SARAH KETTERER

Causeway International Value

Age: 48

Credentials: BA in economics and political science, Stanford University; MBA, Amos Tuck School of Business Administration, Dartmouth College

Experience: Portfolio manager, Causeway International Value (2001-present); CEO, Causeway Capital Management (2000-present); managing director, Hotchkis and Wiley (1996-2001); portfolio manager, Hotchkis and Wiley International Value Fund (1990-1996); associate, Bankers Trust merchant banking group (1987-1990); financial analyst, Dean Witter Reynolds (1983-1985)

Ticker: CIVVX

Inception of fund: October 2001

Style: Foreign large value

Assets under management: $2.1 billion

Three- and five-year performance as of Nov. 4, 2009: -5.2% and 3.2%

Expense ratio: 1.15%

Front load: None

Minimum investment: $5,000

Alpha: 0.6% vs. MSCI EAFE NR USD

China, Brazil and India may be stealing the spotlight now, but Sarah Ketterer, manager of Causeway International Value, isn't about to abandon the developed markets she's been following for more than two decades. A value manager to the core, Ketterer likes Japanese, English and German firms that are largely overlooked because investors are more excited about growth elsewhere.

"There's an insatiable demand for emerging markets and natural resources," Ketterer says. "But soon there will be a great deal of scrutinizing companies' financial statements and the quality of earnings." Developed economies can stand up to that scrutiny, she says.

Ketterer and four co-managers have been honing their valuation skills since the early 1990s when they were part of the international investing team at Hotchkis and Wiley, a firm started by Ketterer's father John Hotchkis in 1980. The founders sold their company to Merrill Lynch in 1996. By 2001, Merrill planned to sell the unit. Ketterer and her partners jumped ship to start their own firm and remain true to their value stripes. The deal was eventually abandoned, and Merrill Lynch sold the unit to a group of Merrill executives.

Value investing hasn't always yielded stellar results, though, especially when markets prefer growthier fare. Over the last three years, the fund is down 5.2% annually through Nov. 4, placing it in the bottom 47% of Morningstar's foreign large-value category. Over the past five years, the fund posted a 3.2% annual gain, but beat only 30% of similar funds. However, during market declines the fund tends to perform better than its competitors due to its value discipline.

SEEKING EARNINGS YIELD

To find stock ideas, Causeway's analysts sift through more than 5,000 stocks a week. Most of these are quickly discarded if they do not pass the firm's value and profitability screens. The team also looks for accelerating earnings, particularly if the company has lagged in recent quarters. "If earnings are no longer declining, they'll probably go up," Ketterer explains. "The stock is likely to see some improvement." Twenty to 30 new names emerge each week.

Among the most important valuation criteria the team looks at is earnings yield, the reciprocal of the price-to- earnings (P/E) ratio. This calculation is useful in comparing the earnings of a stock against the yield of a bond. For example, a stock trading at $30 a share with $3 in earnings over the trailing 12 months has an earnings yield of 10%.

Ketterer and her team are looking for stocks with earnings yields that are more than two percentage points above their countries' 10-year sovereign debt. Equities, given their higher risk, should have an earnings yield that is above that of comparatively risk-free bonds.

Given this view, Ketterer finds plenty of opportunities in the developed world and sees no reason to move wholesale into emerging markets, even though she acknowledges that most of the world's growth in coming years is likely to be in these young, rapidly expanding economies. (The firm started Causeway Emerging Markets in early 2007.)

WE'RE ALL IN CHINA NOW

There are ways to get a piece of this growth without the political risk that often accompanies emerging-market investing. "Most companies that operate globally, their greatest source of growth is emerging markets," Ketterer says. "Any equity investor who owns multinational companies owns an emerging-markets portfolio. We're all holding portfolios that are plugged into growth in China."

For example, one Causeway holding is Hyundai Heavy Industries, a South Korean shipbuilding outfit. (Although South Korea is technically an emerging market, Causeway sees it almost as a developed economy.) "Their major customers are in China," Ketterer says. "I don't see why growth in China should fall off a cliff even if they have to move to more stimulative spending."