In 2008, Robeco’s Jan Keuppens was part of a global equity portfolio management team that backed around 100 stock ideas, with investment responsibilities divided along sector lines. Although performance was good, on analyzing the portfolio’s returns, Keuppens noted that the largest, highest conviction bets tended to pay off, whereas the smaller, lower conviction positions were typically less successful.
Hence, the rationale behind the launch of the Robeco Global Stars Equities Fund was to concentrate investment on the strongest-conviction bets, ideas that the team had analyzed in the most detail. As Keuppens puts it, “I hate losing money and, by making the new fund’s active share as high as possible – ours has always been high at around 90% – we differentiate the portfolio from the benchmark,” adding that the aim is to maximize returns by focusing on the best ideas.
Given the tumultuous market events following the collapse of Lehman Brothers in 2008 and the onset of massive quantitative easing (QE) programs, in a risk-averse market environment, launching a concentrated, high-conviction global equities fund may have seemed counterintuitive. However, as it turned out, late 2008 was rather a good time to launch a new fund, active or not, as, after falling by about 20% over the first quarter of 2009, stock markets have rallied for the most part since.
But Keuppens cautions that for an active, stock picking approach to consistently outperform, correlation needs to come down, meaning that individual stocks need to move out of line with the market index. In broad terms, correlation went up around 2005 but has come down a bit since, suggesting that the market has been presenting more opportunities for bottom-up stock picking. He says, “In that regard, we’ve been pleased with the level of outperformance we’ve been able to generate during the fund’s first ten years.”
Market sentiment since 2008 has been heavily influenced by central bank action, not least QE, with the Federal Reserve quadrupling the size of its balance sheet to USD 4.5 trillion and the European Central Bank pumping around EUR 2.5 trillion into an asset repurchase program that lasted until December 2018. Even now, Keuppens believes that markets can be overly influenced in the shorter term by limited liquidity in credit markets and algorithmic trading.
He also believes that movements can be manipulated by flows into and out of ETFs, with passive investment generally taking a larger share of the market. However, with stock markets gradually less affected by QE, Keuppens is optimistic that the opportunity for active managers to add value should continue to improve over a three-to-five-year time horizon.
Robeco started integrating ESG around 2005 and the Global Stars Equities team began to formally implement ESG in the investment process soon after the fund’s launch, around 2009/2010. While ESG factors have grown in popularity amongst other fund management companies since, Keuppens stresses that ESG screening is much more than a box-ticking exercise and is adamant that the thorough nature of the team’s ESG analysis has helped them to create real value for the fund.
He says, “A big motivation behind our greater integration of ESG is to help us to better understand the risks and opportunities, and the wider effects of change on business models.” Covering key aspects such as corporate governance, operations/innovation management, supply chain management, labor relationships and stakeholder engagement, the team’s ESG analysis assesses how these various aspects impact the key value drivers of companies – revenue growth, margins and capital needs.
Keuppens continues “We compare how each company performed against a benchmark for the overall industry, helping us to determine how companies perform in key areas including supply chains, labor relations and so on. We can then assess whether ESG factors influence the growth potential positively or negatively, helping us to map the risk/opportunities, and allocate investment accordingly.”
Risk management is a vital element of portfolio management, never more so than for concentrated, high conviction funds. Keuppens stresses that as part of the team’s risk management models, they are particularly vigilant about three key risks of fundamental investing. He says, “First and foremost, we need to get the fundamentals right, so we’re looking for sustainable revenue growth, especially among stocks that offer relatively low correlation.”
Keuppens explains that debt is another significant factor, taking the view that the credit cycle always comes back into play. He says, “I’m wary of companies with excess debt/leverage, so net debt in the portfolio is way below that of the wider market”. Thirdly, he notes that the key risk in fundamental investing is that of overpaying, explaining, “Even for good companies, if you pay too much, you might have to wait 20 years to get your money back, so buying at the right price is key.”
Although Keuppens believes that top-down macro-led strategies can add particular value in emerging markets, especially in country allocation, he’s a strong advocate of bottom-up stock selection in developed markets on a three-to-five-year time horizon.
He says, “Of course we continually assess what the risks are in the portfolio in terms of macro sensitivities and how they fit with our ideas. We stress test all our ideas in macro environments in order to be prepared for various outcomes. So we’re still very much bottom-up driven. Overall, I’m trying to find stock ideas that ideally have low correlation with the portfolio’s existing holdings and with particular macro scenarios, recognizing that the degree of correlation might change.”
Nevertheless, Keuppens acknowledges that macro events have some degree of influence on all stocks, even if the degree of correlation can be much lower for individual stocks, such as those undergoing self-help. To put late 2018’s selloff in a macro context, Keuppens believes that talk of an Armageddon situation has been overdone, noting “We might have a global recession, but, given the high free cashflow yield, our portfolio should weather even that kind of scenario well.”
Keuppens is adamant that backing stocks with high ROIC (return on invested capital) and that are attractively valued on normalized free cash flow, using ESG to enhance the risks and opportunities in the business, can continue to produce attractive results for investors. However, he stresses that valuation is key and that the market environment can change rapidly, noting that as recently as mid-2018, finding interesting stocks without stretched valuations was very difficult.
However, sounding a positive note, he concludes that since the market’s fourth quarter slide, “The market pullback has changed things for the better and we’re finding many more attractive opportunities now.”
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会