We are quant specialists and have been running rules-based portfolios for more than 15 years. Our proprietary models leverage in-house research to exploit market inefficiencies in equities and fixed income markets. Research by our in-house experts is the cornerstone of our investment processes.
Emerging markets have become increasingly important to equity investors due to their fast growing economies. But what is the relationship between risk and return in these markets? Answer: it is flat or even negative. Empirical results show that the volatility effect - long-term equity returns at distinctly lower downside risk - is significant, robust and distinct.
There is a shift towards allocating to the factor premiums momentum, value and low volatility. However, since common factor indexes are a suboptimal way to harvest factor premiums, this paper shows the improved results of a more sophisticated approach. Factor strategies developed by Robeco lead to higher returns, while lowering the risks, resulting in higher Sharpe ratios.
Investors increasingly embrace “smart beta” investing, by which we mean passively following an index in which stock weights are not proportional to their market capitalizations, but based on some alternative weighting scheme. Examples include fundamentally-weighted indices and minimum-volatility indices. In this whitepaper we first take a critical look at the pros and cons of smart beta investing in general. After this we successively discuss the most popular types of smart indices that have been introduced in recent years.
After Robeco’s first book on the volatility effect, David Blitz, PhD, Head Robeco Quantitative Equity Research and Joop Huij, PhD, Senior Quantitative Researcher have taken the broader perspective of Factor Investing as research topic for this new book.
Residual Equity Momentum for Corporate Bonds
For decades academic researchers and investors have been fascinated by investment strategies that deliver extra returns simply by making use of the familiar calendar effects. A clever strategy will allow substantial profits to be made.
An enhanced low-volatility strategy, which also provides exposure to valuation and sentiment factors, can improve returns by up to 6% a year.
Corporate bond returns consist of two distinct components: an interest rate component, which is default-free and anti-cyclical, and a credit spread component, which is default-risky and pro-cyclical.
“The higher the risk, the more deluded the investors,” according to Eric Falkenstein, PhD, speaking at the Robeco 2012 Low-Volatility Investing seminar.
A long-time advocate of low-volatility investing, Robert Haugen, believes the evidence in favor of low-volatility investing is overwhelming.
We are pleased to present you with this collection of 13 articles on low-volatility investing. The articles included here share two things in common: they all dig into the low-volatility anomaly and they are all written by Robeco researchers.
In this Research Note we show that low-risk credits had superior risk-adjusted excess returns over the past 20 years.1 By selecting low-risk bonds from low-risk issuers, investors would have earned credit-like returns at substantially lower risk.
The first and only book to focus on the volatility effect, "Low-Volatility Investing", presents low-risk investing from a number of different angles important to investors.
We provide a proof that volatility weighting over time increases the Sharpe or Information Ratio. The higher the degree of volatility smoothing achieved by volatility weighting, the higher the risk-adjusted performance
In this study we evaluate the performance of actively managed equity mutual funds against a set of passively managed index funds.
The volatility effect is present in US stock returns in every decade from 1931-2009. During these decades, low-volatility stocks produced a positive absolute return, with lower risk than the market-capitalization-weighted index.
Ibbotson’s “Stocks, Bonds, Bills and Inflation” data set is widely used because it provides monthly US financial data series going back to as early as 1926. In this data set, the “default premium” is calculated as the difference between the total returns on long-term corporate bonds and long-term government bonds.
New research from Robeco identifies and corrects for biases in analyst earnings revisions, says Senior Quantitative Equities Researcher, Joop Huij.
A short-term reversal strategy based on residual momentum reduces exposure to systematic factors and results in lower risk and better returns than a conventional momentum strategy.
We derive expressions for the Information Ratio (IR) that can be expected from market timing strategies in non-parametric and parametric settings. Our results hold as superior approximations and lift Grinold’s  “Fundamental Law of Active Management” to an operational level.
What is the best way to measure the performance of a strategy focused on risk-adjusted return? David Blitz and Pim van Vliet answer this question in their article, Benchmarking Low-Volatility Strategies, published in the Journal of Index Investing.
An optimal portfolio allocation will have large exposures to value, momentum and low-volatility strategies, according to a study of US equity returns over 40 years.
Several studies report that abnormal returns associated with short-term reversal investment strategies diminish once transaction costs are taken into account.
Inflation is on the rise and bond investors fear further inflation increases. Active duration management is required to protect fixed income portfolios against the adverse impact of higher inflation. In this note we extend the backtest of the duration model to study its performance in times of rising inflation. The duration model has predicted bond returns successfully during such periods. Robeco’s quant duration strategy is hence well-suited to navigate bond portfolios through periods with high or rising inflation.
This comprehensive investigation of the relation between the value anomaly and distress risk finds that value stocks are not cheaper than growth stocks due to the risk of financial distress.
This study provides a comprehensive investigation of the relation between the value anomaly and distress risk. Using risk measures based on accounting models, structural models, credit spreads and credit ratings, we find no relation between the value premium and distress risk. Our findings are inconsistent with the notion that the value effect is a compensation for distress risk.
We examine the performance of passively managed exchange-traded funds (ETFs) that provide exposure to global emerging markets equities. We find that the tracking errors of these funds are substantially higher than previously reported levels for developed markets ETFs.
A decentralized professional investment process can lead to inefficient portfolios. Low-risk equities are undervalued because active managers have a dual incentive to buy high-risk stocks.
The year 2010 can be split in three parts, according to the outcomes of the duration model. In the first months of 2010, the model mainly anticipated higher bond yields. From late May to early October the model mainly forecast lower yields.
The year 2011 can be split in two parts, according to the outcomes of the duration model. In the first four months of 2011 the model mainly anticipated higher bond yields. Yields did rise initially, but they soon started falling. From June onwards, the model mainly forecasted lower yields. Yields did indeed decline over this period. The model performed positively and as a result, the funds outperformed their respective benchmarks in 2011.
Generating benchmark-like returns is a difficult job in the High Yield corporate bond market. High index turnover and illiquidity, i.e. high bid-ask spreads, are the main reasons why passively tracking a High Yield index comes at significant costs.
We build on the work of Wright and Zhou (2009) who show that the average jump mean in bond prices can predict excess bond returns, capturing the countercyclical behaviour of risk premia.
Pension funds can protect funding ratios by making low-risk stocks a part of their equity allocation, says Pim van Vliet, Senior Portfolio Manager, Robeco Low Volatility Equities.
We document the presence of economically and statistically significant value and momentum effects in the new emerging equity markets in the world, the so-called frontier emerging markets. We are the first to investigate the characteristics of individual stocks in these markets.
Efficient markets theory has been challenged by the finding that relatively simple investment strategies are found to generate statistically significantly higher returns than the market portfolio. Well-known examples are the value, size and momentum strategies, for which return premiums have been documented in US and international stock markets. Market efficiency is also challenged, however, if some simple investment strategy generates a return similar to that of the market, but at a systematically lower level of risk.
Portfolio diversification may be the only free lunch available to investors. But diversification isn’t always implemented optimally. Pim van Vliet, senior researcher with Robeco in Rotterdam, explains how a Dynamic Strategic Asset Allocation approach can stabilize risk while enhancing returns.
Some of the most influential scientific papers on the predictability of bond markets connect theory with the tested predictive power of the variables of Robeco’s duration model. A small sample of academic evidence on the predictability of fixed income markets is discussed in this paper and its link to the model is illustrated. The sample, which we selected from many articles, consists of three key academic publications that have strong links to three of the model’s variables. The findings of the publications are discussed in brief and compared with Robeco’s duration model.
We examine competing explanations, based on risk and behavioral models, for the profitability ofstock selection strategies in emerging markets. We document that both emerging market risk and global risk factors cannot account for the significant excess returns of selection strategies based on value, momentum and earnings revisions indicators.
The last decades have witnessed some major developments in the field of asset pricing. These have contributed to a better understanding of stock, bond and other asset prices and have influenced other disciplines such as corporate finance and macro economics.