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‘One less impressive year is not enough to ruffle our feathers’

‘One less impressive year is not enough to ruffle our feathers’

02-02-2017 | Insight

Investors have shifted their money from defensive to cyclical sectors in the last few months. This has had a negative effect on Robeco Global Consumer Trends Equities. Fund managers Jack Neele and Richard Speetjens explain why their fund's returns have lagged. “The type of stocks we invest in perform better than the market over the course of an economic cycle.”

  • Jack  Neele
    Jack
    Neele
    Portfolio Manager Robeco Global Consumer Trends Equities
  • Richard  Speetjens
    Richard
    Speetjens
    Portfolio Manager Robeco Global Consumer Trends

Speed read

  • Investors prefer cyclical sectors to defensive ones
  • Value stocks more popular than growth stocks in 2016
  • Augmented and virtual reality are interesting investment areas

Investors have shifted their money from defensive to cyclical sectors in the last few months. This has had a negative effect on Robeco Global Consumer Trends Equities. Fund managers Jack Neele and Richard Speetjens explain why their fund's returns have lagged. “The type of stocks we invest in perform better than the market over the course of an economic cycle.”

It's as if Mario suddenly turned around and ran off in the opposite direction halfway through the game. In the so-called endless run game, Super Mario Run, the famous game persona runs continuously from left to right across your telephone screen. To win points, the player can make Mario jump to avoid obstacles and try to gather as many coins as possible.

In Mario's two-dimensional world, the direction of the game is fixed. As was the direction of investors – at least until recently. In the last few years they have consistently shifted their money into defensive stocks. In their search for yield, in the low interest-rate, low growth world they found themselves in, they ended up buying stocks with stable revenues and earnings growth. Stocks that were not too volatile and often had an attractive dividend.

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Defensive stocks out of favour

But half way through 2016, these investors started worrying that these defensive stocks were overvalued. Stock prices were no longer reflecting companies’ real revenue and earnings figures. There were signals that the economy was picking up, interest rates were rising and commodity prices recovering.

“Since the summer, the equity market has been rotating out of secular growth companies into cyclical growth stocks and the election of Donald Trump as the new US president added momentum to the trend”, reflects Richard Speetjens. Together with Jack Neele, he is portfolio manager of Robeco Global Consumer Trends Equities. “Trump’s election promises to the steel and oil industry and his plans to invest in infrastructure are boosting stock prices in the capital-intensive sectors. Financial stocks are benefiting from the higher interest rates resulting from Trump's proposed fiscal policy of more government spending and lower taxes.” Investors’ capital has flowed out of defensive sectors (utilities, telecom and consumer staples) and into cyclical sectors (steel, mining and oil). Dividend stocks, that suffer when interest rates rise, fell out of favor. Dividends hold less appeal when interest rates are high.

Style rotation

This sector rotation had a negative effect on Robeco Global Consumer Trends Equities, resulting in underperformance versus the reference index in 2016. The fund generated 1.32% returns1 versus 11.09% for the MSCI All Country World Index.
The Robeco Global Consumer Trends Equities investment strategy is based on three long-term trends: the digital consumer, the emerging consumer and strong brands. Digitalization is moving forward and consumers are buying more and more products and services digitally – via Internet. Consumers in emerging markets are becoming wealthier and have more money to spend. While strong brands maintain their appeal and dominant market position.

The fund, therefore, has a clear overweight in growth stocks in the consumer and technology sectors. And these are exactly the types of stocks that underperformed in 2016. “The winners of 2015 were in many case the losers of 2016. Cyclical sectors such as materials and energy booked profits between 25% and 30%, while defensive sectors like health care and consumer staples disappointed with losses of 5% and an almost flat 2-4%, respectively", explains Neele.

‘We select growth stocks with consistent performance in preference to cyclical names’

Prognosis: above average earnings growth

In 2017, Neele and Speetjens are still expecting above average earnings growth of around 15 percent for the companies in which they are invested compared to 10 percent for the broader market. Speetjens: “Profits come partially from Internet stocks like Facebook, Alphabet, Amazon and Alibaba, which are still showing above-average growth. Strong brands continue to grow too. According to Bloomberg analysts are expecting the likes of Starbucks and MasterCard to enjoy earnings growth of around 15% this year. And emerging markets are back in form too. Last year they reported positive numbers again for the first time in four years. We have also increased our exposure to emerging markets by adding more cyclical stocks, such as Chinese booking website Ctrip and rice wine producer Kweichow Moutai.”

“For the first time in many years, we have also increased our exposure to the luxury goods segment. At the end of last year, we added LVMH, the company behind brands such as Louis Vuitton, and Moncler, known for its popular down jackets, to the portfolio. After several difficult years for luxury goods, mainly as a result of disappointing sales in China, we now predict a pick-up in 2017”, adds Neele.

The market rotation doesn't mean that Neele and Speetjens are shifting their company visits from technology Walhalla Silicon Valley to the steel factories of the Rust Belt. “We are sticking to our strategy. The trends in which we invest will not disappear overnight and we focus on companies with solid fundamentals. Their stock returns can fluctuate in the short term, but we expect them to outperform more cyclical companies in the longer run over the course of an economic cycle", says Speetjens.

Virtual reality, real growth

The fund managers continue to look for the growth names of the future. Enter Mario again. According to Neele, games that can be played on smartphones are an interesting area. “Certainly if they involve augmented reality or virtual reality. Developments here are really taking off. Game developers like Nintendo and Activision are trying to take advantage of this trend. Artificial intelligence and cloud computing are also growth areas. The major Internet platforms Facebook, Google and Amazon are investing heavily in these digital techniques.”

Neele concludes: “We invest in long-term trends and so we have a long-term investment horizon. In 2015 we generated above-average returns; in 2016 our performance was unfortunately below average. But in the last five years we have outperformed the market by an average of more than 4% on an annualized basis. After last year's market correction, we predict better returns for this year. One year of less impressive performance is not enough to ruffle our feathers.”

1D share class, gross return before costs and fees.

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