, which has relatively low annual turnover of 35% as stocks are held for an average of three years.
Here’s a chart showing the geographic concentration of the fund as of Dec. 31, based on where the companies it invests in are headquartered:
“It would appear that we love the U.K.,” Hartford said, but he pointed out that this is because “many international businesses are listed there.”
He said U.K. values appear “to be depressed” because of the ongoing Brexit negotiations, yet the U.K. companies the fund invests in “tend to be well-managed.”
Three international value opportunities
A three-year chart of Volkswagen AG VOW, -0.29% tells the tale:
The stock had been staging a “pretty decent recovery” from dieselgate until the recent market downturn, Hartford said. After Volkswagen in September 2015 admitted deceiving regulators with software in its diesel cars designed to indicate reduced emissions, Hartford said he and his management and research team “decided the business was financially strong enough to absorb significant penalties, which they were subjected to.”
He added that the stock is attractive because of Volkswagen’s “very good free cash flow,” and that the company’s focus on this and profitability “has improved the underlying returns on capital, and we as shareholders have benefited.”
He said the stock is still a good value at its current price of about 173 euros, but “a lot less” than it was when the shares fell below 100 euros.
VW still can’t shake the scandal that has cost it $30 billion. It was reported late last month that Volkswagen used monkeys to breathe diesel exhaust in an experiment to prove that modern-day fumes aren’t as dangerous as they were decades ago.
The second-largest position of the fund at the end of 2017 was British American Tobacco PLC BATS, -1.84% which owns the Dunhill, Lucky Strike, Newport, Camel and Pall Mall brands, and is pushing into smokeless tobacco products.
When asked about the prospects for sales growth in the tobacco industry, Hartford said “you can make a lot of money on companies that may not appear to have a lot of top-line growth” because of improving efficiencies.
He pointed out that tobacco companies no longer spend a lot on advertising. Also, when governments raise taxes on cigarettes, companies “generally raise the price per stick [cigarette] by an amount greater than the tax increase.”
“It’s all about managing demand erosion and costs,” he said.
The third company Hartford talked about was Takeda Pharmaceutical Co. 4502, +1.79% which he said is “going through a significant restructuring” under a new management team.
He expects the company to improve its gross operating margin to about 25% from the current level of about 10% over the next several years. The stock trades now for about 25 times the consensus earnings estimate for fiscal 2017, which ends on March 31 of this year.
But a potential doubling of earnings can make this a winning play for committed long-term investors, Hartford said.
Fund performance
Hartford founded Los Angeles-based Causeway Capital Management, which has about $59 billion in assets under management, in June 2001.
The Causeway International Value Fund mainly invests outside the U.S., focusing on mid- to large-cap companies in developed countries. The fund’s Investor Class shares have a four-star rating from Morningstar, the second-highest level.
Here’s how the Investor Class shares have performed against the fund’s Morningstar category and the MSCI EAFE Index (the fund’s benchmark):
| Total return - 2018 through Feb. 6 | Total return - 2017 | Avg. return - 3 years | Avg. return - 5 years | Avg. return - 10 years | Avg. return - 15 years | |
| Causeway International Value Fund - Investor Shares | -1.7% | 27.1% | 5.8% | 6.6% | 4.1% | 9.2% |
| Morningstar Foreign Large Value category | 0.0% | 22.1% | 6.1% | 5.8% | 2.6% | 8.0% |
| MSCI EAFE Index (U.S. dollars) | -1.4% | 25.6% | 7.0% | 7.1% | 3.5% | 8.8% |
| Sources: Morningstar, FactSet | ||||||
EAFE stand for Europe, Australia and Far East. The MSCI EAFE Index is designed the track the performance of equity markets in developed countries excluding the U.S. and Canada.
Top holdings
Here are the fund’s 10 largest equity positions (out of 57) as of Dec. 31:
| Company | Ticker | Share of portfolio | Total return - 2018 through Feb. 7 | Total return - 2017 | Total return - 3 years |
| Volkswagen AG | VOW, -0.29% | 4.8% | -1% | 25% | -19% |
| British American Tobacco PLC | BATS, -1.84% | 3.3% | -10% | 13% | 40% |
| Barclays PLC | BARC, -0.14% | 3.3% | -7% | -8% | -21% |
| Royal Dutch Shell PLC Class B | RDSB, -1.24% | 2.9% | -7% | 9% | 5% |
| BP PLC | BP., -0.90% | 2.8% | -9% | 10% | 29% |
| Schneider Electric SE | SU, -0.81% | 2.8% | -1% | 10% | 14% |
| ABB Ltd. | ABBN, -3.56% | 2.8% | -7% | 26% | 43% |
| BASF SE | BAS, -2.37% | 2.7% | -4% | 7% | 21% |
| China Mobile Ltd. | 0941, +0.06% | 2.7% | -2% | 3% | -16% |
| Linde AG | LIN, -0.20% | 2.5% | -5% | 19% | 7% |
| Sources: Causeway Capital Management, Morningstar, FactSet | |||||
The fund managers prefer to buy shares in local exchanges, but the companies that made up its 10 largest equity positions as of Dec. 31 also have American depositary receipts (ADRs) listed on U.S. exchanges:
| Company | Ticker for U.S. listing or ADR |
| Volkswagen AG ADR | VLKAY, -0.47% |
| British American Tobacco PLC ADR | BTI, -1.12% |
| Barclays PLC ADR | BCS, -0.75% |
| Royal Dutch Shell PLC Class B ADR | RDS.B, -1.96% |
| BP PLC ADR | BP, -1.40% |
| Schneider Electric SE ADR | SBGSY, -2.36% |
| ABB Ltd. ADR | ABB, -0.95% |
| BASF SE ADR | BASFY, -2.25% |
| China Mobile Ltd. ADR | CHL, -3.14% |
| Linde AG ADR | LNAGF, +2.66% |
| Sources: Causeway Capital Management, FactSet | |