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Robeco GTAA meets demand for absolute returns

19-12-2013 | Interview | Shengsheng Zhang Investors are seeking alternatives to traditional investments. Robeco GTAA meets this demand by using proven quantitative models to take long and short positions in different asset classes.
 
Speed read
  • Strong performance in both rising and falling markets
  • Absolute return strategy using quantitative models
  • Systematic investment process based on academic research
  • Constant level of portfolio volatility ensures risk control

  
Quest for alternative sources of returns
The uncertain outlook for traditional asset classes such as equities and bonds has caused investors to focus increasingly on alternative ways of generating returns. Since the financial crisis, investors are also more inclined to opt for transparent and tradable investment solutions. The Robeco GTAA (Global Tactical Asset Allocation) Fund was developed with this in mind. The nature of the fund is to focus on 'absolute return'. It is driven entirely by Robeco's quantitative models.

Robeco GTAA focuses on 'absolute return'. It is driven entirely by Robeco's quantitative models.

These models are based on Robeco's research work since the early 1990's into the statistical relationships between investor behavior and developments in the financial markets. From this it emerges that emotions prevent people from making sound investment decisions. Excluding emotions and taking advantage of other human failings displayed by investors can help to generate attractive returns. 

Robeco GTAA combines the signals given by these models to effectively time when it takes long or short positions in a range of investment categories. Shengsheng Zhang, who manages the fund together with Jan Sytze Mosselaar, gives us a glimpse behind the scenes.

Are investments based on quantitative models successful?
"If we look at the results, this is certainly a successful way of investing. The gross result achieved since the fund's inception in April 2010 amounts to more than 15% annualized*. Performance has been particularly good in the last year and a half . Our goal is to realize double-digit returns in the long term, aiming for volatility of around 15% in the portfolio. The fund's risk-return mix has been good so far, as demonstrated by the high Sharpe ratio."

Robeco GTAA's track record

 

Source: Robeco. Monthly data from May 2010 through November 2013, gross of fees, based on the net asset value of the Robeco GTAA Fund. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

What is the secret of your success? Is it the quantitative models that you use?
“Yes. It is the models that determine our success. They enable us to reap the benefits of the entire Robeco quant team's research work. Daniël Haesen, our cross-asset allocation specialist, and three other researchers give us direct support, but we actually benefit from the efforts of all 17 analysts. We can also rely on additional support from the nine investment specialists in the Global Allocations team.

The quant team has developed three models: bond market timing, equity market timing en multi-asset allocation. The bond model has been in use since 1993, five years later the equity model was launched and in 2007 the allocation model also became part of Robeco's investment process. This fund was launched in April 2010. The first two models determine the absolute attractiveness of the investments compared to cash and we use the multi-asset-allocation model to determine the relative attractiveness of the investment categories.”

How do the models work?
"Robeco's quantitative models make use of factor premiums such as value and momentum, and of mispricings between investment categories and markets. We determine the attractiveness of equities by comparing the earnings yield with long-term interest rates and by putting this in a historical perspective. The model thus demonstrates a preference for equity markets with a low valuation. At the same time it moves with the trend. Herding behavior and the fact that investors tend not to be very good at absorbing new information mean that it is useful to follow the trend. But the model also looks at changes in commodities' prices and interest rates, for example, and takes into account seasonal patterns to determine how attractive stocks are.

The yield curve is one of the important factors when it comes to valuing bonds. If the difference between long- and short-term interest rates is large, the model will give a positive signal for bonds. Macro indicators, economic growth and inflation are also elements that the model takes into account. The model also assesses seasonal factors for bonds and whether recent gains are an indication that prices will rise further. The multi-asset allocation model, like the other models, is based on valuation and momentum, as well as the sensitivity of the investment categories to risk aversion in the market."

Which investment instruments do you use?
"In setting up the GTAA, our specific aim was to establish a transparent investment process. Particularly since 2008/2009, investors no longer want complicated products where it is not clear how returns are generated. Not only do we publish information about the fund itself, we also include the research on which the models are based and describe the way in which we use these for the fund. This enables people to understand how we think and work."

"Our specific aim was to establish a transparent investment process."

We only invest in a limited number of investment instruments, but these cover most of the investment universe. We invest in index futures on US, European and Japanese stocks and US, German and Japanese government bonds, in euro-dollar and euro-yen forwards and in ETFs for the broader commodities' market and US real estate. In total ten investment instruments. We can take both long and short positions in these instruments with the exception of the ETFs. These are all highly liquid investment instruments as is the cash pool, where we use only call money, week deposits and short-dated government bonds with an AAA rating. As a result, the fund can be traded on a daily basis and the transaction costs are low."

How do you translate the models' signals into changes to the portfolio? 
"We rebalance the portfolio on a weekly basis using the signals from the models. These are both long and short signals. We combine these signals together and if they are strong enough we change the construction of the portfolio. We also take earlier signals given by the models into account. Sometimes the model indicates that we can boost our long or short positions, which increases the leverage."

You talk about going short and leveraging. How do you limit the risks?
"Risk management is not carried out retroactively - it is an integral part of portfolio construction and takes place at various stages in the investment process. First, we spread the risk, because the different variables in the models have a low correlation with each other and each model uses an equal portion of the risk budget. To do this we make the positions in the investment categories inversely proportional to the volatility of the investment categories and the signals from the models. This means in relative terms we take larger positions in bonds than in equities. Moreover, positions are selected such that the resulting portfolio volatility is around 15% for the longer term. We only take a large long or short position in a market or currency if the volatility is temporarily low. The reverse also applies - if the volatility is high, we take smaller positions that the models indicate. Another positive aspect is the fact that most of the instruments we use involve no counterparty risk. This makes the GTAA a fund for long-term investors. Our target volatility level of 15% means that fluctuations can sometimes be considerable.

Does the investment process really depend 100% on the signals given by the models? Do you not intervene when market conditions become extreme?
"No we do not. Ours is a systematic investment process, based on academic research. Human behavior, and therefore emotions, are not permitted to play a part in our decision-making. A simulation with our strategy shows that Robeco's GTAA proves its worth in times of unrest. We therefore feel that the models should be allowed to do their work – especially when there are exceptional circumstances." 

How can a pension fund or other institutional investor make use of the fund?
"Robeco GTAA is a valuable addition to mixed portfolios as a result of the fund's absolute return characteristics. It benefits from upward and downward price movements and the correlation with both equities and bonds is by definition low. The correlation between GTAA and a mix of 40% equities and 60% bonds has only been 0.27 in the last three and a half years. As institutional investors hesitate to allocate more to equities because of high volatility and thus invest more in fixed-income securities, it often becomes difficult to generate sufficient returns to fulfil their obligations. In such cases GTAA offers a solution. By making a relatively small investment in the fund, clients can improve the risk-return profile of their entire portfolio."

The effect of adding Robeco GTAA to a mixed portfolio of 40% equities and 60% bonds

 

Source: Robeco. Monthly data from May 2010 through November 2013, gross of fees, based on the net asset value of the Robeco GTAA Fund. For the mixed portfolio with 40% equities and 60% bonds monthly data for the MSCI daily TR net World index USD (NDDUWI index) for equities and the JPM global aggregated bond total return index (JGAGGUSD index) for bonds during the same period.

Is the fund also attractive for retail investors?
"It is also interesting for retail investors as, unlike many other products of this nature, it does not have an entry threshold and is tradable on a daily basis. Its low correlation with both equities and bonds make it an attractive addition to any investment portfolio. Retail investors also benefit from effective diversification.”

How do you see the fund developing in future?
"The fund is now more than three years old; which means it is attracting the attention of an increasing number of investors. We are confident that the managed assets will grow further as people see that this style of investing consistently provides solid returns in both rising and falling markets. In the meantime, Robeco's quantitative research continues and the results this produces can further enhance the models we use. We are also investigating whether we can add further investment categories to the investment universe we currently use."

* The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.


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