Data and research key to success in volatile markets
This year has really kept investors on their toes. Central banks set the tone again, but geopolitical developments also played a role. Volatility has increased and shows no sign of disappearing as we move into 2016. This does not mean that investors should be pessimistic about the coming year. We talk to Hans Rademaker, Robeco's Chief Investment Officer.
Unrest on the financial markets seems to have increased during 2015. What has caused this?
"After 2014, which was a good year for investors, we expected more volatility in 2015. And that is exactly what we got. In the first few months of the year, everything still appeared calm; but the effects of having large economic blocs in different phases of monetary policy soon became apparent. Volatility increased sharply for three main reasons: the stagnation of economic growth in China, lower commodity prices and the ongoing discussions about the US central bank's first interest-rate hike."
"China was moving into bubble territory. Stagnating growth and the devaluation of the yuan by 3% caused anxiety to spread. Commodity prices fell due to the lack of demand from China and this had a negative impact on economic growth in emerging markets and commodity economies such as Australia and Canada. Needless to say, mining companies were hit the hardest."
At the same time, investors were also worrying about the effects of the Fed’s first rate hike...
"The discussion about whether the Federal Reserve will raise interest rates and when, is of course on investors' minds, but above all the question of who is really calling the shots. Is it the central bank or do the financial markets ultimately determine monetary policy? If the latter is the case, then we are facing a scenario where the Fed could end up 'behind the curve', and have to act retroactively. Tranquility appears to have returned on this front for the time being and the Fed, the ECB and the Bank of China have supplied the market with sufficient liquidity. Their approach has worked for now."
"However, that does not alter the fact that these blocs are at different stages in their monetary policy and so volatility will remain on the menu in 2016 as well. The US is still on the brink of its first interest-rate hike, whereas Europe is still on course for more monetary easing."
What does this mean in terms of expectations for the financial markets in 2016?
"In the longer term, we expect to see normalization in the bond markets, with negative total returns, as we discussed in our Expected Returns 2016-2020 publication. This will happen sooner or later, although the central banks have been able to postpone it. We are banking on a positive market environment certainly in the first months of 2016 as the Fed is reluctant to nip the economic recovery in the bud. This means capital will continue to cost almost nothing for the time being. Ultimately, this is, of course, not a solution, but merely a postponement."
Will the refugee crisis push Europe further back?
"No. The refugee problem has a social and a political impact, but less of an economic one. However, Europe does have a less flexible labor market than the US. You see this reflected in the degree of economic recovery. But the economy is definitely now gaining momentum, also in Europe."
Where are the best opportunities for investors in the coming year, given the stages of the economic cycle the major economic power blocs have now reached?
"It is good that the economic systems diverge. Under these circumstances, diversification proves its added value and robust results are possible. In any case, it is better than a ‘Risk off – Risk on’ environment, where everything moves up and down at the same time. The current scenario offers a good opportunity for active investors to apply diversification."
"At Robeco, we are able to identify anomalies in the market and to capitalize on these. We have a long track record of academic research and efficient implementation of investment models. And I’m not just referring to our quant solutions; this applies to our team of fundamental investors too. Clients do not pay us to stick close to the index. They opt either for passive solutions or for a proven active strategy. In both cases, they are looking for value for money. Taking risks is not an objective in itself, but we identify opportunities and position ourselves to take advantage of these."
Passive investing is growing rapidly and we also expect further consolidation within the asset-management industry. What will 2016 bring in this context?
"There will be still more polarization between truly passive and truly active in the asset management industry. I believe the midfield (in terms of assets under management) will not disappear overnight, because there is still no real commercial necessity for this. The difference between institutional investors and wholesale distribution will gradually disappear. Also within wholesale, a shift from funds to mandates – a business which has a different service and price level – is evident."
Is this shift towards mandates a positive development?
"If you can focus on that as an asset manager then it is. The very large distributors still need strong brands with a wide range of products and services. They do not want a different provider for every type of fund and this has led to the creation of guided architecture. So you have to offer a wider range of funds, while still ensuring that you are best-in-class. Distributors are looking for global players and niche players. Our investment results are good and I also have complete confidence that they will remain solid in the future. The challenge for Robeco lies more in global distribution."
Robeco is increasingly portrayed in the media as a quant investor. Is that justified?
"Robeco has a lot more to offer than just that. At Boston Partners, the emphasis lies on value investing. On the fixed-income side, we are strong in credit analysis and increasingly add value by integrating sustainability in both equity and bond products. Yes, in RIAM we do have a real quant product champion in house, but don't forget that we also have more that EUR 12 billion invested fundamentally in emerging market equities. In addition, we focus increasingly on integrating ESG criteria in our funds – both in equity and in bond products. And then Robeco is still successfully catering to growing institutional demand, where the emphasis lies less on products and more on solutions (outcome-oriented solutions).”
One of the growth markets in which Robeco is not really a big player is absolute return. Are there ambitions to play a bigger role in this area?
"Absolute return is obviously a bit of a catchall term. We actually have several products in this area – Transtrend, Boston Partners' long/short products, and RIAM’s Global Tactical Asset Allocation (GTAA) and new Carry funds. In fact, Lux-o-rente and Flex-o-rente are also a type of absolute return product. They are scalable and less dependent on the people managing them. I don't really see us suddenly offering macro-hedge funds with one or two gurus as fund managers. These types of funds are often very volatile with extreme ups and downs. And that is not Robeco's style."
"For that matter, hedge funds as a group are going through a particularly difficult period with large outflows, disappointing results and pressure on fees. There are positive exceptions, but as a group they are having a tough time."
Finally, what is the main reason why investors should invest with Robeco in 2016?
"Next year, we will also be confronted with a complex and volatile market. Robeco is in an excellent position to identify opportunities and to capitalize on these in a responsible way. As research and data analysis have been the building blocks of our approach for over 85 years. Our focus is on academic research and facts and not on subjective assumptions. The results over those 85 years show that our approach works pretty well."