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Research highlights

Harvesting Opportunities for a Sustainable Food Supply
According to the UN Food & Agriculture Organization (FAO), food production will have to increase by 70% over the next 40 years in order to meet soaring demand. Population growth, economic prosperity in emerg­ing economies, limited opportunities for expansion of agricultural land, declining productivity gains, and growing demand for biofuels pose serious challenges to ensuring food security. As a result, global agricul­tural commodity markets are expected to remain tight, with a prolonged period of high real prices.
This study offers insight into attractive and responsible food and agribusiness investments geared towards developing sustainable solutions to help ensure food security.
 
Residual Equity Momentum for Corporate Bonds
In this research paper, we show that an equity momentum strategy applied to corporate bonds exhibits significant time-varying exposures to common equity and bond risk factors. The strategy thus bets on the persistence of these factor returns. We are able to improve upon a traditional momentum strategy, by focusing on the firm-specific component of stock returns. This residual momentum strategy not only lowers the exposures to the risk factors, but also reduces the volatility of the strategy with about 50%, resulting in a substantially higher Sharpe ratio. We find that our results are robust to changes in the formation and holding period of the strategy, the estimation window, the specification of the factor model, and the formation of subsamples based on liquidity and credit rating.
 
The Impact of Solvency II on Investing in Corporate Bonds
The Solvency II framework will have large consequences for the amount of regulatory capital insurance companies have to hold against their investment portfolios. In this memo we focus on the consequences for investing in corporate bonds. Our empirical analyses show a maturity effect and a rating effect. Regarding maturity, we find that shorter-dated corporate bonds quite persistently offered the highest return-on-Solvency II capital over the past 20 years. Regarding ratings, we find that both within investment grade and within high yield, higher-rated bonds showed on average higher return-on-capital than lower-rated bonds. Interestingly, this pattern is not as strong as the maturity effect, leaving room for rating allocation to optimize
return-on-capital.
 
Low-volatility investing in a “Japan scenario”
Currently the world’s developed economies are facing an environment characterized by very low interest rates in combination with low expected growth and low inflation. In this note, we test how low-volatility stocks perform in such a ‘Japan scenario’. First, we investigate how low-volatility has performed in Japan over the past 26 years and during various interest rate regimes. Second, we perform economic scenario analyses with US data over an extended 80-year period.
For Japanese equities, we find that low-volatility strategies offer protection against very low equity returns which occur during periods with low bond yields. An enhanced low-volatility strategy generates higher returns and statistically significant alpha during periods of both low and high bond yields.
For US equities, low-volatility strategies help to reduce volatility which becomes higher during periods with low and falling bond yields and low inflation. However, the alpha of a generic low-volatility strategy becomes smaller and insignificant during such periods. This is a possible worrying feature of low-volatility index investing. An enhanced low-volatility strategy, however, continues to generate statistically significant alpha in all economic scenarios.
 
Expected Return 2013-2017
Robeco has published a report estimating expected returns on the most important asset classes over the five-year period 2013 to 2017. The main difference to last year's view is that in our opinion the financial crisis will last longer than previously expected. As a result, our inflation expectations in our present five-year outlook are more moderate; returns on high-yield bonds are lower; and the risk premium for equities slightly higher. In this study we explain our rationale and decisions, and we discuss the different forecasts in broad lines.
 
Please contact us if you would like to receive this research paper in hard copy.
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