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Robeco’s assets under management in Quant Equities recently surpassed the EUR 20bn milestone. On this occasion, we asked Peter Ferket, CIO Equity Rotterdam and closely involved in Robeco Quant Equity since the late 1990s, how he explains the success of quant equity investing and Robeco’s role as a thought leader in this field.
The Quant Equity team is one of the four investment teams under Ferket’s responsibility, but his involvement starts much earlier. “From 1999 to 2007 I headed the Quantitative Research department, working together with researchers like David Blitz, Pim van Vliet, and Wilma de Groot,” Ferket explains. “As of April 2003 I combined this role with the position of Portfolio Manager Enhanced Indexing within the Equity department. The Enhanced Indexing products were the first truly quant managed equity products. Since the end of last year I am the portfolio manager of RobecoSAM Quant Sustainable Global Equities, combining two key strengths of Robeco: sustainability research and quantitative investing.”
It is important to understand why a strategy works
Quant investing takes many shapes and forms. What unites them is that they are evidence- and rules-based. “Quant strategies are always the result of thorough empirical research including back-testing of investable strategies. In day-to-day portfolio management pre-defined rules are strictly followed. There is a possibility to deviate from these rules, but only to neutralize undesired risk exposures.”
What is important, says Ferket, is to understand why a certain quant strategy works. “By now we all know that the market is not efficient, but there are different explanations as to why it is not. At Robeco we believe market inefficiencies are caused by behavioral biases of investors, such as greed, fear and anchoring, and by investment restrictions. For example, if investors are not allowed to leverage their positions, they will tend to have a preference for high beta stocks to achieve outperformance.”
Robeco does not believe in the other prevailing explanation, which is that the premiums resulting from inefficiencies are a compensation for risk. According to this line of thought, value companies are said to have a premium because they are more risky as more of them go bankrupt. “We want to harvest the factor premiums without unrewarded risk,” says Ferket. To this end, Robeco’s researches have added distress risk to the variables and have residualized momentum, which means that they have eliminated unrewarded risks and focus on stock-specific momentum rather than market momentum.
The investment industry has changed dramatically. Whereas active asset management was more or less the standard some twenty years ago, passive strategies, such as ETFs and index funds, have made an enormous advance. They give both retail and institutional investors the opportunity to obtain close to the market return at relatively low cost.
“Over the past decade, active strategies have had a difficult time beating the benchmark,” says Ferket. “When they did outperform, this was usually because they – intentionally or not – had above-benchmark exposure to factors such as value, momentum or low-volatility, and because they invested in a disciplined manner.” This paved the way for a different way of investment, factor investing. This type of investment was more often than not done in a quantitative way, as this increased the strategies’ outperformance potential and quant approaches tend to be disciplined and evidence-based. The result was a big advance of quant equity investing and Robeco came out as one of the winners.”
As simple as possible and as complex as needed
Ferket does not consider quant equity investing to be a hype. “On the contrary: I think we are just at the beginning. Over the past years, a lot of assets shifted to purely passive products as investors were disappointed in active management. These passive products however are market-cap weighted investments, which is not necessarily the smartest way of investing. As a result, part of the assets in passive strategies moved to quantitative strategies, such as factor investing, enhanced indexing and semi-passive solutions.”
Ferket sees two important advantages of quant strategies over passive investments. “First of all, they have a more attractive risk-return profile. In the expected lower return environment (with returns averaging 6% to 7%), an excess return of 50 to 150 basis points – or even more - is quite a lot. Second, passive strategies are also passive in term of sustainability or ESG integration. There are several institutional clients, especially in the Netherlands and Scandinavia, who look for asset managers who integrate ESG information in their investment process. We have seen quite some interest, for example, in Robeco Quant Sustainable Global Equities, which offers the market return with enhanced sustainability.”
Most of clients’ quant assets are in the core part of their portfolio and tend to be beta-driven strategies. The satellite part of the portfolio will more and more be filled in with fundamental high-conviction, alpha-driven products, such as Robeco’s Stars products.
Of course every type of investing has its own vulnerabilities. “It is very important to explain to your clients how you invest,” Ferket emphasizes. “Not all our retail clients fully understand the quant products in which they invest. Some are attracted by the good returns or enhanced risk profile. It is our duty to keep explaining when we expect a strategy to do well, and when we don’t. A client needs to know that, for example, in a strong bull market, Conservative Equity products usually lag behind the market, although they will still yield decent returns.”
Robeco’s guiding principle is: Keep it as simple as possible and as complex as needed. “We do not change for change’s sake,” Ferket notes. “This means that our researchers have to accept that research will not always lead to adjustments in the strategy. There is no room for egos. Several of our researchers have a PhD. The research required to achieve that, tends to make one humble. And I think this contributes to our success. We have put much effort and research into dynamic allocation, for example, but we have not found that it improves the risk-return profile of our strategies. Two years of research have therefore not led to any concrete changes. Of course, it has greatly deepened our insights.”
“We keep our strategies as ‘simple’ as possible, at least at first sight,” Ferket continues. “The true sophistication lies within our products. I think it’s great that we have solid, reliable people who are truly passionate about their profession and have an inner drive to understand how the market works and how we can benefit for our clients.”
Ferket is a strong believer in the sustainability of quantitative equity strategies. “Fear and greed are human emotions that will not disappear,” he states. “Investment restrictions won’t either. In addition, I do not expect everyone to make use of the biases or move to quant investing. Passive investments will not go away, nor will fundamental active strategies. Granted, once factor investing becomes more mainstream the premiums may become smaller, but they are here to stay.”