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Pim van Vliet

10 things to know about Conservative Equities

04-09-2013 | Insight | Pim van Vliet, PhD

Robeco’s Conservative Equities strategies aim for equity returns with lower downside risk. Get to know our approach in just ten steps. Pim van Vliet, Portfolio Manager Conservative Equities, explains the advantages of low-volatility investing and how it fits into your portfolio.
 
1. Insight: risk and return do not go hand in hand
Robeco Conservative Equity strategies are based on a revolutionary insight: risk and return do not go hand in hand. The strategies capitalize on one of the oldest anomalies studied: the low-risk anomaly. Stocks with low beta and low volatility realize higher returns than can be explained using the Capital Asset Pricing Model (CAPM). This anomaly has been proven, not only in the United States, but also in Europe, Japan and the emerging markets.
 
2. Long term vision: faster recovery by limiting losses
To capitalize effectively on the low-risk anomaly, a long-term investment vision is required.
The advantage of a low-volatility strategy is that the stocks involved will fall less than other stocks in a declining market. Once the market recovers, low-volatility stocks have less ground to make up to recover and start yielding positive returns again. This compensates the fact that the strategy may lag the MSCI World when this index rises more than 15% annually. You could compare this to the Tour de France; to win the Tour you do not have to be the fastest in every stage. The long-term investment vision is also expressed in another criterion: the average annual turnover in the portfolio is very low at 22%.
 
‘Lower downsize risk can help stabilize funding ratio’s’
 
3. Unusual: lower absolute risk is part of the strategy
The unusual thing is that low absolute risk is part of the strategy and not a precondition. The Conservative approach does not look at relative risk, but at absolute downside risk. Average historical volatility is more than 20% lower than the reference index, the MSCI World. For institutional investors, such as pension funds, this lower downside risk is interesting because it can help stabilize funding ratios. The aim of this strategy is to realize equity returns with clearly lower downside risk.


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4. Trend-setting: contributor to low-volatility investing
Robeco is a trendsetter. In 2005 nobody was interested in low volatility investing while it is now a widely accepted phenomenon. Indeed many institutional investors currently explicitly allocate a significant portion of their portfolio to low-volatility stocks. As one of just a handful of low-volatility pioneers worldwide, Robeco has played a major role in this field. For example by organizing research seminars and writing many academic papers on this topic. At the end of July 2013, the total assets in Robeco Conservative Equities amount to more than EUR 5 billion.
 
5. Balanced: innovative investment approach
Moreover, the strategy leads the market because our proprietary selection model is superior to generic low-volatility strategies. The selection is not only based on volatility, but also on low distress risks and valuation- and sentiment-driven factors. This balanced approach distinguishes us from other providers who only focus on historically low volatility. By also including forward looking factors such as distress risk factors, tail risks will be lower, resulting in smaller drawdowns than a simple low-volatility strategy. The addition of valuation and sentiment factors enhances the risk-return profile even further.
 
6: Different: not a simple dividend strategy
The stocks that the Robeco Conservative Equity strategies have on its radar are not only expected to have a lower risk, but usually deliver a relatively high dividend. This is a result of our investment strategy. We do not focus on selecting the highest dividend stocks, like in a simple high dividend strategy. Our starting point is selecting the most attractive low risk stocks. Companies that pay out consistent high dividends are often profitable businesses that are active in stable, mature sectors, leading to low volatility in their stock price.
This results in a selection of low-risk stocks with a relatively high dividend return. Over the longer term, reinvestment of dividends contributes significantly to the total return.
 
7. Broad: experience with a range of funds
Robeco has plenty of experience with the Conservative Equity strategies. We have many positive experiences with this form of cautious investment. In 2006, Robeco Institutional Global Conservative Equities was launched, which recently won the Asia Asset Management Best-ofthe-best award 2012 in the category “Global Equity 3 years”. With the launch of Robeco European Conservative Equities in 2007 and Robeco Emerging Conservative Equities in 2011, two new conservative strategies were added to the range.
All three strategies are successful and are showing excess returns over their reference indices with substantially less risk (volatility).
 
8. Diversification: combination with other strategies
Combining Robeco Conservative Equities with other strategies offers advantages to investors:

  • In general, the volatility of the total equity portfolio will go down if you invest a larger portion of your portfolio in the Conservative strategy;
  • Robeco Conservative Equities strategies do not have a market cap weighted benchmark, the portfolios are based purely on bottom up stock selection. This leads to a different sector- and regional allocation than traditional benchmark related strategies, which means that there are important diversification benefits to be gained;
  • The strategy of the Conservative approach can be combined with a high dividend strategy because both strategies are different forms of factor investing. The conservative approach is a form of low-volatility investing, while the high dividend approach is a form of value investing.

9. Research: evidence-based investing
Our investment philosophy is based on an evidence-based approach, integrated risk management and prudence. We are building on a research heritage dating back to Robeco’s first CEO Rauwenhoff in the 1930s, who said that “Every investment strategy must be research driven”. The financial literature is often our starting point for research projects and we have also made contributions to the ongoing academic debate. Our combined values and beliefs shape our identity and culture as research-driven investors.
 
10. Returns: strong track-record since launch
The results of Robeco Institutional Global Conservative Equities have been strong since its launch on the 28th of September 2006. The bar chart shows that the strategy has performed very well, both in terms of returns and risk, and in relation to the MSCI World as reference index. Measured from inception until ultimo July 2013, the average annual return of the strategy was 6.0% (2.9% MSCI World) with an average annual volatility of 10.9% (14.1% MSCI World). For the related period this means better returns with substantially lower risks.

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