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Investment fund Robeco moves away from the index

Investment fund Robeco moves away from the index

20-12-2016 | Insight

Robeco NV is to adopt a more distinctive character. The number of stocks in portfolio will be reduced to around 40 names allowing the fund to deviate more from the MSCI World Index. The Netherlands oldest investment fund is making itself future-proof. Fund managers Mark Glazener and Jan Keuppens explain the changes in the fund's investment strategy.

  • Jan Keuppens
    Senior portfolio manager
  • Mark  Glazener
    Fund Manager Robeco NV

Speed read

  • MSCI World Index will no longer form the basis for portfolio construction
  • More focus on a smaller number of quality stocks with higher conviction
  • Concentrated portfolio should lead to above-average returns

“The booming index fund and ETF markets are making it increasingly important for active fund managers to deliver performance that clearly distinguishes them from the index”, says Mark Glazener, manager of the Robeco Fund. He operates in an environment where passive index trackers and ETFs on the MSCI World Index offer investors access to a global, diversified stock portfolio at low cost. Managers of global equity funds who actively select stocks together with their analysts have to prove their added value by choosing stocks in a way that ensures they deviate from the index and with which they can achieve higher returns than the benchmark.

Moving further away from the index is a gradual process; one on which Glazener has been focused for a number of years. He is now in the final stages of creating a concentrated investment fund. Since he took over at the helm in 2003, the number of holdings has been gradually reduced from several hundred to 80 at the end of 2016. This number will now be further reduced to 30 to 40 names. Jan Keuppens, portfolio manager of Robeco Global Stars Equities, will become co-manager of the new Robeco.

This new strategy will also be accompanied by a new name. Robeco NV is planning to change its name to Robeco Global Stars Equities Fund NV, because this title better reflects its investment strategy. The name change still has to be officially approved by the fund's shareholders.

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A portfolio using this more decisive approach requires more conviction in terms of stock selection. How will you achieve this?

Glazener: “The Robeco NV investment philosophy won’t change. We’ll still focus on companies that translate their competitive advantage into a high free cash flow, above average returns on invested capital and perform well in terms of sustainability factors. We are convinced that in the long term these investments will deliver the best returns for investors.”

“The added value of the management and analyst teams lies in their ability to select the stocks with the most potential. This more concentrated approach means we can build up our knowledge about specific companies. This gives us more confidence and conviction in the companies we ultimately select: stocks whose prices do not sufficiently reflect their underlying value.”

“We already have experience with this strategy through managing Robeco Global Stars Equities. This more concentrated little sister of Robeco NV was launched in 2008 and, as a result of the degree of freedom it has relative to the index, it has generated returns that are clearly higher than those of the more broad-based Robeco Fund.”

Will the active share1 – the extent to which the fund deviates from the index – rise significantly?

Glazener: “The active share has already increased over the last few years. We are now at around 80% and with the still more concentrated portfolio this figure will exceed 90%. We endorse academic research like that of Martijn Cremers that confirms that portfolios with a high active share and that dare to move further away from the index, on average generate better investment returns. This is also true in the case of Robeco Global Stars Equities.”

‘We are now going to apply the proven approach of Robeco Global Stars to Robeco NV’

Will you no longer track the MSCI World Index at all?

Keuppens: “The MSCI World will now become a reference index instead of the official benchmark. This means that the index will no longer form the basis for the composition of the portfolio, but that we do want to outperform it in terms of returns.”

Doesn't a smaller portfolio mean an increase in volatility?

Keuppens: “A smaller number of holdings doesn't necessarily have to result in more risk. 30 to 40 stocks offer sufficient scope for solid diversification in different countries, sectors and stock types so the portfolio's volatility need not be any higher than that of the reference index.”

Active share is a means to generate extra positive returns and outperform the index, but can be a source of extra negative returns too.

Glazener: “By maintaining a sharper focus on a smaller number of good quality names, we want to reduce the chance of negative surprises. This is because we know more about the companies in which we invest. By integrating sustainability factors (Environment, Social and Governance or ESG) into our analysis process we are better able to understand a company's risk-return profile.”

Will Jan Keuppens become co-portfolio manager of Robeco?

Glazener: “As manager of Robeco Global Stars Equities, Jan has plenty of experience in managing portfolios containing a smaller number of positions. He has a good track record which makes him an important addition to the team. He will replace Dirk Hoozemans as co-manager of Robeco NV on 1 January 2017.”

What will be the difference between Robeco Global Stars Equities Fund and Robeco Global Stars Equities?

Keuppens: “Both funds have a similar investment strategy. Between January and March, the Global Stars Equities Fund portfolio will gradually be adjusted so that it becomes aligned with that of Global Stars Equities. The difference between the two is where the funds are domiciled. Global Stars Equities Fund NV is registered in the Netherlands and will remain listed on the Amsterdam stock exchange, while Global Stars Equities is registered in Luxembourg and falls under the regulations there.

‘Oldest Dutch investment fund positions itself for new market environment’

“The two funds will not have exactly the same returns because of differences in fund assets, cash flows and taxes. The costs for the Luxembourg fund are also higher. It may make economic sense for Dutch investors in Global Stars Equities to move into Global Stars Equities Fund, as the costs for the former Robeco Fund will remain the same.

This new adjusted strategy will allow the Netherland’s oldest investment fund – Robeco NV was established in 1933 – to position itself for the changing market environment and make itself future-proof. Glazener: “With our new name, we will continue to build on the experience and track record we have built up in the more than 80 years we have been active.”

1The Active share indicates the extent to which the composition of a fund portfolio deviates from the composition of the index. For example, if Shell stock has an index weight of 2% and the stock also makes up 2% of the portfolio, its contribution to the active share is 0%. If its portfolio weight is 4%, then its contribution to the active share is 2%: the total active share of the fund is the sum of all the stock-level deviations from the index weighting.

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