Update: Impact of short selling restriction on Robeco 130/30 funds

Announcement

Update: Impact of short selling restriction on Robeco 130/30 funds

In this Update, we comment on the newly imposed restrictions on short selling and the impact –which is likely to be limited– on Robeco’s 130/30 funds, the funds that have inherent dedicated short positions in the portfolio.
Update restrictions Several countries, such as the US, the UK, Germany, France, the Netherlands and Taiwan, have announced restrictions on short selling.
Some countries imposed restrictions on all stocks, some only on stocks in the financials sector and countries such as France and Germany announced a list of specific stocks that are restricted for short selling. In some countries restrictions only apply to so-called ‘naked short selling’, while in other countries all sorts of short selling, including covered shorting are affected. Restrictions have been announced for a specific time period. In the US, for example, they apply until October 2, 2008 and in Germany until the end of this year.

Robeco’s 130/30 funds, Robeco 130/30 North American Equities, Robeco 130/30 European Equities and Robeco 130/30 Emerging Markets Equities, all have a process where the number 30 stands for the 30% of exposure that is shorted, so these funds are inherently impacted.
This process does not involve setting up so-called ‘naked short positions’, which are especially targeted in many restrictions because they are seen as more speculative. As Robeco’s 130/30 funds are sector neutral a net long position is always held in every sector. Therefore the Robeco 130/30 funds do not speculate on or profit from the downfall of any sector, as our goal is to profit from differences within sectors.

Even though shorting is an important tool for the 130/30 strategies, for now the impact will be very limited and is likely to remain limited for the following reasons:
Under the announced rules existing short positions are not restricted. Furthermore, we have an average holding period of 6-12 months, since we aim for long-term gains. This means that every month after rebalancing new positions form only a small part of total portfolio holdings.

We can therefore continue to run our investment processes within the new regulations. One consequence could be that we have to partly restrict the investment universe for the 130/30 funds and exclude possible new shorts within the financial sector in the future. Since we are sector-neutral in the funds we would maintain an unchanged neutral exposure to the sector. In the most extreme case it would only imply that we maintain our net exposure to financials by a long-only position, without any shorts. Even in this case we could still profit from the predictive power of the model within the sector, as we can overweight high-scoring financials and underweight low-scoring financials. For Robeco 130/30 Emerging Equities restrictions such as in Taiwan could ultimately imply we could reduce the 130/30 exposure towards a 120/20 exposure, although Taiwan tends to form a relatively small part of our short positions.

Conclusion For now the effects of the short selling restrictions remain very limited. After all, existing shorts are not affected, the holding periods of our portfolio positions (including the shorts) are relatively long and the portfolios are sector neutral, limiting the impact of restrictions on financials. If the restrictions will be kept in place longer than announced, this could imply that the 130/30 process is run with a somewhat smaller universe, with a modest expected impact on our investment process and performance.

Important information
This document has been carefully prepared by Robeco Asset Management, a trade name of Robeco Institutional Asset Management B.V. (hereafter Robeco). It is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell securities or investment products.
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The funds mentioned in this update are sub funds of Robeco Capital Growth Funds, that has a license from the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg. The prospectus and simplified prospectus of these funds are available free of charge via www.robeco.com.
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