latamen
Looking for defensive European stocks? Follow the guide...

Looking for defensive European stocks? Follow the guide...

28-05-2019 | Insight

In order to thrive, quant strategies do not necessarily have to be black boxes. Quite the opposite, in fact. Robeco’s transparent quantitative stock selection models and portfolio construction processes always produce portfolios with easily explainable positions and transactions. For Conservative Equities, this means we can not only explain why we have tilts towards certain sectors or countries, but also provide a good picture of the overall attractiveness of the different sectors and countries in our investable universe, from a low-risk perspective.

  • Jan Sytze  Mosselaar
    Jan Sytze
    Mosselaar
    CFA, Director, Portfolio Manager

Detractors of quantitative investment strategies often dub them ‘black boxes’ owing to some of the complex tools they can rely on. But while this may sometimes be the case, it is far from always being true. Robeco’s Conservative Equites, our approach to low volatility investing for equities, are a case in point.

Our proprietary bottom-up, straightforward and transparent ranking approach enables us to explain to clients each and every position, or transaction, as well as the resulting country or sector tilts. We see this as a clear advantage compared to the more complicated mathematical techniques used by some of our competitors, such as minimum variance optimizations.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Bridging the ‘quant vs. non-quant’ gap

Conversely, the outcome of our model also provides a bottom-up picture of the relative attractiveness of countries and sectors at any given moment, which is complementary to the many top-down analyses that are performed by fundamental analysts and economists. In fact, this sort of analysis helps bridge the gap between factor investing and more traditional country and sector-based asset allocation approaches.

As an example, we recently dug deeper into the 1,200-stock investment universe of Robeco’s European Conservative Equities. This strategy is an active approach to low-volatility investing based on award-winning research. It applies a multi-factor stock selection model to select European stocks with a low absolute and distress risk, and attractive upside potential.

We take a multi-dimensional approach to risk, to include return factors like value and momentum, in order to avoid low-risk stocks that are expensive and/or in a negative trend. In our view, selecting stocks based solely on one measure of risk such as volatility or beta is suboptimal, as it ignores information from other factors and variables.

Utilities, real estate and Swiss stocks

Unsurprisingly, we found that more defensive sectors like Utilities, Real Estate and Consumer Staples score well on the different factors considered in the model, although Consumer Staples remains relatively expensive and therefore relatively less attractive than other sectors. Meanwhile, the cyclical Information Technology, Materials, Consumer Discretionary and Industrials sectors are clearly less attractive. Moreover, the value character of both the Financials and Energy sector is clearly visible, as are the growth-like characteristics of the Information Technology and Health Care sectors, which tend to have a higher valuation and a lower dividend yield. Also, we note that the Financials sector is a special case as it consists of high-beta banks such as the universal large-cap banks in the Eurozone and low-risk financials such as reinsurance companies and low-beta, high-dividend banks in Scandinavia and Switzerland.

In terms of countries, we found that, despite relatively high valuations, Switzerland is the best-ranked country based on our bottom-up approach, primarily due to the relatively low volatility of Swiss stocks. The UK comes out as relatively uncorrelated with the rest of the European market and as quite attractive from a dividend perspective, but the volatility of UK stocks is rather high, on average.

Meanwhile, the cyclical German market scores poorly on beta and negatively on momentum, while having an average valuation. The Italian market, which is characterized by a large portion of volatile banks, shows a higher risk profile. Finally, the above-average beta of the Spanish and French markets can mainly be attributed to the high-beta character of their large banks. Overall, we find that sectors matter more than countries in Europe, which is no surprise in Europe’s integrated markets. For instance, the characteristics of a British bank stock will be closer to those of a French bank stock than those of a British telecom company stock.

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree