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“We enhance the tools but the philosophy remains unchanged – we do the same as we have always done, but try to do it better”. Robeco Emerging Stars’ portfolio manager Jaap van der Hart lifts a veil on some of what he considers the most important elements that have made this strategy such a solid performer.
Robeco Emerging Stars was launched as a high conviction variant of the company’s core emerging markets strategy in 2006. Portfolio manager and Morningstar Fund Manager of the Year nominee, Van der Hart, has been with the strategy since inception. The core of the investment philosophy is the belief that focusing on a combination of active country allocation and stock selection in emerging markets can consistently generate alpha over the longer term. The strategy is contrarian in that it looks for undervalued companies with growth potential that have been overlooked by the market.
Long-term alpha generation in emerging markets
“A high conviction strategy enables you to focus on your best investment ideas with a limited number of holdings, between 30-50 stocks, while ensuring that your portfolio also remains well diversified over countries, sectors and stocks,” explains Van der Hart. This requires a balanced approach incorporating top-down country analysis and bottom-up stock selection. Being benchmark agnostic means that it has full flexibility to aim for the best return versus risk, irrespective of any index positioning.
“High conviction does not necessarily mean high risk,” emphasizes Van der Hart. The strategy may have a higher risk limit – this is 150% of the risk level of the MSCI EM Index – but in reality it is usually around 100-115% and it does not necessarily have a higher beta. The portfolio typically has an active share of around 85%, but there is no specific target for this.
A strategy should be structured, disciplined and repeatable
Van der Hart says there is no real dilemma in the case of ‘an attractive stock in an unattractive country’. “If the stock is good we’ll buy it. If we are negative on a country or its currency, we can still buy an exporter. South Africa is a good example, we are not so positive about the economic situation there, but the stock we hold has little domestic exposure.”
Typically, around 80% of the portfolio is invested in the top five countries, with a 35% limit per country. “We have had a fairly consistently high exposure to Korea – also the country with the highest positive contribution from stock selection.” Along with India and China, it is still currently one of our three largest country weights. In principle, our analyst coverage is organized by country. “The differences in terms of economy and political backdrop are enormous in emerging markets, which makes this logical,” says Van der Hart.
This forms an important part of the fundamental resources available to enhance the strategy. Although the focus on governance at corporate level is improving, it is not yet up to developed market standards. “We have developed an extensive ESG check list that forms an important part of the risk analysis,” says Van der Hart. Robeco also actively votes at shareholder meetings and pursues engagement with individual companies to try to positively influence behavior, also sometimes joining forces with other investors to increase its impact.
The strategy’s fundamental philosophy is to look for undervalued, overlooked companies with structurally ‘sound’ business models and high return potential. This all comes together in our proprietary valuation model, which is our main tool for assessing valuation. “The fundamental analysis is enhanced with quant elements,” says Van der Hart. “The quant valuation screening applies several valuation ratios which are used to shortlist stocks that can then be further evaluated fundamentally in greater depth.”
Another quant element monitors the short-term trending variables of stock price momentum and earnings revisions. Van der Hart explains, “These act as an important signaling device, alerting analysts to check whether their fundamental view still holds – is it a temporary blip or a structural deterioration?” And of course the same is true for positive news.
Van der Hart is quick to emphasize the importance of the team. “Consistency is vital and having a stable team really helps.” But he also highlights the importance of diversity. His view is underscored by the importance rating agencies like Morningstar attach to investment teams. “On average, the team’s members have around 15 years of investment experience: some have grown up professionally within the company, while others have gained experience at other firms. There is also a broad mix of nationalities which brings valuable local knowledge – differing backgrounds means differing views which helps ensure ideas are evaluated from a range of angles.”
‘Our biggest competitors are the markets themselves’
According to Van der Hart, having all the team members in Rotterdam also helps ensure a consistent approach. Of course, we travel regularly to visit countries and companies firsthand and have regular contact with our colleagues from the Asia Pacific team based in Hong Kong.”
Since inception (from Dec 2006-May 2017), the strategy has generated a gross annualized return of 9.45% (versus 5.34% for the reference index). 1Van der Hart’s fundamental approach and the strategy’s high conviction structure make it a logical choice for investors who are looking for active emerging market solutions. He plans to continue with what has proved to be a successful formula. When asked who his major competitors are, he replies, “The markets themselves.” And his goal is to continue to outperform them by ensuring the strategy remains well-positioned to benefit from developments in the emerging world.
1Figures for Robeco Emerging Stars (EUR) D-share, gross of fees, based on net asset value, all figures are in EUR. Since 01-07-2008, the reference index has been MSCI Emerging Markets, prior to that it was S&P IFC Composite. The source is Robeco Global Performance Measurement. These performance numbers are single portfolio performance numbers that can be part of a GIPS composite in which case this information is supplemental to the composite report. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.