Time2read volvo ocean race by Robeco

TIME2READ

TIME

Selection of Volvo Ocean Race articles

2READ

Important information Robeco Institutional Asset Management B.V., hereafter Robeco, has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. Without further explanation this publication cannot be considered complete. It is intended to provide the professional investor with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products. All rights relating to the information in this presentation are and will remain the property of Robeco. No part of this publication may be reproduced, saved in an automated data file or published in any form or by any means, either electronically, mechanically, by photocopy, recording or in any other way, without Robeco’s prior written permission. 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. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free of charge at www.robeco.com.

SUMMER EDITION 2015

This document is solely intended for professional investors

FOREWORD

Voyage of discovery The Volvo Ocean Race has captivated millions during the last nine months, and not just because of the thrills and spills of the world’s most exciting sailing race. It has shown just what can be achieved with a combination of talent, technology and good old-fashioned grit. And for us at Robeco, this has emulated what we try to achieve as well with our approach to investing. We are proud to sponsor Team Brunel, the Dutch entry, which has performed so well over the course of the race, despite damage to the boat and some injuries to the crew. Team Brunel is much like Robeco: Dutch in origin but with an international crew and ultimately, a global ambition. There are so many parallels between sailing and investing, from navigating choppy waters to using the latest in quantitative data to plot the best course, that it was always going to be a natural fit. When writing this foreword, Team Brunel occupies second place in the ranking and the dream of finishing on the podium is still very much alive! Over the course of the race we have had both the privilege and pleasure of meeting more than a thousand clients at the nine stopover ports. To commemorate each stopover, we have published our Volvo Ocean Race magazines, offering readers a mix of stories on investing and sailing. We’ve regularly covered three investment themes that we hold dear – quant, sustainability and emerging markets – along with stories directly from the Team Brunel crew. We have content from Alicante, Cape Town, Abu Dhabi, Sanya, Auckland, Itajai, Newport, and the European ports of Lisbon and Lorient. In this special edition of Time2Read, we’ve highlighted the best stories from each magazine. As the fleet briefly docks in The Hague, we offer another opportunity to relive the race through the stories that we told. We wish to thank all of you who have accompanied us on this voyage of discovery! Roderick Munsters Chief Executive Officer Robeco

Contents Where would we be without the sea? “A country that has a coast is never a small country”

Fresh opportunities in Asia

Risk management is key

Robeco’s Asian Equities team is more bullish on the region’s stocks than before, thanks to improved prospects for the Chinese market.

In sailing and in asset management avoiding damage and losses is key to success.

47 Rise of retailer Zara What are the secrets behind the success of the Spanish fashion chain Zara?

What the Volvo Ocean Race sponsorship has brought us “We have achieved all goals we set,” says Board member Hester Borrie.

CONTENTS

The century of the US… again “It is always naive to underestimate the economy and the resilience of this country.”

3 6 10 12 14 17 20 22 24 27 30 32 34 37 40 42 44 47 50 54 56 58 61 64 66 68 71 74 76 78 81 84 86 88 91 94

Foreword Where would we be without the sea? SPOTLIGHT ON SPAIN

Pioneers with a passion for data Spain can do it Rise of retailer Zara SPOTLIGHT ON AFRICA

Gathering momentum on land and sea Africa: An abundance of low-hanging fruit The perils of being at sea, from pirates to plastic SPOTLIGHT ON ABU DHABI

Leading from the front The Gulf: Gateway between East and West Taking on the leaders in their own backyard SPOTLIGHT ON CHINA

Some are more equal than others Riding the Chinese e-commerce boom Fresh opportunities in Asia Interview: Hester Borrie SPOTLIGHT ON NEW ZEALAND

Finding the right factors New Zealand’s cash cow Malaysia: A wealth of low-volatility stocks SPOTLIGHT ON BRAZIL

Managing risk on land and sea Beyond BRICS Rounding the Horn SPOTLIGHT ON THE UNITED STATES

Dedicated followers of fashion ‘The century of the US’... again The Brave New World of Finance SPOTLIGHT ON EUROPE

Navigating choppy waters What Europe can learn from Sweden Europe leads the way in sustainable investment STOPOVER EVENTS

INTRODUCTORY STORY

Where would we be without the sea? Robeco has its head office in Rotterdam, the main gateway to Europe. The sea plays a prominent role in all aspects of Dutch society – not just in the major Port of Rotterdam.

“A country that has a coast is never a small country.” Although this quote is attributed to a president of Estonia, there is no country to which it is more applicable than the Netherlands. Worldwide it occupies 135th place in terms of surface area, but if you take gross domestic product (GDP), it jumps to number 28. It is incredible how influential a small country can be – and the sea is undoubtedly responsible for this! To a large extent the Netherlands has been created through human labor – quite literally. Land was reclaimed from the sea, enclosed with dikes, pumped dry and made habitable. Despite this struggle to dominate the water, its presence has also brought great wealth.

Thanks to its location, the Netherlands became an important maritime nation. Thousands of years before Christ, the ‘Dutch’ were already at sea. Of course they were fishing, but they were also looking for new coastal areas and opportunities to trade. They did so without engines, without maps or other navigational aids, and with no knowledge of currents or shallows. One hell of a job – but it didn’t stop these seafarers from getting into their primitive boats and going in search of trade opportunities with the inhabitants of the island just across the water.

Golden Age The 17th century was the era when Dutch shipping really flourished. Primarily as a result of trade on the Baltic Sea, the Republic of the Seven United Netherlands became a maritime force to be reckoned with, reaching its zenith in political, economic and cultural terms. For long periods of the ‘Golden Age’, the Dutch dominated world trade. Although trade was concentrated in Europe, the Dutch were also active in Asia, Africa and America. Colonies were even established in Asia and America. It was the era of the illustrious Dutch East India Company (VOC). Its story begins in 1595, when three merchant navy ships and a small exploratory vessel set sail for ‘the East’. Three of the four ships returned, in terms of losses of crew members the numbers were less positive – only 87 of the 249 who had set sail came home. However, this first trading mission to Asia was regarded as a success and trade routes to the East were opened. Soon merchants were returning to Holland with textiles, spices, coffee, tea and tobacco. In 1602, the VOC was officially established by Johan van Oldenbarnevelt to stem competition. It was not just ships and warehouses that created employment – by half way through the 17th century the VOC also had six of its own shipbuilding yards. In 1661, the VOC purchased Oostenburg on the IJ River and a huge sawmill, a ropewalk half a kilometer long, three large slipways and a warehouse with four floors soon appeared on the new man-made island.

At its peak, the VOC employed 70,000 people and was the first company in the world to issue shares. This was no ordinary company. It also had a market value of 78 million Dutch guilders – the equivalent of USD 7.4 billion today* – making it the largest company in the history of the Western world by some margin. And bigger than Apple, Shell, Microsoft and many other famous names. History’s largest companies Bell System

THE GOLDEN AGE IN FIGURES

Apple Microsoft Standard Oil PetroChina Saudi Aramco South ea Co. Mississippi Co. Dutch East India Co. 0

Market capital (trillions USD)

* source: www.fool.com

But this glorious era came to an end.Four Anglo-Dutch wars were fought in the 17th and 18th centuries. Both countries battled to gain control of the trade and sea routes. The Dutch enjoyed a number of victories. They still like to talk about the successes of Michiel de Ruyter, who broke through the defense lines across the Thames, sank four English vessels and captured the flagship Royal Charles. But the English gained the upper hand and finally overtook the Dutch as a world power. After the French period, there was little left of the Dutch fleet.

In 1600, the Dutch already possessed around 10,000 ships. In comparison: in September 2013, 1,268 ships put to sea under the Dutch flag. In that year, worldwide there were 1,788 ships with Dutch owners. In the Golden Age, Dutch ships controlled trade between Spain, France, England and the Baltic. But their power extended further: a large proportion of the coastal traffic between French ports was also in their hands. Dutch traders also played an important role in the growth of the wine trade in Bordeaux. Their sailing ships ensured that these wines were available throughout Europe. Entire French vineyards became the property of the Dutch. In around 1670, the fleet of the Republic amounted to around 15,000 ships, five times more than the English fleet. At its peak, the fleet comprised 20,000 ships, ranging in size from 50 to 600 tons. These controlled 60% of the salt trade in Europe, 75% of the herring trade, 75% of the grain trade and 65% of the wine trade.

Today In the 21st century, the Netherlands is still making the most of its favorable location on the sea. Between 1962 and 2004, Rotterdam was the largest port in the world, but has now been overtaken by Shanghai, Singapore and the Chinese city of Tianjin. However, as the largest transit port in Europe, Rotterdam remains a vital hub employing 60,000 people and a further 250,000 indirectly. The main activities are transporting bulk goods, containers and crude oil, chemicals, coal and ore. Including the area covered by the second Maasvlakte, the Port of Rotterdam covers an area of 12,500 hectares, the equivalent of 25,000 football fields. The harbor itself is more than 40 kilometers long, has 18 kilometers of jetties and a further 93 kilometers of additional landing stages. The port has a 24 meter draft enabling even the largest bulk cargo vessels to dock. Every year around 30,000 seagoing ships

and 130,000 barges pass through the harbor. Last year a total of 445 million tons of goods were handled, including 12 million standard sea containers. Apart from being a port, Rotterdam is also the electricity hub of Northwestern Europe and is home to the largest petrochemical industry complex in Europe. Refineries operating on an international scale are located in Rotterdam, linked via a network of pipelines with a total length of 1,500 kilometers. And Rotterdam has ambitions: By 2030, it hopes to be the leading European center for global and intra-European flows of goods and Europeâ&#x20AC;&#x2122;s most important hub for containers, fuel and energy. As part of this vision, its port is to become a frontrunner in terms of sustainable and efficient supply chains. The transition to sustainable energy generation and bio-based chemicals is already in full swing.

Dredging The Dutch maritime sector is also very involved in the offshore oil and gas industries. The Dutch are used to coping with challenging weather conditions and stringent safety requirements; resulting in the prominent position of the offshore industry in Northwestern Europe. The centuries of struggle against water has also earned the Netherlands a leading role in the dredging sector. For many years, two of the largest four dredging companies in the world were Dutch. Five years ago the Papendrecht company Boskalis was far and away the largest dredger in the world, with the highest turnover, most profit, largest portfolio of orders and biggest fleet. The Dutch still carry out many dredging activities worldwide, but currently more often work for the Belgians. Boskalis is no longer the largest dredging company and has transformed itself in to a multifaceted offshore service provider that is capable of anything from building harbors complete with roads to preparing the seabed, and building equipment for offshore oil and gas extraction. The Dutch are often in demand in places where land and sea meet as a result of their centuries of experience and expertise. It is the Dutch who sprayed the sand on the Palm Islands off the Dubai coast and strengthened the dikes of New Orleans. For anything water-related, call in the descendants of the boy who stuck his finger in the dike! The era of Michiel de Ruyter, Piet Hein, the cabin boys of the Bontekoe, Abel Tasman and Willem Barentsz may be over, but new eras provide new heroes.

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SPOTLIGHT ON SPAIN START 1.6 billion TV audience 2.9 million visitors at port events 38,739 nautical miles 267 days 11 ports 9 legs 7 boats 5 continents 1 winner

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QUANT

Pioneers with a passion for data There are many such parallels between sailing around the world and successful investing. Both combine technical know-how with careful risk management. And both require teamwork to win over the long term.

That is why our sponsorship of Team Brunel is a natural fit with Robeco’s way of working. A pioneering spirit has long been embedded in Robeco’s DNA. We were the first to take sustainability investing seriously, among the first to invest in emerging markets and one of the original users of quantitative investing models.

Quant on the high seas Quant expertise is also being used by Team Brunel to help with data collection and navigation, and to minimize risks. “We use quantitative analysis by collecting facts just like Robeco does before considering an

BOUWE BEKKING Team Brunel skipper

‘Data is a crucial part of our campaign. If we don’t have the right numbers, we’re going to make wrong decisions’

investment,” says Bouwe Bekking, skipper of the Team Brunel boat. “We try to get as many facts and numbers as possible. We have to sail through 360 degrees and cover all the possible angles for every wind direction, each one requiring different sails.” “There are so many angles involved when sailing over the ocean – the wind, the weather, the size of waves – that we use as many combinations of data as possible to match it to the real conditions of the day. We put it all in the model and then implement this information to predict velocities in all sailing conditions. The more combinations we can check out to see how fast the boat will go, the better.” “Obviously the faster you go at sea, the more you need proper risk management, or the risk of you hitting an iceberg or a whale becomes very large. It’s the same with investing,” says Peter Ferket, head of equity investments. “We want to take active risks, and we look for opportunities, but at the same time risk management is key to avoiding the bad parts of the market.”

“Our quantitative investment approach is deeply embedded throughout the organization to support this. It is directly connected to the use of as much data and information as possible. But we don’t just look at a company’s past results; we regularly meet with management and look at companies’ qualitative information in order to blend insights that are both forward and backward looking.” “We also use non-financial information in our assessment of a company to decide whether or not it is an attractive investment. Something that might look like a great opportunity on the surface needs a deeper look to avoid disappointments.”

Coping with data in all conditions Using quantitative and other research for risk management relies on accurate data, particularly in new terrain. This presents challenges for sailors and investors alike. “Using data works well to sail from Alicante to Cape Town for example, but the real problem is in places like China where the data and charts are really bad,” Bekking says. “So we have to make risk calculations. For example, the draft of the boat is five metres, so we need to know how deep the water is and make calculations so that the keel is always higher.” “The bigger problem is the weather. In the northern hemisphere the weather forecasts are really accurate and you can even plan on how the wind will change on an hourby-hour basis. But once you get into the

southern hemisphere, sailing for example from Abu Dhabi to China, models for weather forecasting are much less developed and can be completely wrong.” “You then have to start making assessments; positioning yourself in relation to the competition but without being able to trust all the information. We have to decide: do we split from the others, and put all our eggs in one basket, or follow suit and take no risks in terms of positioning?”

And while investing can be painful at times, for Bekking careful risk management can be a matter of life or death. “My worst nightmare is losing a crew member in a rough sea,” he says. “A boat is replaceable but a person is not. Our boats now go at 30 knots and hitting something like a whale or an iceberg would be like driving your car into a wall at 55 km/h. So we have to be careful.”

It’s a marathon, not a sprint Both Robeco and Team Brunel know that taking short cuts can be tempting, particularly if the circumstances are rough. But the Volvo Ocean Race is a marathon, not a sprint, and it is important to keep a steady hand on the tiller. This applies both at sea and in the office. “A short cut can save you time, but you need to be aware of the risks this can entail,” Ferket says. “Typically we aim to achieve good performance in all conditions; we don’t want to be the best when markets are rallying and then the worst when they fall. We want to be the best over a long period and also do well when markets are in decline.”

‘Typically we aim to perform in all conditions’

PETER FERKET Head of equity investments Robeco

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ECONOMY

Local festivities (Festa Major) in Barcelona. The group of castellers are starting to build a human castle, a beautiful Catalan tradition. A perfect example of teamwork, union and brotherhood.

Spain can do it Spain is in recovery mode, but has not been rewarded for this by equity investors so far in 2015. What is the outlook for the rest of the year? Robeco’s Chief Economist Léon Cornelissen explains why he is optimistic*.

“The Spanish economy is doing fine and there is a strong cyclical recovery underway.” That is how Cornelissen sums up the current state of the fourth-largest economy in the Eurozone. The country is emerging from a difficult period as result of the global financial crisis. Economic growth was 1.4% in 2014, but this year it is expected to be more than 3%. In spite of a positive growth figure for 2015, the Spanish stock market is lagging: The IBEX 35 Index has risen 7% this year, while the Euro Stoxx 50 Index is up 11% (as of 5 June 2015). “Economic difficulties in Latin America are a problem for Spanish equities,” explains Cornelissen. “And investors, who already expected a strong economic recovery last year, have now become more cautious.”

‘I do not fear a situation similar to that of Greece’

Opportunities in equities Despite the investor pessimism, Cornelissen sees opportunities in Spanish equities. “I am moderately optimistic about the rest of the year for two reasons. First, the worst is over for the economies in Latin America. Interest rates in Brazil will fall in 2016, which will stimulate the economy.” Latin America is an important destination for exports and many Spanish companies are active in this region. “Second, the outlook for corporate earnings will strengthen as the economy improves further,” he continues. “Financials, which represent the biggest component in the IBEX 35 Index, are geared to see an earnings improvement. And the banks have successfully recapitalized by issuing new shares. Moreover, Spanish house prices have risen again, which is very important for mortgage loans.”

Debt levels improve The recovery will lead to improved public finance figures, says Cornelissen. “The figures are not great; a 4.5% government deficit is still too high, as is the current debt-to-GDP ratio of just under 100%. But the

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direction is positive and the government expects these figures to come down. I agree with the government, given the strong economic recovery. The deficit is expected to go down to the 3% threshold set by the Stability and Growth Pact of the EU.”

economic growth. That said, I expect the impact on credit spreads versus German government bonds to be small. These spreads are already low and I do not expect them to tighten much further.”

Elections not a concern Another important factor behind this Spanish renaissance is the country’s increased competitiveness, says Cornelissen. “Spanish exports are doing well. Unit labor costs have come down, which enables companies to lower their costs. This has been helped by labor market reforms, especially a decentralization of wage negotiations. Currently Spain has the strongest growth within the Eurozone.”

Another major theme for the financial markets in 2015 is the national elections. These have to be held before 20 December and are expected to take place at the end of October or in November. Regional elections were held in May and saw the rise of two new political parties: Podemos and Ciudadanos. Podemos (which means ‘We can’) is often compared with Syriza in Greece, while Ciudadanos (which means ‘Citizens’) is liberal and moderate.

Outlook on bonds more subdued He is less optimistic about bonds, because a lot of the good news has already been priced into the market. Government bond yields have gone down over the last two years and are now around 2.2%. “The ECB’s bond buying is set to support Spanish government bonds,” says Cornelissen. “And ECB President Mario Draghi will continue the program until September 2016, which will keep the lid on any strong rise in interest rates. In addition, Spanish credit worthiness will improve as a result of

Another looming question is Catalan demands for independence. Because of the size of its economy, this region is vital for Spain. Therefore, any talk of secession is a risk to the financial markets. However, Cornelissen is not really worried, and even sees bright spots ahead, once the traditional two-party system has come to an end. “In theory, a Podemos victory is a risk to Spain’s membership of the Eurozone, and any steps towards a Catalan secession could also spook the markets. But it is not going to happen soon. Podemos has peaked in the opinion polls, so I do not fear a situation similar to that of Greece occurring in Spain.” “The rise of Ciudadanos can be seen as a boon to investors because the party opposes Catalan independence – it forms a useful counterweight to regional nationalism,“ he adds. “All in all, investors should not be too worried by the occasional political storm, but should focus on the country’s sunny fundamentals. Spain can do it,” concludes Cornelissen.

* This is a new and totally revised version of the article first published in October 2014.

TRENDS

Rise of retailer Zara The company Inditex* may not be a well-known name outside Spain, but its flagship brand Zara certainly is. It is famous for selling fashionable clothing. So what are the secrets behind its success and why does Robeco Global Consumer Trends Equities invest in it? Interview with portfolio manager Jack Neele.

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Inditex is a Spanish clothing retailer, which operates worldwide. Besides its main brand Zara it operates stores like Pull&Bear, Massimo Dutti and Bershka. The company is based in the coastal city of La Coru単a in the northwestern province of Galicia. The founder and CEO of the company, Amancio Ortega Gaona, has a large stake in the company and has become one of the richest people in the world. Although Spain is still struggling economically, Inditex is doing well. Zara clothing is cheaper in their home market and the pain is compensated by successful expansion abroad.

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‘Many Spanish people are proud of Inditex, like the Dutch are of Heineken’ JACK NEELE – Robeco Portfolio Manager

Inditex is a very Spanish company despite its growth in international operations. Lots of clothing is still manufactured in the region of Galicia. “Inditex is a specific Spanish company. That’s where their roots are. Many Spanish people are proud of it, like the Dutch are of Heineken,” says Jack Neele, portfolio manager for Robeco Global Consumer Trends Equities.

Fits in well with philosophy Inditex fits in well with the investment philosophy of Global Consumer Trends Equities, says Neele. “We are looking for structural winners and have a preference for companies with strong consumer brands. The defensive Inditex stock provides good diversification with other more growth-oriented stocks in our portfolio.” Inditex represents around 1.5% of the total portfolio. “The reason it doesn’t have a higher ranking in the portfolio holdings is that the stock is definitely not cheap. Because of its strong track record, valuation has risen and the price-earnings ratio is in the high 20s.” He explains why the company has been so successful.

Always something new

Low risk fashion mistakes

The Zara brand offers many different collections each year that attract increasing numbers of people to the store, says Neele. “The consumer knows that every three weeks there will be something new to discover in the Zara store.” This short cycle is due to the extremely short lead times for design, production and distribution, a concept sometimes referred to as ‘fast fashion’. In contrast, competitors basically have one collection each season, he adds. “For example, it is difficult for H&M (Hennes and Mauritz) to have more than one collection, because their lead time for distribution is much longer. The reason is that H&M procures mainly in faraway Asia. This is a cheaper part of the world in which to produce, but shipping time to the market in Europe is far longer.”

The risk of making fashion mistakes by stocking clothing that customers do not want to buy is small, says Neele. “If you have only a limited number of ranges, then the impact of a fashion mistake is immense. You end up with large write-downs on unsold stock. But for Inditex, fashion risk is very low, because they have many collections and turnover is high. It will just take a few days longer to sell excess stock. You do not end up with a huge leftover winter range that you need to sell over the spring period.”

Having factories and suppliers close to their markets allows Inditex to react quickly to any change in consumer buying patterns. However, labor costs are higher than in Asia. “Inditex has production facilities in Spain, Portugal, North Africa and Turkey, which are close to their end market in Europe,” he says.

* This article was originally published in September 2014. Where relevant the figures have been updated to 31 May 2015.

This publication is intended to provide investors with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products.

‘Spain is a ship on the right course, at the moment’ OLAF PENNINGA – Robeco Portfolio Manager Global Credits

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SPOTLIGHT ON AFRICA ALICANTE – CAPE TOWN

Team Brunel Stats Sailed

8,788.9 nm

Finished

3rd

Time

25d 7h 33m 25s

Max speed

26.5 knots (1 hr avg)

Max distance

72.6 nm (24 hr)

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QUANT

Gathering momentum on land and sea Momentum is essential to win an ocean race, and the principle works just as well in equity investing. While Team Brunel seeks out the optimal weather patterns at sea, Robeco’s Momentum Equities fund actively makes money out of tailwinds on dry land.

The fund is based on quantitative investing techniques to look for stocks that have built momentum in their share prices, outperforming others over a sustained period of time. In this way, the portfolio can capitalize from those companies winning their own races in their industries, and also in financial markets.

LAURENT PAGES Team Brunel Watch Leader & Trimmer

‘While the boat seeks to go as fast as possible, safety is paramount’

“Momentum strategies profit from Newton’s observation that things that are in motion tend to stay in motion. This law of nature also seems to hold in financial markets,” says Willem Jellema, equity portfolio manager. “So it’s a lot like the Team Brunel boat – once it’s gliding through the water, it picks up speed and profits from that. If it goes through some lulls it can find the next piece of wind.” “We work on the premise that things that have done well tend to continue to do well, and conversely, things that have been doing badly continue to do worse than average. We use models that can measure that.” “A skipper spots which way the wind is blowing, and if you lose speed, where he can regain it. If you’re sailing you know that if you

go for a really strong wind and it suddenly changes, you might capsize. That’s why we tend to look for the winds that are perhaps less strong but more stable.”

Trimming is winning For Team Brunel, it’s not so much a case of finding the right wind, but using it to maximize momentum. Controlling, or ‘trimming’, the sails is one of the most vital jobs on the boat. The Volvo Ocean 65 boats are identical, which means each one has eight sails to choose from. As well as harnessing the wind to power the boat through the ocean at speeds of up to 40 knots (75 km/h), the sails are used to help maneuver the boat. “The sails are trimmed according to the wind strength, the wind angle to the boat, and the state of the sea,” says Laurent Pages, Team Brunel’s trimmer. “There are many actions used to trim them, such as ‘sheeting’ or ‘easing’, to get them in the right places. Each sail is used in one specific wind angle or wind strength. And so one of the fundamental jobs is to know exactly what the best crossover between each sail is.” “For example, we can add a jib between a gennaker and the mainsail, to use as a staysail, to provide an extra 2% of performance at some wind angles. If you don’t use a sail for the job it was designed for, performance crashes dramatically – perhaps by up to 90% of the speed target.”

Looking for stock-specific trends While Pages focuses on what are the right sails at any one time, Jellema looks at what are the right companies. “We look for stock-specific trends, where there is something good at a specific company,” says Jellema. “We focus on stocks that have been doing the best over the past year because the company is doing well.”

ability of being strong in the very light winds can sometimes a massive difference at the end of a race. It allows you to stretch away when you first receive the new wind.”

“However, some trends can be quite volatile, and exposed to large risks. So if you are exposed to a trend you’re also exposed to the risks of that trend. You need to be able to get out of it early enough. We’ve been sailing in this way for two years now and investing very successfully, and we still have enough ideas to improve even further, so the winds are blowing in the right direction for us.” Having a wind that isn’t blowing in the right direction, or isn’t blowing at all, is the biggest challenge for Team Brunel. So what happens if there is little or no wind? “You have to try to keep momentum,” says Pages. “The earlier you are out of the calms, the better it is: the

‘Momentum strategies profit from Newton’s observation that things that are in motion tend to stay in motion’

WILLEM JELLEMA Portfolio Manager Quantitative Equities

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ECONOMY

Africa: An abundance of low-hanging fruit The African continent offers huge growth potential for international investors. Coming from a low base, it is relatively easy for African economies to achieve high growth and companies’ valuations are still very reasonable.

The proportion of African equities in institutional investors’ portfolios is quite small however. The exposure they do have is usually to South Africa, as part of an allocation to emerging markets. The amount of listed equities in African frontier markets is still modest and only a few of them trade in big volumes every day. However, as investors’ interest in African frontier markets is growing, we expect this to change gradually.

The investment case for Africa has many drivers African companies operate in a difficult environment in terms of productivity and corruption. We see this as an opportunity, as there is plenty of ‘low-hanging fruit’ that can be plucked to boost efficiency. We already see that the business climate is improving as governments in various countries are improving accountability. Environmental, social and governance (ESG) factors are therefore important to watch.

Equity culture This change will take place through two channels: the establishment of more stock exchanges and an increase in the number of companies going public. Algeria and Angola, for example, have concrete plans to introduce stock exchanges in the next three to five years. These are countries with large companies and local investors with a lot of money to invest. We see that the English-language countries, such as Kenya and Nigeria and, to a lesser extent, Ghana and Zambia, already have some sort of equity culture. This is less the case in countries with a French colonization history, such as Cameroon.

Another growth driver is the large amount of investments in infrastructure many African countries are making. Not only do these investments benefit, for example, cement companies and banks that finance these investments; they also reduce logistical problems by providing more ports, better roads and cheaper electricity. This should boost economic growth and earnings in other sectors as well. The emerging middle class in various African countries is growing and will drive strong growth in local consumer spending on both basic necessities and discretionary items.

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‘Over the last 12 years equities were less volatile in Africa than in other emerging regions’

Finally, as very few international investors are active in smaller markets like Botswana, Ghana and Zambia, we believe many stocks in these markets are undervalued. When frontier investors discover these markets, we expect significant share price increases.

CORNELIS VLOOSWIJK – Fund manager Robeco’s African equity fund

Investing in Africa tends to be perceived as risky. Of course, we do not contend that it’s risk-free. However, we do want to put this notion into perspective. Research shows that over the last 12 years African equities were less volatile than equities in other emerging and frontier regions. This is explained by the fact that the various countries move quite independently from one another as local factors play an important role. In addition, global cyclical downturns are felt to a lesser extent in some African countries because of their strong structural growth. Finally, as African stocks have a low correlation with stocks in the rest of the world, an investment in this continent offers diversification advantages in a portfolio context.

Isn’t it risky?

Ebola Of course any article about Africa has to address Ebola. This big human tragedy has already affected the local economies of the three hardest hit countries: Guinea, Liberia and Sierra Leone. International flights to and from these countries have been canceled and domestic transport has also become very difficult. We do not hold stocks of any companies with significant exposure to the domestic economies of these countries. However, we do hold shares in some mining companies that are active there. Production could be disrupted as some foreign engineers will choose to stay out of these countries in the next few months. The share prices of these mining companies have been under pressure. In Nigeria, which takes up quite a big chunk of our portfolio, we were pleasantly surprised by the very effective way in which the Nigerian government tackled the issue. As per mid-October, Nigeria appears Ebola-free after eight patients died and twelve others fully recovered. Barring unforeseen developments, we expect the consequences for our portfolio to remain limited.

SUSTAINABILITY

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The perils of being at sea, from pirates to plastic

Team Brunel’s crew members face many challenges on their way around the world and one of them is unwanted human company: pirates.

Armed raiders have been a common sight in African waters, and the prospect of having to deal with pirates formed part of training before the Volvo Ocean Race began. Within a week of leaving Alicante, off the coast of Morocco, the team thought that their worst nightmares were about to come true.

in military gear. Pirates! It was the first thing that came to mind,” recounts Team Brunel on-board reporter Stefan Coppers. “Their boat sped at a frightening pace towards our stern. One of their crew members bent over to pick up something of the floor. I could feel the warm streams of sweat trickling down my spine. I was prepared for the worst scenario.”

Men in military gear “A small boat appeared out of nowhere on the horizon, and on board were eight men dressed

“To my relief, the man emerged with no rocket launcher or Kalashnikov, but a remarkably large

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‘In a single dive, he swam under the 65-foot boot and returned to the surface triumphantly holding aloft the piece of plastic’

Spanish flag. The ‘pirates’ appeared to be Spanish navy men from a nearby navy vessel. Their red-yellow-red flag waved proudly in the wind and their combat equipment consisted only of a camera with which they wanted to capture the Volvo Ocean Race fleet!” Hitting objects remains another ongoing hazard, and it doesn’t need to be a whale or an iceberg … a simple piece of plastic can also wreak havoc. Skipper Bouwe Bekking had noticed on one day that the boat was sailing slower than normal, so crew member Jens Dolmer used a mini-periscope to look round the hull and inspect the keel, and he saw a piece of plastic hanging there. Colleague Louis Balcaen – a former triathlete and accomplished swimmer – came quickly to the rescue. “He ran to the bow, slipped off his boxer shorts and dived into the water completely naked,” recounts Coppers. “In a single dive, he swam under the 65-foot boot and returned to the surface triumphantly holding aloft the piece of plastic. With the naked Belgian back at the winch, the jib is rolled out again and Team Brunel was back on course to Cape Town.”

Running over fishing lines is another hazard. Dolmer was on early morning watch and noticed that a giant tuna was being dragged along behind the boat, fighting for its life. “In the distance a Moroccan fisherman in a tiny rowboat balled his fist at us!” says Dolmer. ”Our boat had just snagged onto his fishing line.” Dolmer had to cut the line free, much to the anger of the fisherman. The crew were disappointed at the loss of the tuna; one of the biggest daily challenges they face is not eating properly. For months on end it is a diet of freeze-dried food during meal breaks that can take place day or night. The men have to make do with five-day menu rotations, which means that at the end of the rotation, they get the same food as they did five days ago.

Culinary war of attrition This is a particularly tough test for Pablo Arrarte Elorza, a Spaniard with a love of gourmet food. “For Pablo, the race is mostly a culinary war of attrition, because the food that the team has brought with it on the race does little to please his gourmet palate,” says Coppers. “One look in the pan is all it takes for him to raise his nose in disgust ... he’ll say, ‘chicken curry again, bah!’”

“However, on one day there is chocolate mousse on the menu. With his mouth watering, Pablo empties his bowl, and his smirking fellow team members then allow him an extra spoonful from their rations! He is in heaven!” And if you thought that sailors could not possibly get sea sick, think again. Coppers says he resisted going on deck for days in case he threw up, but eventually, nature took its course. “The seasickness ghost grabbed him with both hands and he hung over the railing a few times,” says Gerd-Jan Poortman. And he wasn’t the only one. “We also had a rough night”, Poortman revealed. “And I told him – you weren’t the only one who got sick. But we did it for a good cause. We were now in the lead – in one rough night we moved from 6th place to pole position!”

‘Nigeria has a major film industry. After Hollywood and India’s Bollywood, ‘Nollywood’ is the biggest film production center in the world’ LÉON CORNELISSEN – Chief Economist Robeco

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SPOTLIGHT ON ABU DHABI CAPE TOWN – ABU DHABI Team Brunel Stats Sailed

6,417.5 nm

Finished

1st

Time

23d 16h 25m 20s

Max speed

23.7 knots (1 hr avg)

Max distance

717.1 nm (24 hr)

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BUSINESS

Leading from the front Leadership is key to winning any race, be it in investment or on the high seas. And the most important component is effective teamwork, says Robeco’s Middle East regional director Amr Albialy and Team Brunel’s Gerd-Jan Poortman.

“Staying connected with the broader Robeco organization is absolutely essential to building success for the regional business,” says Albialy, who is primarily responsible for large institutional clients in Abu Dhabi and Saudi Arabia. “Teamwork across the group is key, and ensuring that we build and sustain strong networks with the various Robeco teams has been one of the key objectives for the MiddleEast team.”

AMR ALBIALY Regional director Robeco Middle-East

‘A partnership approach, right across the Robeco organization and with our clients as well, has been a key factor for success’

“It has been through a focus on this teambased approach that we have been able to grow and develop the business in the region. You can work incredibly hard locally on developing a client relationship, but without the necessary support of all your team members, the likelihood of success is greatly diminished.” “A partnership approach, right across the Robeco organization, has therefore for us, been a key factor to the success in delivering the more bespoke and customized solutions expected by our large institutional clients in the region.”

Life at the sharp end For Team Brunel’s Gerd-Jan Poortman, leading from the front goes with the job title. He is the team’s bowman, the sailor who specialises in standing at the front, or bow, of the boat to hoist or drop the sails. He also acts as a lookout, particularly when the boat enters busier waters such as the Middle-East shipping lanes. “We have only eight sailors and everybody needs to be able to do everything; we interact

everywhere,” he says. “But everyone on the boat has his own speciality like a football team’s striker, midfielder or goalie. We have trimmers, drivers, and I am the bowman.” “We have six sails on the boat that we can hoist and drop. We use different sails for different wind angles and strengths. To hoist and drop them we have different techniques, and that is my speciality.My goal is to change sails when the conditions are changing without losing speed and time. Sometimes my job is difficult because I am standing on the bow, when all the waves are rolling over the deck at great speed. With big winds it is hard to manoeuvre around the bow, and that makes it quite complicated.”

Serving a bespoke market Albialy also has a focused approach, as the Middle East market differs significantly from most other regions in the world in which Robeco operates. It is heavily dominated by number of very large sophisticated institutional clients, including sovereign wealth funds, central banks and state-funded pension funds. Business development success for Albialy is therefore very much driven by the need to have a very client-centred approach, with an emphasis on developing long-term strategic partnership based relationships. “Trying to approach this market in a product-led manner may generate some short-term results, but is clearly not conducive to building long-term success,’’ says Albialy.

“My role is mainly to ensure I am the primary point of contact with the clients in order to have a better understanding of their investment objectives. I work closely with both clients and my colleagues across Robeco to enable clients to achieve their financial objectives by matching their investment needs with the best solutions. It is very important in dealing with such sophisticated clients to be always client-centric and focus on being content and solution-driven. The key is delivering innovative, customized solutions, and engaging with the clients in a much more advisory capacity.’’

first night in the Atlantic, when we had a lot breeze. We sailed from the back to the front of the pack and that was mainly because we managed to change sails in very difficult circumstances and lose very little speed. So we did much better than the others.”

Defending is harder than attacking Successful investing means staying ahead of the competition, and Team Brunel was sometimes faced with the tactical decision of what to do when they see a boat in front of them. Is it better to catch up, or wait for the opposition to make a mistake, as they do in other sports such as motor racing? “You always want to be in front,” says Poortman. “But if you had the choice, it would be nice to be second and then overtake your competitor at the end. Defending is always harder than attacking.” This can mean busy shifts on deck for Poortman, literally running with the wind during the testing first leg between Alicante and Cape Town. “We had a huge amount of sail changes and 95% of them went really well,” he says. “I especially remember the changes we made during the night just outside the Med on the

GERD-JAN POORTMAN Team Brunel Bowman

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ECONOMY

The Gulf: Gateway between East and West Huge growth in the airline industry in Gulf States has had a major impact on the local economy. The construction and financial sectors offer interesting investment opportunities.

A large increase in the number of flight connections and the construction of airports have put the Gulf States on the map as a global air-traffic hub. The International Civil Aviation Organisation (ICAO) has calculated that by 2020 the six countries that make up the Gulf Cooperation Council (GCC) will be processing around 250 million passengers a year. Within the group of GCC countries, the United Arab Emirates is the most ambitious. In terms of passenger numbers, Dubai International Airport was only the world’s 13th largest airport in 2013, and number eight for freight traffic. But once construction of Dubai’s second airport, Al Maktoum, is complete, it is set to grow rapidly into the world’s largest airport, with projections of 160 million passengers annually, according to the ICAO. In comparison, in 2013, Atlanta airport in the US was the busiest airport in the world, with a total of 92 million passengers checking in or out. The location of the Gulf States plays a key role in current and expected growth. With nearly two billion people within two and a half hours flying

time and, according to the ICAO, no less than seven billion people just one flight away in 2025, the region is exceptionally well positioned to connect Europe, Africa and Asia.

Gateway between East and West But the growth in the airline sector didn’t just happen. The governments of the Gulf States have invested hugely in the development of the airline industry. Dubai’s ulterior motive for attracting many tourists and businesspeople is that it does not possess any oil or gas reserves. So by filling a central function for the wider region, the emirate can still benefit from the area’s prosperity.

‘The region is exceptionally well positioned to connect Europe, Africa and Asia’ ROB SCHELLEKENS – Portfolio manager for Robeco Emerging Markets Equities

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The Gulf States see themselves as an important destination for tourists and expats. Dubai in particular has positioned itself strongly here. It wants to be more than just an air-traffic hub – it aims to be a gateway between East and West, with banks, accountants, media companies, hotels and legal firms. Businesses are being attracted with a favorable tax environment, but also with appealing facilities such as ski slopes, fabulous beaches and luxury retail centers – which are of course also very tempting for tourists. Abu Dhabi is less focused on mass tourism and prefers to attract more culturally aware tourists, for instance with museums.

Major impact on local economy The massive growth in the airline sector is having a major impact on the region’s economic development. Business analysts Oxford Economics calculated that the airline industry in Dubai, including revenues from tourism, already contributes 26% to the country’s GDP, but that this portion will grow to 45% by 2030. The other emirates are also enjoying the fruits of Dubai’s fierce growth. In Ras al-Khaimah, Sharjah and Fujairah, many hotels are being built. Oil-rich Abu Dhabi is also expanding, but they are more reticent as the emirate does not require revenues from tourism. The development of Dubai and other centers in the Gulf stalled when the global economy took a punch from the financial crisis. Projects were put ‘on hold’ and rulers have been planning more rationally since then. Partly due to this more cautious approach, lower oil prices aren’t likely to have any major effect. Not only are there many projects still in the

pipeline, but also the revenues from new activities form a buffer against lower oil prices.

Interesting investment opportunities But does this global hub function also make the Gulf region attractive to investors? The rapidly growing airline companies are not listed, and neither are the airports. The ‘ruling families’ that control the emirates and surrounding countries own these enterprises through their investment companies.

However, there are interesting opportunities in other areas, such as the banking sector and in construction. Rob Schellekens, portfolio manager for Emerging Markets Equities, uses the examples of Dubai Islamic Bank and the recently floated Emaar Malls Group, which commissioned construction of the Dubai Mall, the world’s largest retail center. One positive factor is that the equity markets of Qatar and the UAE are soon to be included in the MSCI Emerging Markets Index. This will automatically attract the interest of professional investors. Equally favorable from an investment perspective in the UAE is the fact that Dubai is organizing the World Expo in 2020. A recent report by consultants Deloitte indicated that tourism is set to almost double by 2020. This will require construction of many hotels and conference centers. There is still no end in sight for construction activities in Dubai. This publication is intended to provide investors with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products.

SAILING

Taking on the leaders in their own backyard Team Brunel faces its toughest challenge as it heads towards Abu Dhabi – racing against the first leg winner in their own backyard.

Abu Dhabi Ocean Racing, commanded by British Olympic silver medalist Ian Walker, won the Alicante to Cape Town stretch, beating Team Brunel by almost 4½ hours. Team Brunel is out for revenge, but knows it won’t be easy, given that Abu Dhabi Ocean Racing will pull out all the stops to be first over the line in their home port. The biggest issue was to learn from the mistakes made in the first leg, says crew member Pablo Arrarte. “We need to go faster with light winds. We have talked a lot about how we can manage that, as it was the biggest mistake that we made during the first leg: losing the momentum when it wasn’t that windy. We were fine when the wind was blowing strongly,” says the genial Spaniard.

Let the north winds blow The principle difference with the first leg is the boats will be sailing in entirely the opposite direction – going north from Cape Town rather than heading south – which means the wind conditions will be much better, says Arrarte. “We start in the Southern Ocean and make our way up to the Equator. In the south there is more wind than in the north – it’s exact the opposite of the first leg,” says Arrarte, whose role as a watch captain makes him one of the more senior crew members. “The tactics during the first leg were to go quite far west, near to Brazil, and then turn sharply east, towards Cape Town, to get to the best winds,” he says. “Tactically it’s a similar story for this leg. The question for us will be: for how long do you go south, and then make the turn to the east before you go north?”

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‘We need to go faster with light winds – this was the biggest mistake that we made during the first leg’ PABLO ARRARTE – Team Brunel Crew member

“If you go directly north much earlier, then you sail less distance, but you have less wind. If you go south there is more wind, but you sail more miles. It’s a trade-off, but the easterly route is normally the fastest one,” he says.

they face potentially monsoon conditions north of the Equator.

In the Doldrums again

“When we go off the coast of East Africa there is a real threat of pirates, but the bigger problem is the many fishermen who sail without lights or proper navigation equipment,” Arrarte says.

The route from South Africa also faces a repeat of a challenge faced on the way down: a notorious area of low pressure called the Doldrums that has little wind and has caused many boats to come to a standstill. The sailors when then go from one extreme to another as

As for the crew, they’ve already bonded during the months of training and time spent at sea, and they have adapted well to living with each other in cramped and sometimes stressful conditions, he says.

“There is always the danger that we could become irritated with each other, but we have not encountered problems of this kind so far,” he says. “We’re living on top of one another, so we work it out. We’re always looking forward though to the next stopover, and sailing into Abu Dhabi – hopefully first.”

‘By now we all know that the market is not efficient, but there are different explanations to why it is not. We believe it is caused by greed, fear, anchoring and investment restrictions’ PETER FERKET – Head of equity investments Robeco

SPOTLIGHT ON CHINA ABU DHABI – SANYA Team Brunel Stats Sailed

5,449.7 nm

Finished

5th

Time

23d 18h 25m 10s

Max speed

18.4 knots (1 hr avg)

Max distance

335.4 nm (24 hr)

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QUANT

Some are more equal than others Investment funds target the same markets, and the Volvo Ocean Race teams are competing with identical boats. So if all things are equal, how do Robeco’s fund managers and Team Brunel generate a winning performance?

Quantitative techniques pioneered by Robeco since the 1990s aim to get more performance out of the same markets than the competition. And Team Brunel likewise relies on the skills of its highly experienced sailors to get more speed out of the same boat as its rivals. The rewards are plain to see: Robeco Conservative Equities strategy have achieved success over the past eight years by moving away from the crowd, while Team Brunel likewise increases its chances of winning by outsmarting the other boats. The team currently heads the race leaderboard after winning the second leg.

manager of the strategy. “Low-volatility investing is slowly gaining more traction and investors worldwide are gradually increasing their allocations.” “Our approach differs in many ways, because we add elements to decrease risk or enhance return,” he says. “We select stocks on the basis of volatility, beta, low default risk and value- and momentum-driven factors. So we consider not only historical volatility, but also include other factors to enhance returns and avoid unnecessary risks and costs. We use the term ‘Conservative’ instead of ‘low volatility’ because this is not a generic low-volatility or minimum variance investment strategy.”

Aiming high by looking low The Robeco Conservative Equities strategy does this by exploiting an anomaly in the equity market where low-volatility stocks have been shown to generate better performance at lower levels of risk. PIM VAN VLIET Portfolio Manager Robeco Conservative Equities

“In 2006 Robeco was one of the first asset managers to adopt low-volatility equity investing,” says Pim van Vliet, portfolio

For Team Brunel skipper Bouwe Bekking, using specialist skills to gain an advantage works the same way when racing around the world. “The boats are identical, so several factors are involved in whether you win or lose,” he says. “We had a good training program, but most importantly we have a fantastic team who never ever give up. They are fighting and believing in themselves until the end.”

“The factors that make all the difference in winning using identical boats are preparation, the actual execution of the game plan according to the weather, the tactics when the weather changes, and how well the team is functioning and sailing as a whole.”

Survival of the fittest Bekking’s crew is one of the most experienced, and one of the most international: the Dutch captain is competing in his seventh Volvo Ocean Race while Australian navigator Andrew Cape is on his sixth. “You need a highly experienced crew, otherwise you don’t stand a chance,” says Bekking. “You have to be physically fit, or you will not get around the world in a Formula 1 sailboat. Of course a 25-year-old guy who is half my age is potentially fitter than me, but then for my age I am super fit. I work hard on that, such as daily training during stopovers, no alcohol and eating only healthy food.” (Cape admits to having the occasional drink and smoke!) Maximizing the winning margin while reducing risk is a strategy used by both Robeco and Team Brunel.

‘You need a highly experienced crew, otherwise you don’t stand a chance’

“In order to enhance the risk-return-profile, Robeco Conservative Equities strategy applies its philosophy of not going against other factors such as momentum and value when selecting low-volatility stocks,” says Van Vliet. “Thorough empirical research shows the benefits of this approach in generating higher risk-adjusted returns.”

other person on Olympic boats,” he says. “I actually think it is a minus, as these Olympic sailors are very often individuals used to putting themselves at the forefront, instead of making sure that the team is the most important thing.”

“When we first started, the challenge was how to convert the low-volatility factor, or anomaly, into an efficient portfolio,” he says. “Because in the end, not all low-volatility stocks perform the same, so we want to select the most attractive ones.”

Making the most of momentum One thing that Van Vliet wants to avoid is distress risk – when a company has difficulty paying off its financial obligations to its creditors. “We look at more than backwardlooking statistical risk measures,” he says. “The negative impact of leverage is picked up by distress risk factors but not by volatility or beta. The main result of taking distress factors into account is smaller drawdowns compared to a generic low-volatility strategy.” And teamwork is key. Bekking, for example, is not impressed by the fact that some of his competitors – notably Abu Dhabi Ocean Racing captain Ian Walker, who won the first leg – have won medals at the Olympics. In fact, he thinks it may even negatively impact them. “Of course they have performed under a lot of pressure, but only by themselves or with one

BOUWE BEKKING Team Brunel Skipper

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EQUITIES

‘As consumers get enough handbags and shoes, they will buy services – that’s the next mega trend’ VICTORIA MIO – Portfolio Manager Robeco Chinese Equities

Riding the Chinese e-commerce boom China’s rapid growth is now being fueled by e-commerce as the country becomes more consumerist, says Chinese Equities portfolio manager Victoria Mio. And that means investors should target those internet or consumer-oriented companies whose profile was recently massively raised by the flotation of industry titan Alibaba, she says.

China has a clear strategy to move away from its export-led economy, where growth is now unsustainable, to one more focused on the vast internal market for consumer products and services.

of a physical infrastructure, and regional imbalances. But in the last few years there has been a digital revolution thanks to the advance of smartphones and the penetration of internet services in China.”

And there is certainly plenty of growth potential. China’s real consumption in 2013 was 36% of total GDP at USD 3.4 trillion – significantly lower than that of other developed countries. As China becomes more of a consumption-driven economy, consumption share is expected to make up a larger percentage of GDP, which in turn will benefit the e-commerce industry.

“Many of the sectors have now embraced the internet. China now has the largest internet market in the world with 618 million users in 2013 and the penetration rate is 46% of the population. Thanks to this, e-commerce can expand very rapidly.”

World leader in online “China’s consumption engine has turned to online,” says Mio. “China now accounts for about 35% of all global e-commerce sales, which makes it the world leader. This is expected to become half of the global market by 2018.” “These are huge numbers. Initially, China’s consumption story was negatively impacted by the lack of a social security safety net, the lack

China is skipping years of business evolution by embracing e-commerce without first having had traditional ‘high streets’, in the same way that many emerging countries have completely skipped the era of fixed line telephone. Mio says the lack of physical shopping facilities within China – despite some recent headline-grabbing developments – has facilitated online. The world’s largest shopping mall recently opened in Tianjin, but you would need to live in the city to be able to take advantage of it.

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“In terms of shopping space, China as a whole has retail space per capita of about 0.6 square meters, which is much lower than the US, which has 2.6 square meters,” Mio says. “A major reason why e-commerce has developed so quickly in China is the inadequate offline retail market. When consumers want to buy things, they have no better choice than to go online.”

Alibaba as the role model The growth of e-commerce can be seen in the astonishing valuation of Alibaba, an e-commerce platform that operates a customer-to-customer (C2C) market that is similar to eBay. Alibaba’s flotation in September 2014 instantly made it worth more than both eBay and Amazon and turned founder Jack Ma – who was already the richest man in China – into a multi-billionaire. In January 2015, the company was worth USD 250 billion. “Jack Ma said: ‘In the US, e-commerce is just online shopping. In China, e-commerce is a lifestyle’,” says Mio, whose portfolio includes Alibaba shares. “Most of the Chinese e-commerce market is internal; Alibaba’s international sales only account for 10% of its revenues – 90% are in the domestic market.” Part of the growth has been due to China’s 12th 5-year plan which aims to steer the country away from exports towards domestic consumption. To do this, the country has engaged in a massive infrastructure drive. “The government has helped to construct 200 logistics parks in major economic zones and has made investments in highways, railways, waterways, as a key initiative to improve the infrastructure to support the growth in domestic consumption and commerce,” says Mio. “The national postal system was not big enough to support the growth in e-commerce, so companies have built their own logistics networks. There are now many third party logistics suppliers. Alibaba totally outsourced the logistics to a network of companies, and also has a subsidiary that owns warehouses and last-mile delivery companies.”

Western model for services She says e-commerce is not the only major growth area as the country restructures towards a more Western model. “Another thing that is exciting in China is the growth of services such as tourism, financial services, entertainment, and personal services such as massages,” says Mio. “As consumers get enough handbags and shoes and so on, they are going out to buy services – that’s the next mega trend.” So how can investors benefit? Mio’s strategy is to buy Chinese stocks that are best placed to take advantage of the growth story fueled by e-commerce or more traditional industries like autos. The sector may also insulate investors against any potential slowdown in the rest of Chinese GDP. “Logistics, e-commerce, internet and tourism companies, along with mass market consumer products like sportswear and alcohol are the best investments,” she says. “Despite some restrictions on car ownership, the auto market is still growing at the high end for SUVs and foreign brands such as BMW.” “We have a positive outlook for Chinese equities in 2015 because of two things: continued reforms in major economic sectors to make growth more sustainable, and the fact that valuations in Chinese stocks are quite low. Chinese domestic A-shares staged a spectacular rally of 53% last year, but Chinese offshore stocks have some catching up to do. I’m really quite enthusiastic about the Chinese market.”

EQUITIES

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Fresh opportunities in Asia

Robeco’s Asian Equities team is more bullish on the region’s stocks than before, thanks to improved prospects for the China market. “We turned bullish on Asian equity markets in September 2014, mostly on the idea that worries about China were more than priced in. Any relief here would pull the whole region back up again,” says Arnout van Rijn, Chief Investment Officer for Robeco Asia Pacific. “And that is what happened – China cut interest rates and markets rose strongly. Before, I was just bullish on Japan and considered other

Asian markets to be range-trading. So we’re more bullish on the region than we have been for quite some time.”

Bottom-up stock picking The top-down approach is relevant, but you don’t need strong macroeconomics to find great stocks, he says. Japan is a perfect example of how you can pick winners, even if the overarching environment is more negative.

“It’s hard to make a bullish case from the top-down perspective in Japan; its central bank is trying to create some inflation but it doesn’t seem to be working very well,” he says. “The bull story for Japan really focuses on the bottom-up improvements that you see in corporates. Generally they are evolving towards more shareholder-friendly behavior, so we are seeing more share buybacks, dividends being raised, and a nice tailwind from the weakness of the yen.” “So we do think that earnings growth in Japan will be pretty solid, even though the domestic

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economy may be going nowhere. And that is combined with pretty low valuations for Japanese equities, which makes us quite bullish.”

Better corporate governance Van Rijn says much of the renewed attractiveness of Asian stocks is due to improvements in corporate governance, partly thanks to pension fund pressure. “A new corporate governance index in Japan is being followed by the largest domestic pension fund – if you don’t have independent directors or if your return on equity is too low, you can be disqualified from this index,” he says. “It’s really pushing the discussion in the boardroom in Japan into a more Western style of thinking about creating shareholder value.”

“Likewise, the national pension fund in South Korea, a very large shareholder that owns about 8% of the domestic equity market, has started to demand that companies improve their pay-out ratios. That’s the thing that I think will drive the South Korean equity market, particularly if interest rates stay low or go lower, and dividend yields go up.” “Last year South Korea was the weakest equity market in the region, but it’s one of our favorites for 2015. The Korea (corporate governance) discount is bigger than ever just as companies start to address the root cause of it.”

Avoiding Australia and Indonesia Elsewhere, opportunities are more limited says Van Rijn. “We are neutral on India. We do believe it is a bull market but it is hard to find attractively priced stocks. We need to see

inflation come under control – and there are signs of that now – so discount rates in our models can be reduced to make the valuations work.” “Australia has seen a lot of currency weakness which was one reason to be underweight. Resources stocks have been under pressure and the overall domestic economy is also weak. In some sectors valuations start to look more appealing. Our underweight stance may not last for all of 2015.” Van Rijn has not been invested in Indonesia since 2013 after the rupiah fell badly. “Currency moves can be powerful and over-riding, and it’s a big mistake to ignore currency risk in this region,” he says. “You can find many good stocks, but if the currency moves against you, you still lose your shirt.”

‘We do believe India is a bull market, but it’s hard to find attractively priced stocks’ ARNOUT VAN RIJN – CIO Robeco Asia Pacific

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INTERVIEW

A viable adventure The Volvo Ocean Race is entering the decisive phase. Robeco, proud sponsor of Team Brunel, is following the movements of skipper Bouwe Bekking and his team with bated breath. Whatever the final result turns out to be, Management Board member Hester Borrie can already look back with satisfaction on Robeco’s sponsorship of this event.

”Our sponsorship of Team Brunel has contributed a lot to Robeco in a variety of ways. Our association with this incredible race and the opportunities this has given us to receive our target groups in a unique setting, have brought a great deal in terms of value. Also within the company, the Volvo Ocean Race has evoked feelings of pride and unity. The thousands of online publications, the Facebook page, the extensive media attention: we have reached a large audience worldwide and we have benefited from this. Most importantly, we have raised our profile and heightened exposure in our target markets.”

to attribute to the media attention. In short, we drew up a whole list of criteria and can now conclude that we are ahead of target with these KPIs. We have achieved all the goals that we hoped and expected to achieve. For example, since the beginning of the race we received more than a thousand clients. Some of them were also given the opportunity to bring their clients too. With more than 15,000 online publications about Team Brunel, the media value has also been considerable. If the team ends in the top three, this focus will continue for some time.”

Is there still a chance of a podium position? Can you quantify this value? “At the beginning of the process we formulated a number of KPIs, such as: the number of people we intended reaching, the number of guests we wanted to receive at events and the extent of the value we wanted

“I am optimistic by nature, but even without misplaced optimism we shouldn’t rule out a place on the podium, Bouwe Bekking is a fantastic skipper, a true all-rounder. He is not only an excellent sailor – he also has creative ideas about how to handle wind, water and plotting a course.”

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Before it became a single-class event, the Volvo Ocean Race was more of a competition for adventurers. Would Robeco also have considered being a sponsor in those days? “Perhaps. At that time the teams learned – not seldom the hard way – the necessity of testing things over and over again until they worked. This fits in very well with the credo ‘pioneering’ in our motto. Maybe international branding did not play such an important role in the early years of the Volvo Ocean race [It was then still called the Whitbread Round the World Race, Ed.]. Of course, this is an important factor for us. The race offers us the opportunity to be present all over the world and receive guests at a range of locations over a period of more than nine months.”

What was the highlight of this race for you? “I was in Alicante when the boats left and found it incredibly impressive. Our Spanish team was host there for a week at a hospitality event they had organized and they did it brilliantly. A couple of months later, I also attended the stopover in Auckland, which was also an amazing experience. It was quite moving to see everyone again and to be part of the whole atmosphere. And how the men manage to hold up after a couple of months at sea: their mental strength is incredible! In Auckland the hospitality management was of the highest level. I am secretly hoping for another highlight – when Team Brunel sails into first position.”

Do you have a personal affinity with sailing? “I am a mediocre to poor sailor; I never learned to sail as a child. Luckily I have a group of very competent female friends who know exactly how to handle the combination of wind and water. Now and then we hire a boat and go sailing somewhere beautiful like Croatia. During a week like this I carry out simple tasks, such as stowing the fenders. The rest of my contribution is made in the galley. Luckily I never get seasick. However rough the sea is I can always put together an acceptable tuna salad. I wouldn’t mind having a lesson or two to learn more about the sailing part – but then from Bouwe Bekking himself.”

Volvo Ocean Race 2014–2015

4-11 October

Alicante

14-15 March

Auckland

14-17 June

Lorient

15-19 November

Cape Town

18-19 April

Itajaí

19 June

The Hague (Pit Stop)

2-3 January

Abu Dhabi

16-17 May

Newport

27 June

Gothenburg

6-7 June

Lisbon

7-8 February Sanya

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SPOTLIGHT ON NEW ZEALAND SANYA – AUCKLAND Team Brunel Stats Sailed

6,374.6 nm

Finished

5th

Time

20d 6h 30m 30s

Max speed

22.6 knots (1 hr avg)

Max distance

460.0 nm (24 hr)

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QUANT

Finding the right factors Interest in factor investing has increased substantially, and the philosophy of pursuing factors such as momentum is very much part of Team Brunel’s game plan to win the Volvo Ocean Race.

While the concept of factor investing is relatively new, it has a long history in terms of academic research into how it leads to better returns for less risk. The main concern for asset owners is how to find the best way to implement it, says Joop Huij, Robeco’s head of factor investing research. “In the wake of the financial crisis, institutional asset owners made achieving diversification their top priority. But this was more difficult than expected because equities, high yield bonds, hedge funds and private equity all proved to be closely correlated in times of distress,” says Huij. “Now that we are able to obtain greater insight into the underlying factors relating to risk and return, we see an increasing desire to construct robust portfolios designed to withstand shocks.”

JOOP HUIJ Head of Factor Investing Research Robeco

‘Value, momentum and low volatility are the most convincing factors’

“It is very important that there is strong evidence for the existence of a premium. Value, momentum and low volatility are the most convincing.”

Different roads to Rome Team Brunel’s bowman Gerd-Jan Poortman also follows the factors of momentum and low volatility in his sailing role. Maintaining momentum is all important in an ocean race, which means that he and his team mates must perfectly align the sails to get the most out of the prevailing wind. “We’re always trying to change the sails to achieve the best possible setting,” he says. “There is no perfect trim, because the circumstances are always different. Maximizing momentum is not an exact science. Some boats can use the balance to go faster while others can trim the sails better.” So with so many roads to Rome how can investors implement a successful factor investing strategy? “It should all start with the investment policy and evaluation of how the current

portfolio is loaded to factors before really going into recommending certain strategies. If this step is not implemented properly, it may result in undesired factor exposures,” Huij says.

Three things to avoid Huij says there are three things to avoid when selecting stocks and constructing a portfolio: – Avoiding unnecessary turnover leads to better after-cost returns, because trading costs eat directly into net performance. Smart rules to select stocks and construct a portfolio can result in more stable portfolio weights and hence lower turnover. – Avoiding risks that are not properly rewarded. For example, the extra premium gained when investing in value stocks is typically attributed to bankruptcy risk, but we found that this value premium is not related to distress risk alone. – Avoiding counteracting other factor premiums, because negative exposure to other factors will hurt performance. A stock may be attractive from a momentum perspective, but if its price continues to rise it may no longer offer value. Similarly, Team Brunel must avoid overlapping factors, such as raising the volatility of the boat in the pursuit for momentum. “I constantly check the state of the sails, the sea state and what the wind is doing,” says Poortman. “I’m always keeping an eye on the bow, so that is basically everything in the front of the mast,” says Poortman. “I need to deal with a

lot of water and the big waves that crash over the bow.” Poortman knows from experience the dangers of these big waves. During a sail change in the dead of night, the bowman was caught by a wave and thrown against one of the raised dagger boards, sustaining a burst eardrum and a bruised arm.

was in the sea,” he says. “I realize now that we live in a small village that is called the world. We must take better care of it. And I hate snakes!”

Getting the timing right For investors getting the timing right is similarly important in avoiding unwanted collisions, especially when chasing factors across different asset classes. “The evidence for factor investing has also been found in other asset classes such as bonds,” says Huij. “The presence of factors across multiple asset classes gives asset owners the option of introducing factor investing throughout an entire portfolio, or limit it to just a part of it.” “However, timing is extremely difficult. We have carried out a lot of research on this topic, but our results have not given us sufficient confidence to claim that we can effectively time these factors,” admits Huij.

And the unknown factors? Snakes! So what factors remain undiscovered for Poortman after months at sea? What surprised him was the level of plastic he has seen in the oceans – and he didn’t welcome an encounter with a sea snake that became tangled on the boat’s keel. “I was really amazed how much pollution there

GERD-JAN POORTMAN Team Brunel Bowman

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SUSTAINABILITY

‘There are excellent growth opportunities

for dairy product manufacturers that meet strict safety standards’ JÜRGEN SIEMER – Agribusiness analyst RobecoSAM

New Zealand’s cash cow The dairy industry is faced with sustainability challenges such as food safety and greenhouse gas emissions. “Companies that are able to address these challenges can benefit from a fast-growing market with very good prospects,” says Jürgen Siemer, RobecoSAM’s agribusiness analyst. For a rainy island such as New Zealand, cows are the best way to utilize the land. The grassland is very productive as it grows almost throughout the year, it protects the soil from erosion, and the cows can be used for various ends, including milk, meat and leather. Dairy farming is still a family business (although the farms are pretty large) and provides jobs for families in rural areas, and opportunities for rural entrepreneurs.

Providing high-quality infant formulas to China and Southeast Asia is one of the highest growth markets. In China, this market is currently worth USD 13 billion a year, according to the Sydney Morning Herald. Since the milk contamination scandal in 2008, in which Chinese babies died from drinking improperly treated milk, Chinese regulations have become much more stringent.

Dairy is important

“Companies that are able to comply can find a rapidly growing market of middle-class mothers who are willing to pay a premium for food safety,” says Siemer. “New Zealand-based Fonterra, the world’s biggest dairy exporter, was granted access by the Chinese authorities in 2014, and other companies include Mead Johnson, Danone and local company Biostime.”

“Dairy is an important growth market,” says Siemer. “Demand is growing quickly as many emerging markets have been shifting to a more Western diet. Demand growth is expected to exceed supply growth in important markets like China, India, the Middle East and North Africa by 2020.” These lofty growth prospects come with their own challenges. Food safety, for example, is a top priority in the dairy industry. If not treated right, milk is highly susceptible to bacteria and degradation. “Companies in New Zealand are doing a good job in this respect,” Siemer says. “Their products are highly valued, for instance by Chinese mothers looking for infant formula.”

RobecoSAM’s Governance and Active Ownership team tasked a research company with mapping the various Environmental, Social and Governance (ESG) challenges in the dairy industry. One of the sustainability issues they identified was largely linked to issues in soy production.

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“In most developed countries dairy cattle are kept in an intensive farm production system based on large quantities of imported feeds,” says Peter van der Werf, engagement specialist in the team. “Soy is a widely used animal feed. Land conflicts, water conflicts and neglect of the rights of indigenous people are associated with soy production in Latin America, Africa and Asia.”

Greenhouse gas emissions Another challenge is the level of greenhouse gas emissions which are mainly the result of feed and fertilizer along with high methane release from the cows themselves. Methane emission is estimated at around 100 million tons each year and represents the biggest source of it after rice cultivation. It is not just ‘man-made’ – millions of tons of methane is naturally produced in the guts of ruminant livestock as a result of

microorganisms. The composition of the animal feed is a crucial factor in controlling the amounts of methane produced. “Dairy product manufacturers that deal with these challenges in a sustainable way have a competitive edge and are very well equipped to benefit from the excellent opportunities in this growth market,” says Siemer. “New Zealand’s dairy industry is in a unique position, as this country has enough grass and the necessary scientific knowledge to find the optimum feed composition that would ensure animal health and productivity while minimizing any negative effects.”

LOW VOLATILITY

Malaysia: A wealth of low-volatility stocks

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Malaysia is an important country for the Emerging Conservative Equities portfolio. Portfolio Manager Pim van Vliet discusses what makes many Malaysian stocks attractive for low-volatility investors.

62 |

‘Malaysia’s growth has been

sustained despite the challenging global economic environment’

PIM VAN VLIET – Portfolio manager Robeco Conservative Equities

Equity investors in emerging markets often focus on large markets such as China, and Brazil. A country which attracts relatively little attention is the relatively small and open economy of Malaysia. With its 30 million inhabitants, Malaysia is dwarfed by its giant near neighbor Indonesia, which has a population of a quarter of a billion. Malaysia’s growth has been sustained despite the challenging global economic environment. GDP grew around 5.8% in 2014, supported mainly by strong domestic demand and improved export performance. This was the second highest growth in the group of ten ASEAN countries, just behind Philippines’ growth of 6.1%. Just as some countries receive relatively little attention, some stocks also tend to be overlooked: low-volatility stocks. These rather ordinary stocks have lower risk, more stable returns and unexpected upside potential. Many attractive low-volatility stocks can be found in Malaysia. “Stocks are not just chosen on historical volatility, but we also look at other factors to enhance returns and avoid unnecessary risks and costs.”

“As a smaller emerging market, Malaysia often receives less attention from international investors,” says Van Vliet. Malaysian stocks represent around 10% of the Emerging Conservative portfolio (30-04-2015).

Good scores on volatility and low default risk So what makes many stocks from Malaysia attractive for this strategy? “They tend to score well on low volatility and have a low default risk. They often also offer an attractive dividend yield of between two and six percent, while momentum is mixed.”

Tenaga Nasional is the country’s largest electric utility company and also the largest power company in South East Asia. It serves over 8.4 million customers. Maxis is one of the largest telecommunications groups in Malaysia with 13 million customers.

Importance of diversification Although Malaysia is an important country for the portfolio, it will never become a dominant one, says Van Vliet. “Because we mitigate concentration risk by having strict limits in place for regions, countries and sectors and these concentration limits ensure diversification.” He emphasizes that he does not have a top down country approach. We do not have a favorite country for our strategy, but we select individual stocks, he emphasizes. “And because there are large differences between the individual stocks within each country, our allocation differs strongly from the MSCI Emerging Markets Index.”

Risk management essential The country’s political environment is considered stable compared with other emerging markets. Furthermore, its stock universe is diverse, although the country is an oil and gas producer. But unlike countries such as Russia, the stock universe is not dominated by more volatile commodities stocks. Malaysian telecom and utility stocks are particularly attractive for low-volatility investors, Van Vliet says. “These are stable mature sectors. Examples in our portfolio are Tenaga Nasional and Maxis.”

The Conservative approach has advantages for investors in emerging markets, says Van Vliet. “Risk management is essential, as the risks and volatility are higher than in developed markets. Investors in these markets also have to deal with greater political and currency risks. But on the plus side, these higher risks in emerging markets also positively enhance the effects of risk reduction.” This publication is intended to provide investors with general information on Robeco’s specific capabilities, but does not constitute a recommendation or an advice to buy or sell certain securities or investment products.

‘Disinvestment in the Australian mining industry is now the name of the game after falling commodity prices’ PETER VAN DER WELLE – Strategist Robeco

64 64 |

SPOTLIGHT ON BRAZIL AUCKLAND – ITAJAI Team Brunel Stats Sailed

6,374.6 nm

Finished

4th

Time

19d 0h 25m 48s

Max speed

24.0 knots (1 hr avg)

Max distance

541.0 nm (24 hr)

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RISK

Managing risk on land and sea Strong risk management is essential for both investing and sailing – and the ways in which it is applied is remarkably similar between Robeco and Team Brunel.

The risks of sailing became plain to see when the start of the fifth leg from Auckland to Itajai was delayed by three days after Cyclone Pam erupted in the Pacific. Fortunately for the sailors, it was spotted in advance. And fortunately for investors, problems that can adversely affect asset values are also normally on the radar as well, says Monique Donders, Head of Risk Management at Robeco. “The fifth leg was delayed because of the risk, and that’s something we can do with portfolios as well,” she says. “If we see a high concentration of risk in a certain region or industry, and there is reason to expect

MONIQUE DONDERS Head of Risk Management Robeco

‘We have a very riskaware culture, and people are not reluctant to tell us if something happens’

something bad happening, we can reduce exposure to it.” “The difficulty is always whether we think the risk is priced in, or judge whether we can face the downside risk in order to still keep the upside. Once the downside gets so big that you can’t bear the risk from either a financial or a reputational perspective, you might decide to exit those positions.”

Preparing for the worst Donders says risk management may mean preparing for the worst while hoping for the best. “So sometimes we sit down with portfolio managers and think about the worst circumstances that you could imagine for that portfolio at that time. We consider whether we could handle that risk.” For Team Brunel skipper Bouwe Bekking, the fifth leg is the most dangerous. “Whales are the biggest problem, as they sleep at the surface during the hours of darkness,” says Bekking. “Hopefully they will wake up if we approach them, as our boat is very noisy

when we are sailing at high speeds. ”He says avoiding icebergs is easier, as the boats are not allowed to sail south of certain ‘ice gates’ – navigational points which are too risky to cross. “These are based on satellite pictures, but do not guarantee that there are not pieces of ice floating north of these boundaries,” he says. “So we keep a good eye on water temperatures; if a sudden drop appears, it is very likely that there is ice nearby.”

Stress testing is essential Crash testing can have its advantages though when conducted safely. Both Robeco and Team Brunel know that extensive research is essential to know that either an investment product or a racing yacht is going to function properly. Robeco has a well-known slogan – ‘If we can’t prove it, we don’t launch it’ – while Team Brunel tested their Volvo Ocean 65 boat to its limits before the race began. “Before we bring anything to the market, every department that is involved in the operational process must sign off on the design not only of the product, but of the underlying processes,” says Donders. “So if the product is approved, we can run with it. It’s similar to designing a boat: all the people who will sail in it, or maintain it, will understand what the different parts of the boat are, and what spares it would need before it sails.”

Mistakes can stil happen And mistakes do happen. Like other financial institutions, Robeco faces the risk of

‘operational incidents’, such as an incorrect equity order, or errors in calculating fund values. “If an operational incident happens, what we’ve done for 20 years is try to learn from that to prevent it from happening again,” says Donders. “If it is prohibitively expensive to prevent it from happening again, then you can opt to accept this risk, or take it out completely.”

about quant investing is the models they use help you to think about things very consistently, taking the emotion out,” Donders says. “You have to take everything into account.”

“At Robeco we have a very risk-aware culture, and people are not reluctant to tell us if something happens; everyone has a button on their computer to register an incident, and nobody is scared to do so. For someone to put their hand up, it is essential that they know they won’t be hanged in the high street.” Bekking’s operational risks can be more physically painful. The team’s bowman, GerdJan Poortman, suffered a head wound when he was knocked over by a sudden wave. “We took it easy on the maneuver, but he clipped onto the wrong spot and got hit by a relatively small wave, and was then out of action for 24 hours,” recalls Bekking. “That was a good reminder for us all.” Poortman himself admits he had dropped his guard after many months at sea. “I took a little hit on the last leg, but it’s healed now,” he says. “Sometimes you need a little wake-up call.”

Cutting-edge technology One way of reducing risk is by using cutting-edge technology and strategies in building portfolios. Robeco is a pioneer of quantitative and sustainability investing. “What I like very much

BOUWE BEKKING Team Brunel Skipper

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EQUITIES

Beyond BRICs For about a decade many investors believed investing in the four BRIC countries – a concept launched by Goldman Sachs Asset Management – was the easiest way to profit from growth in emerging markets. But times have changed.

Simplification is not always the best approach. When Jim O’Neill, chief economist at Goldman Sachs AM, coined the term BRIC in 2001, it was quickly embraced by many of the main asset managers worldwide. BRIC funds offered investors a simple way to gain exposure to the equity markets of the four biggest emerging economies Brazil, Russia, India and China. BRIC funds were arguably a commercial success, but the economic tide has now turned against two of these Big Four economies, says WimHein Pals, head of the Robeco Emerging Markets team.

Corruption has hurt growth “Brazil has been a big disappointment for years now. Little that President Dilma Rousseff has done has gone right, and currently the Petrobras’ corruption scandal is taking its toll,” he says. “The fact that this scandal is now being handled openly is good in the long run, but the country is feeling the pain right now. Economic growth has been subdued for years and Brazil is heading for a recession.”

A growth rate of 5% or 6% per annum, similar to levels achieved by countries like Indonesia and Turkey, should be possible for Brazil with all its potential, but it has only managed to generate between 1-2% over the last decade. Bad politics, corruption and mismanagement, on both micro and macro levels have had a devastating effect on economic growth Pals adds. In Russia things are probably worse – for obvious reasons. The country’s economy is bleeding due to economic sanctions and the falling energy prices. “Capex spending is decreasing, especially by the oil majors. Consumer spending is weakening and inflation has hit double-digit levels,” says Pals. The equity market has become extremely cheap though, and if the ‘Minsk Two’ ceasefire holds, sanctions might be lifted this summer, which could trigger a rally in Russian stocks. However, the elimination of Boris Nemtsov, a significant opponent of President Vladimir Putin, has once again shown how tense the political situation in the country is.

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‘The Andean countries – Peru, Chile and Colombia – as a combination have more to offer than Brazil’ WIM-HEIN PALS – Head of Robeco Emerging Markets Equities

Why limit yourself to four countries? Robeco was one of the asset managers that did not launch a BRIC fund during its heyday. “We have never understood why investors should limit their emerging markets exposure to only four countries,” Pals explains. And certainly now, there’s still so much value to be found in other growth countries, such as those in Latin America. “The Andean countries – Peru, Chile and Colombia – as a combination have more to offer than Brazil, for example,” he says. “Peru is still very poor, but could lift off sharply once growth sets in. Colombia might profit from a ‘peace dividend’, when the war with the FARC comes to an end, while Chile has a rich economy thanks to its copper resources.”

China and India are much better off at the moment, thinks Pals. “We like both countries and are cyclically and structurally positive on India, while China is structurally attractive, although there are some cyclical issues.” India has adopted a pro-business budget and President Modi’s reform program really seems to be taking off. The country is heading for 8 to 8.5% growth this year – more than China’s 7%.

However, Pals thinks that Asia is more attractive at the moment. “The ASEAN countries have become very expensive, but we do see huge potential in both Indonesia and South Korea. The first has good demographic dynamics and a new president who is pushing for reform. The latter still has its traditional discount which makes it attractive for investors. In the long run this ‘Korean Discount’ will disappear once corporate governance further improves, dividend payout ratios rise and the growing number of active shareholders force companies to improve their ESG policies.” So while BRIC no longer offers the winning formula it did in the past, plenty of other emerging countries are ready to take up the baton.

SAILING

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Rounding the Horn

‘Rounding the Horn’ is the ultimate in sailing – and three Team Brunel crew members will be notching up this iconic achievement for the first time.

The seas at Cape Horn at the southern tip of South America are notoriously rough: waves of up to 30 meters high are common, whipped up by sudden ‘williwaw’ winds blown down from the Andes mountains which can reach speeds of over 150 km/h. Over the centuries, shipwrecks or capsizes have been frequent, and successfully ‘Rounding the Horn’ is seen as the sailing equivalent

of climbing Mount Everest. The cape itself – actually a small island – is named after the town of Hoorn in the Netherlands after it was discovered by Dutch sailor Willem Schouten in 1616. It is now part of Chile. Rokas Milevicius and Louis Balcaen are both competing in their first Volvo Ocean Race, joining the Dutch boat under the race rule which states that two crew members must

72 |

be aged under 30. Gerd-Jan Poortman is competing in his third race, but has never completed the Cape Horn leg due to accidents. In 2005 he broke his back and was forced to pull out, while in 2008 his boat was damaged en-route to China.

efforts, so I’m looking forward to it, and I hope it will be sunny for the pictures!” Milevicius says he has learned a great deal since joining the crew at the relatively young age of 28. “We are inexperienced compared

this involved cutting a long poisonous snake free from the keel. He dives into the water completely naked, save for his swimming mask, requiring discreet editing of YouTube videos to cover over any personal parts that become visible.

‘Anxiety and excitement’ “I’m really looking forward to going round the iconic landmark of Cape Horn: it will be a combination of anxiety and excitement,” says the Belgian sailor. “In the heat of the moment it will probably be just a cape rounding, but afterwards we will realize what a big achievement it is.” “Completing the whole Volvo Ocean Race is probably more like climbing Mount Everest. Rounding the Horn is like climbing from the last base camp to the summit; a small part of the bigger picture. And I am loving every minute of it. It is a true enrichment on both personal and professional level.”

Like scaling Everest “Cape Horn for every sailor is like a Mount Everest because of its remoteness and harsh environment,” says former Olympian Milevicius, who is the first Lithuanian ever to compete in the race. “It probably means a lot for every sailor, just as scaling Everest would be for every mountain climber.” “It has lot of respect from sailing communities from the older days. And for sure, this is the biggest adventure in my life. The Horn is like the tip of the iceberg, the pinnacle of all your

to the captain Bouwe Bekking or the navigator Andrew Cape, and we learn a lot of them,” he says. “We learn how to take hard decisions and later deal with them, how to be patient, and how to look at everything with a clear head. We also learn a lot about seamanship and loads of other stuff outside sailing.” Though he is also relatively young, Balcaen already has a reputation as the team’s ‘Action Man’ who is often called on to dive into the water to remove debris that has become stuck to the boat. During the Sanya to Auckland leg,

Poortman says he hopes it will be ‘third time lucky’ to not only bag the Horn, but also complete the Southern Ocean leg into Brazil. “We still have two weeks of challenging sailing to get to Cape Horn, but this will be the first time I’ve done this leg, so I’m happy about that,” he says. “Certainly when you do three round-the-world races you want to bag this landmark – I only hope I see it!” “Louis is going to sort out some cigars if we get round it, plus a small whisky!”

‘Cape Horn for every sailor is like a Mount Everest because of its remoteness and harsh environment’ ROKAS MILEVICIUS – Team Brunel Crew member (under 30)

SPOTLIGHT ON THE UNITED STATES ITAJAI – NEWPORT

Team Brunel Stats Sailed

5,820.2 nm

Finished

3rd

Time

17d 9h 56m 40s

Max speed

22.9 knots (1 hr avg)

Max distance

478.8 nm (24 hr)

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TRENDS

Dedicated followers of fashion Successful sailing means knowing which way the wind is blowing – a concept that is also followed by Robeco portfolio manager Jack Neele’s Global Consumer Trends Equities fund.

“By looking at the long-term trends we want to find out which way the wind is blowing, but over a longer timeframe,” says Neele. “If we are convinced we are sailing in the right direction, we then find those companies that have the majority of their revenues tied to that trend, in what we call ‘pure-play’ exposure to it.” “It should be longer term because in the short term you can have things that only last a year, or fads that come and go. A trend is really a seismic shift in an industry that is here to stay, such as smartphones.” A ‘trend’ for Team Brunel navigator Andrew Cape more simply means finding a wind that can sustainably propel the boat faster than the others. In a global race, conditions vary enormously, from the searing heat and calmer seas of the Middle East, to the freezing conditions and giant waves of the Southern Ocean.

JACK NEELE – Portfolio Manager Robeco Global Consumer Trends Equities fund

“But you have the same problem everywhere you are… you just want to know where the wind is blowing and what the weather is going

to do,” says Cape. “Obviously you use the same electronics on each leg to collect and to interpret all the different weather data that we are getting from the Volvo Ocean Race organization.”

Avoiding the fads While a racing yacht always wants to be first from the outset, Neele says that his fund prefers to play a waiting game to avoid buying into a fad. “We don’t invest in the hype stocks, or in the concept stocks. We’d rather be in it a little bit later with a conviction that it’s an actual trend and is something that will persist over a longer time frame,” he says.

‘During the crisis people were still using Facebook and Google’

“So we’ll never be the first to invest in specific companies. When we do invest, at least we know that we’ll have some confidence or some clarity about the direction in which the industry is going, and therefore the direction of the company. If you’re in early, the returns can be huge if you’re right, but there’s also a lot more risk if things go wrong.” Cape conversely has a short-term time horizon out of necessity. “Usually we can see only four days in the future, so that’s all you could plan for,” he says. “And even then, sometimes the predictions don’t come true, so then we need to change the plans again. Sometimes you’re too late to change a plan on a new weather forecast, and then you lose a lot of miles.” “We look to see whether our current invested trends are still valid. And we talk to a lot of companies which are investing in new products. If you look at Google, they’re now investing in self-driving cars and Google Glass. Then there’s the Apple Watch and so on. Some of these products will fail, but we can see what direction the world is going.”

Growth of sharing services

In the US, the cheaper clothing stores such as Dollar General are doing really well. Consumers are looking to save money, whereas in the past it was more like ‘hey, look what I have’.” One fashion that will certainly be repeated in ocean races is the direction of it. In common with most circumnavigations, the Volvo Ocean Race runs eastwards around the world: “The prevailing winds generally blow from west to east – you sail this way mostly with the wind from behind,” Cape explains. “If you’re sailing the other way around you would sail mostly upwind and against the prevailing currents. That’s pretty uncomfortable, and a rough ride.”

‘All the guys are highly motivated to go sail again. Everything is possible’

Using cyclical theory Cyclical theory plays well in his portfolio, which is both US-centric and digitally focused. His biggest investments are Facebook, Google and Apple. “It’s very techy, but these are also the companies that are much less dependent on the economic cycle. During the crisis people were still using Facebook and Google, and were still buying more smartphones because they became much more important in people’s lives.”

“Many young people don’t have a TV subscription because they’ll subscribe instead to Netflix or something on their laptop or tablet, and they don’t have a car because they’ll use Uber. That’s a new reality.”

The most important thing for Team Brunel now is to win the Volvo Ocean Race. The Abu Dhabi team has an impressive lead, but so did Dongfeng before it broke its mast and came last during the Itajai leg. “It’s simple; we just need to win this leg.”

“We also follow fashion. For example, people in western markets have not seen wage growth, and may be looking to save money.

ANDREW CAPE Team Brunel Navigator

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ECONOMY

‘The century of the US’... again China and India are making progress, but the US continues to be the main player on the world economic stage.

Although in terms of purchasing power parity, China may have become the counterpart of the US, just extrapolating trend lines is too simplistic a way of formulating a realistic image of the future, says Robeco’s Chief Economist, Léon Cornelissen. “The 21st century is going to be the century of the United States too,” he says. This has little to do with the role of the US central bank, the Federal Reserve, which in recent years has increasingly left its mark on the economy and the financial markets. It is primarily the resilience of the US economy, which should not be underestimated – a phenomenon that Europeans do not seem to fully appreciate, Cornelissen says.

Monetary policy to remain easy “The Fed will raise rates at some point, but Janet Yellen is in no hurry. That much is clear,” he says. “Monetary policy is and will remain easy. At worst – slightly less easy. “The US had a disappointing first quarter and there is little optimism about structural growth potential, indicates Cornelissen. The country is also suffering from the effects of climate

change. For two years now it has been plagued by extremely cold winters, while the rest of the Northern Hemisphere has enjoyed mild winter months. “The expectations for economic growth are now below the 3% level, which isn’t exactly exuberant. The demographic tailwind is also a factor,” says Cornelissen. “The US population is aging, although admittedly not to the same extent as that of Japan or Germany.” But there are also positive notes to offset a too-gloomy future scenario, he believes. The participation of women in society is still increasing and the US is traditionally a country of immigrants. Far more importantly, the US is still the cradle of technological innovation. “We are seeing interesting breakthroughs in DNA research, robotics and medicine. When you look at this, it is difficult to be gloomy,” says Cornelissen. Yet many consumers, economists and analysts are. And Cornelissen thinks that this is related to how slowly the country’s dented confidence is recovering from the blow it received during the financial crisis.

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‘US politics does not hinder innovation in the shale gas sector, in contrast to European regulators’ LÉON CORNELISSEN – Chief Economist Robeco

“It is understandable that the recovery is so slow. It was an exceptionally deep crisis; the worst since the 1930s,” he says. “And the US was also grappling with budget debates, automatic spending cuts and a government on the brink of collapse. All are typical elements of American folklore, but at such times the US government makes a negative contribution to growth.”

Wage growth needed According to Cornelissen, the real turnaround will only occur when there is substantial wage growth and that is not yet the case across the board. “Yes, McDonald’s and Wal-Mart have increased pay and the minimum wage has risen somewhat. At the same time unemployment is falling steadily. In the long term, wage growth will pick up. But we are not there yet. And income inequality is also increasing rapidly.”

The shale revolution is also driving the economy, despite the fact that the lower oil price is now dampening euphoria somewhat. But the companies are lean and mean, and US politics does not hinder innovation in this sector either, in contrast to European regulators. And innovation remains the most important means of survival for a vulnerable US. “The large innovative companies are American. The best universities are in the US. It is always naive to underestimate the economy and the resilience of this country,” says Cornelissen. “For real innovation and growth you need an open society where political saber-rattling is a sign of vitality. This is an advantage that the US has over a country like China, partly thanks to a spirit of unbridled optimism. Of course, both China and India have more pairs of hands to carry out cheap labor. But cheap farming and copying last century’s business models are not enough to get you there. You need a vibrant middle class. This is still a long way off for the new superpowers, India and China.” In short, despite what all those trend lines far out into the future show us, Cornelissen is convinced that the for this century the US will be the main player on the world economic stage… again.

EQUITIES

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The Brave New World of Finance As the boats of the Volvo Ocean Race are reaching the coast of the â&#x20AC;&#x2DC;New Worldâ&#x20AC;&#x2122;, the global financial sector is coming to grips with a brave new world of its own. Long-term trends are changing the core of the financial industry and investors that can benefit. Patrick Lemmens, fund manager of Robeco New World Financial Equities, explains how he does it.

An investor first has to identify the most important structural, long-term trends in the myriad of changes that are going on. Lemmens has identified three main trends for his portfolio, which he calls Aging, Digital and Emerging Finance. These trends can cut across traditional (sub-)sectors.

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As large parts of the world are faced with aging populations, demand for life cycle financial planning grows. As some pension schemes such as ‘final salary’ plans become unaffordable, it is increasingly important that people build enough savings to retire comfortably, and are able to pay for care and housing. “Companies that offer solutions to meet people’s pension/care/housing needs are interesting for us,” says Lemmens.

Financials are digitizing Like pretty much everything else, the financial sector is digitizing as well, which is transforming the competitive environment. First of all, global payments are changing: consumers are increasingly moving from paying with cash to paying with cards or electronically. Second, mobile payments are growing very rapidly. As a result, more and more financials are outsourcing their IT including even the front office operations. “As we do not confine ourselves to the traditional financial sector, we can also seize opportunities in the IT sector,” Lemmens says. The third and last trend focuses on the growth of the global middle class. It is growing the fastest in emerging markets, though financial penetration is still very low. In developed markets Lemmens looks for financials that can grow by providing often basic financial services in an innovative way, or with limited competition. “These three trends consist of many subtrends,” Lemmens explains. “We want to have

‘We want to have some downside protection by investing in multiple, independent trends’ PATRICK LEMMENS – Fund Manager Robeco New World Financial Equities

enough trend exposure to profit from growth if it materializes, but we also want to have some downside protection by investing in multiple, independent trends. An example of a subtrend is the search for absolute returns. Here we invest in wealth managers with exposure to alternative assets, such as KKR, Blackstone, Carlyle and Oaktree. Increasing demand for ‘smart beta’ solutions, which are based on indices that take advantage of systematic market inefficiencies, and Exchange-Traded Funds (ETFs) is another sub trend, which is illustrated by our investment in WisdomTree.”

Diversification is crucial Broad diversification is crucial in financials. “There are factors unique to this sector such as the unpredictability and influence of regulators, as well as the risk and impact of legal issues,” says Lemmens. “Also, it is impossible to fully grasp and predict the balance sheet and cash flows developments of most financials in which we invest. There is no full disclosure and even if there were, it would be impossible to do a due diligence on an entire balance sheet of, say, one trillion euros.” Lemmens is most optimistic about emerging market banks and life insurers. “For banks as well as insurers regulation continues to play an important role but we do expect this to become less relevant in the next six months,” he says. Also interesting are companies exposed to electronic or mobile payments and financial IT services. For the next 12 months, he expects a return in the low teens of percent. “And if long-term interest rates were to start rising gradually, the upside for the sector would even increase,” Lemmens concludes.

‘Cheap farming and copying last century’s business models won’t help China to overtake the US’ LÉON CORNELISSEN – Chief Economist Robeco

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SPOTLIGHT ON EUROPE NEWPORT â&#x20AC;&#x201C; LISBON*

Team Brunel Stats Sailed

3,050.8 nm

Finished

1st

Time

9d 11h 9m 49s

Max speed

22.0 knots (1 hr avg)

Max distance

473.06 nm (24 hr)

* legs to Lorient and Gothenburg were not yet started when Time2Read was printed.

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BONDS

Navigating choppy waters Investing is often compared to sailing as both involve navigating choppy waters – and fewer financial markets have been choppier in recent weeks than bonds.

Bond yields had fallen for many years, as interest rates repeatedly hit historical lows. As bond prices move inversely to yields, their values had consistently risen, earning attractive returns for investors. However, yields began rising again sharply in early May, causing their values to fall. And for Team Brunel, the race has also produced some ups and downs. The team has avoided major accidents that befell other teams, but still lost three crew members through injury, and had a wobble when their boat hit a giant fish in the Atlantic.

KOMMER MONIQUEVAN DONDERS TRIGT Manager Head of Risk Rorento Management Total Return Bond Robeco Fund

“The bond market was in turmoil during early May; many bond funds saw their profits from the first four months of the year evaporate in just a handful of trading sessions,” says Kommer van Trigt, manager of Rorento Total Return Bond Fund. “There are two main factors that could explain it. The oil price has been rising again for a while now. Its earlier sharp declines had led to lower long-term inflation expectations, which triggered central banks either to carry out another round of rate cuts or to implement quantitative easing.”

“The second reason is less fundamental in nature, but perhaps more applicable. More and more investors thought that the European bond market could only go in one direction and were positioned for even lower rates. This high degree of consensus made the market ripe for a correction.”

Staying afloat in all weathers For Bouwe Bekking, Team Brunel skipper, staying afloat in all weathers is what it’s all about. “Luckily throughout the race we didn’t have many scary moments: the guys are so well trained and professional that they know what they are doing, and know where I lay the boundaries.”

‘More and more investors thought that the European bond market could only go in one direction’

“But we had a couple of scares in the build-up period.” Bekking says the choppiest waters were, as expected, in the Southern Ocean around the notorious Cape Horn. “The most breeze that we have seen so far came just after Cape Horn. The Sargasso Sea was also a nightmare because of the enormous amounts of seaweed.” Both men can draw on their vast experience to know that if things do turn sour, things have been worst in the past. As the bond market undergoes a shakeout, Van Trigt feels it is still too early to start making comparisons with 1994, the ‘annus horribilis’ when yields rose dramatically and bond values plummeted. “In 1994 the crisis was triggered by a change in policy of the US central bank. At that time, the Fed, fearing a rapid rise in inflation and wanting to ensure it did not end up ‘behind the curve’, hiked interest rates aggressively,” he says. “This is not the case now. Inflation is still well behaved. Yields are mainly rising at the long end of the curve and as yet there is no fear of overhasty intervention by the Fed or the ECB.”

Canary in the coal mine There is also little sign of wage inflation, which can trigger rate rises to combat the inflation that it generates, Van Trigt says. “That’s unlikely in Europe anyway, because the growth there is still in the very early stages. If wages rise significantly, it will happen in the US and the UK first. In a complex world full of data, this is the canary in the coal mine.”

Bekking says planning and experience is key to handling short-term turbulence to attain a longer-term goal of getting the best returns – in his case, trying to win a nine-month aroundthe-world ocean race. “I think experience is what counts in the long run in this race, as well as preparation. We had an excellent few months before the race. With experience comes the ability to make the right calls,” he says.

‘If I could change something for the next race then it would be to have a bigger shore crew’

“I don’t think that we made many mistakes during the race; sometimes we just missed out on a first place in a leg, maybe through the luck of the draw.” Such is the risk to the sailors that only four of the original seven who began the race will finish it. Three were injured during the race and one was hospitalized, requiring back-up crew members to step in. “But all the replacements fitted in extremely well and did a good job. We learned some tricks from them as well, so the ‘fresh blood’ was actually a good thing for our team,” says Bekking. The ‘fresh blood’ theme is actively practiced by Van Trigt, who can use the flexibility of the fund to buy bonds that are less sensitive to interest rate movements to generate returns. He sees the market correction primarily as a wake-up call for investors, requiring them to think more about diversifying their portfolios as buoyancy for rough weather.

BOUWE BEKKING Team Brunel Skipper

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ECONOMY

What Europe can learn from Sweden Sweden is an ordinary Western European country, but one that does just that bit better, according to Robeco’s chief economist, Léon Cornelissen.

Nothing tops Sweden. In geographic terms, clearly, not very much does. But this Scandinavian country is also often held up as an example of how to do better. And not by just anybody – economists Brad DeLong and Paul Krugman, for instance, referred in 2008 to the Swedish approach to tackling a financial crisis as exemplary. Cornelissen puts it this way: “What the Swedes did was to apply a pure-blooded Keynesian approach.” In the early 1990s, Swedish banks ran into major problems when the bubble in the housing market burst. However, the approach taken by the Riksbank was very different to the method used to deal with these problems in the US and the European Union in recent years. “Shareholders were expropriated, leaders of banks that were being recapitalized fell, and managements were replaced.” There were no makeshift solutions and no ‘Japanese convoy system’ as Cornelissen calls it, where the strong hold up the weak. “Assets were packaged and sold at a discount and removed from the balance sheet. The banks went on as ‘new banks’.”

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Better than ordinary At the same time, the budget deficit increased rapidly. “A period of crisis is not the right time for austerity. True, the government deficit increases, but that can be brought down again in the course of time.” What helped the Swedes, of course, was their own currency, which the country still firmly embraces now as an EU member and which absorbs the shocks. Cornelissen characterizes Sweden today, 20 years after its banking crisis, as a major industrial power with growth that exceeds that of the Eurozone (just above 2%). This can be attributed to the high degree of participation in the employment market, above all by women; the extended pensionable age; the large number of immigrants; and a social

‘Sweden is just like any ordinary Western European country, only in many things a bit better’ LÉON CORNELISSEN – Chief Economist Robeco

security system that focuses on reintegrating those out of work into the employment market. However, some of these advantages also have a downside. The high level of immigration in recent years has led to riots in Malmö and Stockholm, and the political tensions in this area follow a trend here that can also be observed in other countries. Thus growing income inequality has also increasingly become a source of unrest. “In Sweden we can see the same trends as in the EU. It’s just like any ‘ordinary’ Western European country, only in many areas the Swedes do things that bit better.” This doesn’t mean that there aren’t risks involved. House prices have risen rapidly, with the danger of a new bubble ahead. Deflation is also a latent danger, certainly with the low price of oil and falling transport costs. The country has a negative deposit interest rate (-0.25%) that can easily fall still further.

Visit a sauna Cornelissen sees a very different story in other Scandinavian countries: “Finland is suffering from the Nokia effect. This company was once worth 40% of the Finnish market’s capitalization, but has now fallen into decline. In addition, the sanctions towards Russia are having a higher-than-average effect on this country. On top of that, Finland is fully dependent on Russia’s gas – a far from pleasant situation to be in, considering the increasing war rhetoric in that country. Cornelissen is not particularly impressed by Denmark either: “The situation there is a bit schizophrenic, as the country’s currency is linked quite tightly to the euro.” Can the rest of the EU learn from the Swedish model? Cornelissen certainly sees a few lessons to be learned. “The first of these is women’s significant participation. Sweden and Norway, as egalitarian societies, are front-runners in this field. They have excellent parental leave schemes. In addition, they have a high-quality industry and a strong civil-engineering culture – a trump card for any country. And their own currency is an important instrument for economic policies. Swedish companies have a culture of ‘one for all and all for one’, low in hierarchical thinking and notions of class and status. Maybe, like the Swedes, we in the Netherlands should visit a sauna more often: this is where all the barriers come down and everyone is on the same footing.”

SUSTAINABILITY

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Europe leads the way in sustainable investment Sustainable investing is growing rapidly. Although it has been growing fastest in the US over the past two years, Europe remains the undisputed leader, says Nicolas Bénéton, Sustainability Investment Specialist for Robeco France.

Concepts such as board accountability, community relations and natural capital scarcity have become part of the global financial language. The sustainable investment (SI) field, i.e. an approach that considers environmental, social and governance (ESG) factors, has shown accelerated growth in recent years. ”From a niche status it has now become a fully-fledged investment theme spreading to all asset classes and leading to increased awareness among mainstream investors,” says Bénéton. The global SI market increased from USD 13.3 trillion at the outset of 2012 to USD 21.4 trillion at the start of 2014 (+61%), and from 21.5% to 30.2% of professionally managed assets,

according to Global Sustainable Investment Alliance. Over this two-year period, the fastest growing region was the US, although Europe remains the absolute leader with a 64% market share, twice that of America. How to explain Europe’s leadership? After all, the US has as much as USD 36,715 trillion in global assets under management, versus 23,143 trillion for Europe, and was a pioneer in ethical investment with the exclusion of ‘sin stocks’ as early as the 1920s. On top of that, the US has witnessed a fair number of scandals that struck investors over the past two decades, such as the Enron fraud, the Deepwater Horizon spill in the Gulf of Mexico, and the subprime crisis, to name but a few.

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‘Europe remains the absolute leader with a 64% market share in sustainable investment’ NICOLAS BÉNÉTON – Sustainability Investment Specialist for Robeco France

European leadership Bénéton sees three main reasons for Europe’s lead. “First of all, European investors are more diverse in the various countries, have adopted a broader range of sustainability approaches, and are therefore imposing a wider definition of SI,” he says. “It is generally accepted that the Nordics favor exclusion-based approaches, while France considers best-in-class as the most effective way to invest responsibly. Attitudes toward corporate engagement and thematic investing also diverge. This enlarges the asset base for SI in Europe.” “Europe also benefits from a positive development context,” Bénéton continues. “In 2014, for example, the EU took a major step towards requiring major European companies to report on environmental, social, employee, human rights, corruption and bribery matters. It has also submitted a proposal to increase the level and quality of engagement by institutional investors and asset managers with investee companies in order to tackle corporate governance shortcomings and excessive shorttermism.” “Finally, Europe’s asset owners increasingly acknowledge the potential materiality of ESG issues in terms of both risk management and

contribution to sustainable development,” says Bénéton. Here, French and Germany investors are clearly the top markets in terms of assets (EUR 1,900 billion and EUR 1,200 billion respectively, according to Novethic). Dutch and Scandinavian investors who are more pensionfund driven are increasingly stressing financial performance and risk management when asked for the rationale of their investments in sustainability.

SI frontiers are moving And SI is in constant evolution. The latest significant trend in 2015 is impact investing. This comprises targeted investments which are aimed at generating a measurable positive impact, either on the environmental side (reducing carbon emissions) or from a social standpoint (improving occupational health and safety conditions). Still small in size, this approach is definitely gaining traction in the run-up to COP21, the UN Climate Change Conference, to be held in Paris at the end of the year. “At Robeco, we are convinced that taking ESG criteria into account results in better-informed investment decisions and is necessary to fully grasp the risks and opportunities that are associated with the businesses in which we invest,” Bénéton concludes.

‘The courageous efforts of Spain and Italy to rise like a phoenix from the ashes are being almost completely overlooked’ PETER VAN DER WELLE – Strategist Robeco

STOPOVER EVENTS

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‘They came as clients to the stopover event and left as friends’ PABLO MORENO ORTEGA – Sales Manager Robeco Spain

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TIME2READ

TIME

Selection of Volvo Ocean Race articles

2READ

SUMMER EDITION 2015