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The three circles philosophy

Achieving success in any equity market comes down to a very simple premise: buy stocks low and sell stocks high. Where it becomes more difficult is taking a view on what exactly is low, and what is high? A bull market has a flip side as it becomes harder to find true value in the market. Many companies become overvalued relative to their true potential, whereas others become relative bargains.

In order to find the best companies, we apply the ‘three circles’ approach to investing. Companies must have:
  • A low valuation – they must be cheaply or reasonably priced relative to the market
  • Positive business momentum - the ability to grow their earnings
  • Good business fundamentals, with strong cash flow

Put another way, we ask ourselves: what are we buying, why are we buying it, and what is the real return? These are the three circles that underpin our investment strategy across the Global Premium Equities Fund and all other Robeco Boston Partners equity portfolios.



The three circles approach works because low-valuation stocks have been shown to outperform their higher-valuation peers over time. Meanwhile, companies with strong fundamentals, such as a high returns on invested capital, outperform those with poor fundamentals. And stocks with positive business momentum due to improving trends or rising earnings generally outperform those with negative momentum.

Putting the philosophy into practice may sometimes mean not following the herd instincts of the wider market. The market tends to react to news and tries to predict future earnings perfectly. But inevitably it is wrong; sometimes the market overreacts and share prices fall disproportionately to the underlying issues at the business.

We particularly aim to find stocks which exhibit ‘dislocation’ – when a company’s share price does not reflect the real underlying value of the business. This results in high levels of ‘active management’ - where we do not necessarily buy stocks that are constituents of the benchmark index.

The fund’s performance is compared against the benchmark, and the goal of any active manager is to beat the returns of the index. The fund has consistently done this over time, proving that the strategy works in good times and bad.

That’s because the premise remains the same: we look for companies with a higher than average return on invested capital and earnings momentum that are better than that of the wider market. We maintain a high level of discipline to ensure that all of our attributes are reflected in the portfolio.

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