112014 investment opportunity eng

INVESTMENT OPPORTUNITY November 2014 For professional investors

US sets the tone for global growth Robeco BP Global Premium Equities Fund

Chris Hart, Portfolio manager Robeco BP Global Premium Equities

– Fund has highest historical exposure to North America – Earnings growth is superior in US compared with Europe – We stick to our three circles philosophy whatever the market The Robeco BP Global Premium Equities fund has been going from strength to strength in recent months, picking up nine Morningstar awards in 2014 and crossing the EUR 500 million in assets threshold.

As the portfolio manager, investors often ask me just how ‘global’ the portfolio actually is. I live and work in Boston, and so clients query whether the fund is essentially US-centric, with other world stocks thrown in. And as

economies continue to diverge, with the US now setting the tone for global growth as Europe retrenches and Asia goes sideways, that question grows louder.

The fact is the fund is now more US-centric than it has ever been, with about 60% exposure to North America, a record level for the six and a half years that I’ve been running the portfolio. Conversely, our exposure to Europe – specifically the companies in

Robeco BP Global Premium Equities investment opportunity

the still-troubled Eurozone – has never been lower at 16%. In this Investment Opportunity I want to explain why the weightings have moved so significantly.

Being US-centric makes sense for now Put simply, there is nothing that changes in the way that we think about our three circles of valuations, momentum and fundamentals when buying companies. Using this kind of factor premium approach, we always

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Historical Market Weight Range September 2009 - September 2014 2%

Emerging Markets

0% - 5% 0% 18%

Continental Europe 7%

Japan

12% - 31% 17% - 21%

4% - 11% 8% - 11% 61%

North America 3%

Pacific

0% - 10% 5% - 6% 9%

UK

9% - 19% 8% - 10%

10

0

44% - 62% 53% - 61%

20

40

30

Robeco BP Global Premium Equities

MSCI World Index

50

60

70

Positioning as of September 30, 2014

Regional allocation from September 2009 - September 2014. Source: Robeco

than what’s generally expected today. year) to further improve over time. think about populating the portfolio Historical Market Weight Range That’s why it’s hard to maintain today Here’s why. with the best three-circle stocks, and September 2009 - September 2014 the kind of overweight that historically currently the best ones are in the US. continental Europe has had14% in the Companies are cash rich 8% - 19% Cons. Discretionary 9% - 12% portfolio. There needs to be significant We’re not going to force a square peg Firstly, there is a lot of cash on US structural changes in Europe; the ECB into a round hole just to be able to say balance sheets, and we feel the most 6% 5% 13% Cons.

Staples is pushing on a string with easy money, we’re not US-centric and go out and comfortable about investing in those 9% - 11% and it’s not the answer. purchase non-US companies for the companies that can generate a lot sake of it. Over the past six years, the of free cash flow. The macro, central 8% - 13% 8% Energy 9% - 12% US has historically been underweight bank view that companies are under‘We’re not going to in the portfolio, in the mid-40%s of investing in themselves is something - 24% force a square peg into a 18%we don’t see from13%a bottom-up Financials exposure. And during this time, 70-75% 18% - 21% of the portfolio’s alpha was generated round hole and purchase perspective. These companies own outside the US. Today, the US is where plant and equipment which is 20% property, 7% - 20% Health Care non-US companies for 9% 12% the opportunity lies, but it doesn’t more than adequate to allow them to the sake of it’ mean that the portfolio couldn’t have return capital to shareholders. So they 11% 10% - 19% Industrials significantly less exposure to the US in don’t need extra investment.

10% - 12% two quarters from now.

So whether we like it or not, the world We own companies where the is becoming 9% 4%less - 9%correlated, and we Materials 5%at - 8% We always employ a flexible approach. utilization of assets is about 70%, and need to look it market by market.

Europe is the lowest portfolio weight that’s not beckoning for significant When I look at the companies that 14% 11% - 19% Technology it’s ever been because we have a capital expenditure. A lot of capacity we own and create a mosaic to get a 11% - 13% different view of earnings expectations has been built over the last 10 years, picture of 2015 earnings levels, I feel 1% growth 1%pretty – we think the level of earnings and the profitability of the majority of - 5% confident that there is still room Telecom 4% - 5% on the Continent will be lower in 2015 companies across the board is generally for US indices (which set records this 0%

Utilities

0% - 3% 3% - 5%

Robeco BP Global Premium Equities investment opportunity 0

5

10

Robeco BP Global Premium Equities

2

15 MSCI World Index

20

25

Positioning as of September 30, 2014

30

3%

Pacific

0% - 10% 5% - 6% 9%

UK

9% - 19% 8% - 10%

10

0

20

40

30

Robeco BP Global Premium Equities

MSCI World Index

50

60

70

Positioning as of September 30, 2014

Historical Market Weight Range September 2009 - September 2014 14%

Cons. Discretionary 6%

Cons. Staples

8% - 19% 9% - 12%

5% - 13% 9% - 11% 8% - 13% 9% - 12%

8%

Energy

18%

Financials

20%

Health Care 11%

Industrials 9%

Materials

10% - 19% 10% - 12%

14%

1%

0

11% - 19% 11% - 13%

1% - 5% 4% - 5%

0%

Utilities

7% - 20% 9% - 12%

4% - 9% 5% - 8%

Technology Telecom

13% - 24% 18% - 21%

0% - 3% 3% - 5%

5

10

Robeco BP Global Premium Equities

15 MSCI World Index

20

25

30

Positioning as of September 30, 2014

Sector allocation from September 2009 - September 2014. Source: Robeco

higher today than it has ever been. This by default means that their assets are being utilized at a much higher level of efficiency, which results in higher levels of free cash flow generation.

There’s always the bear case of seeing a mean reversion in profitability in 2015, but we haven’t seen signs of that yet. We just don’t see any significant deterioration in US companies’ profitability levels over the next one to one-and-a-half years.

The US has a fair amount of tailwinds

– lower fuel prices, a consumer who has been somewhat retrenched over the last five years and may resume spending, and a housing market that is bottomish to muddling along without getting any worse. Incrementally, these are all positives; there is a fair amount of pent-up demand in the US that has been structurally held back in recent years.

US politics plays a part Part of this structural blockage has been political. Until the mid-term elections on 4 November 2014 we had

Robeco BP Global Premium Equities investment opportunity

a Democrat president and Senate but a Republican House of Representatives.

Now that the Republicans have taken over the Senate and kept control of the House of Representatives, it has the potential to remove some of the gridlock.

This has also removed a level of strength that the executive branch has enjoyed, which is good news for companies, because a much higher regulatory burden has been placed upon US companies over the last six years than there has ever been

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historically. As a result, small to medium-sized enterprises (SMEs) have held back because they did not know what their costs were going to be in six months’ time. Now that a much more business-friendly legislative has been put into place, it can free up this regulatory burden, and this can create better job growth.

‘We just don’t see any deterioration in US companies’ profitability levels over the next one to one-anda-half years’ The Holy Trinity - the three circles

Forget the Fed, it’s about real loan growth Another big positive for the US next year is the strong loan growth that we have seen over the last year. Banks have really been lending to consumers and SMEs, and that’s partly why we see such strong earnings growth. The end of tapering won’t really affect things that much next year. When you look at the 10-year forward curve for interest rates, there are a good 50 to 60 basis points of tightening already priced in.

So we always look at it from a bottomup perspective. I’m not looking at the absolute levels of GDP (although that’s set to rise by a healthy 2-2.5% in the US next year); I’m looking at the individual companies that we are potentially investing in. We put all that together to paint a picture of how we see the markets.

Sticking to the three circles So to recap, nothing changes in the way that we think about our three-circle

stock selection criteria of attractive valuations, positive momentum and strong business fundamentals. We’re always going to invest in high-quality names.

It’s true that we’re now paying a little more for these earnings than we were a year ago. But it’s important to recognize that our valuation characteristics are still less expensive than the market. We will never have a portfolio that is more expensive than the market, and we won’t overpay for safety, which is still reflected in the fact that we have very limited exposure to staples and telecoms and zero exposure to utilities.

‘Nothing changes in the way that we think about our three-circle stock selection criteria’

Robeco BP Global Premium Equities investment opportunity

Since the market bottom of 2009 we have always been able to find pockets of opportunity. A perfect example is media, which for a period of two to three years was upwards of 13-14% in the portfolio; that was a pocket of opportunity. These media names had very strong structural improvement potential; their business models were structurally favorable, the valuations were always compelling, and they continued to generate high levels of free cash flow and growth. We’re no longer finding big broad pockets of opportunity like that. Instead, what we’re looking for are one-off companies that are idiosyncratic in nature as stock picks.

That’s also reflected in the fact that the portfolio has its highest-weighted market capitalization to date. It’s been repositioned into very high quality, structurally favorable largecap companies versus smaller cap opportunities that the portfolio

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historically had 50-60% exposure to.

We’ve been selling small and large-cap European companies over the last three quarters and buying large-cap US companies.

Top 10 Holdings Company

Sector

% of fund

Microsoft

Information Technology

3.37%

CVS Health Corp

Consumer Staples

3.00%

Liberty Global

Consumer Discretionary

2.95%

Our favored sectors: a pretty little package

Comcast Corp

Consumer Discretionary

2.80%

Apple

Information Technology

2.55%

The one area that we still really like is the packaging sector – that’s been a constant overweight in the portfolio for a long time as we like the stability of earnings of those businesses and the company managements’ ability to navigate a historically very difficult industry. They’ve done a really good job of restructuring their businesses and positioning them for success.

Roche Holding

Health Care

2.34%

McKesson Corp

Health Care

2.20%

Capital One Financial

Financials

2.11%

Johnson & Johnson

Health Care

1.97%

Graphic Packaging

Materials

1.71%

Everything here is relative, so what we see now is financials, healthcare and our materials holdings offering a really favorable three-circle componentry relative to the other opportunities in the market.

Holdings and percentages at 30 September 2014. Source: Robeco

and Western Digital. The Cloud is very disruptive, so we don’t own any of the large software companies such as SAP or any of the expensive SAAS (software as a service) companies. While their legacy businesses are entrenched, it is not clearly evident to us how successful they will be in transitioning the Cloud.

They’re paying egregious prices for Cloud company acquisitions, and that says to me that they don’t really have a core competency in that, so we have avoided them. Microsoft is a completely different enterprise business though.

From a sector perspective we like US financials due to loan growth and low structural impediments in a financial system that is fixed. We like the regional banks that are at the front line in lending to SMEs - that’s the source of real economic growth.

One theme worth watching: US energy

We still like healthcare (though not as much as last year), due to the stability of their earnings. We’ve cut our consumer discretionary exposure significantly over the last two months.

Industrials for us have historically been a strong source of outperformance, but we have been trimming positions as we feel that they’re starting to see some negative earnings revisions.

We’re not driven by themes, because they tend to be overhyped and then they under-deliver. But one issue that is very interesting is whether the US is becoming more self-sufficient in energy. That creates cheaper fuel, which results in higher levels of disposable income for the consumer in what is predominantly a consumer-led economy. So that’s beneficial for the US.

We still have mature tech companies in the portfolio – names such as Microsoft

Robeco BP Global Premium Equities investment opportunity

‘We’re not driven by themes, because they tend to be overhyped and then they under-deliver’ That also adds to loan growth, which leads to economic growth, and gives the US tailwinds that are not present in the other regions of the world in which we invest. Shale gas has been going on for a while now, but from an investment perspective there are limited opportunities as the companies involved are very expensive. The way to play shale gas was five or six years ago when the pump and rig companies were very cheap; now it’s more than discounted in the market.

Reasons for buying and selling: Apple vs Aryzta We had sold Apple at a nice premium in 2013 but bought it back in February 2014, which raised a few eyebrows, but the valuations were interesting.

It was until recently the number one position in the portfolio. We knew that there was a new product cycle coming through, and we thought that the

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margins had stopped deteriorating and the earnings growth was quite compelling. We think it is still a little bit undervalued and we still like it. We’ll be very sensitive to a target price on a name like Apple, but right now it’s still a compelling name.

Recently we sold Aryzta, the Swiss bakery company. It’s a company that we bought about two years ago when the management was restructuring the business; it was a good opportunity to extend margins, and the valuations were compelling. Aryzta become quite a dominant staples name in the portfolio but as management hit its targets over the last quarter, the stock hit our target price and the valuation become somewhat stretched for us. As we’re very sensitive to valuations and target prices we sold it to zero. But if the multiple shrinks and the share price comes back to a discount to our target price, we would probably buy it back.

It’s a well-run company.

Regional geopolitical vs macro risk So what could go wrong? What are the risks? We are bottom-up stock pickers, but certainly we cannot ignore the top-down macro effects that can upturn markets. Let’s start by pointing out that there is a difference between geopolitical and macroeconomic risk.

Geopolitical risk probably can’t get any worse; what’s happening with ISIS in the Middle East is a significant issue and will dramatically change the ‘Goldilocks mentality’ that everything is OK in the world. The US and Europeans will have to step up and take control of the situation - I find it hard to believe that Western governments are not going to respond in a manner that

Calendar year performance Year

Fund

Benchmark

Outperformance

2013

27.52%

21.20%

+6.32%

2012

14.44%

12.28%

+2.16%

2011

0.74%

-3.07%

+3.81%

2010

18.80%

18.42%

+0.38%

2009

28.10%

23.32%

+4.78%

*Performance for periods longer than one year is annualized. Figures are net returns. The value of your investments may fluctuate. Past results are no guarantee of future performance. Source: Robeco

Periodic performance Period

Fund

Benchmark

Outperformance

1 month

2.11%

1.48%

+0.63%

3 months

6.36%

6.87%

-0.51%

1 year

19.54%

17.92%

+1.62%

3 years*

21.94%

18.16%

+3.78%

5 years*

18.27%

14.20%

+4.07%

Since inception*

8.53%

6.34%

+2.19%

*Performance for periods longer than one year is annualized. Figures are gross returns to 31 October 2014 for the EUR D share class. The value of your investments may fluctuate. Past results are no guarantee of future performance.

Source: Robeco

is worthy. History has told us that preventing power vacuums post-war is key and this step was skipped in Iraq.

Asia isn’t really that worrying There will always be the macro questions such as what happens to China, and whether China devalues its currency because Japan has done so, and so forth, but we don’t make those kinds of calls. It’s unknown and somewhat speculative – we’ll factor in from a bottom-up perspective what is evident in a company’s earnings stream today and the near future.

The future is unknowable, and to position the portfolio or make investment decisions based on pontification or trying to guess what will happen in China or Japan doesn’t

Robeco BP Global Premium Equities investment opportunity

really work. When Abenomics first came through we were very skeptical about whether it was going to create a serious economic uplift to growth or inflation in Japan. The markets quickly discounted a really strong earnings recovery, and multiples expanded, but we didn’t see it in coming through in individual company earnings.

We’re not going to pay for currency effects and when we have looked at companies that could potentially benefit from a cheaper yen, the market had already overvalued that type of recovery. What’s happened in Japan over the last year and a half is that the market over-extended itself and figured out that a cheaper yen was not the cure-all for Japan’s woes. The market has re-set earnings and multiples have

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become much more reasonable.

Chris Hart profile

Treading lightly in Japan

Chris Hart, who has managed the Robeco BP Global Premium Equities Fund since July

But we still tread lightly in Japan and our general exposures are to one-off companies. We’re not focusing on exporters or building for the Olympics; just individual companies that we can see are doing well on a fundamental basis. It goes back to solid stockpicking in Japan because we think those broad-brush macro themes very rarely translate through to the real economy from an individual company perspective.

2008, has 22 years of experience in asset management, research and finance. Based in Boston, he is a portfolio manager for the global and international equity products. Prior to this he was an assistant portfolio manager for the firm’s small cap value products for three years.

He joined Robeco from Fidelity Investments, where he was a research analyst specializing in conglomerates, engineering and construction, building, machinery, aerospace and defense, and real estate investment trusts (REITs).

He holds a bachelor’s degree in finance, focusing on corporate finance, from Clemson University in South Carolina. He also holds the Chartered Financial Analyst (CFA) designation His hobbies include fishing, American football, and teaching sports to his children.

China will go through a pretty dramatic transformation in which it is going to have to mature as an economy rather quickly. Foreign direct investment has fallen precipitously, and when we have looked at individual companies that have looked cheap to us, we’ve felt that very often these companies over the last 10 years have significantly overinvested in China.

‘What worries me is an unknowable geopolitical event’

control the short-term gyrations of markets which are driven by things such as monetary policy comments or geopolitical flare ups. Questions like ‘what if Chinese growth slows to 2%’ don’t really bother me as it’s speculative, and it wouldn’t prohibit me from buying a good Chinese company.

Volatility is good for stock picking

We are currently at the point where growth rates have slowed, so they will have to start managing their businesses a lot better. Companies with a structurally favorable position in China look expensive to us. China is still growing, and if it does slow down, I think it will create an incremental effect for the rest of the world.

I’m often asked about volatility, and I respond that if you are concerned about volatility you probably shouldn’t be investing in the equity markets. If you’re buying for the long term, who cares about volatility? Over a market cycle, would an investor decline to invest with an asset manager who can cumulatively outperform the index by 30-40% because he’s worried about volatility of 1-2% on a weekly basis?

That doesn’t make sense to me.

I guess what worries me is an unknowable geopolitical event. The portfolio is well structured and we’re very much meeting our long-term objectives, but of course we can’t

Market volatility does create opportunities because it means that all the companies in the market are not moving in a similar way; there becomes less of a consensus, and

Robeco BP Global Premium Equities investment opportunity

therefore it opens up a valuation anomaly. So higher volatility is good for stock picking, and it does help from an investment perspective – I just have no control over it, so I don’t worry about it.

My gut instinct at the beginning of this year was that 2014 would be a good stock-picking market, but it didn’t turn out that way because the index itself has been a top-quartile performer, which tells you that the market doesn’t have a conviction one way or the other.

An investor could just buy large indexweighted securities and just wait it out until dislocations in the market start to present themselves again. That’s when a portfolio and style like ours does extremely well. So we’re always still trying to exploit the best three-circle opportunities that we can find.

What keeps me awake at night? Central banks …

From a market perspective what really concerns me is: has anything really changed since 2008/2009? Is there any real difference to counterparty risk today than there was in 2009?

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I hope there is, but I have very little confidence in central bank regulators.

There’s nothing in the market that is so egregious it is way off the charts and looks like a bubble.

If there’s anything that’s a bubble it’s the ineptness of central bank policy.

When Draghi talks about negative interest rates in the EU on deposits, there actually has to be deposits at the central bank for that to have any effect.

None of the banks have any deposits to put at the ECB. So it doesn’t change anything!

There was no change in the ECB’s

reserve requirements, and the whole asset-backed issue is a joke, as there is no asset-backed market in Europe with which to effect it. And the ECB buying covered bonds doesn’t incentivize banks to go out and lend because the bank still has to be invested in the security; it doesn’t get regulatory relief.

It’s a lot of posturing that has no real economic effect. The real issues with continental Europe are structural ones.

I have mentioned that the ECB is pushing on a string, but so is the Fed. It has pumped in USD 1.5 trillion, but I haven’t seen USD 1.5 trillion of incremental lending. Where did all

this money go? Why didn’t they just give every US citizen a check for USD 100,000? It would have had a much better economic benefit than giving it to some bank. That’s what keeps me awake at night – where did all the money go?

Reaching a milestone of EUR 500 million Finally, my team and I are very grateful that so many clients entrust us with their money. We’re so excited that we have now reached the important EUR 500 million milestone in assets under management in the fund. We look forward to working with clients.

Important information This document has been carefully prepared by Robeco Institutional Asset Management B.V. (Robeco).It is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Any investment is always subject to risk. Investment decisions should therefore only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. The information contained in this document is solely intended for professional investors under the Dutch Act on the Financial Supervision (Wet financieel toezicht) or persons who are authorized to receive such information under any other applicable laws.

The content of this document is based upon sources of information believed to be reliable, but no warranty or declaration, either explicit or implicit, is given as to their accuracy or completeness. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.

Past performances may not be representative for future results and actual returns may differ significantly from expectations expressed in this document. The value of your investments may fluctuate. Past results are no guarantee of future performance.

All copyrights, patents and other property in the information contained in this document are held by Robeco. No rights whatsoever are licensed or assigned or shall otherwise pass to persons accessing this information.

The information contained in this publication is not intended for users from other countries, such as US citizens and residents, where the offering of foreign financial services is not permitted, or where Robeco’s services are not available.

Robeco Institutional Asset Management B.V. (trade register number: 24123167) has a license as manager of UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. The prospectus and the Key Investor Information Document for Robeco Boston Partners Global Premium Equities fund (which is registered with the Netherlands Authority for the Financial Markets in Amsterdam) can all be obtained free of charge at www.robeco.com.

Robeco BP Global Premium Equities investment opportunity

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Robeco BP Global Premium Equities investment opportunity

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