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Robeco 2008: positive cash flow but decline in AuM

28-04-2009 | Press release Despite the uncommonly harsh conditions, Robeco managed to realize net cash inflow of around EUR 600 million in 2008. As a result of falling stock prices, assets under management declined from EUR 146 billion to around EUR 111 billion.  Some investment strategies managed to beat the trend and realize a positive performance; Transtrend’s Diversified Trend Program had a very good year, and the Lux-o-rente fixed-income duration program and several Robeco Boston Partners equity strategies performed well relative to their benchmarks. Robeco managed to avoid the most severe pitfalls such as US subprime mortgage-backed securities and imploding hedge funds.

Lessons learned
Robeco was, however, unable to swim against the tide. Its customers, many of whom held well-diversified portfolios exposed to global equity, emerging markets, funds of hedge funds or fixed income, all suffered. Many people who had entrusted Robeco with their money suffered a severe loss of wealth as a result of this crisis. Robeco realizes that, in many cases, this has had an enormous impact with long-term consequences. As many in the industry, Robeco has learned lessons from this and will, where necessary, simplify the characteristics of its products, adjusting those that incorporate leverage to reflect the new situation in the financial markets.

Positive cash flow
In 2008, net cash inflow was EUR 600 million. The retail cash inflow was strong in the US, particularly into the mutual funds of Harbor Capital Advisors. However, in the Netherlands, Robeco experienced substantial cash outflow especially from its traditional mutual funds. In the retail market, clients invested more in savings products such as Roparco and Robeco Euro Cash. Institutional products suffered considerable outflow mainly in the US. In Europe, Transtrend was able to attract significant cash inflow. The strong track record of this managed futures investment advisor was an important driver for this success. Overall, Robeco’s cash flow was well diversified across products and continents.

Decline in assets under management (EUR x billion)

table1_decline_in_assets_under_management

The turmoil in the financial markets has affected the assets under management at Robeco considerably. During 2008, Robeco’s assets under management declined by 24%. This decrease was mainly driven by a net investment result of EUR -29.1 billion. This figure includes a positive contribution of EUR 1.9 billion caused by the appreciation of the US dollar. The divestment of Robeco’s fixed-income capability in the US also reduced the assets under management.

Responsible investing
In 1999, Robeco was the first large asset manager to introduce a sustainable equity fund in the Netherlands. Since then, Robeco has introduced a number of other sustainable investment strategies and become a respected player in the field of engagement to listed companies. There is a growing consensus among both private and professional investors that taking environmental, social and governance (ESG) factors into account when making decisions leads to more sustainable returns and better risk-return profiles.

As a result of this, Robeco has decided to become a truly responsible investor and to create a clear and distinctive responsible-investing proposition for the market. Robeco sees responsible investing as a long-term strategy which focuses on creating added value and realizing the best possible investment performance for its clients. Full integration of responsible investing will ultimately benefit all parties concerned.

Robeco has set a target to integrate ESG factors into all investment processes for all Robeco’s business lines. Robeco will focus on four key objectives for 2009/2010 in order to achieve this. The first objective is to introduce responsible-investment policies for the investment categories equities, fixed income and private equity. Furthermore, Robeco aims to provide a set of ESG analysis instruments for investors. The next objective will be to integrate ESG factors into investment analyses and investment decisions. This is in conformity with the first UN PRI Principle. Robeco’s final objective is to achieve gross cash flow through responsible-investment products and through engagement services.

SAM, which Robeco acquired in 2007, succeeded in further strengthening its reputation as a leader in sustainability investing. SAM enlarged both its sales area and product range. In the latter part of 2007 and in 2008, SAM moved into the US and Canada. This resulted in several mandates in these markets. The Dow Jones Sustainability Indexes (DJSI), which are subadvised by SAM, also had a successful year; an increasing number of licenses were sold in 2008. In November, the DJSI was selected as benchmark for the first exchange-traded sustainability futures worldwide. In addition, SAM introduced one of the first sustainable convertible bonds and a long/short strategy that leverages its sustainability research by taking long positions in sustainability leaders and short positions in sustainability laggards.

Operational excellence
An important condition for the successful execution of Robeco’s strategy is an up-to-date and efficient operational infrastructure. In order to achieve this, a comprehensive program was initiated in 2007 to provide Robeco with a high-grade and flexible back-office system and organization enabling portfolio managers to manage their investments with a full range of instruments, to shorten the time to market for new investment strategies, and to conduct state-of-the-art risk management. The program is also crucial to Robeco’s hub-and-spokes model as it will enable asset-management ‘spokes’ to plug into the Rotterdam infrastructure.

Cost-effectiveness
In October 2008, Robeco launched Top Shape, a program aimed at creating a more efficient organization, fit for future growth. The decision to increase efficiency was made early in 2008, after Robeco Group’s cost-effectiveness was assessed on the basis of a peer-group comparison. The financial crisis has also increased the need to take urgent action. By performing support operations more efficiently, Robeco expects to be able to reduce its workforce by around 250 FTEs, and to cut costs by around EUR 78 million, mainly at its head office in Rotterdam. The majority of the measures have been implemented in the first few months of 2009 and some outsourcing measures will be completed in 2010. Subsidiaries Harbor Capital Advisors, SAM and Transtrend are outside the scope of the program.

In the US, Robeco Investment Management’s operations were streamlined in 2008, creating a strong focus on equity investments which are managed by Boston Partners. Both RIM’s taxable US fixed-income business and non-taxable (municipal) fixed-income business were sold. Back-office activities have also been streamlined by outsourcing equity operations to The Bank of New York Mellon. Finally, RIM’s management structure and support activities were adapted to fit the new organization in order to further increase cost-effectiveness.

In December 2008, as part of the Top Shape program, Robeco exchanged its business-unit model for a functional-management model for its core business activities.

Financial results

table2_financial-results

The operating income increased in 2008 by EUR 69.3 million to EUR 888.9 million (+8.5%). Operating income includes net management fees, performance fees, and the net interest result from banking operations. Due to a significant decline in assets under management from EUR 145.8 billion to EUR 110.7 billion, the management-fee income decreased substantially. The sale of RIM fixed income also resulted in a decrease of management-fee income.

Higher performance fees were the main driver behind the improvement in income which was a direct result of the strong investment returns of the performance fee-related products. The Transtrend Diversified Trend Program (DTP) in particular showed excellent investment returns.

Due to a deterioration in interest margins, especially in the last quarter of 2008, the interest result from banking operations remained at a similar level to 2007 despite an increase of EUR 0.9 billion in entrusted savings in 2008.

Growth in operating expenses amounted to EUR 75.7 million (+13.9%) and was, to a large extent, the result of strategic project costs, restructuring costs and the recognition of impairment losses on financial assets.

An assessment was made as to whether it was necessary to record the impairment on asset-backed securities. The unrest in the financial markets has led to still lower levels of liquidity, causing asset-backed securities to become illiquid and their fair value to be significantly reduced. In some cases, it was concluded that – due to unfavorable ratings changes, worsening macro-economic indicators and decreasing excess spreads – impairment was inevitable for Robeco’s banking operations. This resulted in an impairment of EUR 52.8 million on the asset-backed securities portfolio.

The non-operating negative result was caused by a strong decline in the fair value of the seeding and co-investment positions, including recognized impairment losses. This relates to a decline in the fair value of the various investment portfolios.

The effective corporate tax rate was 25.4% in 2008. Shareholders’ equity amounted to EUR 1.3 billion at year end 2008, an increase of EUR 53.8 million.
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