Erika van der Merwe (Erika): It's never a dull moment in the investment industry. Disruptive trends, new technologies, regulatory developments and clients with ever more sophisticated needs are now a way of life for asset managers, all while maintaining healthy performance, of course.
Male voice: Welcome to a new episode of the Robeco podcast.
Erika: Mark van der Kroft is very familiar with the complexities of navigating change and challenge in investments. He's Robeco’s Chief Investment Officer for fundamental and quant equity, and serves on the Robeco ExCo. Welcome, Mark. Super to have you with us.
Mark van der Kroft (Mark): Thank you, Erika. Nice to be here.
Erika: Mark, the past year or more has been very unusual for investments and with very little guidance seemingly from previous experience and past market cycles. What are your reflections on this period, both as someone with strategic responsibility as an asset manager, and as someone who managers and coaches investment teams?
Mark: Well, indeed, it has been fascinating, Erika, as you say, and I sometimes compare it a bit with when I watch television, for example, and you look to the weather forecast and normally when you hear them talk about when the atmosphere is stable, it's boring and when the weather really changes a lot and you get thunderstorms, et cetera, and then all those people get really excited. And to me, it's a bit the same being in the investment world. It feels like when the atmosphere is getting turbulent and when markets are showing huge swings, then of course, it becomes a bit dangerous to be out there. But at the same time, you feel the adrenaline and you feel that portfolio managers are getting really up to the toes and you know, that's where you’re here for. And that gives you lots of opportunities to really show that you have skills and that you really try to master those huge swings in financial markets. So, yeah, on balance, this is the period in which we basically like to be in.
Erika: Change is a reality in investments. And I think that's very clear from your description of your working life in the industry in which you are. Now I think it requires a high degree of nimbleness and flexibility to survive and thrive in this industry. At the same time, it strikes me that the asset management industry places a very high value on stability. Would you say there's some sort of a tension between this need for stability and the importance of always being in the process of reinventing oneself and having that adrenaline?
Mark: Yes, to a certain extent that is true. It's sort of a dilemma. And, you know, being long in a business that shows that you have to go through huge economic cycles, huge market swings, and at the same time, you must remain calm, understand what's going on. And I think that is something which sometimes feels like a bit of a contradiction, because when you have these huge swings, like we have currently, for example, in the growth or value debate and the swings in the markets, which are what we're currently seeing, the risk is that you want to change. That you want to change your style. And that's absolutely not what you're here for. Clients commit their money to a certain investment philosophy you have, which is embedded in your whole process for many, many years. And they expect you to stick to your style or they expect you to continue to, you know, manage your portfolios according to the philosophy you have. And that's sometimes a bit of a finding the right balance in there and trying to keep calm, trying to navigate through those, let's say, you know, stormy weather. And I think being long in the business, that helps you, it helps you to indeed keep this oversight, understand where performance is coming from in times when sometimes, you know, you have some headwinds and sometimes you have tailwinds, and really understand what's going on and then indeed remain sure that you don't do stupid things or change things for the sake of that, you see swings in markets and that stability, I think, and navigating in that stability on the one hand and huge market swings on the other. I think that's something which is very important in the role I have to play in overseeing indeed many teams with different styles and different portfolio managers. But at the same time, yeah, asking the right questions. You know, being sharp on if we really understand where the swings are coming from, if we really understand what it means for your portfolio and make sure that we remain loyal to what we promise to our clients in terms of the way we invest. And, yeah, you know, over the years that has for me been a terrific way in doing my job. It's a bit of coaching, but it's, yeah – keeping this oversight to me is really a nice challenge in this whole environment.
Erika: Mark, you oversee both the quant equity and the fundamental equity teams, which I would imagine must be like managing creatures from Venus and from Mars. Quants love what they call ‘deep history’. Again, yesterday, I heard one of the quants using this term. While the fundamental managers are assessing the distant future, does it make sense to include these two extremes within one house, never mind the difficulties of keeping it all together.
Mark: Yeah, I think it does make sense. And, you know, to start with, as you say, different creatures – in a way that is true, because if you look to, let's say, the way we build portfolios, that's usually built upon past decades of data, finding historical relationships, being based on academic research and then building portfolios with certain characteristics based on the evidence you have, building a well robust, diversified portfolio. And indeed, that is different than sometimes on the fundamental side, where, for example, on our thematic offerings and trends offerings, where you don't look back into the past and build a portfolio on the back of a benchmark but where you look for, you know, future winners and almost forget about the benchmark and build a somewhat more high-conviction portfolio. And that seems to contradict [each other]. At the same time, I think it is very valuable to have those kinds of, let's say, different offerings in one firm, for several reasons. I think it helps us with, let's say, the cross-fertilisation between those two offerings. It makes us stronger. It helps us understand what we do and why we do the things we do. And second of all, I think it's also important to note that there are different investment views, but also our clients have different investment views. There are clients who, you know, don't believe in quant investing. They want the emotion of fundamental investing. They don't want to look back. They only want to look forward and believe that that is the way to, you know, to put your money to work. At the same time, you have clients who absolutely don’t want to get the emotion into the equation. And 100 percent rule-based portfolios driven by strong computer-based models and based on evidence of the past. And I think catering for these two needs, I think that's the beauty we have in in our firm. And the third part I would like to mention as well, I think the combination of the two is also very interesting in the sense that building a total portfolio can also consist of two, let's say, these different approaches where you can have a sort of a well-diversified core portfolio built from the rule-based, low-risk quant portfolio with a satellite consisting of much more benchmark, unaware, high-conviction, thematic approach. And I think that therefore, for several reasons, it's interesting to have this kind of, let's say, different investment styles under one roof.
Erika: Now, perhaps directly in support of your points about the value of combining the two styles: some of your Robeco colleagues recently interviewed Professor Bob Litterman, a veteran quant researcher and investor of Black Litterman fame. They asked him about the best way to approach climate investing. And here he is on that point.
Bob Litterman (recording): The world is complex. Now, when you talk about climate, we can't look at the historical data to tell us what's going to happen. We haven't done this experiment before. We're doing something fundamentally new. And yet here I am, a quant and I see what's going on and I see that there's going to be a rapid transition. The world’s going to be very different. So how do I think about investing in that world? Well, if you ask me, is it much more like fundamental investing than quant investing as we think about it? The answer is yes. Yeah, you have to be much more fundamental. Yes, you can use some statistical approaches, but at the end of the day, I have to think about what does this company do, where are its facilities located, what are the material, climate-related risks for this company and how is it dealing with them?
Erika: So, Mark, your comments on that. So that's an example of doing sustainable investing well, and here is a famous quant investor telling us that he thinks it's important to use fundamental investing in that. Your reflections on that?
Mark: Well, I think it's an interesting quote, of course. And it's also an area we are thinking a lot about. And in a way, it's true when you don't have this, let's say, this historical data, you can't test the things which you can take away from the past and then translate it to the future. At the same time, I think in quant we are really capable of using the data we have and using the models we have with binding restrictions to still build a portfolio which accommodates the needs related to SI requests. For example, we have done a lot of work over the past couple of years on our index business side, but also on our, let's say, traditional quant business, where we are able to get bespoke solutions, where exposures to a portfolio are very much related to SI requirements or SDG requirements where the risk budget is purely used in order to build such a portfolio rather than making portfolios with a factor exposure target in it. So I think what Mr. Litterman is saying is certainly true, but that doesn't mean that you cannot use quant in building portfolios with a sustainable solution.
Erika: So, Mark, changing tack, your career’s followed a very interesting route. I had a look at your LinkedIn profile. You started off as an economist, transformed into a bond trader, eventually became a sales director, and then last year took on the title of CIO for the second time in your working life. So quite a variety of job descriptions. Does that reflect the flexibility that we’re talking about that's needed in this industry?
Mark: Well, it is certainly flexibility indeed I have apparently shown in my career, and so indeed it was from a fixed income specialist to managing an equity team within Robeco. You know, in that sense, I think, yes, the flexibility is always needed, but it cannot – the flexibility should be reflected in terms of being able to adapt and to adjust to what you see in the market happening, but without giving up your heritage and without giving up the strong beliefs you have, which is the foundation in your strategies. And I think in that sense, at Robeco, in the past 20 years that I've been working for, I think we have been very well able to have this flexibility, adjusting models, adjusting insights, adjusting techniques we use in research, but without giving up a strong academic foundation in the way we manage our portfolios. So indeed, it's finding the right balance between, on the one hand, sticking to your beliefs. Believing in the way you work, that that is the way to go forward. And at the same time, indeed, being adaptive to survive: you cannot be too dogmatic. You cannot become, you know, sitting still with the risk of becoming a dinosaur in your industry. And I think we have been very well capable of finding this balance between believing in what you do and at the same time adapting to the needs and the new techniques which are possible in the marketplace.
Erika: Now, Mark, let's talk about the relationship between asset managers and clients. We’re seeing a drive towards strategic partnerships with clients. What's motivating this?
Mark: Well, I think that it's continuing. My own experience, you mentioned to my previous roles, being active on the client side as well, is that it's not something new. I remember when representing Robeco at the 2000s onwards, 2010 onwards, on factor investing, for example, investing in general, which really became popular at that time. I think building these partnerships were already extremely important for the simple reason that clients needed education. They wanted to understand what is quant investing, what is factor investing, how does it work in my portfolio? And it was already some sort of a partnership in really taking a long time in, you know, sharing research, talking to your clients, getting them to the office, showing the system, showing the way we work. I think the last few years this has accelerated, I think, for two reasons maybe. I think the regulation requires even more knowledge, more also cost related to a lot of institutional investors as well. So they are searching for partners who have the knowledge and expertise to help them out. And then in particular, I would say on more pressing questions these days, like what's happening, everything in terms of sustainable investing; there we also see a huge demand from the society, but also from regulators to implement it, to have a clue on what you want to achieve. And that's something which is not easy to achieve on your own as an asset owner. And there I think a partnership in and, you know, taking you together in a journey on. Where is this whole SI debate going for and what does it mean for me as an asset owner? I think that that really accelerates this quest for partnerships, I would say, and I think at Robeco we are well positioned to do that, given the fact that we have a huge history already in terms of SI and research. And I think that helps us a lot in really setting up these partnerships. And I know from my colleagues also in the ExCo that they're working very hard on this, too, to get it done. And I think that's also the best way forward.
Erika: Coming back to the point of change as the theme for the industry, we posed a question to our readers on LinkedIn asking about the biggest challenges ahead for asset managers. Now clearly, Mark, it’s not a scientific survey, but nevertheless, thought-provoking. Respondents felt that the biggest challenge ahead was in keeping up with AI and data, while the second-biggest perceived challenge is doing sustainability well. Now let's just take AI and data and technology in general. We're seeing huge developments here, both in the operational use of new technology and in using technology to do investing. How are you at Robeco responding to these developments?
Mark: Yeah, a very interesting question. And it's also a big topic with all my other colleagues when we talk about technology and how it's changing the way we do our work and live our daily lives. You know, put it simply, we have so much more computing power in, well, almost every year and so much more data coming to us and that leads to many new opportunities out there and to search for potential alpha signals or improving the accuracy of predictions or speeding up the forecasting type of work. And I think these techniques continue to change data availability as well as infrastructure. So in that sense, it is a hot topic. For us, it means that we believe that new techniques will be used and can be used to create new data, for example, with the whole natural linguistic programming techniques, scraping websites, scraping measures for market sentiment. So a lot of potential, I think, out there on benefiting from technological change. At the same time, we believe we should still stick to the things we do. But without falling victim to being too dogmatic and forgetting a bit about the huge potential which may be out there and a potential alpha which may be out there due to new data techniques or new techniques, new data coming out. So we at the same time feel we need to invest in that area. We need to be focused upon it. We need to spend time on it again without forgetting our existing business. But we must be open-minded to really have a closer look at all the possibilities which will come to us. And for us, we have a large debate on, are we in a sort of a new paradigm or not? Do we have to lean on the more sophisticated signals with the help of new datasets and artificial intelligence, as you mentioned, Erika, rather than the basic factors which we have used over the past many years. So we are clearly in this journey. We are investing in it. We have quite some people already working on it with a clear focus on machine learning, on AI, on the big data stuff. But I'm also convinced that it's not easy. It will take time before you really get, let’s say, the outcome of reliable data, reliable algorithms, which will make also scalable products. It's a challenge. We're working on it, but it will be really a journey which we do not know the outcome yet. Having said that, we are spending and we need to spend time on it ourselves, which we are currently doing.
Erika: But to challenge you on that, are you big enough as a house to keep up; the mega competitors out there that you're competing with on similar products? So, can you keep up in the sense of putting in the capital to adapt and innovate?
Mark: Yeah, I think we are. Indeed, scale, that is always an element which comes back in discussions about the future of asset management and also for Robeco, it's understandable. At the same time, I think, you know, it all starts with having credible product offerings which deliver performance clients expect you to deliver. I think ultimately that is the reason for your existence, almost your license to operate. If you are not able to generate those kind of products; that's where it all starts with. So it doesn't start with scale or being big, but it starts with having the capability within your company to generate the products which deliver alpha. That's the existence, the reason for your existence. I think that's one. And I think we have been able over the past many years that Robeco is in the business, that we are able to deliver that performance and to have this edge why we are relevant for our clients and why we are relevant for a client to reach out to Robeco. At the same time, I think even now, although not being the biggest, we continue to have this edge. And I think for the next decade we will have this edge. It's not only on the fundamental or quant business, but also, as I mentioned earlier on the whole SI journey, where the next decade, I think so much focus will be put on from governments, from the regulatory environment, also from the society, as well as from clients, where also Robeco I think is a frontrunner in that area. So despite being not the biggest one, I think we still have quite a very credible offering there. We are there for a long time. We are not just there putting money to it in, you know, with the idea, OK, we need to do it because it's now a trend. We are there already for more than 20 years. And I think that that combination of this entrepreneurship, this credible product offering in combination with the way we look at how the world is moving into this whole SI journey as well, that makes us very well positioned to be an excellent partner for most of our clients.
Erika: Mark, thank you. Thanks for your insights and your time.
Mark: Thank you, Erika.
Erika: Thank you, dear listeners. Thanks for being part of this conversation. We'd like to hear from you. So please do send us your comments, feedback, and suggestions to firstname.lastname@example.org. You'll find all our podcasts on your favorite podcast platform as well as at www.robeco.com.