Robeco Enhanced Indexing invests in global developed markets equities, and has a low tracking error against its benchmark, the MSCI World index. In recent years, performance has been strong. In this article we focus on one element that distinguishes Robeco’s strategy from those of others: our short-term stock selection model (SHOT).
The SHOrt-Term stock selection model (SHOT) was developed in 2007 as a stand-alone performance driver for a holding period of one to three months. It aims to distinguish factors not covered by the core stock selection model, which has an investment horizon of nine to twelve months. The model’s structure is similar to that of the core stock selection model: it combines variables into themes, which are combined into a final model ranking.
The model identifies three themes: price reversal, liquidity and earnings revisions. They exploit market inefficiencies arising as a result of predictable patterns in investor behavior:
In brief, SHOT likes stocks that have recently experienced a strong drawdown, favorable short-term earnings revisions and increased attention from investors.
In the investment process, we use the ranking of the core stock selection model as a starting point. Subsequently, we adjust this ranking - upwards or downwards - in accordance with the ranking produced by SHOT. In doing so, we apply a maximum adjustment of 20 percentage points.
The table below shows that the SHOT model performed well on a standalone basis since it was included in the model in March 2009. The model was able to separate the winners from the losers.
Besides strong performance, SHOT also offers diversification as the correlation with the core stock selection model has been around 20% since March 2009. The chart shows that the incorporation of the SHOT model has made a positive contribution to performance.
Robeco Enhanced Indexing shows a strong investment performance.
Over the past five years, the integration of the short-term stock selection model (SHOT) in the investment process has contributed to this performance. Improving the timing of buy and sell decisions, SHOT differentiates Robeco’s strategy from other strategies with similar investment objectives.