In 1999, fifteen years ago, Robeco found that quantitative stock selection techniques known to be effective in developed markets are also able to deliver superior investment results in emerging markets. What are the biggest takeaways from the research done and how does the model work in practice?
The selection model is used successfully in two portfolios: Robeco Emerging Markets Quant and Robeco Active Quant Emerging Markets. The live track record of our quantitative emerging markets model and the two portfolios has been very strong.
Since its inception in 1999, our model was built on two pillars, namely Valuation and Sentiment. Compared to its current form, the overall structure of the original model has remained virtually unchanged. We strive for an optimal balance between Value and Sentiment factors. We believe that a diversified, balanced model will outperform single-factor models over time, as the two factors individually experience periods of weak performance. The final output of the model is a ranking of stocks from most to least attractive.
Over the past fifteen years, we have continuously investigated how to further enhance the model. The most crucial innovation is incorporating integrated risk management at the root of the investment process, meaning that we apply sophisticated risk controls in the definition of our variables. As a result, we are able to obtain even better risk adjusted returns with more stable risk contributions from each factor over time.
We are proud of what we have achieved and are firmly committed to further innovate with our ambitious research agenda. This agenda consists of lowering transaction costs, ESG integration, further decreasing avoiding unrewarded risks and a better understanding of which investor behavior is driving factor premiums.
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