Harnessing opportunities across emerging markets
Investing in emerging markets

Harnessing opportunities across emerging markets

Robeco’s history of investing in emerging markets is almost as long as our history as a company: we made our first emerging market investment – in Peru – back in 1930, the year after our company was founded. Today, we manage more than EUR 28.5 billion (June 2017, including Asia-Pacific) in a wide range of global and regional emerging market equity and bond strategies, all of which build upon the vast experience we’ve gained over the past nine decades.

  • 25 years of innovation
  • 4 major inefficiencies to exploit
  • 1994 The first dedicated team
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25 years of innovation

Our first emerging markets equity strategy was launched in 1994 and has regularly been improved by investment process enhancements. We have continuously built on our experience through innovation, also with respect to new product launches. For example, all our strategies have incorporated quantitative models since 2001. There are huge differences between our various investment approaches, but the track record of innovations shows that we only launch successfully tested strategies.

As one of the first continental European asset managers with a team dedicated to emerging markets, we are proud to be pioneers in this field, and continue to pioneer unchartered waters. We were one of the first asset managers to offer quantitative emerging market strategies and one of the first to launch a low-volatility strategy. In 2017 we were among the first to register a Chinese A-shares strategy in Luxembourg.

4 major inefficiencies to target

We see four major inefficiencies in emerging market investing and we aim to take advantage of these. The first is that ‘emerging markets’ are not a homogeneous asset class; instead, it is a grouping of very different counties that are in constant evolution. By actively analyzing countries, our fundamental investing teams are able to benefit from the differences in risks and opportunities between markets.

In determining our top-down allocation, we focus primarily on each country’s fundamentals, and in particular on our outlook for long- and short-term economic and political developments. But we also use other factors to analyze a country’s attractiveness, including earnings expectations, valuations, share price momentum and sentiment indicators. Environmental, Social and Governance (ESG) criteria are also crucial when investing in emerging countries, which means that we also assess a country's transparency, political stability and the progress it has made on establishing basic democratic principles and protecting shareholder rights.

The second opportunity is that local emerging equity markets are often driven by retail investors and short-term market noise. So we believe it is vital to have a long-term investment view to uncover structural drivers. To achieve this, we conduct in-depth research and look for companies that are positively exposed to the macro drivers that we identify in our top-down country analysis in our fundamental strategies. Meanwhile, we add multiple factors such as quality, value and low risk in our quantitative models.

Another important consideration is that emerging market investors often display behavioral biases, such as overconfidence and herding behavior. We employ leading-edge quantitative models as a tool to take advantage of these biases. Our stock selection model analyzes stocks based on three parameters: valuation, earnings revisions and momentum. This analysis has been part of the emerging equity investment process since 2001.

The fourth inefficiency that we consider is the market’s tendency to focus on high-quality growth stocks, which can lead to excessive valuations. To avoid investing in overvalued companies, we apply a deliberate value tilt by seeking to identify undervalued stocks whose earnings potential is not yet fully appreciated by the market.

ESG analysis is integrated into investment processes of all of our emerging market capabilities, as we consider many ESG factors to be strong leading indicators for long-term earnings.

1994 The first dedicated team

We’ve had a dedicated global emerging markets team since 1994. Throughout its history the team’s membership has been very stable – in fact, its current head was one of the founding members. Now consisting of eight portfolio managers and five research analysts, it receives considerable support from other experts within Robeco. This allows the team to remain small, focused and fully accountable.

We also have teams focusing on Asia Pacific Equities and quantitative equities, as well as global equity researchers. All teams work closely with RobecoSAM’s sustainability experts and our Active Ownership team. While the emerging market team is located in Rotterdam, underpinning a culture of collaboration, Robeco also has investment research teams in Hong Kong, Shanghai and Singapore who provide local expertise.

Our Asia Pacific Equities team in Hong Kong adopts a clear value bias in its portfolios. This is because while most investors in the region are looking for growth, historical data show that value has actually outperformed growth in Asia in the long term. In 2016 the team opened a local research unit in Shanghai, enabling them to cover the Chinese A-share market more effectively. As well as looking at both fundamental and quantitative data, the team also makes considerable use of technical analysis. This process results in portfolios consisting of the team’s highest-conviction investment ideas and an active weight of 75–90%.

Our Quantitative Equities team has managed over EUR 15 billion in emerging markets strategies since 2006. The Core Quant Enhanced Emerging Markets strategy offers an alternative for those investors aiming for a low tracking error solution. The team also manages an Active Emerging Markets Sustainable strategy that aims to outperform the market by offering investors integrated exposure to value and momentum factors, while offering a 20% lower carbon footprint than the benchmark. The Quantitative Equities team also runs an emerging market Conservative Equities strategy: an active, low-volatility approach that also integrates value and momentum factors.

On the fixed income side our Global Fixed Income Macro team runs an aggregate emerging fixed income strategy that seeks to add value over the long term by actively allocating to sovereign and corporate debt denominated in both local and hard currencies, with a focus on diversification to maximize risk-adjusted returns. Fundamental country research forms the basis of the strategy’s investment process. The team also manages a quantitative emerging fixed income strategy.

Our Credit team runs a strategy that provides well-diversified exposure to corporate bonds from across the emerging world. We apply the same proven investment strategy as our developed market credit portfolios, and focus on a company’s risk exposure rather than its location when deciding on which bonds to select. The team’s conservative approach to credit investing has seen the strategy build up a long track record of strong risk-adjusted returns.

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