PORTFOLIO MANAGER’S UPDATE Q3 2015 For professional investors
ROBECO GLOBAL PREMIUM EQUITIES FUND
Defensive flight hurts Q3 returns
Christopher Hart, Portfolio Manager
Global equities drop on China fears Fund lags in expensive Consumer sectors Industrial holdings produce strong returns Underweight exposure to Utilities detracts
Retrospect: Global equities see worst quarter since US downgrade in 2011 Global equities as measured by the MSCI World Index declined 8.4% during the third quarter. This was the worst quarterly return since the third quarter of 2011. Back then, markets were hit by a US debt downgrade following political tussling over whether to increase the US debt ceiling. The debt ceiling is in play again now for different reasons, but isn’t the cause of the market’s recent maladies. China’s decision to devalue its currency was the proximate cause of the sell-off. The devaluation raises concerns about the ability of Chinese policymakers to prevent a hard landing in the world’s second-largest economy. Curiously, markets also traded lower following the US Federal Reserve’s decision not to raise rates last month. Over the past few years, markets have anxiously awaited the first Fed rate increase since 2006. Since former Chairman Ben Bernanke first mentioned ‘tapering’ in May 2013, the silver lining to disappointing economic news has been that it tipped the scales in favor of keeping rates unchanged and low. The Fed’s decision to pass on this well-telegraphed rate increase was seen as a lack of confidence in the global economy. Few asset classes posted a positive return during the third quarter. With the exception of Utilities, all economic sectors and geographic regions within the MSCI World Index delivered a negative return. The riskier segments of the equity markets had the worst performance, as emerging markets and commodities feel the most pain whenever concern about global growth deteriorates. Emerging market equity underperformance is mostly due to continued currency weakness as many EM currencies are trading below or near lows last seen in the 1990s.
Performance: Fund lags amid market flight into expensive defensive sectors The Robeco Global Premium Equities Fund underperformed its benchmark, the MSCI World Index, during the third quarter. Our strategy remains focused on identifying dislocations between underlying fundamentals and valuations on an individual company basis. Sector allocation, which is purely a side-effect of individual stock selection, was a notable driver of the underperformance, as expensive defensive sectors like Consumer Staples and Utilities, where the portfolio is underweight, outperformed the broader market during the sell-off. The overweight allocation to Materials also detracted from performance, but this was
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Performance: USD D share class
Robeco BP Global Premium Equities Fund, gross of Fees MSCI World Index (net)
Sept 2015
Q3 2015
YTD 2015
One Year
Three Years
Five Years
Since inception (08/13)
-4.14%
-8.87%
-3.30%
-1.04%
-
-
7.02%
-3.69%
-8.45%
-6.04%
-5.09%
-
-
4.25%
The performance figures presented above correspond to the D USD share class of the Robeco US Global Premium Equities UCITS fund which was launched in August 2013. The performance figures presented below correspond to the D EUR share class which was launched in January 2005. Performance for other share classes may vary. Performance for periods longer than one year is annualized. The value of your investments may fluctuate. Past results are no guarantee of future performance. All data to 30 September 2015.
Performance: EUR D share class
Sept 2015
Q3 2015
YTD 2015
One Year
Three Years
Five Years
Since inception (01/05)
Robeco BP Global Premium Equities Fund, gross of Fees MSCI World Index (net)
-3.79%
-9.05%
4.81%
11.98%
17.52%
16.97%
8.70%
-3.32%
-8.62%
1.86%
7.41%
13.84%
12.11%
6.34%
more than offset by strong stock selection performance within the sector. The portfolio is overweight construction materials and packaging companies, where falling commodity prices reduce expenses, and underweight chemical, mining and paper companies, where falling commodity prices reduce revenues. Overall, the largest sector level detractors from performance were Consumer Discretionary, Consumer Staples and Utilities, while the Industrials and Materials sectors were notable contributors to performance. Overweight positions in Safran, Google and Activision Blizzard, and off-benchmark stocks Alent and Auralius were the largest individual contributors to performance. Shares of Safran rose ahead of its expected inclusion into the Euro Stoxx 50 Index. Google’s shares rose after the company signaled plans to restrain spending as the company reported profit that exceeded analyst estimates. Activision Blizzard posted second-quarter sales and profit that beat analysts’ estimates on the strength of video game franchises such as Call of Duty and Skylanders. Platform Specialty Products agreed to buy Alent, a specialty chemical company, at a 46% premium to its market price in July. Shares of Aurelius traded higher following its acquisition of ARBA Processing Group, a leading European manufacturer of vehicle modules and containers mainly for the dairy industry and dairy engineering. The largest individual detractors from performance were off-benchmark stocks Hudbay Minerals and Zebra Technologies, and overweight positions in Mitsubishi Electric, Nitto Denko and Capital One Financial. Stocks of materials companies, like Hudbay Mineral, fell following the Chinese yuan devaluation. Mining companies are particularly vulnerable to a slowdown in China. Zebra Technologies reported second-quarter earnings and provided third-quarter guidance below consensus estimates. Shares of Capital One and Mitsubishi fell sharply after reporting profit that missed analysts’ estimates. Osaka-based Nitto Denko derives a significant portion of its revenue from China and smartphone manufacture, two areas where demand is slowing.
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Performance attribution: Sector allocation causes lag in third quarter Sector Av. Weight Consumer Discr. Consumer Staples
Fund Total Return
Cont. To Return
Av. Weight
MSCI World Total Return
Cont. To Return
Av. Weight
Variation Total Return
Cont. To Return
Attribution Analysis Allocation Selection Total Effect Effect Effect
16.1
-10.60
-1.71
13.19
-6.26
-0.82
2.91
-4.34
-0.90
0.05
-0.74
-0.69
7.13
-5.60
-0.35
10.00
-0.93
-0.11
-2.86
-4.67
-0.24
-0.24
-0.26
-0.51
7.37
-17.66
-1.37
6.73
-17.86
-1.24
0.64
0.21
-0.13
-0.07
0.01
-0.06
Financials
17.87
-10.73
-1.91
20.98
-9.37
-1.98
-3.11
-1.37
0.07
0.04
-0.23
-0.19
Health Care
14.19
-8.35
-1.31
13.75
-9.28
-1.31
0.45
0.93
0.00
-0.06
0.13
0.07
Industrials
14.68
-4.34
-0.61
10.66
-9.03
-0.97
4.03
4.69
0.36
-0.02
0.73
0.71
IT
12.97
-5.24
-0.61
13.45
-5.08
-0.65
-0.48
-0.16
0.04
0.00
0.00
0.00
Materials
6.90
-12.86
-0.89
4.74
-19.51
-0.97
2.16
6.65
0.07
-0.28
0.52
0.24
Telecom Services
2.78
-9.95
-0.33
3.39
-8.15
-0.29
-0.61
-1.80
-0.04
0,00
-0.07
-0.07
--
--
--
3.12
0.18
-0.01
-3.12
-0.18
0.01
-0.25
--
-0.25
100.00
-9.09
-9.09
100.00
-8.34
-8.34
--
-0.75
-0.75
-0.84
0.08
-0.75
Energy
Utilities Total
Holdings Data of Robeco BP Global Premium Equities and the MSCI World from 6/30/2015 through 9/29/2015. Please note that all figures provided in the attribution table above refer to the US calculated performance which does not include any cash, is calculated in US dollars, and does not account for any share class specific differences. Attribution figures may differ by share class. For further details regarding your specific share class, please contact your Robeco account manager .
Comparison of characteristics for the portfolio and the benchmark index US-based Global Fund Market Cap: Weighted Avg.
Market Cap: Median Yield Price/Earnings (FY1) Price/Book value Median Free Cash Flow Yield Operating return on operating assets (5 years) Return on Equity (5 years)
MSCI World Index
USD 74.3 billion
USD 87.3 billion
USD 16.6 billion
USD 10.0 billion
2.2%
2.7%
14.0x
14.2x
1.8x
2.1x
3.3%
2.3%
30.9%
22.8%
12.0%
11.4%
Please note that all figures provided in the characteristics table above refer to the holdings of the USbased Global Equity Fund Minor differences in characteristics may exist by share class.
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Positioning: Largest overweights to undervalued Industrials and Materials stocks At sector level, Industrials and Materials are the largest overweight sectors. Aerospace & Defense and Machinery are the overweight industries in the Industrials sector, and Container & Packaging is the most overweight industry in the Materials sector. The largest underweight sectors are Consumer Staples and Utilities. Stocks in both sectors continue to trade at unattractive valuations. From a regional perspective, the portfolio is overweight in the UK, while North America remains the region with the largest underweight. The underlying rationale for all of the portfolio’s exposures is the dislocation between valuations and company fundamentals.
Outlook: No need to draw parallels with the great slide of 2008-09 While global growth is not accelerating as hoped, we would not draw parallels with 200809. Corporate earnings in the US have hit a plateau due to slowing emerging markets, the strong US dollar and lower oil and commodity prices. However, we do not believe the current decline in earnings will lead to an economic recession. Earnings appear to be taking a pause and not collapsing as they did in 2008. The US financial system is quite healthy today as major banks are among the best capitalized banks in the world, and increased regulations are keeping a lid on speculative activities. Aside from pockets of energy loans at selected financial institutions, credit quality – often referred to as the backbone of the economy – remains quite strong. Employment, housing and consumer spending statistics continue to point toward a healthy, growing economy. We are not sure when this sell-off will bottom out, but we do not expect this correction to evolve into a recession-led bear market. During this time of uncertainty our idea generation has picked up considerably. High quality, free cash-generating companies that have a history of responsibly allocating capital have been unduly punished, and they offer excellent value today. We would expect to see more signs of stress in lower-quality companies that have been aggressively using capital and pricing to carry out their unsustainable business models. We expect this market decline to result in new opportunities for active managers with successful track records to exploit the current controversies and create excess returns for their clients. We expect global economic data to remain mixed in the near term as North America continues to show intermediate signs of strength, while growth elsewhere is subdued. Central bank activity as exemplified by the Chinese yuan devaluation or the Fed’s interest rate activity will continue to exert substantial influence on markets for the foreseeable future. Nevertheless, this dynamic creates the opportunity for strong security selection through fundamental and valuation dislocations. The portfolio remains well positioned with holdings that reflect Robeco Boston Partners’ 3-circle characteristics – attractive valuations, solid fundamentals, and identifiable catalysts.
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Important information This document has been carefully prepared by Robeco Institutional Asset Management BV (Robeco). It is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Any investment is always subject to risk Investment decisions should therefore only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. The information contained in this document is solely intended for professional investors under the Dutch Financial Supervision Act (Wet financieel toezicht) or persons who are authorized to receive such information under any other applicable laws. The content of this document is based upon sources of information believed to be reliable, but no warranty or declaration, either explicit or implicit, is given as to their accuracy or completeness. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. Past performances may not be representative for future results and actual returns may differ significantly from expectations expressed in this document. The value of your investments may fluctuate Past results are no guarantee of future performance. All copyrights, patents and other property in the information contained in this document are held by Robeco No rights whatsoever are licensed or assigned or shall otherwise pass to persons accessing this information. The information contained in this publication is not intended for users from other countries, such as US citizens and residents, where the offering of foreign financial services is not permitted, or where Robeco's services are not available. Robeco Institutional Asset Management BV (trade register number: 24123167) has a license from the Netherlands Authority for the Financial Markets in Amsterdam. The prospectus and the Key Investor Information Document for Robeco Global Premium Equities Fund, a sub fund of Robeco Capital Growth Funds SICAV, can all be obtained free of charge at www.robeco.com.
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