What is a Wholesale Client?
A person or entity is a “wholesale client” if they satisfy the requirements of section 761G of the Corporations Act.
This commonly includes a person or entity:

  • who holds an Australian Financial Services License
  • who has or controls at least $10 million (and may include funds held by an associate or under a trust that the person manages)
  • that is a body regulated by APRA other than a trustee of:
    (i) a superannuation fund;
    (ii) an approved deposit fund;
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme.
    within the meaning of the Superannuation Industry (Supervision) Act 1993
  • that is a body registered under the Financial Corporations Act 1974.
  • that is a trustee of:
    (i) a superannuation fund; or
    (ii) an approved deposit fund; or
    (iii) a pooled superannuation trust; or
    (iv) a public sector superannuation scheme
    within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of at least $10 million.
  • that is a listed entity or a related body corporate of a listed entity
  • that is an exempt public authority
  • that is a body corporate, or an unincorporated body, that:
    (i) carries on a business of investment in financial products, interests in land or other investments; and
    (ii) for those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public, within the meaning of section 82 of the Corporations Act 2001, the terms of which provided for the funds subscribed to be invested for those purposes.
  • that is a foreign entity which, if established or incorporated in Australia, would be covered by one of the preceding paragraphs.
I Disagree
Short-term stock selection model boosts performance Enhanced Indexing

Short-term stock selection model boosts performance Enhanced Indexing

11-12-2014 | Research

Robeco Enhanced Indexing invests in global developed markets equities, and has a low tracking error against its benchmark, the MSCI World index. In recent years, performance has been strong. In this article we focus on one element that distinguishes Robeco’s strategy from those of others: our short-term stock selection model (SHOT).

  • Michael Strating
    Managing Director, Head of Core Quant Equities
  • Wilma de Groot
    de Groot
    CFA, Director, Portfolio Manager
  • Weili  Zhou
    CFA, Director, Researcher

The short-term stock selection model

The SHOrt-Term stock selection model (SHOT) was developed in 2007 as a stand-alone performance driver for a holding period of one to three months. It aims to distinguish factors not covered by the core stock selection model, which has an investment horizon of nine to twelve months. The model’s structure is similar to that of the core stock selection model: it combines variables into themes, which are combined into a final model ranking.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates

The Robeco short-term selection model (SHOT)

Source: Robeco

The model identifies three themes: price reversal, liquidity and earnings revisions. They exploit market inefficiencies arising as a result of predictable patterns in investor behavior:

  • Price reversal. Academic literature shows that stocks with high recent returns tend to underperform stocks with low recent returns. This theme exploits the systematic overreaction of investors and works especially well in a turbulent market environment.
  • Liquidity. The SHOT model likes stocks that have had more attention in the past one to three months. Academic articles have documented that abnormal trading volumes are usually caused by investors with material, non-public information. This is usually positive for stock prices.
  • Earnings revisions. This theme exploits the empirical finding that stocks for which analysts have recently upgraded earnings forecasts tend to outperform, whereas those with negative revisions tend to underperform.

In brief, SHOT likes stocks that have recently experienced a strong drawdown, favorable short-term earnings revisions and increased attention from investors.

SHOT’s integration into quantitative equity strategies

In the investment process, we use the ranking of the core stock selection model as a starting point. Subsequently, we adjust this ranking - upwards or downwards - in accordance with the ranking produced by SHOT. In doing so, we apply a maximum adjustment of 20 percentage points.

Positive performance contribution since the start

The table below shows that the SHOT model performed well on a standalone basis since it was included in the model in March 2009. The model was able to separate the winners from the losers.

Besides strong performance, SHOT also offers diversification as the correlation with the core stock selection model has been around 20% since March 2009. The chart shows that the incorporation of the SHOT model has made a positive contribution to performance.

Cumulative log performance of the top-minus-bottom 20% of the stock selection model with and without integration of SHOT, March 2009 - December 2013

Source: Robeco. The graph does not represent returns of an actual portfolio. It depicts returns of securities as ranked by the Stock Selection Model, as used by the Quantitative Equities team. We assume a 3-month holding period. Securities ranked in the top or bottom quintile may or may not have been included in the actual portfolio. Results are shown gross of fees. Results would be reduced by application of fees and expenses incurred in the management of the account. Returns shown do not represent the results of actual trading. Actual results could have been different, and potentially lower than the hypothetical results that are presented.

SHOT makes the difference

Robeco Enhanced Indexing shows a strong investment performance.

Over the past five years, the integration of the short-term stock selection model (SHOT) in the investment process has contributed to this performance. Improving the timing of buy and sell decisions, SHOT differentiates Robeco’s strategy from other strategies with similar investment objectives.

Subjects related to this article are: