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Exploiting opportunities across the emerging world
Emerging markets

Exploiting opportunities across the emerging world

Robeco’s history 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 20 billion (September 2016) 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.

  • 20 years of country research
  • 4 major inefficiencies to exploit
  • 1994 The first dedicated team
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20 years of country research

There are huge differences between the various emerging equity markets and they are constantly changing over time. This means that active country analysis is a key factor in ensuring we take advantage of these. It is also one of the main performance drivers of our global emerging markets strategies.

The experience we’ve gained from over 20 years of conducting country-specific research plays a vital role in understanding the macro environment in which emerging countries operate. There are significant differences in economic cycles, the political landscape and local investor sentiment across emerging markets. What’s more, local investors have a tendency to focus on their home markets, so differences in sentiment give rise to further inefficiencies at country level that we can exploit.

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.

4 major inefficiencies to exploit

We see four major inefficiencies in emerging markets and we aim to take advantage of these.

The first is that emerging markets are not a homogeneous asset class and are in constant evolution. By actively analyzing countries, we are able to benefit from the differences in risks and opportunities between markets.

The second opportunity is that local emerging equity markets are often driven by retail investors and short-term market noise. So we believe it’s 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.
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 exploit 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 the stock selection process, as we consider many ESG factors (especially corporate governance issues) 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.

Key support comes from our Asia Pacific Equities team, and our global and quantitative equity researchers. The team also works closely with RobecoSAM’s sustainability experts and our Governance & Active Ownership team. While the Emerging Market team is located in Rotterdam, ensuring 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 covers Asia Pacific equities. They adopt a clear value bias in their portfolios 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 they strengthened their regional presence by opening 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 helps them avoid buying into value traps or taking profits too early in a region in which stock price momentum can be very strong. This process results in portfolios consisting of the team’s highest-conviction investment ideas and an active weight of 75–90%.

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. Our Quantitative Fixed Income team also manages an emerging fixed income strategy.

Our Credit team runs an emerging credit 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 issues 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.

Our Quantitative Equities team manages over EUR 10 billion in three successful quant emerging markets equity strategies. The Core Quant Enhanced Emerging Markets strategy offers an alternative for those EM investors aiming for a low tracking error solution. This strategy aims to deliver a better performance than the MSCI Emerging Market Index and ensure a very low controlled tracking error. For institutional investors, the tracking error of Core Quant Solutions can be scaled to client preferences. The team also manages an Active Emerging Markets strategy that aims to outperform the market by offering investors integrated exposure to value and momentum factors.

The Quantitative Equities team also runs an emerging market Conservative Equities strategy: an active, low-volatility approach that also integrates value and momentum factors. This strategy aims to generate returns that are in line with or better than the market, but with a significantly lower downside risk.
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