Robeco Quarterly June 2018

Robeco

Intended for professional investors only

QUARTERLY

QUANT investing SUSTAINABILITY investing #8 / June 2018

QUANT MEETS SUSTAINABILITY – 36 THE NEW CHINA – 7 AVOIDING THE RETAIL APOCALYPSE – 26 BREXIT NORWEGIAN STYLE – 28 CYBERSECURITY LONG READ – 32

"Factor investing in equity markets should revolve around the factors identified by Eugene Fama and Kenneth French in their famous five-factor model: value, size, profitability and investments, supplemented by low volatility and momentum. I’m happy not to invest in the remaining part of the factor zoo” Bernd Scherer, research associate at EDHEC-Risk Institute

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Robeco QUARTERLY • #8 / JUNE 2018

The high dividends of low-risk investing

Stock price fluctuations tend to monopolize investors’ attention on a daily basis. Yet dividends account for a significant and much more stable part of the equity premium over the long term.

A 200-year multi-asset analysis of factors

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A late-cycle approach to high yield

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Combining factors and SI to achieve sustainable alpha

SUSTAINABILITY investing

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The cost of climate change

And MORE

QUANT investing

CONTENTS OPINION Quantity to quality – China’s growth shift

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CREDITS Short maturity = low risk, less volatility

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TRENDS Avoiding the retail apocalypse

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OPINION Will it be BRINO – Brexit In Name Only?

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RESEARCH Watch your Term Premium

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LONG READ Cybersecurity: turning threats into opportunities

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INTERVIEW Quant meets sustainability

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COLUMN All about the euro

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The battle against global warming is gaining momentum, with more and more investors actively planning how they can mitigate climate-related risks.

Culture is key to risk levels at banks

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Quantifying a company’s contribution to SDGs

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Making sense of all the SI data

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Research

Prestigious award for Robeco research For many years, factor investing research remained mostly focused on equities, both in academia and in the financial industry. This is now changing as more and more evidence emerges to show that factor investing works for other asset classes as well.

As a pioneer in this field, Robeco has long been seeking evidence to prove the existence of factors beyond the equity markets. In a groundbreaking paper ‘Factor Investing in the Corporate Bond Market’ Patrick Houweling and Jeroen van Zundert, from Robeco’s quant credits team, were the first to document how portfolio managers can successfully implement a multi-factor approach in their credit portfolios. This article has now been selected by the CFA Institute to receive a Graham and Dodd Scroll Award of Excellence for 2017. This award recognizes excellence in research and financial writing while honoring Benjamin Graham and David L. Dodd for

Demographics: Big in Japan Everybody is talking about Japan’s demographic challenges, but the difference with, say, Germany is not that big.

Rank Country Median age 1 Japan 46.3 2 Italy 45.9 3 Germany 45.9 4 Portugal 43.9 5 Martinique 43.7 6 Bulgaria 43.5 7 Greece 43.3 8 Austria 43.2 9 Hong Kong 43.2 10 Spain 43.2 Source: QZ.com

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their enduring contributions to the field of investment analysis. Previous winners include well-known names from the academic and investment management community, such as William Sharpe, Fischer Black, Cliff Asness, Peter Bernstein and Roger Ibbotson.

In their paper, Houweling and Van Zundert show that corporate bond portfolios which are explicitly tilted to size, low risk, value and momentum generate statistically significant and economically meaningful alpha compared to the market portfolio.

Skill in the game Total hours worked in Europe and the US, 2016 vs 2030 estimate, billion 2016

2030 Physical and manual skills

Basic cognitive skills

Higher cognitive skills

Social and emotional skills

Technological skills

203

115

140

119

73

174

97

151

148

113 55

Change in hours spent by 2030, %

8 -14

24

-15

Source: McKinsey Global Institute Workforce Skills Model

Robeco QUARTERLY • #8 / JUNE 2018

Volatility is back, and that’s a good thing

How to deal with trade war risk?

Even though trade tensions between the US and China have increased, a full-blown trade war is not the base-case scenario.

Over the past few months, US president Trump has made good on his campaign promises, having taken various measures to protect US industries. His actions, of which an increase in tariffs on aluminum is but one example, mainly appear to be targeting China, although lately Europe is more in the picture as well. Victoria Mio (fund manager Robeco Chinese Equities) and Jie Lu (head of research China) believe Trump is putting his bargaining chips on the table, while China is responding in a very measured way, aiming to de-escalate the situation and stressing the importance

of free trade. Recently, the two countries reached consensus to reduce the US trade deficit with China by China importing more US products such as oilseeds, beef, energy, automobiles, and aircraft. The overall impact of the US measures on trade between the US and China as well as on China’s GDP is relatively small. Still, the Chinese authorities are keeping a close eye on developments, ready to mitigate any negative consequences.

Robeco QUARTERLY • #8 / JUNE 2018

Editorial

China

Bargaining chips

Geopolitical tensions, the lurking threat of a trade war, as well as the feisty rhetoric from Washington on both fronts. Add to that political unrest in Italy and gradually rising oil prices, and it should be clear why volatility is making a comeback on financial markets.

Investors are shy of uncertainty, but there’s currently a veritable flood of it.

And yet we can’t speak of an exceptional situation. In fact, if there’s one thing that we could call exceptional, it was the lack of volatility in 2017. Yet many investors struggle to resist the urge to change tack when volatility increases. The question is whether that is such a smart strategy. Investing is a long-term game, and successful investing requires you to hold a fixed course in turbulent times. Frequently switching strategies adds very little value, if any at all.

Academic research shows that investors in investment funds realize returns (annualized) that are 1.9% lower than those of the funds they invest in. And for index funds that difference is as much as 2.7% – in the jargon, that’s known as the difference between ‘investment return’ and ‘investor return’.

This difference is mainly explained by investors entering and exiting a fund – often at precisely the wrong moment. Over the longer term, this has an enormous negative impact on expected returns. It demands courage and discipline to keep to an investment strategy when markets appear to be going against it. The art is to do no more than is absolutely necessary in terms of portfolio management in difficult market conditions.

That’s not to say that you shouldn’t do anything at all. But all things being equal, a portfolio is set up for the longer term and must show resilience against short-term fluctuations. At a strategic level, investors must therefore be very prudent when it comes to changing their policy. But that doesn’t mean that you shouldn’t be proactive at a tactical level, by adjusting the duration of a credit portfolio, for instance. Strategic choices rarely work out well. We all still remember how many investors embraced emerging markets in 2009-2010 and then dropped them again in 2013 after a few disappointing years. Volatility has returned to the stage, and that’s a reality check for every long-term investor. But if you’ve got your business in order, all you need to do is stick to your plan in a disciplined way – despite trade wars, geopolitical tensions, rising oil prices and the commotion south of the Rubicon.

Peter Ferket, Head of Investments

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The SDGs as a unifying factor

Surely the ‘designers’ of the Eurozone, aimed at increasing both economic and political stability, could not have foreseen that the region would turn out to be so ‘lively’. With headline inflation up to 1.9%, solid economic growth and falling unemployment, the ECB was comfortably cruising towards the exit from its QE program. Then, however, we got a less than gentle reminder that within the Eurozone, politics can take center stage at any time.

Italy’s inexperienced new government is not

The SDGs are omnipresent. In China, the One Belt One Road project is measured against them, Japan is more and more focused on governance and even in Kenya, it’s a subject of increasing interest.

Engagement

Column

Never a dull moment

And in spite of the US’ withdrawal, various American states and businesses have pledged to participate in the Paris Climate Agreement.

In his keynote speech at the first Robeco Sustainability Explore event in Amsterdam, former Prime Minister of the Netherlands Jan Peter Balkenende emphasized the success of the Sustainability Development Goals initiated by the United Nations. “The SDGs are bringing together countries, businesses and organizations.”

Balkenende also demonstrated that with a concerted effort, a lot is possible. “Within 15 years’ time, 70% of the UN Millennium Development Goals, the forerunner of the SDGs, was achieved.”

While reports of progress abound, actually being able to measure how far we’ve come with the SDGs is still often an issue, says Balkenende. And then, in business at least, there’s the

task of balancing short-term gains and long-term sustainability – the proverbial tragedy of the commons.

“We live in a world of Big Data, IoT, AI and a sharing economy. But amid the swift pace of technological innovation and the radical changes it entails, businesses must look beyond just their technological successes.

Balkenende emphasized the importance of having ‘a moral code’.

“Businesses must ask themselves: what part do I have to play in ensuring a sustainable future for this planet? What is our company’s DNA? What is our goal?”

According to Balkenende, it will help if we redefine what we mean by ‘economic growth’. Sustainability should be factored into the equation.

“We need a hope barometer, combining both ethics and economic factors.” The SDGs must be elaborated on all fronts by laying the foundations for a sustainable future in business, science, education and legislation.

“The big advantage of the SDGs is that the whole world is addressing them and the objectives are concrete.

And across the globe, each region is adding its own local touches.”

likely to last very long. But if it does manage to endure, it will only increase Italy’s already huge debt. At times, it feels like we have not come very far since the outbreak of the peripheral debt crisis back in 2010. But that would be too short-sighted. The last decade has also shown that in the Eurozone, a bit of anxiety just goes with the territory from time to time, even if the region is, overall, pretty resilient.

Jeroen Blokland Senior Portfolio Manager

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Robeco QUARTERLY • #8 / JUNE 2018

Quantity to quality – China’s growth shift However you look at it, growth in China is decelerating. Fixed investment growth in particular – and domestic data confirms this.

China’s leaders have made reducing risk, ensuring financial stability and containing leverage top priorities and therefore shifted their focus from ‘growth at any cost’ to ‘quality growth’. But just how successful have they been?

Speed read

Opinion

• Containing debt and controlling shadow banking are key issues • Consumption is replacing investment as economic growth engine • Balancing act between debt and stable growth

In our second Credit Quarterly Outlook of the year, we refer to China as one of the three locomotives of global growth. But China’s GDP growth has been heavily dependent on debt-financed investment since the global financial crisis and credit growth has outpaced nominal GDP growth for the last few years, especially if you take shadow credit into account. This high and rising debt level has long been one of investors’ greatest concerns, as the derailment of a global powerhouse of this magnitude would have a huge knock-on effect on the global economy and bond markets.

But China is taking action. Hong Kong-based Senior Credit Analyst Tiansi Wang took a closer look at how the world’s second largest economy is tackling some of the economic challenges it is currently facing.

So while investment in most areas is falling, services and consumption are now on an upward trend, accounting for around 70% of GDP growth. The willingness and ability of the younger, wealthier generation to consume has spurred a structural spending upgrade in terms of the products they purchase, with booming consumption in information services, smart home appliances, cultural services, tourism, healthcare and education.

The stable employment situation, strong labor market and resilient wage growth will continue to boost disposable income and play a key role in GDP growth in 2018.

Shift from investment to consumption and services well underway Over the past five years, the extent to which credit-intensive investment has driven growth has gradually decreased. Since 2012, year-on-year growth in manufacturing investment has decelerated, falling from 31.8% in 2011 to 4.1% in October 2017.

Low single-digit growth is set to continue in the near term, driven by investment in manufacturing upgrades and technology innovation (including AI, high-end machine tools, new energy vehicles and biomedical industries).

In terms of infrastructure, investment has continued to increase at a brisk pace, but we expect further deceleration here too in 2018. Overall fixed asset investment growth is set to slow this year from 7.2% in 2017 to around 6%, as the effects of deleveraging and the government’s tightening measures start to kick in. Central government has also halted some planned projects, sending a signal to local governments that they wish to contain debt and investment at grassroots level.

Robeco QUARTERLY • #8 / JUNE 2018

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Opinion

Stabilizing the property sector

‘Services and consumption account for about 70% of GDP growth’

The government’s aim is to gradually bring down the debt-to-GDP ratio without causing too sharp a slowdown in growth; to “effectively control leverage” in the economy and to de-risk. The main focus has been on reducing financial system risk, especially shadow banking leverage, which is probably the most vulnerable piece in China’s debt puzzle. Banks are an important source of funding for shadow banking through nonbank financial institutions (NBFI). This form of financing, often via riskier vehicles, ballooned from CNY 7 trillion (USD 1.1 tln) at the end 2013 to CNY 24 trillion (USD 3.77 tln) in mid-2016, mostly through the inter-bank market. Since late 2016, tighter rules have led to a decline in banks’ shadow financing activities, with the growth of their claims on NBFI decelerating from 80%

YoY in early 2016 to 11% by late 2017.

The property sector is pivotal to the Chinese economy, with property-related industries accounting for around 25% of China’s GDP in 2016. In terms of urbanization, China’s housing area per capita has risen from 2m2 in the 1990s to 41m2 today (the level of the Netherlands) but is now slowing, while the impact of leverage on the property market is also lessening due to the current tighter policy.

Shantytown reconstruction remains a growth driver, boosted by local government efforts to deal with these areas of cheap housing and poor infrastructure, and to provide affordable housing while reducing the large property inventory overhang in smaller cities. We expect China’s national housing sales growth rate to continue to decelerate and bottom out in the first half of 2019, with real estate investment also slowing to around 3% in FY18, compared to a still strong 7% in FY17.

Credit positioning geared to the new economy GDP remained surprisingly strong in 2017, with 6.8% real growth. This is driven in part by the structural shift towards more consumption-driven growth, but the buoyant global economy is also a contributory factor. Shadow credit growth has slowed sharply and the strong GDP figures have helped narrow the gap between debt and GDP growth. The leadership’s focus for the next five years is on reducing financial risk, combatting pollution and tackling poverty. And although the 2018 real GDP growth target is 6.5%, this will no longer be part of local government performance evaluation – which should be a key factor in helping to change behavior from the bottom up.

This paradigm shift in China offers plenty of opportunities for investors. In Robeco’s credit portfolios, the China exposure is focused on the new economy. For example, we have holdings in the gas distribution segment to capitalize on the transition to cleaner power sources and we avoid the old economy industries of mining and steel. We also invest in the bonds of companies that are set to benefit from the shift to a consumer-driven economy.

It remains to be seen whether China will be successful in completely eradicating the credit excesses of the past and tackling the negative overhang in terms of the debt-to-GDP ratio without seriously hurting longer-term growth. In a market economy it would be difficult to successfully implement the current strategy, but with their ‘Chinese economic model’ they may well succeed.

At any rate, the first signs look reasonably positive.

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Robeco QUARTERLY • #8 / JUNE 2018

QUANTinvesting

Lower risk, higher dividend Even though they may seem negligible when compared to daily stock price moves, dividends account for a very significant part of equity returns in the long run.

What’s more, stocks characterized by an above-average dividend yield tend to achieve higher and more stable returns over time. For prudent long-term investors, looking for low-risk stocks, the upshot is that they will often end up with a portfolio showing relatively high dividend yield. This is indeed the case for Robeco’s Conservative Equity strategies, our approach to low volatility investing. In fact, these strategies offer a compelling proposition compared to traditional market capitalization-weighted indices in terms of three key aspects: lower risk, of course, but also higher dividend yield and higher returns.

Robeco QUARTERLY • #8 / JUNE 2018

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The high dividends of low-risk investing Stock price fluctuations tend to monopolize investors’ attention on a daily basis. Yet dividends account for a significant and much more stable part of the equity premium over the long term. This is also true for Robeco’s Conservative Equity strategies which, in addition to risk reduction, offer high income and attractive returns, say Pim van Vliet, Jan Sytze Mosselaar and Maarten Polfliet.

time. This is because companies that distribute such high dividends tend to be more mature businesses, with a more conservative management approach.

Systematically investing in stocks which pay a high dividend can therefore be considered an effective way to reduce volatility, while at the same time enhancing returns.

‘Investing in stocks which pay a high dividend can be considered an effective way to reduce volatility’ dividends are also very important.

When considering stock returns, investors often tend to overlook dividends and focus mainly on price changes. Indeed, from a short-term perspective, price fluctuations are clearly the main driver of stock returns.

Daily price moves are frequently larger than the dividend earned over a full year.

The bigger picture only emerges when a truly long-term perspective is taken:

In fact, over the past century roughly half of equity returns has come from dividends and half from price changes.

Figure 1 shows the US equity return decomposition, going back as far as 1900.

Over this very long period, equities have delivered a total return of 9.5% per year, 4.5% of which came from dividends and 5.0% from price increases.

A closer analysis of stock returns shows that stocks characterized by an aboveaverage dividend yield tend to deliver higher and more stable returns over

Figure 1 | Equity return decomposition of US stocks since 1900 20% 15% 10% 5% 0% -5% -10% 1900-2015 1900s 1910s 1920s Dividend Price return Source: Shiller and Robeco.

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1930s

1940s

1950s

1960s

1970s

1980s

1990s

Low risk and high dividends

Robeco’s Conservative Equities approach comprises a range of active low volatility strategies.

Their primary focus is to reduce risk by combining the statistical analysis of low risk factors with our own more forwardlooking proprietary distress risk factors.

Since inception in October 2006, this approach has helped us reduce volatility by 27% compared with the MSCI World Index (10.4% versus 14.3%).

But our Conservative Equities strategy also aims to deliver enhanced returns. We do this by adding customized valuation/ income and momentum/sentiment components to the stock selection model. High dividend is an interesting characteristic because it usually leads to both lower risk and higher returns.

Therefore, our Conservative Equities strategy involves selecting firms with high and stable dividends. In addition, we take into account share buybacks, as some companies prefer to repurchase shares rather than pay dividends.

2000s 2010s

Moreover, if a stock’s price momentum is strong, earnings revisions are positive and

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there is strong credit momentum, the risk of seeing dividends decrease over time is mitigated. Taking price momentum into account also helps us avoid value traps and reduce risk.

Conservative Equities strategy showed a more stable and attractive return pattern between October 2006, when the strategy was introduced, and the end of 2017. It also achieved an 8.0% annualized return, in line with the MSCI Momentum Index, while the MSCI World Index generated a 5.6% annualized return over the same period.

Proven track record Besides a risk-reduction of 27%, the

Figure 2 | Robeco versus MSCI Factor indices, 2006-2017 10%

Robeco Conservative

Return

8%

3.9%

1.6%

4.1% 6.7%

2.4%

6%

4.0%

MSCI Momentum MSCI Minvol 0.9%

4%

As a result, the Conservative Equities strategy offers a compelling proposition compared to traditional market capitalization-weighted indices in terms of three key aspects (see Figure 2): higher dividend (in line with the MSCI High Dividend Yield Index), lower risk (in line with the MSCI Minimum Volatility Index) and higher returns (similar to the MSCI Momentum Index).

3.5%

MSCI High Dividend 2% 0%

The strategy’s average dividend return during the same period was 3.9%, which is double that of the MSCI World Index, at around 2%. The dividend return was in line with the MSCI High Dividend Index, which realized a return of 3.5%.

9%

10% Dividend return

11%

12%

13% Volatility

Price return

14%

15%

16%

1 Source: Robeco Performance Measurement. Monthly data since inception October-06, gross of fees, based on net asset value of Robeco Institutional Conservative Equity Fund. The fund and reference indices are unhedged for currency risk as of June 30 2012. Index returns are based on net returns, as a result dividend return of MSCI High Dividend Yield is relatively low due to the impact of withholding taxes which substantially lower the amount of dividend reinvested. In reality, costs (such as management fees and other costs) are charged. These have a negative impact on the returns shown. Results obtained in the past are no guarantee for the future. The value of your investments may fluctuate.

Source: MSCI and Robeco

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A multi-asset analysis of factors over more than two centuries The most important requirement that an investment factor must meet in order to be considered relevant is that there is ample empirical evidence supporting the factor’s existence over time, over the cross-section and across asset classes. This is particularly important in order to avoid potential ‘p-hacking’, or ‘data mining’, write Guido Baltussen, Laurens Swinkels and Pim van Vliet.

When assessing the evidence on potentially interesting factors, it is of utmost importance for researchers to consider data over the longest possible period of time and across as many asset classes as possible. The quest for such ample evidence on factor premiums was

Robeco QUARTERLY • #8 / JUNE 2018

actually what recently led us to analyze more than two centuries of international market data from multiple historical sources, relating to an array of asset classes.

In a research paper included in a recent book of collected articles on quant

allocation,1 we looked at four major factor premiums in equity indices, government bonds, currencies, and commodities, using data going back to 1800, applying basic definitions for the different factors. We tested factors both within and across all four asset classes using traditional performance metrics and metrics that control for market exposure when assessing the profitability of a factor strategy. Such an extensive sample allowed us to falsify certain factors if previous results were simply driven by ‘p-hacking’, and to

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‘Such an extensive sample allowed us to falsify certain factors if previous results were simply driven by p-hacking’

study the sensitivity of factor premiums to financial market and macroeconomic regimes.

Indeed, a serious concern with many empirical studies published in academic journals over the past decades is the robustness of the documented factor premiums over time and samples. First, relatively little is known about the longrun behavior of factor premiums. Most studies cover the past 20 to 50 years

of data. This period is characterized by peace, growing global prosperity, and only includes a few recessions and

Return

Figure 1 | 217 years of multi-asset factor investing 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Trend Carry MFMA Momentum Value

0%

2%

4%

6% Volatility

8%

10%

12%

The figure shows the full sample annualized total return and volatility of global equity and government bond potfolios. The factor portfolios are lang-short portfolios applied to equity, bond, commodity, currency and cross-asset class universes. The multi-factor multi-asset (MFMA) portfolios consist of an equally weighted combination of the four factor premiums. The sample starts in December 1799 ans ends in December 2016. Performance is measured on a monthly frequency.

Source: Robeco

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14%

periods of social unrest.

Moreover, in an influential paper2 published in 2016, Campbell Harvey, Yan Liu and Heqing Zhu warned against dangers of a ‘multiple testing bias’ in backtesting, leading to the discovery of factor premiums that might be a reflection of a type I error in testing. They showed that such ‘p-hacking’ is a widespread phenomenon. For that purpose, they studied over 300 documented stock-level anomalies and showed that analyzing these in a rigorous testing framework that allows for multiple testing makes many of them questionable. As a result, one may wonder how factor premiums hold up in other time periods and samples.

Persistent factors Our research shows significant, persistent, and robust momentum, value, and carry premiums both within and across asset classes. It also

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evidences that the momentum, value, and carry factor premiums generally work well with each other in the context of portfolio diversification. Our analysis also shows that the time-series trend and cross-sectional momentum are in essence similar factors. Moreover, a multi-factor, multi-asset strategy gives rise to a statistically highly significant Sharpe ratio well above 1.5, with positive returns over every single decade since 1800. Our main findings are summarized in Figure 1.

‘A multi-factor, multiasset approach offers considerable added value relative to a 60/40 equity/bond portfolio’ approach offers considerable added value relative to a traditional 60/40 equity/bond portfolio.

Lesser-known factors The factor premiums remain robust across economic regimes such as bear markets, turbulent periods, recessions, inflationary periods, crises, and wars.

They are robust to various testing choices, like the period of rebalancing, accounting for lagged implementation, the exact portfolio construction method, and the trimming of extreme positive returns. As a result, our research article concludes that a multi-factor, multi-asset

In addition, our paper also examined other lesser-known premiums. More specifically, we looked at two low-risk factors (betting-against-volatility and betting-against-beta), and two seasonal factors (‘Sell in May and go away, but remember to come back in November’ and monthly return seasonality). Our study shows the presence of a low-risk effect in equity markets, but not in other markets, which is consistent with the

typical explanations given for the low-risk effect. It also reveals a strong monthly seasonal factor premium.

Overall, we present convincing empirical evidence that multi-asset factor premiums are economically strong and persistent over time. They are highly unlikely to be the result of data mining, supporting the assumption that they will exist in the future. A multifactor, multi-asset approach offers considerable added value relative to a traditional 60/40 equity/bond portfolio, offering true diversification and return enhancement.

1 G. Baltussen, M. Martens, P. van Vliet, ‘Quant Allocation – Collected Robeco Articles’, 2018.

2 C. Harvey, Y. Liu, H. Zhu, ‘... and the Cross-Section of Expected Returns’, The Review of Financial Studies, January 2016.

A late-cycle approach to high yield Has the time come to adopt a more defensive approach to high yield? The structure, breadth and complexity of the high yield market make it a challenging environment for investors. But it offers attractive returns compared to other credit segments and often receives a fixed allocation.

Portfolio manager Johan Duyvesteyn explains how his strategy approaches high yield.

As timing the peak of the market is notoriously difficult, what are the options for managing the high yield allocation in the later phases of the credit cycle? Robeco Dynamic High Yield offers a solution to this quandary. This is a strategy that enables investors to maintain high yield exposure, while outsourcing the ‘timing decision’. It does this by reducing risk when spreads are expected to widen and the high yield

Robeco QUARTERLY • #8 / JUNE 2018

market looks bearish, or by increasing exposure if spreads look set to tighten and prices to move higher.

Timing strategy based on proven quantitative model Decisions on when to dynamically adjust exposure are fully based on the signal from a proprietary quantitative market-timing model, which is rooted in academic research. The model applies various fundamental, well-established

and technical variables to forecast credit returns, including macro factors and equity market trends.

By systematically adjusting the investment portfolio according to the model’s signals, the strategy avoids well-known human behavioral biases and can even benefit from them. When markets are driven by investors’ emotions, the model sticks to the fundamentals.

Alternative access to the high yield market The high yield corporate bond market lacks the liquidity of the equity or developed government bond markets, so it can be

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Figure 1 | Bull and bear market performance since October 2001 25 20 15 10 5 0 -5 -10

Full Strategy

CDS indices

Bear market

Bull market

Bloomberg Barclays Global High Yield Bond Index

Sources: Bloomberg Barclays, Robeco Quantitative Research. Simulated returns for the strategy before its live track record (from 10/2001 to 03/2014) and Robeco QI Dynamic High Yield, IH EUR share class over its live track record (from 04/2014 to 04/2018). All figures in EUR and gross of fees but net of transaction costs. In reality, costs (such as management fees and other costs) are charged. These have a negative effect on the returns shown. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. The definition of bull and bear markets respectively are the top and bottom 50% of calendar quarters based on high yield bond market returns.

difficult for investors to move in and out of it rapidly. As this strategy focuses on market timing, it requires this flexibility and thus uses credit default swaps (CDS) to gain high yield exposure rather than buying individual high yield bonds.

Investing in a CDS index means buying one single market instrument to gain a broad high yield exposure. No bottom-up issuer selection is required, differentiating this approach from traditional fundamental high yield approaches. The CDS indices the strategy uses are well-established, cover a representative range of issues and are regularly rebalanced, thus ensuring their quality in terms of liquidity and diversification. Trading these indices instead of individual bond issues offers flexibility in terms of trading volume and enables portfolio changes to be implemented quickly while keeping transaction costs down.

At times of market turmoil, when high yield bond returns can be hit severely, the impact on these more liquid instruments is less extreme and drawdowns are historically less severe. While the lower liquidity of cash bonds increases risk, this is not rewarded with higher returns. So in

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‘A liquid high yield solution that dynamically allocates market exposure’ this respect, CDS indices are able to deliver more stable returns over time and offer a better risk-return ratio than the global high yield bond index.

Limited drawdowns As Figure 1 illustrates, the Dynamic High Yield strategy’s performance somewhat lags that of the high yield bond market in bull markets. But its strength lies in the combination of the timing element and the CDS exposure and the protection this offers in bear markets; a factor which can be particularly significant in a volatile segment like high yield.

In bear markets, including the market corrections of 2002, 2008 and 2015, the cash high yield bond market suffered more acutely than the CDS indices. For example, in 2008, when the market plummeted, falling around 29%, the losses incurred by the more liquid CDS indices were much smaller and the strategy lost only 2.1%.

Although high yield bonds recovered more strongly, as is reflected in their higher return in bull markets, both the CDS indices and the strategy posted higher returns over the period

as a whole.

Dynamic but defensive As a quant high yield approach, Robeco’s Dynamic High Yield strategy can function as a style diversifier. For example, it offers investors in traditional high yield strategies an alternative way of gaining high yield exposure. It is also suitable for tactical investors as it offers the flexibility to make short-term decisions and more effectively time high yield exposure.

But in the current market environment, the most compelling argument for this strategy lies in its ability to offer high yield exposure in a more defensive way. It is a solution that combines less risk, lower costs and more stable returns. It has outperformed in bear markets and addresses the liquidity concerns sometimes associated with weaker high yield markets. These attributes result in a superior risk return profile and a higher Sharpe ratio over the credit cycle as a whole.

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Combining factors and sustainability to achieve sustainable alpha Factor-based equity strategies can help investors achieve sustainability objectives, in addition to better risk-return characteristics. There are many ways to integrate sustainability in a quantitative portfolio, but maximizing both outcomes simultaneously is far from trivial.

Indeed, striking the right balance between quant factors and sustainability aspects to ensure sustainable alpha requires a smart approach, says Machiel Zwanenburg, a portfolio manager from our quantitative equities team.

The rising demand for sustainable investment solutions poses challenges for asset managers, who must increasingly take into account environmental, social and governance (ESG) aspects, without sacrificing returns. In this context, the ability to combine some of the highest sustainability standards with efficient quantitative, or factor-based investment approaches has become one of the key ways asset managers can differentiate themselves from the competition.

In fact, over the past few years, a growing number of research papers have been published on the interplay of factor investing and sustainability. Both academics and product providers have dived into this field of research, as awareness about the potential benefits of combining the two investment approaches increased among the investment community.

a quantitative portfolio but we have identified three main approaches. The first one is to address ESG and financial objectives independently. This means allocating a certain percentage of the portfolio to a factor-based strategy, in order to meet the desired financial objectives, and the rest to an ESGoriented strategy, to enhance the

‘A smarter way to ensure return and sustainability objectives are met, is to maximize factor tilts and sustainability criteria simultaneously’

portfolio’s overall sustainability profile.

However, this kind of approach may not be optimal, as integrating sustainability will frequently imply giving up on factor exposures and vice versa.

Another approach is to start by screening the market portfolio according to the desired sustainability criteria and apply a factor-based strategy to the remaining universe. While this method may produce better results, it is also far from ideal. This approach is about avoiding investments in companies that score low in terms of the sustainability criteria, such as an ESG score, or a carbon footprint. But it does not focus on the end result: maximizing both returns and the portfolio’s sustainability profile.

A smarter way to ensure return and sustainability objectives are met, is to maximize factor tilts and sustainability criteria simultaneously. This can be achieved by treating sustainability as a theme in the quantitative stock selection

Various approaches to sustainability integration There are many ways to integrate sustainability in

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QUANT INVESTING

Figure 1 shows a stylized illustration of the tradeoff investors will be faced with, when trying to meet both return and sustainability objectives. The grey line represents the different options available for investors applying the first approach: addressing ESG and financial objectives independently. Meanwhile, the blue line shows the possibilities for those who decide to maximize factor tilts and sustainability criteria simultaneously.

The relationship between factor tilts and sustainability represented by the blue curve can be demonstrated by running backtests on data based on existing Robeco strategies. This is illustrated in Figure 2. It shows a set of portfolios, each with a different factor/ESG profile, based on Robeco’s QI Global Developed Sustainable Enhanced Index strategy.

Figure 2 | Efficient frontier of portfolios with different factor/sustainability profiles Factor exposure

model, or as an additional criterion in the portfolio construction process. Robeco’s in-house research and years of experience have shown it is possible to maintain the required factor tilts and ensure that financial objectives are met, while also taking into account ESG aspects, that enable us to satisfy the desired sustainability standards.

Weight of sustainability in the stock selection model Weight of alpha factors in the stock selection model Sustainability Source: Robeco. Simulated information ratio plotted versus the weighted sustainability score of the portfolio for different combinations of the model factors (smoothed). We compare models mainly based on the value, quality and momentum factors with models mainly based on sustainability scores.

Robeco’s QI Global Developed Sustainable Enhanced Index strategy integrates ESG by means of the tilt towards companies with enhanced sustainability profiles, compared to the average derived from the reference index. Moreover, the portfolio’s footprint for greenhouse gas emissions, waste generation, water consumption and energy use has been reduced by at least 20%. An extensive values-based exclusion list is also applied. This illustrates how improved sustainability profiles can be achieved while simultaneously capturing most of the factor-based exposure provided by our quantitative stock selection model.

Factor exposure

Figure 1 | Stylized illustration of tradeoff between factor tilts and sustainability Multi-factor equity strategy

Robeco Sustainable Enhanced Indexing

Sustainability equity strategy

Sustainability Source: Robeco

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Building on RobecoSAM’s know-how Robeco applies three different approaches to sustainability investing in its quantitative equity strategies. Our basic approach ensures that the ESG profile of the portfolio exceeds that of the benchmark or the reference index.

Our enhanced approach applies three dimensions of sustainability integration in the portfolio construction process: exclusions, environmental footprint reduction and tilt towards companies with an enhanced sustainability profile. Finally, our advanced approach determines the attractiveness of stocks according to their scores on both sustainability and factor aspects, while still maintaining the aforementioned portfolio construction criteria.

To measure sustainability scores, we use RobecoSAM’s Corporate Sustainability Assessment (CSA). The CSA consists of an annual analysis of financially material sustainability information from approximately 4,500 listed companies.

Following the first CSA conducted in 1999, Robeco’s sister company RobecoSAM compiled one of the world’s most comprehensive databases on corporate sustainability.

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Short maturity = low risk, less volatility Increasing volatility and rising interest rates – not really the cocktail of choice for the risk-averse credit investor. But how can investors maintain their market exposure while enjoying an acceptable risk-reward profile without too much volatility? According to Reinout Schapers, portfolio manager in Robeco’s Global Credits team, short-maturity strategies offer an attractive solution as they deliver high risk-adjusted returns and are less volatile, as well as offering perhaps less obvious diversification and liquidity benefits.

Speed read

Credits

• Attractive segment in a volatile and rising interest rate environment • Short maturity offers advantages to tactical and strategic investors • More liquidity, less turnover, lower transaction costs

Market fundamentals remain positive and the global economy looks strong, but risky assets are expensive across the board – from investment grade to high yield, and from US Treasuries to emerging market debt. But it’s not all doom and gloom. This scenario will cause higher dispersion in our universe and this offers opportunities.

capitalize on the low-risk anomaly. This phenomenon is well known in equities, but there is convincing evidence that it also applies to credits, where low-risk bonds produce higher riskadjusted returns. Figure 1 shows that short-dated credits have a higher Sharpe ratio than longer-dated ones across the various rating categories.

Investors have a tendency to prefer and thus overpay for high-risk bonds. This causes a low-risk anomaly where low-risk securities empirically have a superior risk-return profile to highrisk ones. Benchmarked investing means portfolio managers

Short maturity bonds, for example, are a smart way to outperform from both a strategic and tactical standpoint in this kind of market environment. US 5-year bond yields have moved up by 100 bps in the last six months and the broader global investment grade credit market (Bloomberg Barclays Global Aggregate

‘Investors have a tendency to prefer high-risk bonds’ Corporate Index) has fallen 2.0%, while the total return for short-dated global investment grade credits (Bloomberg Barclays Global Aggregate Corporate 1-5 years Index) has only declined by 0.90%.

Low risk, less volatility One strategic argument for short maturity bonds is that they enable investors to

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Credits

are often incentivized to outperform a specified benchmark index and longermaturity bonds often have risk profiles that are more closely aligned with market benchmarks than bonds that are nearing maturity.

‘Short maturity – a smart approach in the current market environment’

This is further amplified by a ‘hot money’ effect: money flows into asset classes that perform well. This acts as a further incentive for portfolio managers to buy highrisk credits; for example, because they tend to outperform in bull markets. Investors in shorter maturity credits also benefit from the roll down effect – the increase in the bond’s price as it approaches maturity and the spread declines.

interest rate environment, short-maturity bonds can offer an intermediate step into riskier asset classes. Investors may consider looking beyond domestic markets towards Asia, high yield and emerging markets, where short-maturity products can offer an attractive risk-return profile.

4. Investors who are looking for an alternative to holding longer-term cash positions and want to make their cash ‘work’ for them. A short-maturity strategy provides enhanced returns over cash, while still allowing sufficient flexibility and maintaining a lower exposure to risk.

Diversification and liquidity benefits Which investors may be interested in the strategy and why?

Adding a short-maturity strategy to a traditional fixed income portfolio can offer diversification benefits, as the returns are less correlated with traditional bond markets. Furthermore, shortdated credits are characterized by a more favorable liquidity profile than their longer-dated peers. This attractive liquidity profile, which stems from regular cash flows from maturing bonds, coupon income and the fact that short-dated credits are more often held until maturity, enables a short-maturity strategy to minimize turnover and so reduce transaction costs.

1. Investors who expect interest rates to continue their upward path may choose a short maturity approach as it enables them to reduce their portfolio’s sensitivity to rising yields (duration risk). Short-dated credits have a lower duration and a lower spread duration and are less sensitive to rising yields and widening credit spreads. They even have the potential to benefit from rising yields, as the bonds mature relatively quickly and the principal can then be reinvested at higher rates.

This is an especially attractive feature in the current challenging liquidity environment. As with any approach, there are times when a short maturity strategy will be less advantageous. In a scenario of falling interest rates and rallying credit markets, for example, its more defensive nature means that investors will give up some degree of performance as it offers less upside potential at such times.

2. Investors who wish to mitigate the impact of market volatility may opt for short-maturity investing, because it offers limited volatility and drawdowns compared with the general credit market. This also makes their returns more predictable.

3. For investors who are looking for yield in the current low Figure 1 | Maturity x rating (USD investment grade 1994-2013) 1.2% BBB

Credit return

1.0% A

0.8% AAA/AA

0.6%

AAA/AA

A

BBB BBB

0.4% AAA/AA

0.2%

A

0.0% 0%

1%

Short maturity

2%

3% 4% 5% Credit return volatility Middle maturity Long maturity

6%

7%

8%

The Robeco Global Credits – Short Maturity strategy invests in short-maturity global corporate and financial bonds. It is managed against the Bloomberg Barclays Global Aggregate Corporate 1-5 years Index. The core of the portfolio is invested in developed investment grade corporate bonds with a maximum maturity of six years, but up to a maximum of one third of the portfolio can also be invested in emerging credits, high yield (mainly BB-rated paper) and securitized credits to enhance returns while controlling the overall risk profile. It may also hold certain callable securities if these have a call date that is less than six years away.

Source: Houweling, Van Vliet, Wang & Beekhuizen, 2015, ‘The Low-Risk Effect in Corporate Bonds’

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SUSTAINABILITY investing

The cost of climate change The battle against global warming is gaining momentum, with more and more investors actively planning how they can mitigate climate-related risks. Robeco’s Active Ownership team has identified the two biggest threats that worry investors the most – the transition risks in moving to a lower-carbon economy, and the costs of extreme weather events – as part of a wider ‘Climate Action’ engagement program with high carbon emitters.

In this edition’s lead sustainability story, two of our engagement specialists outline how they are trying to make a difference.

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Two climate change issues that concern investors the most There are two issues central to combatting climate change that concern investors the most – the transition risks and the costs of freaky weather – Robeco’s Active Ownership team has warned.

Transition risks are related to changing business models as companies progressively decarbonize, moving the investing landscape and potentially leading to stranded assets. And then there are the physical risks from storms and rising sea levels that could cost billions in damage, reparations or higher energy costs.

The Active Ownership team is trying to help

companies adapt through an extensive ‘Climate Action’ engagement program targeted at high carbon emitters that began in earnest this year. Robeco also launched a climate change policy in 2017 to align investment practice with limiting global warming to between 1.5 and 2 degrees Celsius, in line with the 2015 Paris Agreement.

“Transition risks are linked to the implications of climate-related policies requiring the reduction of greenhouse gas emissions and the adoption of clean

stranded if they cannot be burned in order to limit global warming. Those companies that are not prepared for the energy transition will face significant financial challenges as regulations change and energy priorities shift.”

Switching to renewables This energy landscape is already changing, as generating companies switch from coal to less pollutive gas, and as more renewable energy from wind or solar comes onstream, they say. “Coal plants in the US are a case in point for carbon-intensive energy sources which are losing competitiveness against lower-emitting sources.”

“For decades, coal has been the dominant energy source for generating electricity in the US. However, in 2016, natural gas-fired generation surpassed coal generation in the country on an annual basis for the first time. Natural gas emits about half the amount of CO2 per megawatt-hour of electricity than coal, and is therefore considered by many to be a ‘bridge fuel’ that can help in the transition to a low-carbon economy.”

‘Fossil fuels are at most risk of becoming stranded if they cannot be burned in order to limit global warming’ technology,” engagement specialists Cristina Cedillo and Sylvia van Waveren explain. “For example, a tax on carbon would disincentivize an electric utility company from generating energy from coal, and instead encourage energy generation from renewables.”

“This could potentially lead to stranded assets – situations where man-made capital such as coal plants has to be retired prematurely due to direct or indirect climate policies, or to the falling costs of alternative, cleaner technologies.

Fossil fuels are at most risk of becoming

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“Moreover, the share of coal in the US energy mix has also been reduced by the expansion of renewables such as wind and solar. This growth has been driven by state and federal policies supporting greater investment in renewable energy technologies and the adoption of them.”

Extreme weather costs Meanwhile, global warming is causing

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sea levels to rise due to melting ice, and is dramatically changing atmospheric patterns. “Physical risks are linked to extreme weather events such as floods, droughts or hurricanes,” the specialists say. “Although they can be hard to predict as global weather patterns become more unstable, these risks can also have a significant financial impact.”

“The costs of California’s drought between 2012 and 2016 raised electricity costs by USD 2 billion. Electric utilities saw a steep reduction in their low-cost hydroelectric power generation, some of them by as much as half. As a result, energy demand had to be compensated with other, more costly sources of fuel. Some companies reported replacement costs of as much as

‘There is a growing sense of urgency to understand how investee companies will be impacted by climate change’ USD 200 million in a single year.”

Fortunately, asset managers are aware of the risks and taking the appropriate action to mitigate them, Cedillo and Van Waveren say. “The financial industry is becoming increasingly aware of climaterelated risks. There is a growing sense of urgency to understand how investee companies, and the economy in general, will be impacted by climate change, and to what extent they are seizing emerging

opportunities.”

“The recommendations of the Task-Force Climaterelated Financial Disclosures (TCFD) issued in the summer of 2017 are expected to contribute to this. The TCFD’s voluntary disclosure framework recommends that financial and non-financial organizations provide climate-related financial disclosures in their annual financial filings, including scenario analyses that assess the business impacts of climate risks. Robeco supports this initiative, as we believe that such disclosures will help us make betterinformed decisions on the climate risks and opportunities of our investments.”

Culture is key to risk levels at banks Understanding a bank’s culture is key to finding out how risky it is, say Robeco’s engagement specialists, as they put the issue at the heart of a new three-year risk assessment program.

The banking industry has lurched from one crisis to another in the past decade, from the global financial crisis and bank bailouts of 2008, to traders manipulating the LIBOR interest rate and the PPI loan insurance scandal which has cost the industry billions.

To get a better understanding of the risk profile of banks, engagement specialists Cristina Cedillo and Michiel van Esch conducted an elaborate research project into some of the most material governance issues that banks face.

The results identified some key areas for engagement over the next three years in a program entitled ‘Culture and Risk Governance in the Financial Sector’.

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“We believe that understanding the culture of an organization is of great importance to understanding the implementation of its risk management systems and overall strategy,” say Cedillo and Van Esch in the Robeco Active Ownership Report Q1 2018.

“Peter Drucker, the business consultant who is often called ‘the founder of modern management’, once said that ‘culture eats strategy for breakfast’. While this may be true, the problem with organizational culture is that it is difficult for an outsider such as an investor to assess.”

Looking below the surface The engagement program aims to grasp how banks are setting their risk tolerances, implementing compliance and

risk management systems, and managing their culture. “None of these objectives are easy to achieve,” the specialists warn.

“Even if banks report a risk appetite framework and provide statements on their risk appetite, investors often do not get to know how risk statements are translated into practice.”

“We believe that the quality of a company’s risk management framework and the nature of their culture cannot be captured by only studying annual reports, risk statements and other company reports.”

As a first step to gain a better understanding, a questionnaire was drafted and sent to ten retail banks in Europe and the US. One of the questions specifically related to the bonus pools that were directly blamed for causing the financial crisis, as bankers engaged

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in risky financial bets in order to boost profits and therefore their own salaries.

Flawed bonus plans “Incentive structures are used in many forms by corporate organizations: most of the time these aim to motivate people to chase specific targets, or to trigger desired behaviors,” say Cedillo and Van Esch. “If such structures are designed well, executives and employees might be motivated to keep improving performance and to act in the interest of all relevant stakeholders. Many plans, however, have significant flaws, and can trigger the opposite effect. Gaming and bonus blindness are often issues that create the negative side effects of financial incentives in remuneration plans.”

“Likewise, executive stock plans are intended to align management incentives with the interest of their shareholders. Yet these

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plans do not always achieve that goal. Even if provisions are in place to prevent management from benefiting from negative stock performance, management might still gain more from some specific stock plans by increasing stock volatility. In these cases, management may still have a very different risk appetite from most investors.”

The specialists say a textbook example of where bonus schemes go wrong was seen at the US bank Wells Fargo, where employees created millions of checking and savings accounts and thousands of credits cards that were never authorized by clients. One of the key driving factors was the sales-driven incentive structures

‘Investors often do not get to know how risk statements are translated into practice’

which rewarded employees for creating these new accounts.

Grasping risk tolerances As a result of all these misdeeds, banks now face more regulation than ever, though some risks are measurable and some are not. “For investors, it is often unclear how several risks are measured and managed in practice,” the specialists say. “In our engagement, we will try to get a better grasp of how management sets risk tolerances, and how it measures, monitors and aggregates all relevant risks.”

“On the one hand, banks face a broad range of financial risks, including market, solvency, liquidity and credit risk. For many of these risks, measures are available that allow banks to set tolerances and report on and monitor the situation throughout the organization.”

“On the other hand, banks also face non-financial risks, which often include

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those relating to conduct, operations and crime. These risks are often harder to quantify and monitor. Still, we have recently seen that non-financial risks can be very material. So, we believe that in order to manage non-financial risks, an effective governance system and a strong risk culture are necessary.”

‘Management may still have a very different risk appetite from most investors’

Codes of conduct

are becoming increasingly important, but ultimately it still boils down to culture, says Taeke Wiersma, co-head of credit research at Robeco.

From the investment side, Robeco uses a number of measures to try to establish risk when buying bank bonds. These include assessments by RobecoSAM, along with standard metrics such as loan growth, remuneration packages and capital levels.

Codes of conduct and whistleblower programs that can expose a bank’s ability to discover unethical or criminal activity

“Many of the conduct issues in the banking sector such as mis-selling can be attributed to a culture of chasing fees and putting short-term personal gains above longerterm client interests,” he says. “Ultimately this always backfires on the banks.

The result is large fines and very costly settlements to make up for client losses.”

“This severely impacts the fundamental credit quality of the banks in terms of lower profits, and the ability to do business through the risk of license withdrawal, clients walking away, or other problems.”

“However, having the right procedures and policies in place is only part of the equation. To really understand the extent to which this is fully embedded throughout the entire organization, a regular dialogue with the bank is essential. The engagement project will therefore bring a lot of additional insights.”

Quantifying a company’s contribution to the SDGs Many investors want to embrace the United Nations’ Sustainability Development Goals (SDGs) but don’t know where to start. RobecoSAM has developed a system to analyze how companies contribute to them, and the results are used by Robeco’s Credit team for their investment strategies.

The 17 goals address a broad range of objectives, including clean water and sanitation for all, food security, gender equality, and access to affordable and sustainable energy. Launched in 2015, the UN hopes to achieve these objectives by 2030 and invites investors to play a part through their investment decisions.

What was lacking was a scoring system to show what contribution a company actually makes – or, conversely, if it works against achieving these goals. It is easy

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to imagine that, for example, a solar power company has a positive impact on the goals, and an oil company a negative one. The challenge, however, is in properly evaluating and quantifying the contribution of all companies in an investment universe when building a targeted SDG strategy. This requires a framework with clear, objective and consistent rules.

Proprietary framework RobecoSAM has become one of the first asset managers to meet this challenge by developing a proprietary SDG framework

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that is based on a three-step approach.

The first step involves a simple question: what does the company actually produce?

Its products and services can be linked to the SDGs that are relevant to the company.

Companies are assessed on an extensive set of rules and Key Performance Indicators that are summarized in a guidebook. This guidebook states whether the contribution of these products and services is positive, neutral or negative.

For the telecoms sector, for example, the starting point is positive, since telecommunications are an essential part of the infrastructure needed in a safe and connected society. Farmers can use mobile phones to check market prices before selling to middlemen, and market traders can accept payments electronically.

In this way, the telecoms sector can contribute to the development of a proper infrastructure (SDG 9), the promotion of economic growth (SDG 8) and ultimately

to the eradication of poverty (SDG 1).

RobecoSAM’s analysts then determine the extent of the contribution, which can be high, medium or low. Subsequently, they dig deeper by looking at the individual companies within the sector and how they each score on a set of KPIs. If, for example, more than 25% of a telecom company’s sales take place in emerging markets – which have most to gain from a good telecom network – then the impact of its operations may be upgraded from ‘positive-low’ to ‘positive-medium’.

Assessing behavior SDGs are also about how companies

‘Telecommunications are an essential part of the infrastructure needed in a safe and connected society’

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operate. The questions asked may include whether they are polluting, respect labor rights or are engaged in corruption. So, in the second step, the credit analysts check if the way the firm operates is compatible with the SDGs. If necessary, the SDG rating can be adjusted upwards for positive aspects of its business or downwards for negative parts.

In the third and final step, the analysts check whether the company concerned has been involved in controversies such as oil spills, fraud or bribery. This step can also lead to adjustments in the rating. Companies that commit serious and structural breaches of the UN Global Compact are excluded.

450 companies studied In their work so far, Robeco’s credit analysts and RobecoSAM’s sustainability analysts have conducted a mapping exercise of 450 companies. Some 62% of the companies, or almost two in three, have been assessed as making a positive contribution. These include grid

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operators, healthcare companies, banks that provide finance in emerging markets, and utilities that have a relatively small share of coal, nuclear energy and oil in their energy generation mix.

At the other end of the scale, 26% of the companies analyzed were shown to make a negative contribution. These include energy producers with a relatively large part of their business activities in fracking, companies that produce unhealthy food, and car manufacturers

‘Analysts check whether the company concerned has been involved in controversies such as oil spills, fraud or bribery’ with a low share of electric or hybrid models.

include the energy, car manufacturers and food and beverage sectors. While this does narrow the investible universe, the analysts also found more than enough to enable the creation of a well-diversified global credit portfolio of bonds from issuers that have a positive impact on the SDGs.

Broadly, the results so far indicate that sectors with a weaker SDG profile

Information is power?

Making sense of all the SI data They say that ‘information is power’, but is there enough of it available to show whether sustainability investing works? The problem isn’t really in finding data, but in knowing how to process it.

The growth of SI since the 1990s has been mirrored by a growth in the number of data providers and media groups covering the industry. Many specialize in a particular field, broadly operating in three groups: gathering new data for use in investment processes; curating or analyzing existing data that can serve as a searchable database; and broadcasting sustainability news and organizing events to spread the word further.

Many specialized providers now sell ESG information to investors to use in their decision making. Others offer proxy voting services and keep records of investor voting activity at shareholder meetings, which assists with engagement and governance work. Some services now even use artificial intelligence to analyze

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unstructured or random data and spot trends in them.

The growth of all this information has created an industry of its own – one that aims to improve the quality of the data and enable investors to make sense of it all. The Global Reporting Initiative was launched in 1997 to promote the quality of sustainability reporting around the world, and now has more than 600 members. Similarly, the Carbon

Disclosure Project is a not-for-profit group that reports on the environmental impact of companies, cities and countries.

One vexed issue though has been definitions, since SI means different things to different people. The European Commission’s High-Level Expert Group on Sustainable Finance has set out strategic recommendations for creating a system that can “deliver a roadmap for a greener and cleaner economy” across the EU. One of these recommendations is to create a common framework, or ‘taxonomy’, that aims to harmonize all definitions within the SI spectrum.

So, the data is there and the old phrase ‘you just need to know where to look’ doesn’t apply. But interpreting it and knowing what to do with it all still present a challenge.

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Avoiding the retail apocalypse A spate of corporate failures amid new expansion for e-commerce is accelerating the ‘retail apocalypse’, says trends investor Jack Neele.

The demise of retail chains such as Toys “R” Us and Maplin Electronics, combined with planned mergers of large supermarket groups, has advanced fears of the collapse of the traditional high street.

Speed read

Trends

• High-profile collapses and mergers spell doom for the high street • Move to shopping online now includes more categories of goods • Investors should target e-commerce and omni-channel retailers

And the problem looks set to worsen as the e-commerce trend expands into previously untapped categories of goods and services led by food categories, he says. “The online revolution began with consumer electronics, books, CDs and those types of products, but has since spread to clothing, apparel-type goods, and has now started to move towards groceries,” says Neele.

“That’s caused some consolidation in groceries, as we’ve seen with some high-profile merger plans among the supermarket chains, where it’s become more important to gain scale. So, the retail apocalypse has been spreading to more and more categories.”

“And although it is still in the early stages in the grocery business, some of these companies now offer whole meal packages, with the ability to get food in many different ways over the internet. That is now impacting the food retail landscape as well.”

“Demographics are also changing. Younger people who grew up with the internet are much more comfortable with using it for all things, including sharing a car or renting apartments. Older people have more of a hurdle to overcome because they’re used to doing things in a certain way. So as older people are gradually replaced by millennials, you will see the percentage of people opting for internet shopping getting higher, which is fueling the structural trend.”

Targeting e-commerce As an investor, Neele seeks to take advantage of these changes.

“We tend to invest in the companies that are set to benefit from the overall shift to digital, so we target e-commerce retailers and those with scale. We own a lot of the streaming businesses that are so popular with millennials – there are no more video stores and very few music shops, as it has all become digital.”

‘Impulse buying isn’t there when you buy online because there is no immediate gratification’

Less impulse buying One under-appreciated trend is the demise of impulse buying at the checkout, including ‘pester power’ from children, Neele says.

“When you’re in a store you always pass by the chocolates or sweets by the till at the end, and there’s a lot of impulse buying,” he says. “This impulse buying isn’t there when you buy online because there is no immediate gratification from eating your sweets outside the store.”

So, what’s the answer for retailers losing a long-term battle with the internet? Where possible, they should change their business models to join the fray, he says. “Most retailers have anticipated

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the structural change as people switch from physical stores to online, and are now adopting omni-channel models where they can do both. They’ve become better at e-commerce where people can get the same products in the stores or online.”

“We do though like the branded sports goods retailers which have this omni-channel combination of selling through department stores, their own retail outlets and their own online shops. They are also in categories that lend themselves well to omni-presence, as they have big distribution networks, and these are often small products like training shoes that are easy to deliver.”

“And we have a lot of exposure to luxury goods; if someone is buying a USD 5,000 handbag, then they want to buy it in the physical store, because it’s more of an experience. In the past, you could display your wealth by showing off your possessions, but now it’s more about experiences shared on social media. We therefore have exposure to luxury goods and the travel industry, which are more actual experiences than simply buying stuff.”

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Limiting the fallout

‘We have exposure to luxury goods and the travel industry, which are more actual experiences than simply buying stuff’

Neele says that while many high streets are dying, the retail apocalypse isn’t likely to spread to towns or cities that can offer something else. “The demise of retail has been a long-term structural theme and we’ve seen that across many high streets, but places like Amsterdam, Madrid and Milan will all be fine, because they’re big tourist attractions,” he says.

“You simply do not get the traffic any more – there is not enough footfall. You only get people who want to go to the high street specifically to visit a favorite restaurant or something; you don’t get people who just walk around and pop in to a shop. So the problems there are likely to continue.”

“The real problem is in town centers that are not really a tourist or shopping destination in their own right. In the UK for example, prime locations like London will probably be OK, but in smaller cities such as Shrewsbury or Chesterfield, then it’s a lot more difficult.”

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Will it be BRINO – Brexit In Name Only?

On the second anniversary of Britain’s historic decision to leave the European Union, Chief Economist Léon Cornelissen discusses the likely outcomes. Increasingly it looks like the UK will achieve a BRINO – Brexit In Name Only.

Speed read

Opinion

• British government continues to argue over terms • UK looks set to be partly in and partly outside the EU • Parallels with the Norwegian model in the Single Market

The Brexit saga continues to dominate the European agenda, and it’s still looking messy. Two years after the 23 June 2016 referendum result that shocked the world, the UK is struggling to agree terms that will secure its divorce after a troubled 45-year marriage. Issues such as whether the UK should stay in the Single Market prevail, while few anticipated the complexities of the Northern Irish border, let alone what to do with millions of expats.

the free movement of people and continue to contribute to the EU budget. This would not solve two political problems that lay at the heart of the Leave campaign – immigration levels that were perceived as being too high, and the notion that Britain is being ruled by Brussels.

That said, a hard Brexit would not solve all political problems either. It would mean a hard border with customs checkpoints on the Irish border, which contradicts the 1998 Good Friday Agreement that brought peace to Northern Ireland after decades of the Troubles. It is also seen as being economically disastrous, since the UK would be leaving the largest trading bloc in the world, losing frictionless access to a market of more than 500 million people. And it raises the question of what future trading model the UK would then pursue.

Norway led the way Meanwhile, the clock is ticking, with less than a year remaining to reach some sort of settlement before the UK legally exits next year. A two-year transition period seems likely, leading to claims that the UK would become an EU vassal state until as late as March 2021, creating a Brexit In Name Only. But is that such a bad thing? The UK would essentially become like Norway – lying outside the EU but effectively in it – which means BRINO might also come to mean Britain Is the New Norway.

Soft or hard-boiled?

‘The referendum result simply called for Britain to leave; it did not say how, or on what terms’

Leaving the European Union is proving to be the most difficult thing that the UK has done in peacetime, as the ruling Conservative Party continues to bicker over what it really wants. The main problem is that the referendum result simply called for Britain to leave; it did not say how, or on what terms.

At the heart of the issue is whether the UK should pursue a ‘soft Brexit’, in which it remains in the Single Market, or a ‘hard Brexit’, in which it leaves the bloc entirely.

A soft Brexit would be the most economically beneficial solution for the UK and solve a whole host of issues, including the complex problem of the border between Northern Ireland and the Republic of Ireland, since the borderless Single Market would remain in place. However, it would mean the UK must continue to accept

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So, a BRINO encompassing a soft Brexit seems to be the obvious stop-gap solution. A good example of a country that has willingly accepted this model is Norway. The Nordic nation is not a member of the EU but does belong to the Single Market. This is for democratic reasons as well as economic expediency because, like Britain, Norway has long been split over EU membership.

A 1972 referendum rejected joining the EU by 53.5% to 46.5%, and a second try a generation later in 1994 produced a similar response, with a small margin of 52.2% against and 47.8% in favor of membership. The principle reasons against were the perception of loss of sovereignty, and the fact that unlike most other EU nations, Norway is a major oil producer and relies heavily on forestry and fishing.

In that way, the narrow margins resembled the 51.9% versus 48.1% margins on the UK referendum. However, the Norwegian follow-on approach differed greatly from the all-or-nothing ‘Brexit means Brexit’ approach being adopted by Britain. Acutely aware that the country was divided on the issue, the Norwegian government adopted a more conciliatory approach to try to please both the ‘yes’ and ‘no’ camps. Eventually it settled on

Robeco QUARTERLY • #8 / JUNE 2018

‘A BRINO encompassing a soft Brexit seems to be the obvious stop-gap solution’

what became BRINO but the other way around – staying outside the EU and its Customs Union but joining the Single Market. That meant Norway had to accept freedom of movement, a loss of sovereignty in accepting EU regulations, and make annual contributions to the EU budget. But it retained full control over its oil, forestry and fishing industries.

Changing red lines So, would this work in Britain? The EU’s chief negotiator on Brexit, Michel Barnier, said in April 2018 that “the only frictionless relation with the UK would be a Norway Plus” model. “Norway Plus means… they have to change their red lines.” Those red lines all relate to sovereignty, so it remains doubtful whether a Norwegian-style deal would be acceptable to the ‘Brexit means

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Brexit’ mantra. The Jacques Delors Institute, named after the former president of the European Commission who presided over the creation of the European Union in 1992, concurred that a Norwegian solution would be economically but not politically expedient.

“It is not unlikely that the Norway-style transition phase will stay in place for a long time,” the group said in a blog post in March 2018.

“This BRINO scenario would be economically rational for the UK, but obviously raise political questions among the Brexiteers.”

And so the saga is likely to continue to dominate the agenda for some time to come. Investors should not expect a quick or easy solution.

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Watch your Term Premium It crops up as a topic of discussion every now and again: the ‘term premium’. But what is it exactly? Simply put, the term premium is the bonus that investors traditionally received for the risk of owning longer-dated bonds – the duration risk. And yes, that’s ‘received’, past tense.

In the last decade of global central bank quantitative easing, bond term premiums have been compressed as never before, pushing sovereign yields down worldwide. Analyst and member of the Global Macro team, Bronka Rzepkowski explains why.

Speed read

Research

• Term premiums have evaporated in the easy money environment • To what extent will remuneration for risk improve as QT picks up pace?

• Global scarcity of safe assets will continue to play a major role

A 10-year bond yield can basically be broken down into two main components: the average future short-term interest rate expected over a 10-year horizon and a term premium. The first is largely dependent on local monetary policy expectations, while the second appears to be more affected by global developments. As unconventional monetary policies are now set to normalize – starting in the US – what will be the impact on the term premiums and will this produce a synchronized global upswing in bond yields?

One obvious culprit is the global shortage of safe assets – initiated by the rapid and substantial increase in central bank foreign exchange reserves since 2000 and exacerbated by quantitative easing.

This trend is confirmed by the fact that, prior to QE, common global factors accounted for about 69% of the changes in individual term premiums, a percentage which jumped to 83% at the end of February this year. Because central banks such as the ECB and the Bank of Japan have bought substantial amounts of sovereign bonds in their domestic markets, international bond investors have been forced to shift their portfolios to regions where bonds are less scarce or into riskier assets.

This portfolio rebalancing has been responsible for the comovements in term premiums in developed markets.

‘Synchronicity of term premiums suggests global forces are at work’

Global shortage of safe assets While it may seem logical to assume that long-term yields are mainly driven by local monetary policy, the term premium component can in fact sometimes exert a much stronger effect on yield dynamics. The synchronicity of US, German and Japanese term premiums in recent years has been striking and suggests that common global forces are present and affecting these markets.

So, although the decline in the US term premium in 2017 and its move into negative territory may seem counter-intuitive given that the Fed had already started to shrink its balance sheet, it illustrates the extent to which global factors affect individual term premiums.

There is nothing to suggest that this situation will change in the immediate future. Local differences in terms of the scarcity of domestic bonds may well affect the pace of normalization, but are unlikely to become a decisive factor.

Figure 1 | 10-year term premium 4.5 3.5 2.5 1.5 0.5

-1.5

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-0.5

US

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GE

The term premium a year from now?

Interest rates in both the US and Germany will probably rise to a certain extent. But don’t expect rising term premiums to be a major contributory factor in this process.

In the current phase of the cycle and with official bond holdings still at high levels, any such rise in yields is more likely to stem from a re-pricing of central bank rates than from a jump in the term premium. For the foreseeable future, the risk associated with holding long-dated paper will continue to be rather poorly rewarded.

JP

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LAST BUT NOT LEAST

Countering the cyberthreat An increasing number of cyberattacks have been grabbing our attention in the headlines. In response, governments, companies and individuals are stepping up spending on cybersecurity dramatically. Tighter data privacy regulation, a rapidly expanding attack surface and a growing army of resourceful hackers are bound to drive spending up even further.

How can investors profit from this dynamic growth market?

Small challenger companies are on top of the game, but are not always listed or liquid. The larger incumbents offer stability and profitability, but may lack the innovative power to grow at attractive rates. It’s easy to get lost in the complex world of cybersecurity. Trend analysts Vera Krückel and Steef Bergakker show us the way.

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Cybersecurity: turning threats into opportunities Vera Krückel and Steef Bergakker – Robeco Trends Investing

The incidence and severity of cyberattacks have risen dramatically, triggering a large increase in cybersecurity spending. Investors can profit from this dynamic growth market with a core-satellite strategy, consisting of established players with durable competitive advantages on the one hand, and a basket of young, techsavvy challengers, on the other.

cybercrime tends to be underreported. The affected companies are understandably reluctant to disclose such incidents, which might damage their reputation and, consequently, hurt their commercial operations.

Moreover, the reported commercial damage is likely to be significantly understated, as well. A study by Deloitte suggests that the indirect and less tangible costs of cyberattacks, such as the loss of intellectual property or increases in insurance premiums, may well account for the bulk of the total cost.

Whether it be interference in elections, the usage of ransomware or the wholesale loss of sensitive client data, the public-at-large is increasingly faced with something that cyberexperts have been seriously concerned about for a long time: cybercrime. In that respect, the attempts by Russian hackers to influence the 2016 American presidential elections probably appealed the most to the general public’s imagination. The range of threats is diverse and dynamic: from the widely varying and hugely costly ransomware attacks like WannaCry and NotPetya to the shocking revelation that Equifax, one of the largest credit bureaus in the US, had experienced a data breach that exposed the personal information of a whopping 143 million people. Suddenly, cybercrime seemed to be all over the news.

Spending spree The growing number of cyberattacks has prompted governments, private enterprises and individuals to go on a veritable spending spree to counter the cyberthreat. In the US alone, spending on cybersecurity has grown by roughly 12% per year since 2010.

While the size of the global market is difficult to estimate due to the proliferation of new products and services offered by hundreds of new market entrants, reputable market forecasters Gartner and IDC both put the current size at around USD 80 to 90 billion. Gartner has predicted worldwide security spending will increase by 8% in 2018, to reach a total of USD 96 billion by the end of the year, while IDC forecasts that spending will reach USD 120 billion by 2021. While

Figure 1 vividly shows the recent rise in data breaches in the US. Not surprisingly, the expense of cybercrime has gone through the roof: based on reports received by IC3, the Internet Complaint Center, costs exploded from USD 17.8 million to 1,330 million between 2001 and 2016. It is well known that

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Data breaches and records exposed in millions

The recent rapidly growing public concern with cybersecurity is backed up by a host of worrisome numbers: • Research from cybersecurity firm Symantec shows that ransomware attacks worldwide increased by 36% in 2017.

• Symantec also estimates that one in 123 emails is infected by malware.

Figure 1 | Data breaches are on the rise • In 2017, 6.5% of cyber-active people 2,000 were victims of identity fraud with fraudsters stealing USD 16 billion 1,500 according to Javelin Strategy & Research.

1,579

1,093

1,000 656 500 157 0

321 19.1

2005 2006 Data breaches

127.7

662 498

446

783 614 419

447

16.2 22.9

17.3

91.98 85.61

2012

2013

222.5 35.7

2007 2008 2009 2010

781

2011

2014

169.07

178.96 36.6

2015

2016

2017

Million records exposed

Source: Identity Theft Resource Center; CyberScout

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the discrepancy between the forecasts already indicates how immature and dynamic the market still is, it seems safe to say that global spending on cybersecurity will likely exceed USD 100 billion in 2019.

‘It seems safe to say that global spending on cybersecurity will likely exceed USD 100 billion in 2019’

Three overarching trends are driving security spending: 1. A dynamic threat landscape 2. Increasing regulatory pressures 3. An expanding attack surface

1. A dynamic threat landscape The sophistication of cyberattacks has been rising steadily over time, while the sophistication required of the attackers has been declining thanks to the increased availability of easy-to-use cyberattack tools. This has forced the cybersecurity community to respond with increasingly sophisticated products to keep the threats at bay.

Cyberattackers and defenders are effectively locked in an arms race, the end of which is nowhere in sight. This arms race is one of the major drivers of the increasing cybersecurity spending.

2. Increasing regulatory pressure In Europe, new regulations will be implemented in 2018 including the General Data Protection Regulation (GDPR) and Network and Information Security (NIS) Directive. GDPR tightens rules on the protection of EU citizens’ personal data and its usage for commercial purposes while the NIS Directive sets cybersecurity standards for operators of essential digital services like search engines, cloud services and online marketplaces. Among other things, it stipulates that companies will be required to report cyberattacks and data leaks within 72 hours or face fines of EUR 20 million or 4% of global revenue, whichever is higher.

The regulations apply to all companies active in Europe, which in practical terms extends the reach of these regulations across the globe.

Obviously, companies are highly motivated to protect themselves against the growing risks of cyberattacks and data loss as these regulations take effect. It is only to be expected that cybersecurity spending will receive a boost as a result of these regulations.

importantly, by the connection of sensors, machines and wearable devices to the Internet. Estimates of a ‘big data bang’ vary, but there is no question that the world’s digital content will explode in the years to come. Cisco estimates more than 50 billion objects will be connected by 2020.

In view of this hugely expanding attack surface, many observers think that current forecasts for cybersecurity spending are too low. For example, Cybersecurity Ventures, a private research and market intelligence outfit, projects annual growth in the cybersecurity market of 12% to 15% through 2021. This would amount to cumulative cybersecurity spending of over USD 1 trillion from 2017 to 2021.

A complex, dynamic market So far, the ‘magic bullet’ has not yet been found and most corporations are resorting to a ‘defense in depth approach’ to cybersecurity. This effectively means putting several layers of defense on top of each other. Many solutions are complementary, but often there is some overlap. Network security − mainly firewalls − is the largest segment, followed by endpoint security, identity and access management and security and vulnerability management. Growth rates, the level of consolidation and differentiation vary widely between the different segments as well as over time.

Overall, we are observing a move away from spending on protection – blocking threats with e.g. firewalls – towards detection and response, i.e. approaches for detecting and responding to the inevitable breaches. Segments such as identity & access management, security and vulnerability management and regulatory advisory and analytics are therefore the flavor of the day and are likely to show above industry level growth rates over the next several years. To stay relevant in the longer term, however, we think whether a solution works seamlessly across on-premise, hybrid and cloud environments and is ‘open’ in the sense that it shares and integrates intelligence with other point solutions, are more important factors.

3. An expanding attack surface

The challenges of the cloud and the Internet of Things

The growth in data generation and data traffic will ultimately drive the growing need for cybersecurity, as cybercriminals have access to an ever-expanding number of human and digital targets. Similarly, increased connectivity is expanding the attack surface, driven by a still rapidly growing number of Internet users and, much more

We see a number of structural trends that are shaping the cybersecurity industry. New technologies such as the hybrid cloud, Internet of Things (IoT) and machine learning (ML) are bringing about tremendous change from the outside − but also internal industry developments such as consolidation or limits to the so-called ‘defense

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Figure 2 | Cumulative economic profit generation in the cybersec industry: volatile and historically dominated by a few players 3,000 2,500

USD thousands

2,000 1,500 1,000 500 0 500 1,000 2006 Check Point Software Sophos Imperva

2007

2008

Verisign Keyw holding Palo Alto

2009

2010

Symantec Mimecast Splunk

2011 Trendmicro SecureWorks Hortonworks

2012

2013 Cyberark Software Proofpoint FireEye

2014

2015 Fortinet ServiceNow

2016

2017

2018e

Qualys Rapid7

Source: HOLT, Robeco

in depth’ approach will leave their marks in the years to come. The era of cloud computing has completely changed the security game. In the olden days, the name of the game was to protect the walls of the castle with a firewall. However, in the distributed architecture of the cloud there simply aren’t any more walls to protect; the boundaries are blurring to say the least.

The IoT will significantly increase the attack surface: an estimated 50 billion devices will be online by 2020, providing hackers with a multitude of new attack points: in each case the device itself can be hacked, or the software or the data in transit can be a vulnerability.

All this comes with potentially dire consequences: just think of what would happen if connected cars, smart grids or smart traffic control were compromised.

Figure 2 shows that economic profit generation in the industry is skewed towards a few players, is highly volatile and that in many cases, economic profit is still negative.

While high market growth is providing a welcome tailwind to all players, competition is fierce and success is not guaranteed – especially not over the longer term. Investing in cybersecurity is tricky: competitive advantages and innovative technologies generally do not last long. Defenders find themselves in a constant battle with a huge number of attackers and have to make sure they stay ahead of new threats. Showing nimbleness and responding quickly to the inevitable eventual breach is key. In a way, the attackers are setting the agenda of defenders, thus lending the industry a certain ad-hoc character.

A core-satellite strategy Investing in cybersecurity What do all these prospects for increased cybersecurity spending and changing internal market dynamics mean for investors?

The bright side is that the fast growth trajectory of cybersecurity spending provides ample opportunities for solution providers to start successful businesses in the land of cybersecurity − making it a dynamic and thriving marketplace with lots of active players.

For listed equity investors, it pays to have exposure to the cybersecurity sector – not only because of the high growth and cash generation stocks offer, but also because investing in cybersecurity effectively provides a hedge in the portfolio against the negative impact of cyberattacks on other holdings. However, with an ever-increasing number of sub-segments and players it is easy to get lost in the world of cybersecurity. Where in the industry is most value generated and how sustainable are any competitive advantages one stands to gain?

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For listed equity investors, there are other complications; small, nimble companies develop innovative next generation solutions best suited for today’s cloud infrastructure and therefore show high growth profiles. But they are not always listed, nor do they always offer sufficient trading liquidity. Not all of them have proven business models and clear paths to profitability.

In addition, in this dynamic and fast-moving industry, today’s winners might be tomorrow’s losers. The larger, more established players, on the other hand, offer the desired stability and profitability, but might lack innovative power and frequently grow at sub-market rates.

In our view, a prudent way to gain exposure to cybersecurity’s most attractive parts is to buy a basket of listed companies in the fastest growing segments of the cybersecurity landscape around a core of established legacy players. The latter offer longer-term sustainable

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competitive advantages and a proven track record of generating economic profit. We term this a ‘core-satellite’ approach. We think there are opposing forces at work, which in a way keep each other in check and will ensure that while the big, established platforms get bigger, there will always be some room left for small innovative entrants into the industry.

‘It is in investors’ best interests to encourage companies to up their cybergame via active engagement’

We think the core of a portfolio should consist of more established players, who we think will ultimately succeed in creating an integral and holistic platform for security. While their growth rates are not always anything to write home about, we like their margin structures and their strong cash flow generation gives them ample strategic options. Importantly, this will allow them to become industry consolidators over time, as they will integrate now separate offerings into a one-stop shop solution for security. In this way, they will generate substantial value for their customers and create a moat around their businesses.

While some incumbents are fast followers and capable of integrating new functionalities into their platform offerings, the real innovation in the industry generally comes from small players or completely new entrants. Capable of reacting with agility to the drastic changes the cloud has brought about in the IT architecture, these legacy-free new entrants attract customers with cloud-native solutions. While obviously coming with a higher risk profile, their innovation activity translates into high growth rates, making them attractive and complementary additions to the portfolio.

even the best IT infrastructure is of limited value.

Humans often remain the weakest link

No matter how much companies spend on technical cybersecurity solutions, in the end, success hinges on the judicious and disciplined implementation of cybersecurity policies. In most cyberincidents, negligent or risky behavior, disregard for or ignorance of procedures and sloppy implementation of security policies by company employees lie at the root of the problem. People are the weakest link in any organization’s cybersecurity armor. The recent Equifax breach is a poignant example of this. Well before the breach happened, the company had already been informed about the technical fix for the weakness that was eventually exploited.

Equifax needed to implement a tool called Apache Struts, yet it failed to complete implementation in a timely manner. There would not have been a problem if the right processes had been in place and followed diligently.

We are not claiming that this is always an easy task; the large number of false positives is troublesome: due to their sheer numbers, shockingly, a mere 4% of alerts are actually investigated.

As a side note, we think this is precisely how an integrated platform would add value: by bringing the number of alerts down to include only the relevant threats.

While there is a lot of opportunity to invest in attractive cybersecurity segments, there is a flip side of the coin as well: spending on cybersecurity is a fast-growing cost item for the vast majority of businesses, a clear negative. For the moment however, this is unlikely to impact profit margins too severely. At less than 5% of total IT spending, for most companies, the cost of protecting against cyber insecurity can still be absorbed relatively easily.

Nevertheless, a lot, therefore, depends on an organization’s culture, explicit policies and agility in developing resilience to cyberthreats. It is rapidly becoming an important part of an organization’s governance profile. To ensure that companies have the right culture and policies in place, investors have to be vigilant that companies are following procedures, training their workforce and keeping up with the latest developments. Active engagement on the topic of cybersecurity by investors can play a vital part in fostering the right culture to keep cybersecurity risks to a minimum.

What is less predictable and potentially much more devastating is of course the cost associated with a successful breach – increasingly reflected in sharp declines in share prices, as was the case after the Equifax breach. It is therefore in investors’ best interests to encourage companies to up their cybergame via active engagement. Importantly, on top of the technological factors, this investor engagement should comprise behavioral aspects with a focus on internal policies and controls. Without the right people,

Robeco is starting an extensive engagement trajectory on cybersecurity with a number of selected holdings. We are working together with industry experts to assess the cyber-resilience of an organization based on factors such as IT structures, protocols and controls, but also an organization’s cyberstrategy and culture. In addition, Robeco will increasingly include its assessment of cyberresilience in its sustainability analysis of investment candidates and portfolio holdings.

Active engagement on cybersecurity is a must

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Joop Huij

‘Integrating sustainability has become mainstream for factor investing’ Interview

Factor investing has gained considerable traction over the past couple of years, particularly in the equity space. As a pioneer in this field, Robeco has experienced an acceleration in terms of investment flows, driven by various elements, including several significant mandate wins. Joop Huij, Head of Factor Investing Equities and Factor Index Research, explains some of the major trends in the market.

Factor investing no longer seems to be considered as exotic, or an investment niche. Have there been any notable changes in how investors perceive this kind of approach?

“That’s right. Factor investing is no longer considered a niche reserved only for large and sophisticated investors. And that’s actually a major shift. Whereas we used to talk almost exclusively to these big institutions, we are now seeing some growth in the number of midsized asset owners that are adopting factor investing as well.”

When you say you have seen growing interest from mid-sized investors, is it because asset managers used to talk exclusively to large institutions and are now addressing smaller investors as well? Or has there really been an increase in popularity? In other words, is it down to asset managers or investors?

“Mostly investors, I think. Many leading institutional investors have been considering and implementing factor-based strategies for several years now. But the scientific foundations of factor investing can be complicated to assimilate and require significant groundwork.”

“Smaller mid-sized players don’t necessarily have the resources to carry out this work. They tend to be more consultant-driven.

And in recent years we have seen investment consultants across the board eagerly embracing factor investing. So, it doesn’t really

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come as a surprise that their clients – the mid-sized investors – are now adopting this strategy too.”

Are these mid-sized newcomers adopting factor investing in the same way as larger investors have?

“Well, not necessarily. In fact, another phenomenon we’ve noticed is that while investors increasingly want to incorporate factor investing in their portfolios, they’re not always interested in the more traditional active strategies. Our conversations with clients reveal that implementing factor investing through indexbased products is becoming extremely popular.”

“This has actually been confirmed by numerous studies. Roughly speaking, we can say that the early adopters of factor investing tended to be investors disappointed by their fundamental active managers and looking for factor-based – but still active – alternatives. Nowadays, however, we see an increasing number of investors who have used more market cap-weighted approaches choosing to implement factors using indices, because this is closer to what they are used to.”

What about sustainability? Growing concern about environmental, social and governance (ESG) issues is changing profoundly traditional fundamental investing. Does the same hold true for quantitative management and factor investing in particular?

“Yes, indeed. We’ve seen a significant change in how investors

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view sustainability aspects. A few years ago, we started seeing interest in ESG considerations among investors. Robeco actually started explicitly factoring ESG criteria into its quantitative equity strategies as early as 2010. But investors have now become much more demanding, especially with regard to carbon emissions.”

“Robeco recently won a EUR 3 billion bespoke multi-factor equity mandate, which illustrates this well. A lot of time was spent fine-tuning the strategy and there was a strong emphasis on sustainability aspects. An important element was the introduction of a carbon benchmark, which enables our client to manage and reduce the overall carbon footprint of its portfolio.”

“And this new mandate is far from an isolated case. Earlier this year, for example, another pension fund selected Robeco to build a multi-factor equity index with integrated ESG components, to manage over EUR 1 billion. So, although we have been talking about ESG and attracting investors’ attention for some years now, integrating sustainability now seems to have become mainstream for factor investing.”

In terms of factor-specific exposures, have you seen any recent changes in the way investors allocate to individual factors, such as value, momentum or low volatility?

“One of the most important trends we’ve seen in this area in recent years has been the rise of multi-factor strategies. Initially, investors tended to allocate to one preferred factor, such as value or low volatility. But they are now increasingly demanding solutions that provide exposure to multiple premiums. This enables them to reduce stress in years when one particular factor delivers belowaverage performance.”

‘We are now seeing some growth in the number of midsized asset owners that are adopting factor investing as well’

“Inflows seen over the past few months have confirmed this rise in multi-factor allocation. Having said that, the value factor has also seen an unexpected rise in popularity. I think this has to do with how poorly this factor has performed over the past few years.

Some investors have been disappointed and are now looking for more sophisticated value strategies as alternatives to generic value strategies.”

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“Also, some investors have realized that, after several years of lagging performance of the value factor, their portfolio was underexposed to this particular factor. This explains why many of them decided to make an explicit allocation to this factor over the past 12 months.”

“At the same time, we’ve seen a growing demand for sustainable value. Generic value strategies tend to be overexposed to firms with high CO2 emissions, such as oil companies and energy companies. To address this, Robeco decided to launch a sustainable value strategy.”

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Column

All about the euro And then, suddenly, it was all about the euro. During the Italian general election campaign, the euro played a subordinate role. Populist parties had toned down their rhetoric, presumably because of the lack of success of the French Front National on this theme during France’s presidential elections. The Five Star Movement called their earlier suggestion of holding a referendum on the euro only a measure of last resort. The Lega declared it only wanted to prepare for a collapse of the euro, rather than to trigger it. The center-right Forza Italia again toyed with the idea of introducing a (probably illegal) parallel currency but was against a eurozone departure. Apart from developments in France, this apparent moderation was also logical as the Italian economy strengthened and growth became less of a political priority.

There are of course huge differences between the two large populist parties in Italy supporting the government, but they have easily found common ground in agreeing on an irresponsible budget based on the proposal of a low flat tax rate and the introduction of a basic income. Italy’s budget deficit could easily rise to above 5% GDP next year. This would put Italy on a collision course with the other EU member states.

The Eurosceptic Savona, who they initially proposed as minister of finance, was rejected by the Italian President, who feared that Italy would sleepwalk out of the euro, and probably rightfully so.

Someone less obviously Eurosceptic has taken office, with Savona ironically now serving as minister of European affairs. Will it change much? New elections have been averted, at least for the time being, which could have easily brought about a de facto referendum on the euro.

There is no painless exit from the euro. A Quitaly would drive the Italian economy into a deep recession and destroy the financial system and domestic savings. It is unlikely that an Italian government will ever get a mandate for this or that it is in the interest of both of the populist parties.

The European summit to take place on 28 and 29 June in Brussels will give European leaders a chance to make some meaningful gestures. So far, the expectations have been very low as the weakened German Chancellor has been reluctant to support initiatives by French President Macron to strengthen euro architecture. Completion of the banking union looks impossible other than as a shared – but as yet unattainable – ideal.

The Italian crisis could help to focus minds and kick-start European leaders out of their lethargy, probably also enhanced by the favorable economic tide. As an higher EU civil servant once quipped: “When the sun shines, you do not want to repair the roof. You want to go to the beach!”

Steps in the wrong direction are also possible. Recently, the former president of the Ifo Institute in Munich, Hans-Werner Sinn, mischievously suggested that the Bundesbank should cap Italian liabilities (currently around EUR 425 billion) within Target2 (the Eurozone’s gross settlement system), so that they won’t rise any further. Germany’s claims in this system have risen to EUR 900 billion. Of course, following up on Sinn’s suggestion would be a highly unfriendly act, albeit a way of cutting (tremendous) losses, while also bringing Quitaly a step closer. Prepare for a tense end of the month.

Léon Cornelissen, Chief Economist

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Important Information Robeco Institutional Asset Management B.V. has a license as manager of Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) (“Fund(s)”) from The Netherlands Authority for the Financial Markets in Amsterdam. This document is solely intended for professional investors, defined as investors qualifying as professional clients, have requested to be treated as professional clients or are authorized to receive such information under any applicable laws. Robeco Institutional Asset Management B.V and/or its related, affiliated and subsidiary companies, (“Robeco”), will not be liable for any damages arising out of the use of this document. Users of this information who provide investment services in the European Union have their own responsibility to assess whether they are allowed to receive the information in accordance with MiFID II regulations. To the extent this information qualifies as a reasonable and appropriate minor non-monetary benefit under MiFID II, users that provide investment services in the European Union are responsible to comply with applicable recordkeeping and disclosure requirements. The content of this document is based upon sources of information believed to be reliable and comes without warranties of any kind. Without further explanation this document cannot be considered complete. Any opinions, estimates or forecasts may be changed at any time without prior warning. If in doubt, please seek independent advice. It is intended to provide the professional investor with general information on Robeco’s specific capabilities, but has not been prepared by Robeco as investment research and does not constitute an investment recommendation or advice to buy or sell certain securities or investment products and/or to adopt any investment strategy and/or legal, accounting or tax advice. All rights relating to the information in this document are and will remain the property of Robeco. This material may not be copied or used with the public. No part of this document may be reproduced, or published in any form or by any means without Robeco's prior written permission. Investment involves risks. Before investing, please note the initial capital is not guaranteed. Investors should ensure that they fully understand the risk associated with any Robeco product or service offered in their country of domicile (“Funds”). Investors should also consider their own investment objective and risk tolerance level. Historical returns are provided for illustrative purposes only. The price of units may go down as well as up and the past performance is not indicative of future performance. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. The performance data do not take account of the commissions and costs incurred on trading securities in client portfolios or on the issue and redemption of units. Unless otherwise stated, the prices used for the performance figures of the Luxembourg-based Funds are the end-of-month transaction prices net of fees up to 4 August 2010. From 4 August 2010, the transaction prices net of fees will be those of the first business day of the month. Return figures versus the benchmark show the investment management result before management and/or performance fees; the Fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark. Please refer to the prospectus of the Funds for further details. Performance is quoted net of investment management fees. The ongoing charges mentioned in this document are the ones stated in the Fund's latest annual report at closing date of the last calendar year.

This document is not directed to, or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, document, availability or use would be contrary to law or regulation or which would subject any Fund or Robeco Institutional Asset Management B.V. to any registration or licensing requirement within such jurisdiction.

Any decision to subscribe for interests in a Fund offered in a particular jurisdiction must be made solely on the basis of information contained in the prospectus, which information may be different from the information contained in this document. Prospective applicants for shares should inform themselves as to legal requirements also applying and any applicable exchange control regulations and applicable taxes in the countries of their respective citizenship, residence or domicile. The Fund information, if any, contained in this document is qualified in its entirety by reference to the prospectus, and this document should, at all times, be read in conjunction with the prospectus. Detailed information on the Fund and associated risks is contained in the prospectus. The prospectus and the Key Investor Information Document for the Robeco Funds can all be obtained free of charge at www.robeco.com.

Additional Information for US investors Neither Robeco Institutional Asset Management B.V. nor the Robeco Capital Growth Funds have been registered under the United States Federal Securities Laws, including the Investment Company Act of 1940, as amended, the United States Securities Act of 1933, as amended, or the Investment Advisers Act of 1940. No Fund shares may be offered or sold, directly or indirectly, in the United States or to any US Person. A US Person is defined as (a) any individual who is a citizen or resident of the United States for federal income tax purposes; (b) a corporation, partnership or other entity created or organized under the laws of or existing in the United States; (c) an estate or trust the income of which is subject to United States federal income tax regardless of whether such income is effectively connected with a United States trade or business. Robeco Institutional Asset Management US Inc. (“RIAM US”), an Investment Adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, is a wholly owned subsidiary of ORIX Corporation Europe N.V. and offers investment advisory services to institutional clients in the US. In connection with these advisory services, RIAM US will utilize shared personnel of its affiliates, Robeco Nederland B.V. and Robeco Institutional Asset Management B.V., for the provision of investment, research, operational and administrative services.

Additional Information for investors with residence or seat in Australia and New Zealand This document is distributed in Australia by Robeco Hong Kong Limited (ARBN 156 512 659) (“Robeco”), which is exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order 03/1103. Robeco is regulated by the Securities and Futures Commission under the laws of Hong Kong and those laws may differ from Australian laws. This document is

Robeco QUARTERLY • #8 / JUNE 2018

distributed only to “wholesale clients” as that term is defined under the Corporations Act 2001 (Cth). This document is not for distribution or dissemination, directly or indirectly, to any other class of persons. In New Zealand, this document is only available to wholesale investors within the meaning of clause 3(2) of Schedule 1 of the Financial Markets Conduct Act 2013 (‘FMCA’). This document is not for public distribution in Australia and New Zealand.

Additional Information for investors with residence or seat in Austria This information is solely intended for professional investors or eligible counterparties in the meaning of the Austrian Securities Oversight Act. Additional Information for investors with residence or seat in Brazil The Fund may not be offered or sold to the public in Brazil. Accordingly, the Fund has not been nor will be registered with the Brazilian Securities Commission – CVM, nor has it been submitted to the foregoing agency for approval. Documents relating to the Fund, as well as the information contained therein, may not be supplied to the public in Brazil, as the offering of the Fund is not a public offering of securities in Brazil, nor may they be used in connection with any offer for subscription or sale of securities to the public in Brazil.

Additional Information for investors with residence or seat in Canada No securities commission or similar authority in Canada has reviewed or in any way passed upon this document or the merits of the securities described herein, and any representation to the contrary is an offence. Robeco Institutional Asset Management B.V. is relying on the international dealer and international adviser exemption in Quebec and has appointed McCarthy Tétrault LLP as its agent for service in Quebec.

Additional Information for investors with residence or seat in Colombia This document does not constitute a public offer in the Republic of Colombia. The offer of the Fund is addressed to less than one hundred specifically identified investors. The Fund may not be promoted or marketed in Colombia or to Colombian residents, unless such promotion and marketing is made in compliance with Decree 2555 of 2010 and other applicable rules and regulations related to the promotion of foreign Funds in Colombia.

Additional Information for investors with residence or seat in the Dubai International Financial Centre (DIFC), United Arab Emirates This material is being distributed by Robeco Institutional Asset Management B.V. (Dubai Office) located at Office 209, Level 2, Gate Village Building 7, Dubai International Financial Centre, Dubai, PO Box 482060, UAE. Robeco Institutional Asset Management B.V. (Dubai office) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients or Market Counterparties and does not deal with Retail Clients as defined by the DFSA. Additional Information for investors with residence or seat in France Robeco is at liberty to provide services in France. Robeco France (only authorized to offer investment advice service to professional investors) has been approved under registry number 10683 by the French prudential control and resolution authority (formerly ACP, now the ACPR) as an investment firm since 28 September 2012.

Additional Information for investors with residence or seat in Germany This information is solely intended for professional investors or eligible counterparties in the meaning of the German Securities Trading Act. Additional Information for investors with residence or seat in Hong Kong The contents of this document have not been reviewed by the Securities and Futures Commission (“SFC”) in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (“Robeco”). Robeco is regulated by the SFC in Hong Kong.

Additional Information for investors with residence or seat in Italy This document is considered for use solely by qualified investors and private professional clients (as defined in Article 26 (1) (b) and (d) of Consob Regulation No. 16190 dated 29 October 2007). If made available to Distributors and individuals authorized

by Distributors to conduct promotion and marketing activity, it may only be used for the purpose for which it was conceived. The data and information contained in this document may not be used for communications with Supervisory Authorities. This document does not include any information to determine, in concrete terms, the investment inclination and, therefore, this document cannot and should not be the basis for making any investment decisions.

Additional Information for investors with residence or seat in Peru The Fund has not been registered with the Superintendencia del Mercado de Valores (SMV) and is being placed by means of a private offer. SMV has not reviewed the information provided to the investor. This document is only for the exclusive use of institutional investors in Peru and is not for public distribution.

Additional Information for investors with residence or seat in Shanghai This material is prepared by Robeco Investment Management Advisory (Shanghai) Limited Company (“Robeco Shanghai”) and is only provided to the specific objects under the premise of confidentiality. Robeco Shanghai has not yet been registered as a private fund manager with the Asset Management Association of China. Robeco Shanghai is a wholly foreign-owned enterprise established in accordance with the PRC laws, which enjoys independent civil rights and civil obligations. The statements of the shareholders or affiliates in the material shall not be deemed to a promise or guarantee of the shareholders or affiliates of Robeco Shanghai, or be deemed to any obligations or liabilities imposed to the shareholders or affiliates of Robeco Shanghai.

or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. The contents of this document have not been reviewed by the MAS. Any decision to participate in the Fund should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions (as described in the section entitled “Important Information for Singapore Investors”) contained in the prospectus. You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of this document, regulatory status of the Fund, applicable regulatory protection, associated risks and suitability of the Fund to your objectives. Investors should note that only the sub-funds listed in the appendix to the section entitled “Important Information for Singapore Investors” of the prospectus (“Sub-Funds”) are available to Singapore investors. The Sub-Funds are notified as restricted foreign schemes under the Securities and Futures Act, Chapter 289 of Singapore (“SFA”) and are invoking the exemptions from compliance with prospectus registration requirements pursuant to the exemptions under Section 304 and Section 305 of the SFA. The Sub-Funds are not authorized or recognized by the MAS and shares in the SubFunds are not allowed to be offered to the retail public in Singapore. The prospectus of the Fund is not a prospectus as defined in the SFA. Accordingly, statutory liability under the SFA in relation to the content of prospectuses would not apply. The SubFunds may only be promoted exclusively to persons who are sufficiently experienced and sophisticated to understand the risks involved in investing in such schemes, and who satisfy certain other criteria provided under Section 304, Section 305 or any other applicable provision of the SFA and the subsidiary legislation enacted thereunder. You should consider carefully whether the investment is suitable for you. Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.

Additional Information for investors with residence or seat in Spain The Spanish branch Robeco Institutional Asset Management B.V., Sucursal en España, having its registered office at Paseo de la Castellana 42, 28046 Madrid, is registered with the Spanish Authority for the Financial Markets (CNMV) in Spain under registry number 24.

Additional Information for investors with residence or seat in Switzerland This document is exclusively distributed in Switzerland to qualified investors as defined in the Swiss Collective Investment Schemes Act (CISA) by Robeco Switzerland AG which is authorized by the Swiss Financial Market Supervisory Authority FINMA as Swiss representative of foreign collective investment schemes, and UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, as Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s), as well as the list of the purchases and sales which the Fund(s) has undertaken during the financial year, may be obtained, on simple request and free of charge, at the office of the Swiss representative Robeco Switzerland AG, Josefstrasse 218, CH-8005 Zurich. The prospectuses are also available via the website www.robeco.ch.

Additional Information for investors with residence or seat in the United Arab Emirates Some Funds referred to in this marketing material have been registered with the UAE Securities and Commodities Authority (the Authority). Details of all Registered Funds can be found on the Authority’s website. The Authority assumes no liability for the accuracy of the information set out in this material/document, nor for the failure of any persons engaged in the investment Fund in performing their duties and responsibilities.

Additional Information for investors with residence or seat in the United Kingdom Robeco is subject to limited regulation in the UK by the Financial Conduct Authority.

Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Additional Information for investors with residence or seat in Uruguay The sale of the Fund qualifies as a private placement pursuant to section 2 of Uruguayan law 18,627. The Fund must not be offered or sold to the public in Uruguay, except in circumstances which do not constitute a public offering or distribution under Uruguayan laws and regulations. The Fund is not and will not be registered with the Financial Services Superintendency of the Central Bank of Uruguay. The Fund corresponds to investment funds that are not investment funds regulated by Uruguayan law 16,774 dated September 27, 1996, as amended.

Additional Information concerning RobecoSAM Collective Investment Schemes The RobecoSAM collective investment schemes (“RobecoSAM Funds”) in scope are sub funds under the Undertakings for Collective Investment in Transferable Securities (UCITS) of MULTIPARTNER SICAV, managed by GAM (Luxembourg) S.A., (“Multipartner”). Multipartner SICAV is incorporated as a Société d'Investissement à Capital Variable which is governed by Luxembourg law. The custodian is State Street Bank Luxembourg S.C.A., 49, Avenue J. F. Kennedy, L-1855 Luxembourg. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the RobecoSAM Funds, as well as the list of the purchases and sales which the RobecoSAM Fund(s) has undertaken during the financial year, may be obtained, on simple request and free of charge, via the website www.robecosam.com or www.funds.gam.com.

Version Q1/18

Additional Information for investors with residence or seat in Singapore This document has not been registered with the Monetary Authority of Singapore (“MAS”). Accordingly, this document may not be circulated or distributed directly

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CONTACT Robeco P.O. Box 973 3000 AZ Rotterdam The Netherlands T +31 10 224 1 224 I www.robeco.com