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According to Peter Ferket, CIO Equities, Robeco's step-by-step method of developing new quantitative strategies is exemplary in showing how caution and pioneering spirit can go hand in hand.
In Ferket's view, there is no potential conflict between caution and a pioneering spirit. In fact, in his eyes, these concepts are complementary: "In the investment world, if you wait until all the lights have turned to green, you will always be too late. Taking risks is necessary to capitalize on opportunities other parties are not yet aware of. However, it is important to carefully take stock of the risks you take. More specifically: why in the long term you can expect to be rewarded for taking them."
Ferket illustrates this by citing the reputation Robeco has secured in the field of quantitative investing: "We began developing quantitative models in the early nineties. Robeco’s fundamental investment teams applied the knowledge we had accrued to construct their portfolios. This gave us the practical experience we needed to go on improving our theoretical models. Then, the third step was to realize full portfolio management using quantitative models."
More than ten years ago, Robeo launched an enhanced index strategy – with minor underweights and overweights against the market index – and applied it to equities from developed countries as a first product from the quantitative mold. Ferket has two reasons for considering this to have been both a cautious and pioneering move: "Enhanced indexing means that the portfolio moves within a very narrow bandwidth, staying close to the index. Also, by deciding to apply this to developed countries, we were opting for a known market."
The aim is to get off the well-trodden path without immediately taking a leap of faith." This is how Ferket summarizes this method of pioneering. "The very worst that can happen when we launch a strategy and our clients trust our theory and the underlying concept, is that it then performs very poorly in practice. Gradually building on your own knowledge and research reduces this danger much more effectively than trying to take one huge step."
'Leaving the well-trodden path without taking a leap of faith'
The introduction of Conservative Equities is a good example of such a gradual step. The point of departure for constructing a portfolio using this strategy is no longer a specific benchmark. After the introduction of Conservative Equities for developed market equities, the strategy was also applied to emerging markets. "Robeco Emerging Conservative Equities is now one of our most popular products", Ferket notes. "But if we had skipped steps in the development process, that success story would never have had the solid basis it has today."
The knowledge accrued in the field of factor investing will continue to point the way towards developing new strategies. "For instance, we are now working on ways to enhance the process by applying this method of investing to corporate bonds", says Ferket. "But this market has a completely different structure to the equities market. We have plenty of experience investing in corporate bonds and are also experts in the field of quantitative investing, so it is a logical step to combine the two."
A precondition to the effective implementation of new strategies based on factor investing is that researchers and portfolio managers work closely together in developing the models. "This way we can build a bridge between theory and practice", explains Ferket. "We avoid the danger of a team of clever people designing highly complicated models that will never be applied in practice because they are too far removed from the world of portfolio managers. This is real teamwork."
'It's not hard to make good headway with a strong wind in your sails'
"The implementation of a model takes place gradually. That way we can always maintain complete control of the process. The world of sailing makes a good comparison. It's not hard to make good headway with a strong wind in your sails. But if you use any means to get ahead at full speed and cast all caution to the wind in the process, the consequences can be incalculable if the wind strengthens or suddenly changes direction."
In this context, the rise of passive investing represents a structural change in the underlying current rather than a simple shift in the direction of the wind. "At Robeco we have two ways of capitalizing on this", Ferket explains. "First, we develop strategies that may either deviate considerably from the index or invest completely independently of an index, such as Emerging Stars Equities. Second, enhanced indexing gives clients the opportunity to invest in an improved version of an index at lower cost."
In addition to being compared to an index, investment performance is also compared to the competition. In this respect, many things have changed these past years, notes Ferket. "In the same way as the large institutional parties in the Netherlands used to do business principally with local asset managers, Robeco in the past focused mainly on the Dutch market. This has changed completely. When big Dutch pension funds tender a mandate, we have to compete with parties from all over the world."
"This is no longer the Premier League. We're now playing in the Champions League. I am quite competitive by nature, and it gives me a boost when a client from Australia – who can do business with a whole range of national and international parties – chooses Robeco. It's a wonderful feeling when that click happens and the investor really believes in your investment philosophy, the process, the people and the organization."