Customizing quant with Quintet

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In an investment world increasingly focused on sustainability, investors face the complex task of aligning their portfolios with sustainable practices and evolving regulations. Each investor’s journey is distinct, often presenting challenges in identifying an appropriate starting point or pathway. In response, Robeco leverages its sustainable investing IP and strong quantitative research capabilities to meet clients at the current stage in their sustainability journey. A prime example of this approach is our collaboration with Quintet, aimed at increasing the level of sustainability while maintaining a robust client portfolio.

In our discussion with Paul Linssen, Head of Fund Solutions at Quintet and Robin van der Poel, Robeco’s Deputy Head of Sales, we explored Quintet’s desire to enhance sustainability without trading in returns. This conversation shed light on the journey for a bespoke solution and how Robeco, using our Customizer tool, effectively met Quintet’s specific needs.

What unique challenges was Quintet looking to address at the start of this journey?

Paul Linssen: “This first came up around Covid, when we started discussing developments within Quintet. I indicated to Robin that we were trying to make our portfolio more robust, while maintaining the sustainable profile. We had discovered that the instruments we used had a relatively high correlation. So we were looking for something that would diversify compared to the methodology we already had in place, in this case the MSCI World SRI index. And we preferred an instrument that ideally had a lower tracking error compared to the parent benchmark, because we measure performance against traditional benchmarks. So those were the two main challenges we faced, and that’s when the conversation kicked off.”

What aspects of collaborating with Robeco to develop a customized solution were the most significant for you? What elements were you especially drawn to?

Paul: “The starting point for us is to feel comfortable with the skills and in-house expertise. Having an established relationship with Robeco, we knew that your quant side was strong. We’ve used several of your solutions over the years, so when we asked for a lower tracking error portfolio, we were confident we’d get a robust one. Your strong track record in sustainability combined with the quant elements, especially around in the light of SFDR discussions, was another compelling argument in favor of Robeco in supporting such products.

Practicalities also play a big role, like the flexibility to create share classes across Quintet’s locations. We’ve got a lot of different locations with diverse needs, and the more flexible your partner, the easier it is to gain acceptance across different countries. This flexibility from your end has been a significant advantage.

The comparative discussions regarding your proposed solution and the indices, and the evaluation of added value and overall portfolio effect was also helpful. And the work around the SDGs was especially appealing to the sustainability team because it was a different setup and one that we could easily follow in terms of how to build the portfolio.”

The dedicated marketing support during the launch was crucial, too. Given that quantitative strategies differ from fundamental ones, detailing what the product entails is important. Your support was excellent, adding to its widespread acceptance. One last thing to mention is the softer but equally important values: our open dialogue, mutual trust, responsiveness, reliability, and a long-term focus.

Robin, could you please take us through the journey so far from your perspective? In terms of your collaboration with Paul and Quintet and the process behind the scenes?

Robin van der Poel: “As a client, Paul didn’t witness our extensive behind-the-scenes work. Mutual trust, as Paul said, is essential, and our personal relationship played a role in co-creating this solution. I appreciated the openness from both sides, and for our part we opened up our quant research. Jan de Koning, our Head of Quant Client Portfolio Management closely collaborating with the client. The request was complex, involving balancing the risks of the SRI indices with a product offering similar sustainability but lower tracking error. We said yes, we can do that, but then had to backtest and show how it worked.

Initially, there was significant exploration into the structure and the right level of tracking error to reduce the overall tracking error in Quintet’s US portfolio. Our collaboration with Paul and team was marked by frequent discussions to refine the product to meet their specific needs. For example, in our SDG discussions, we debated whether to exclude only the -2 and -3 scoring companies, or also the -1s in terms of the SFDR.

The process, lasting about six to eight weeks, was dynamic. Our quant team’s flexibility was highly appreciated. We constantly made adjustments, potentially laying the groundwork for the Quant Customizer we now use. This tool enables real-time discussions with clients to adjust tracking error or sustainability characteristics. At that time, however, it was still a concept and not integrated into the tool.

In terms of marketing support, Jan and I in particular held four webinars for the investment teams across Europe. This also supported the perception of the products within Quintet. With the SRI indices lagging behind the regular ones, there were question marks around sustainability. Robeco promised and delivered US exposure with a lower tracking error and a high level of sustainability and even outperformed the benchmark. It’s a good example of the quant team translating client desires into a solution they want.”

Can you elaborate more on the solutions we’re developing with clients in general?

Robin: “We see a lot of interest in customizing portfolios based on client preferences, which are pretty nuanced, maybe on a regional basis or in terms of the desired outcomes. This is where we can use our customizer tool to assess what sustainability considerations they want to take into account, if they have specific return targets, and what flexibility they have in terms of risk budgets. So if it doesn't fit cleanly into a pooled vehicle, we can customize the solution for them on a mandate basis. That's where we are seeing activity. Given that we use a quant platform capable of trading off sustainability, risk, and returns, that flexibility is quite appealing to clients.

And we increasingly see clients coming to us with the passive question, wanting a higher level of sustainability because standard indices are not that flexible, and often not that sustainable. Or, if they are, they come with an elevated tracking error, echoing Quintet’s experience with the SRI indices. In this example, when a choice is made to overweight US assets while using the SRI index, you often see underperformance due to its strict exclusions and constraints. This means if you’re bullish on the US and expect high returns, going the SI route might lead to lower returns than expected. It’s a significant shift from what you’d normally anticipate, and it can be tricky to explain why there’s a drop in performance. This is hugely mitigated with this solution because we tick a lot of boxes. By combining everything in one algorithm, we deviate much less.”

Paul: “Another factor is that we have a pan-European footprint. We noticed that the leeway people accept in terms of underperformance linked to sustainability, for example in 2022, was higher in the Netherlands than perhaps some other countries. This customized solution really caters to both sides of that debate, striking the right balance.”