20141028 vor emagazine africa

In this issue

AFRICA: AN ABUNDANCE OF LOW-HANGING FRUIT Page 4 WHY IMPLEMENTATION IS IMPORTANT Page 6 GATHERING MOMENTUM ON LAND AND SEA Page 8

SPOTLIGHT ON AFRICA A collection of articles to commemorate Robeco’s sponsorship of the Volvo Ocean Race

CONTENTS 3 Foreword 4 Africa: An abundance of low-hanging fruit Cornelis Vlooswijk 6 Factor investing: Why implementation is important Joop Huij 8 Gathering momentum on land and sea Laurent Pages & Willem Jellema 10 Africa – a continent of opportunities and risks Léon Cornelissen 13 The perils of being at sea, from pirates to plastic Team Brunel’s crew members 14 Volvo Ocean Race Facts & Figures 15 SABMiller: African sourcing offers tasty growth Vera Krückel 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

16 Contact

FOREWORD After weeks at sea, Team Brunel and its competitors in the Volvo Ocean Race have finally completed the first leg to Cape Town. There have been plenty of thrills and spills along the way, and of course we have another nine legs calling at eight stopover ports to look forward to.

We never doubted that the race would attract the kind of interest that it has, with millions following it online, and tens of thousands flocking to the race start in Alicante and now the first stopover in South Africa. We’ve been proud to be a major sponsor of Team Brunel and hope that it will be plain sailing for the brave crewmen right up to the finishing line.

To commemorate the Cape Town stopover, we are pleased to publish our second e-magazine, focusing on South Africa as well as some stories directly from the boat itself. In this edition, Cornelis Vlooswijk, portfolio manager of the Robeco Africa fund, explains the investment opportunities in this fascinating continent. He argues that there is an abundance of “low-hanging fruit” – but emerging markets always carry challenges.

Like Robeco, Team Brunel uses state-of-the-art quantitative analysis techniques to navigate a successful path, in the first leg across 6,000 nautical miles sailing south from Alicante. Quant

researcher Joop Huij explains how implementation is so important when exploiting a factor investing strategy.

And of course the boat needs to build momentum to win the race. In a double interview, Willem Jellema, portfolio manager of Robeco Momentum Equities, adds his insight into this particular style of factor investing, while Team Brunel crew member Laurent Pages explains how he aligns the sails for the maximum speed.

In further insight, chief economist Léon Cornelissen gives his views on the South African economic outlook, and we take an in-depth look at one of the country’s leading companies, SABMiller. Finally, we can only know of developments during the race thanks to the work of Team Brunel’s Stefan Coppers.

He lets us into his daily routine in our story, A Day in the Life of the On-Board Reporter. We think you’ll find it fascinating.

We hope you enjoy our second e-magazine and will continue to follow the race with us.

Graham Elliot Managing Director, Head of Middle East & Africa

‘Over the last 12 years equities were less volatile in Africa than in other emerging regions’ Cornelis Vlooswijk Fund manager Robeco’s African equity fund

AFRICA: AN ABUNDANCE OF LOW-HANGING FRUIT Cornelis Vlooswijk 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.

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.

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.

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.

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.

Isn’t it risky?

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.

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. They currently represent 0.5% of the portfolio.

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.

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.

FACTOR INVESTING: WHY IMPLEMENTATION IS IMPORTANT Joop Huij, Robeco Head of Factor Investing Factor investing is becoming more popular across the globe. Professional investors are increasingly considering investing strategically in certain parts of the financial market which realize better risk-adjusted returns over longer periods. The question is: “How can investors best implement this strategy?”

Robeco was a pioneer in offering factor investing strategies which avoid the pitfalls associated with generic approaches. You need to implement such strategies well to be successful and a prudent riskcontrolled approach offers investors the best of both worlds.

be flexibly applied to achieve optimal exposure.

Robeco also offers the Factor Solution Fund, which combines all three strategies.

Robeco Head of Factor Investing Joop Huij discusses the dilemma which investors face when it comes to factor investing. On the one hand, investors want to take advantage of the latest ideas. But on the other hand, implementation can carry risks. Huij explains the importance of a prudent approach.

Early adoption

Factor investing has its roots in solid scientific research. Leading academic studies demonstrate that, for example, value, momentum and lowvolatility stocks, generate higher risk-adjusted returns. In the last five years, a systematic approach has been taken to explicitly allocate to these factors and investors have clearly benefited in terms of their risk-return profiles.

Interest in factor investing has grown significantly, says Huij. “It started with a 2009 research report compiled by professors Andrew Ang, William Goetzmann and Stephen Schaefer, who advised the Norwegian government to strategically allocate to factors. The three professors were asked to investigate the reasons for the disappointing performance of Norwegian’s sovereign wealth fund in 2008. This fund invests Norway’s oil revenues and is one of the largest in the world.”

The question is how these academic insights can be incorporated into investment strategies. Robeco offers efficient exposure to one or more important factor premiums, including the value, momentum, and low-volatility factors. These three Robeco factor equity strategies are building blocks that can

“It turned out that the fund’s performance could largely be explained by its exposure to a small group of factors, something that its managers were not aware of at the time. Many of the different asset classes it held had the same exposure so the portfolio was not well diversified at all. The

idea of factor investing gained ground among professional investors around the world who faced similar diversification issues and were open to new approaches.”

Robeco embraced factor investing at an early stage, he says. ”But we were also skeptical after Ang, Goetzmann and Schaefer published their report.

We looked at many other academic studies on the subject, and tried to fill in the gaps with our own empirical research.”

“Take for example the value premium, the extra returns to be gained when investing in value stocks.

The existence of this premium is typically attributed to distress risk, i.e. bankruptcy risk. Robeco research found that although a simple value strategy can indeed involve large exposures to distressed firms, the value premium is not necessarily related to this risk. Therefore, investors are better off using an investment strategy that captures the value premium in a way which avoids this kind of extra risk.“

In the end this research paid off. Robeco is one of the few asset managers that can offer an extensive product range of low-volatility, momentum and value equity strategies. “We didn’t just talk about factor investing, we also developed equity strategies aimed at efficiently harvesting the most important factor premiums,” says Huij.

A different approach Huij emphasizes how the Robeco approach to developing factor strategies is different from those of others. “Whereas many providers heavily rely on mere statistical patterns in the data, we try to gain insights on where the return and risk is coming from. One of our key findings was that factor premiums are not a compensation for risk. This implies that investors do not need to take extra risks to enhance returns.”

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.

‘Factor premiums are not a compensation for risk’ Joop Huij Robeco Head of Factor Investing

GATHERING MOMENTUM ON LAND AND SEA Laurent Pages & Willem Jellema 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.

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

‘While the boat seeks to go as fast as possible, safety is paramount’ Laurent Pages Team Brunel Watch Leader & Trimmer

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. There is one mainsail, three smaller ‘jibs’, two ‘Code 0s’, one ‘gennaker’ and one storm jib.

As well as harnessing the wind to power the boat through the ocean at speeds of up to 40 knots (60kph), the sails are used to help maneuver the boat. So far Team Brunel has averaged 22.5 knots between Alicante and Cape Town.

“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. It is sometimes a very thin line to choose the right one.”

“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 and are doing well because the company is doing well, independent of market circumstances.”

“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.

Otherwise you can stay too long on a trend and capsize with it.”

Jellema says it is particularly important to beware of extreme cases such as bubbles. “A good example is the dotcom boom of the 1990s when almost every IT company was going through the roof.

You’re then very exposed to when it becomes overblown – you need to get out as soon as it reverses.”

“We find it is quite hard to get out of risky trends in time, so it is much better to look for less volatile trends instead, even though some overlap can occur.”

He says shale gas – now a developing industry – is a good example of one of the trends picked up by the momentum strategy. “We also invest in oil exploration companies and their related

suppliers – such as the transport infrastructure. It’s very interesting as a stock-specific trend but there is still risk because its dependency on the world economy,” he says.

“Normally, if the sail is not totally in pieces, we can fix it onboard,” says Pages. “But it’s tough work trying to fix a sail that is 400 square meters in a boat that is less than 10 square meters.”

“That is why we rely on a big team of portfolio managers and researchers to discuss if these trends warrant the risks being taken. We integrate risk management into our models to avoid some of the risks altogether without missing out on returns.”

While the boat seeks to go as fast as possible, safety is paramount. “The boat can reach up to 40 knots. It’s extremely fast, especially for a single hull.

Any mistake at these speeds can become a huge problem or danger. We’re all clipped on to the boat with a harness at that speed.”

Blowing in the right direction “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 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.”

Conversely, when the weather is rough, the sails can sometimes be torn, rendering them useless.

‘Momentum strategies profit from Newton’s observation that things that are in motion tend to stay in motio’ Willem Jellema Portfolio manager Robeco Equities

AFRICA – A CONTINENT OF OPPORTUNITIES AND RISKS Léon Cornelissen, Chief economist Robeco Economic growth in Africa has been strong for years and the standard of living is rising. Does Africa’s future look rosy or will weak leadership and Ebola cloud its prospects? Chief economist Léon Cornelissen sees both opportunities and risks.

What are the most important factors influencing Africa’s strong economic development?

The continent is characterized by immense diversity, yet there are a number of identifiable features that African countries have in common. These are mainly their rich commodity resources and their

young and rapidly growing population. As a result, many countries are showing strong economic growth.

The situation in South Africa and Nigeria is particularly significant for investors. These countries are developing into major economies. But they are not the only ones to show growth. Among the smaller economies, Botswana is doing very well.

Commodities play a role here, but also the country’s good governance. This last feature is important, as badly functioning governments are one of Africa’s core problems.

How important is the commodities sector for economic growth?

‘In many countries the primary risks are political in nature’ Léon Cornelissen Chief economist Robeco

Extremely important. China invests heavily in Africa because it wishes to safeguard commodity supplies for its own economy. Economic growth in China will diminish gradually as a result of the country’s transition from an export-led to a more consumerdriven economy. Yet if we consider production per capita, China is still poor. A high catch-up demand can therefore be expected from domestic consumers. This will lead to a sustained hunger for commodities.

Then there is India. Since the Modi government came to power there, the likelihood of an upturn in economic growth has increased considerably.

Commodity-producing countries in Africa are reaping major benefits from Asia’s strong growth.

Besides commodity production, what other opportunities does the continent offer?

Further privatization can make a major contribution in Africa, not only in commodity extraction.

Provided governments give businesses more latitude, large amounts of foreign capital can still be attracted. Another positive factor is Africa’s population structure. While money is clearly required to educate its young population, the continent is free of the burden of an aging society.

And of course Africa is huge, and therefore still has substantial development potential.

Due to global population growth, agriculture offers further opportunities. Examples are coffee and flowers from Ethiopia, fruit and vegetables from Morocco, and wine from Algeria. These countries can gain a substantial amount of ground if they manage to upgrade their production methods and succeed in making infrastructure improvements.

And this is happening. Ethiopia, one of the poorest countries in the world, is investing in its infrastructure.

As economies prosper, they become more diversified. Nigeria has a major film industry, for

instance. After Hollywood, and India’s Bollywood, ‘Nollywood’ is the biggest film production center in the world. It is the country’s second-largest source of employment.

What are the primary risk factors?

In many countries, the primary risks are political in nature. Individual situations vary considerably, and many countries - I mentioned Botswana earlier - have effective leadership, but in other countries, conditions are in danger of deteriorating.

Nigeria developed a type of pacification model that appears to have succeeded in reconciling the Islamic North and the Christian South with the distribution of power. However, since the rules of the game are not always observed, the elections in February threaten to become fairly fraught. This is not a good sign. Egypt has similar problems.

The economy is taking a positive turn there, but religious tensions could ruin everything.

Then there is Ebola, of course. This dreadful disease - and more particularly the fear it generates - is putting a damper on growth. All areas can come under pressure as a result: economic activity, tourism and foreign investments. And this is not the only disease on the continent: while AIDS and Malaria cause many more deaths than Ebola, they are not a risk factor, though they do have a damping effect on economic growth.

‘Commodity-producing countries in Africa are reaping major benefits from Asia’s strong growth’ What are South Africa’s economic prospects?

South Africa is one of the BRICS countries, a loose association of emerging economies with large populations. However, this country, with its more modest population numbers, remains something of an outsider. Its commodities were the reason China and India wished to include South Africa.

Meanwhile, it is a convincing member of the ‘Fragile Five’, the group of emerging countries that rely heavily on foreign capital to finance their growth ambitions. Its large current-account deficit has become obscured by lengthy strike action in the mining sector, but the underlying figures are still high. This also applies to the country’s budget deficit and inflation.

Medium-term growth prospects are moderate and will not bring down the country’s high unemployment rate. Structural problems affect education, infrastructure and energy distribution, and the country’s political situation is unstable.

The ANC did not manage to win a two-thirds majority in the May elections and has now formed a government team that can hardly be described as small and decisive.

Is the low oil price a problem for countries such as Nigeria, Algeria and Angola?

Only in the short term. I expect the relative price of oil to rise again. Oil is a fantastic product, and it is not easy to find substitutes. The shale-gas revolution in America is likely to be short-lived.

At some point the reserves will be exhausted. Oil exports remain a positive factor for these countries, as does exporting other commodities to different countries.

All things considered, Africa is a continent of opportunities in economic terms. Nevertheless, a downturn scenario is also possible. The main thing now is to improve governance. If the continent succeeds in this respect, it will be able to maintain its present high growth rate for a long time to come.

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.

THE PERILS OF BEING AT SEA, FROM PIRATES TO PLASTIC Team Brunel’s crew members Team Brunel’s crew members face many challenges on their way around the world – and one of them is unwanted human company. Specifically – 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.

“A small boat appeared out of nowhere on the horizon, and on board were eight men dressed 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.”

“To my relief, the man emerged with no rocket launcher or Kalashnikov, but a remarkably large Spanish flag. The ‘pirates’ appeared to be Spanish navy men from a nearby navy vessel. Their redyellow-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.

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.

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.”

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!’”

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.

“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!”

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

VOLVO OCEAN RACE Facts & Figures – This is the 12th edition of the race, and the 5th under the name Volvo Ocean Race – The Netherlands and Sweden (Volvo’s home country) have the strongest history in the race in terms of the number of teams and sailors taking part – 7 teams are in this edition, including the first women’s team (Sweden) in over a decade.

– Each boat has 8 sailing crew and one on-board reporter – Some 22,000 corporate guests will be invited at stopovers and other hospitality events by sponsors of the race and the teams – The total TV audience is expected to be 1.65 billion people, on a par with the Olympics and World Cup The teams in the race are: – The Netherlands: Team Brunel – Abu Dhabi: Abu Dhabi Ocean Racing – China: Dongfeng Race Team – Sweden: Team SCA (all-female) – America/Turkey: Team Alvimedica – Spain: Team Espana – Denmark: Team Vestas Wind The other sponsors of Team Brunel are: – Brunel: project management, staff secondment and consultancy – Schouten Global: training and development – Moduleo IVC: premium vinyl flooring – Sub-sponsors : Gaastra (teamwear); Ernst & Young (accountancy)

SABMILLER: AFRICAN SOURCING OFFERS TASTY GROWTH Vera Krückel - Analyst Robeco Global Equity SABMiller* combines an African growth strategy with a high ESG score, says analyst Vera Krückel of the Robeco Global Equity team.

South Africa’s SABMiller is the world’s secondlargest brewer in terms of revenue, after AnheuserBusch InBev, and it is also a major Coca-Cola bottler. Its brands include Fosters, Grolsch and Miller Brewing Company. Africa is important to SABMiller; not just its home market where it generates 17% of its turnover, but also the rest of Africa (15% of turnover). Its markets include Tanzania, Mozambique, Zambia and since recently Nigeria.

Vera Krückel is the consumer staples analyst of the Robeco Global Equity team, which in total has 11 sector analysts and portfolio managers.

SABMiller is part of the investment portfolio. The incorporation of ESG factors into investment cases is very important to the team. SABMiller scores well on these criteria, especially because of its close cooperation with local farmers.

Low cost strategy leads to growth SABMiller makes beer more affordable to people by offering beer brewed from cheaper local crops, says Krückel. “In the last few years the company has launched new brands such ‘Impala’ cassava beer. By doing so, It needs to import less expensive

European ingredients such as barley malt. Instead, the company sources locally and uses cheap ingredients such as cassava, which are widely available in Africa.”

This low-cost-strategy allows SABMiller to take market share from homebrew beer, she adds. “This enables them to achieve high top-end growth. In South Africa volumes are increasing by around 1-4% a year, and in the rest of Africa, this figure is around 7-9%.”

RobecoSAM we have analysts who make an ESG-profile per sector and per company. For example, they look at reducing the use of water in the brewing process and monitor whether any improvements have been made.”

These ESG factors are integrated in her investment case. “ESG factors can directly influence the value of a company. A reduction in waste can cut costs and innovation can increase revenues. Per sector we have criteria that look at the materiality or importance and impact per issue.”

The company also benefits from Africa’s rising population and increased urbanization, she says.

“SABMiller is a demographics play for investors.

The company has a broad portfolio of brands for different segments of the population. SABMiller has low-end brands which offer volume and introduce people to the concept of commercial beers, but they also sell high-margin premium beers.”

The Robeco Global Equity approach to ESG is different from other investors, she concludes.

“Many just tend to focus on screening and exclusion. Often, the connection to business models and valuation tends to be missing. Our approach includes all stages of the of the investment process.”

ESG incorporated in investment decisions

Room to raise margins

SABMiller scores well on ESG factors, because of its cooperation with local small-scale farmers, says Krückel. “It is a win-win situation for both. It allows SABMiller to cut transportation costs, while these farmers find a willing buyer for their crops.”

Besides top-line growth, there is room to raise gross margins, says Krückel. “SAB Miller has pricing power in Africa, because their market share is high, which gives them the flexibility to raise margins in the future. Another way to raise margins is to increase volumes. Breweries have high fixed costs and any increase in volumes to cover these costs directly contributes to gross margins.”

She explains how Robeco Global Equities incorporates ESG in its investment cases. “Within

She is optimistic about the future of the company.

“The Africa exposure is high. The relatively low consumption of commercial beer per capita in the region will allow SABMiller to continue to grow.”

‘It is a win-win situation for both’ Vera Krückel Analyst Robeco Global Equity

* 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.

Robeco Middle East Dubai International Financial Centre Gate Village Building 7 2nd Floor, Unit 209 Dubai United Arab Emirates T +971 4361 4700 F +971 4368 8160 I www.robeco.com

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