In 2008, Robeco’s Jan Keuppens was part of a global equity portfolio management team that backed around 100 stock ideas, with investment responsibilities divided along sector lines. Although performance was good, on analyzing the portfolio’s returns, Keuppens noted that the largest, highest conviction bets tended to pay off, whereas the smaller, lower conviction positions were typically less successful.
Hence, the rationale behind the launch of the Robeco Global Stars Equities Fund was to concentrate investment on the strongest-conviction bets, ideas that the team had analyzed in the most detail. As Keuppens puts it, “I hate losing money and, by making the new fund’s active share as high as possible – ours has always been high at around 90% – we differentiate the portfolio from the benchmark,” adding that the aim is to maximize returns by focusing on the best ideas.
Given the tumultuous market events following the collapse of Lehman Brothers in 2008 and the onset of massive quantitative easing (QE) programs, in a risk-averse market environment, launching a concentrated, high-conviction global equities fund may have seemed counterintuitive. However, as it turned out, late 2008 was rather a good time to launch a new fund, active or not, as, after falling by about 20% over the first quarter of 2009, stock markets have rallied for the most part since.
But Keuppens cautions that for an active, stock picking approach to consistently outperform, correlation needs to come down, meaning that individual stocks need to move out of line with the market index. In broad terms, correlation went up around 2005 but has come down a bit since, suggesting that the market has been presenting more opportunities for bottom-up stock picking. He says, “In that regard, we’ve been pleased with the level of outperformance we’ve been able to generate during the fund’s first ten years.”
Market sentiment since 2008 has been heavily influenced by central bank action, not least QE, with the Federal Reserve quadrupling the size of its balance sheet to USD 4.5 trillion and the European Central Bank pumping around EUR 2.5 trillion into an asset repurchase program that lasted until December 2018. Even now, Keuppens believes that markets can be overly influenced in the shorter term by limited liquidity in credit markets and algorithmic trading.
He also believes that movements can be manipulated by flows into and out of ETFs, with passive investment generally taking a larger share of the market. However, with stock markets gradually less affected by QE, Keuppens is optimistic that the opportunity for active managers to add value should continue to improve over a three-to-five-year time horizon.
Robeco started integrating ESG around 2005 and the Global Stars Equities team began to formally implement ESG in the investment process soon after the fund’s launch, around 2009/2010. While ESG factors have grown in popularity amongst other fund management companies since, Keuppens stresses that ESG screening is much more than a box-ticking exercise and is adamant that the thorough nature of the team’s ESG analysis has helped them to create real value for the fund.
He says, “A big motivation behind our greater integration of ESG is to help us to better understand the risks and opportunities, and the wider effects of change on business models.” Covering key aspects such as corporate governance, operations/innovation management, supply chain management, labor relationships and stakeholder engagement, the team’s ESG analysis assesses how these various aspects impact the key value drivers of companies – revenue growth, margins and capital needs.
Keuppens continues “We compare how each company performed against a benchmark for the overall industry, helping us to determine how companies perform in key areas including supply chains, labor relations and so on. We can then assess whether ESG factors influence the growth potential positively or negatively, helping us to map the risk/opportunities, and allocate investment accordingly.”
Risk management is a vital element of portfolio management, never more so than for concentrated, high conviction funds. Keuppens stresses that as part of the team’s risk management models, they are particularly vigilant about three key risks of fundamental investing. He says, “First and foremost, we need to get the fundamentals right, so we’re looking for sustainable revenue growth, especially among stocks that offer relatively low correlation.”
Keuppens explains that debt is another significant factor, taking the view that the credit cycle always comes back into play. He says, “I’m wary of companies with excess debt/leverage, so net debt in the portfolio is way below that of the wider market”. Thirdly, he notes that the key risk in fundamental investing is that of overpaying, explaining, “Even for good companies, if you pay too much, you might have to wait 20 years to get your money back, so buying at the right price is key.”
Although Keuppens believes that top-down macro-led strategies can add particular value in emerging markets, especially in country allocation, he’s a strong advocate of bottom-up stock selection in developed markets on a three-to-five-year time horizon.
He says, “Of course we continually assess what the risks are in the portfolio in terms of macro sensitivities and how they fit with our ideas. We stress test all our ideas in macro environments in order to be prepared for various outcomes. So we’re still very much bottom-up driven. Overall, I’m trying to find stock ideas that ideally have low correlation with the portfolio’s existing holdings and with particular macro scenarios, recognizing that the degree of correlation might change.”
Nevertheless, Keuppens acknowledges that macro events have some degree of influence on all stocks, even if the degree of correlation can be much lower for individual stocks, such as those undergoing self-help. To put late 2018’s selloff in a macro context, Keuppens believes that talk of an Armageddon situation has been overdone, noting “We might have a global recession, but, given the high free cashflow yield, our portfolio should weather even that kind of scenario well.”
Keuppens is adamant that backing stocks with high ROIC (return on invested capital) and that are attractively valued on normalized free cash flow, using ESG to enhance the risks and opportunities in the business, can continue to produce attractive results for investors. However, he stresses that valuation is key and that the market environment can change rapidly, noting that as recently as mid-2018, finding interesting stocks without stretched valuations was very difficult.
However, sounding a positive note, he concludes that since the market’s fourth quarter slide, “The market pullback has changed things for the better and we’re finding many more attractive opportunities now.”
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.