Verslag rwif 2014 online def

Profiting from long-term trends Investor insights AMSTERDAM 2014

>6 No future in tech if you won’t wear it

>8 There is a disconnect between markets and politics

ROBECO WORLD INVESTMENT FORUM | 2014

Are we looking at trends through rose-tinted spectacles?

Technologically-driven trends usually have a big impact but their trajectories are often difficult to predict. Take Google Glass: the revolutionary new product has alienated as many people as it has impressed, and may not be a big seller.

This lack of predictability may seem negative, but actually is an advantage, because the implications of technological change are not directly clear to all market participants.

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One of the earliest meanings of the word trend is ‘to run or bend in a certain direction’ and was used for describing rivers and coasts. It is also a fitting description for investing; the key point is that it is about direction, with twists and turns along the way. An investor’s edge should be in being more successful than others in interpreting trends and in taking a long investment time horizon.

And trends tend to be underestimated by the investment community. Many prefer to focus on ‘the twists and turns along the way’; such as quarterly earnings or the next Federal Reserve meeting. But they pay relatively little attention to long-term trends such as technology, demographics and regulation, when these can have a profound impact on the value of stocks and bonds.

CONTENTS 4 In brief The views from delegates at the forum, an opinion from Robeco’s chief economist, and a truly startling statistic

5 Challenge your investor instincts Behavioral finance expert Paul Craven urges financial professionals to question their own assumptions

6 Profiting from long-term trends Futurist Ben Hammersley and Robeco’s Jack Neele argue that a gadget won’t sell if society won’t wear it

8 A disconnect between markets and politics?

George Papandreou and Robeco bond manager Victor Verberk fight their corners

10 Take a look under the hood Be careful when assessing asset managers, warn quantitative researchers Joop Huij and David Blitz

11 Don’t compare China with India India is really an African country, argues Parag Khanna

12 What they’re saying The best quotes from the speakers at the forum

Key takeaways TODD BENJAMIN, MODERATOR “There was one thing that really surprised me: around 50% of the people in the audience thought the biggest tech company of 2020 will be one we have not even heard of yet. It tells us how fast technological change is happening. But on the other hand people haven’t really changed at all. Our behavioral patterns that lead to irrational decisions are the same. We still have herd behavior. Investors should take this into account when making decisions.”

Todd Benjamin moderated the Robeco World Investment Forum. He was an anchor, correspondent and financial editor for CNN and has interviewed many makers of history, from Mikhail Gorbachev to Alan Greenspan.

INTRODUCTION Robeco’s annual World Investment Forum discusses topics that matter to investors. This year’s theme: ‘Riding the waves: from long-term trends to investment decisions’ provided plenty of material for discussion. We have to be humble when predicting long-term trends, because we live in a rapidly changing world. Only six years ago, the buzzword was peak oil; now it is gas glut. But we should also be undeterred; trends create risks and opportunities, both of which can impact your investment portfolio.

Our goal was to encourage an exchange between thinkers from different backgrounds. Our venue was the Krasnapolsky Hotel in Amsterdam.

Key agenda items were about interpreting these long-term trends for future planning and assessing their effects on our industry. Take demographics: people are living longer and the number of wealthy individuals across the globe is increasing. These people will typically save for their retirement. By centering on solutions for an aging society, we want to enable our clients to achieve their financial goals.

The forum reflected the way Robeco operates – as an innovative asset manager sharing knowledge and encouraging open debate. Our in-house experts highlighted Robeco’s active involvement in the discussion, including Jack Neele on how technology can create and destroy new industries.

One of the forum’s main topics was behavioral bias – our investment portfolios should be built on facts, not emotions. Joop Huij and David Blitz argued that investors should be critical when monitoring portfolios, while Victor Verberk gave insights into human irrationalities. George Papandreou passionately addressed the Greek situation that he lived through as prime minister and the future of the eurozone. Let him be an example to all politicians debating Europe!

One thing that struck me during the forum is an awareness of the tension that rising inequality around the world is causing. What are we going to do about that? As participants in the financial sector, we must make sure we keep our license to operate. And we should leave our desks and get out there to see trends happening and enable our clients to benefit from them!

I hope you will find this compilation of our speakers’ viewpoints useful.

RODERICK MUNSTERS, CEO ROBECO

ROBECO WORLD INVESTMENT FORUM | 2014

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IN BRIEF

Learn from history and human behavior, say delegates Learn from history and try to rein in human frailties when it comes to navigating markets. These were key observations of the audience of 150 people from across the investment industry when asked to comment on what takeaways they had picked up from the forum.

The delegates included representatives from asset managers, pension funds, consultants, sovereign wealth funds and banks. Many were from the Netherlands and Europe, though the conference also attracted delegates from the Middle East, Asia, the US and Latin America.

“Human behavior and mistakes are important drivers of markets and economies,” said one delegate. This means investors should “link historical and behavioral aspects to arrive at better-informed investment decisions”. This is because “humans are hugely influenced by stories (positive or negative) rather than the underlying data”, and unfortunately, “stupidity rules and we are bound to repeat mistakes”.

“The importance of being aware of our biases and how we can easily fool ourselves pretending that all our decisions are taken on rational basis,” was a key observation. The flipside is that “understanding human behavior can yield great profits”. The consensus: “Pay more attention to behavioral patterns” and “we have to be humble in front of history, and think smartly when making our daily investment decisions”.

Don’t write off India’s potential One of the interesting points made at the forum is that you shouldn’t lump China and India together – it makes no sense to use a concept like ‘Chindia’. It’s true that India is in some ways much more African than the rapidly urbanizing China (see page 11). Agriculture is much more important to India due to a lack of infrastructure.

Urbanization and growth go together: no country has ever reached middle income status without a significant population shift into cities. Urbanization is necessary to sustain – though not necessarily drive – growth in developing countries.

But India does have two advantages. It is a tested democracy and will much more easily accommodate the inevitable rising political clout of the middle class than China. Secondly, India’s population is much younger. The fact that the future belongs to the young bodes better for India than China.

Léon Cornelissen, Robeco Chief Economist

Combatting these very human traits means engaging in a great deal more self-analysis, the conference heard. “Be your own devil’s advocate”, “challenge your own assumptions” and “do not rely heavily on anecdotal evidence” were all suggested solutions. But investors should not necessarily become meek: “Dare to think independently!”

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billion people 4

… live within this circle in Asia, more than the rest of the world combined

Do you as an investor challenge your own instincts and assumptions?

Investors should recognize that human psychology plays a role in decision making, says economist Paul Craven, an expert on behavioral finance. “In order to be a successful investor it is important to challenge your own instincts and assumptions.”

Paul Craven isn’t just a theorist: he worked for decades in the City of London. He left Goldman Sachs in 2013 to focus entirely on promoting behavioral finance, a subject he is deeply passionate about. We interviewed him during the Robeco World Investment Forum.

Behavioral finance questions the way traditional economic models say we think; that humans are rational and that we make conscious decisions, he says. “But rather than being rational, logical creatures, we constantly take subconscious decisions.” Craven gives three examples of biases: - Herd instinct: we like to do what other people are doing.

- Conformity: we do not like to hold a different opinion to other people.

- Anchoring: a word, name or number can subconsciously influence you.

with your assertions, or having someone around you who can.”

“We can be irrational“, he says. “The reason is that we have hard-wired biases. We have things inside our head, which are there for very good evolutionary reasons. But when it comes to 21st century financial markets, they often cause us to do things that are suboptimal.”

The third way to deal with biases is through coaching. For investors, it should not be a sign of weakness to be coached, he says. “It should be a sign of strength. All performance-related sports have coaches. And you don’t have to be better than the person you coach in order to help them. Take the golfer Tiger Woods. He has one, even though this coach is not nearly as good at golf as Woods. But he can spot tiny mistakes. Why not use a coach for investors?”

Three ways to prevent biases So how can investors prevent biases? According to Craven, the first way is to be aware of them: “Then they immediately become less dangerous.” The second way is to challenge your own beliefs: “Why do I think this? Where could I be wrong? You need to play devil’s advocate by reading material that disagrees

> To read the full article, click here.

‘You need to play devil’s advocate’

ROBECO WORLD INVESTMENT FORUM | 2014

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DISCUSSION Ben Hammersley

There’s no future for tech if you won’t wear it We live in a world of constant change, and so many innovations have enhanced our quality of life. But the success of technology depends on its acceptance by society, argue futurist Ben Hammersley and Robeco portfolio manager Jack Neele.

No need for glasses?

It’s the gadget that has been banned in many places before it is even sold – and it’s made by one of the world’s most successful companies.

One would think that Google Glass would be another winner from a tech giant that every investor wants to own. However, some inventions will prove unsellable – and therefore uninvestable – if society disapproves of them, investors have been warned.

“Google Glass is seen as miracle technology which uses voice commands to record things, check email and send things to your phone,” says Ben Hammersley, a British ‘digital guru’ and the man credited with inventing the word ‘podcast’. “If you believe the hype about Google Glass you would think it was inevitable that by Christmas 2015, everyone is going to have one.”

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“Yet, even before it has been launched, restaurants, bars and other public places have started to ban it. This ‘miracle technology’ has already created its own backlash before it even goes on sale. The new collective noun for people who wear Google Glass is ‘glassholes’.”

“So here we have what appears to be an inevitable technological success – and it’s from Google, no less – but socially it is unacceptable.

Certainly, one of the biggest trends is not what is possible, but what is the reaction to it?”

Some wearables ‘work out’ well However, some wearables are socially acceptable, says Jack Neele, manager of the Robeco Global Consumer Trends Equities Fund.

He cites the example of the Nike FuelBand, a popular wearable workout monitor which

allows users to upload their exercise results online.

‘When you get to a certain point, it becomes hyper creepy’ “FuelBand gives users the ability to share the outcomes of their runs with their friends on Facebook,” he says. “And as these networks are very important to consumers, you can see that Nike is moving with the spirit of the times and embracing technology that allows it to stay relevant with its customers. The consumer experience is improved and the gap with Nike’s competitors has grown.”

What will be the biggest tech company in 2020?

When forum delegates were asked what tech company they thought would be the most valuable in the world in 2020, almost half said it would be a tech company that currently we have never heard of. Some 39% (including Neele) said Google and 12% (including Hammersley) said Amazon.

considered ‘super-cool’ by some,” he says. “But the vast majority of the world is freaked out by them.”

“One of the biggest trends is augmented intelligences – Facebook, Google, Twitter and Dropbox – which run on your phone and give you suggestions about what you should do next. They tell you which restaurants to go to and things like that.”

“What we’re realizing is that when you get to a certain point, it becomes hyper creepy.

It’s invasive, and it becomes like a stalker. The economic drivers against people being freaked out by stuff are a much bigger problem than people think today.”

“LinkedIn has had the same effect on traditional recruiters; job boards are being marginalized as employers rout around them because all companies use it now to search for future employees. These companies are disruptive in that they are eradicating industries that were powerhouses a decade ago.”

Bubbles versus trends Both Hammersley and Neele cited the example of Kodak, which failed to keep up with technological trends and went out of business when digital cameras replaced film. But what is a true trend, and what becomes a bubble? “It goes back to what is the social purpose of the innovation,” says Hammersley.

‘To avoid bubbles, you have to look at the underlying social psychology’ “These wearables mean that the brand recognition of Nike will be enhanced versus its competitors and its profits will increase over time, and so the share price will take care of itself.” Indeed, while shares in the once mighty Apple peaked in 2012, Nike shares have rocketed.

While there may be social objections to the use of certain devices, their growth cannot be disputed. The total number of internet-enabled devices will reach 20 billion – or three times the current world population – by the end of this decade. And initial objections to innovations can often be overcome – Google’s StreetView suffered protests when it was launched but is now very popular.

‘Context collapse’ is key Hammersley says the real problem with innovation is the concept of ‘context collapse’ – when the underlying perception of what is socially useful is lost in the “radical push of technology” – to bring a product to market.

“I get very excited about artificial intelligence, robots, drones and all of these things which are ROBECO WORLD INVESTMENT FORUM | 2014

Embracing technology Neele says it boils down to offering something that people genuinely think is useful – a trend that has been tapped by existing large companies that use technology to maintain their brand relevance, even when these services are not directly related to them.

“Mainstream companies are embracing these technologies quite smartly; at Starbucks you can now pay with your mobile phone,” he says.

“These companies are using them to enhance the overall consumer experience. Even though you are not going to offer coffee online, they have connected with the consumer.”

Elsewhere, he says the tech winners will be the services that rout around traditional players and cut out the middleman. “News is breaking on Twitter these days and not in the newspaper. It’s a good example of a company that is changing the way that we gather and share information, and it means we are all publishers now.”

“To avoid bubbles, you have to look at the underlying social psychology and ask whether that technology is acceptable within the wider realm of things,” he says. “Bitcoin is a particularly good example of a bubble. It’s a very interesting piece of technology, but no-one can decide if it’s a payment system or a virtual currency, and it’s been a nightmare for those investing in it.”

“What we’re seeing here is a culture clash between an engineering mindset and a social science mindset. As investors you can do one of two things: look for a way to get a really good return, which means finding the next winners to get in low and sell high; or you can look for the original purpose of investment, which is to find the technologies which will do long-term good.” > To read the full article, click here.

> Click here to see video Jack Neele.

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DIFFERENT PERSPECTIVE

There is a disconnect between markets and politics Financial markets do not always mix well with politics and democracy, says George Papandreou, who was prime minister of Greece when the country’s debt default threatened the entire Eurozone.

George Papandreou is a man who knows only too well what happens when a financial crisis engulfs a country. The US-born and educated politician was leader of Greece from 2009-2011, when he was ousted and replaced with an unelected economist who had been vice president of the European Central Bank. The subsequent bailout saved Greece and the Eurozone, but it came at the price of disregarding democracy.

“We need to bring markets and politicians together”, says Papandreou, who was speaking in Amsterdam on the day that Greece returned to the financial markets for the first time in four

‘The leaders of today are the central bankers’ 8

years, successfully selling EUR3 billion of 5-year bonds.

“Obviously financial markets are useful. But financial markets can also have a psychology of over-exuberance – creating bubbles – or a psychology of being overly fearful – creating a panic and a herd reaction. I lived through all this,” he says.

“Politics and markets have an interplay.

We need to find a balance between market sentiment – which obviously can see some of your faults – and global politics, which need to give you the framework and protection as local governments to behave in a normal, humane way.”

Investors certainly voted for Greece After so much turmoil, many investors were surprised that Greece’s auction of bonds

yielding 4.95% was seven times oversubscribed, even though the country’s credit rating is still ‘junk’. Greece also achieved the second-lowest borrowing costs for a bailed-out Eurozone state returning to the market.

“It is a highly symbolic move, and it shows that the market sees us as credible,” says Papandreou, the third member of a political dynasty to run Greece after his father and grandfather. “We have made sacrifices - even more than we needed to.”

“But after four years of very difficult reforms which brought huge, huge pain for the Greek people, markets have responded positively.

That is a true sign that there is the prospect for Greece for growth. It is a very important step for both the Greek people and the markets.”

Investors should learn to deal with crises?

Financial crises such as the one that engulfed Greece are a fact of life and investors should not try to predict or prevent them, says Victor Verberk, portfolio manager of Investment Grade Credits at Robeco. Instead, investors should develop smart strategies to deal with them, he says.

“If you study history – and we have data for roughly the last 400 years – then you see that every 20 or 30 years, humanity generates an enormous bubble that bursts each and every time,” he says. “Centuries ago, we started in Holland with tulip mania, and we now have a credit bubble in emerging markets.”

“Investors know that bubbles occur, but they are driven by short-term behavior. Politicians regularly contribute to the creation of bubbles on financial markets,” he adds. It’s because we are human. “People – and that includes investors – make the same mistake over and over again, in every economic cycle, every decade and every century. As a society we

‘When I became prime minister I didn’t know I had to have a crash course in bond markets’ Papandreou says he learned some tough financial lessons during the crisis – particularly the need to please unelected bankers rather than his own people who voted him into office.

“When I became prime minister I didn’t know I had to have a crash course in bond markets,” he says. “I have learnt that there is a disconnect between markets and politics. When I was losing my popularity with the Greek people I gained a standing ovation from the bankers.”

“That is because crises today are not simply at the local or national level - they are global.

Politicians are very much focused on their local constituencies, but issues need be addressed at a global level.”

and overspending. However, he believes that the Eurozone did not do enough in the early stages to avoid the spiral that led to fears the whole Eurozone would collapse. Markets only calmed down when Mario Draghi, president of the European Central Bank (ECB), said in 2012 he would do “whatever it takes” to save the euro.

“Greece made reforms, but Europe did not step in when markets needed more reassurance,” Papandreou says. “It could have been issuing Eurobonds, it could have been giving a guarantee, it could have been simply a statement, a strong statement like Draghi made later in 2012, saying he would do whatever it takes to prevent a bankruptcy.”

‘The Eurozone should have done more’ Papandreou accepts that Greece was the author of much of its own misfortune, due to poor financial management, corruption, tax evasion ROBECO WORLD INVESTMENT FORUM | 2014

The power of central bankers The ECB’s role highlights how the balance of power has changed, he says. “In the midst of

are ever progressing, with rising productivity, increasing prosperity and greater well-being.

But it is two steps forward and one step back.”

So what should investors do? Live and learn.

“What we can learn from these bubbles is extremely useful. The developments themselves do not run in trends, but investor conduct does.

Knowledge of behavioral finance helps to understand investor conduct,” he says.

> To read the full article, click here.

> To read the full article, click here.

the crisis we have seen that the leaders of today are the central banks. It is because of the power and fear of markets, and the ECB stopped it.”

“But I really wouldn’t want to think that the leaders of today are central bankers. They play an important role and they saved the day, but I think we have to bring politics and markets back together.”

Papandreou, a socialist, says he does not believe markets are bad, but they do pose a threat to democracy. “Markets can be bad and can be good,” he says. “Governments can be bad or good as well – I lived under a dictatorship. In Greece during the crisis we were dealing with entities that had more capital than our total national budget. There is a huge concentration of power and wealth. That can undermine democracies.”

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DIFFERENT PERSPECTIVE Joop Huij

Investment portfolios: take a look under the hood You would not be pleased if you thought you had the right exposures to factors that drive expected returns, but it turns out you actually have precisely the opposite tilts. This is happening quite often though. Quantitative researcher Joop Huij and head of equity research David Blitz argue that institutional investors should be careful when assessing asset managers.

There is over twenty years of academic literature on how investors can get extra returns with exposure to factor premiums such as value, low volatility and momentum. These parts of the market offer the best prospects in terms of risk and reward and investors are well advised to adjust their portfolios to these premiums.

Surprising findings in portfolios So are investors using these insights to their advantage? Huij and Blitz helped to develop the Robeco Factor Exposure Monitor to measure exposure in portfolios versus the benchmark. They scanned several portfolios of institutional investors and found a surprising outcome. “Often these portfolios turn out to be concentrated in the wrong type of stocks: highrisk, growth stocks which have poor prospects for returns,” says Huij. But why are investors doing this?

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Blitz studied the academic literature and found that the reason may be a conflict of interest between investors and asset managers.

“Often asset managers take high-risk stocks that do well in bull markets. This is the period when money is flowing to the market”, he says.

The winner takes all, so a profit-maximizing asset manager has the incentive to take high risks in order to be a top performer, says Blitz.

“This strategy would allow him to attract more assets under management. But it is not in the interests of investors.”

The problem is that asset owners often do not know that asset managers are taking large risks with their money. In some cases asset managers even change their fund name to a hot style, while their investment policy remains unchanged, he adds.

‘Let the numbers tell the tale’ More transparency needed Huij argues that the way to prevent this conflict of interest is through more transparency. “Even though investors know that exposure to factor premiums enhances risk and reward, they are often not aware of their actual exposure. They should gather more information to base their decisions on, and the Robeco Factor Exposure Monitor can provide it. Let the numbers tell the tale.” > Click here to learn more about factor investing.

‘China is years ahead of India’ ‘India compares more to Africa if you look at its key indicators’

For investors looking at the world’s two most populous markets, China is years ahead of India, which is more comparable with an African country, says globalization expert Parag Khanna.

Many investors like to lump China and India together as emerging Asian economies, but the reality is different, argues Khanna, director of the Singapore-based Hybrid Reality Institute and a Senior Fellow at the European Council on Foreign Relations. He has forged a business and academic career studying globalization and has some observations about so-called emerging markets that some may find startling.

For one, he says: “India is basically an African country”. For another, he advises investors to stop using the phrase ‘emerging markets’ in the first place, as it becomes meaningless when you consider the case of Greece, a supposedly developed nation that almost went bankrupt.

India has been hyped up India versus China is a case in point, particularly as many believe that China is an ‘emerging market’ that has long since emerged to become an industrialized power and the world’s secondlargest economy, while India has remained a rural backwater.

We hype up India because of its population size, but its performance according to accepted indicators is basically around what Africa’s is.”

One key difference is China is more highly urbanized, he says. “Agriculture employs the vast majority of the Indian workforce – 65% of the country is still rural, and it is probably 10 years or more behind China on urbanization,” says Khanna.

“India has a much higher unemployment rate than China, and that’s very dangerous because it doesn’t have the quality of infrastructure that is necessary to attract manufacturing industry into the supply chain.”

“And so India is suffering as a result of having a structure that is basically driven by jobless growth. China is better positioned for growth because of better infrastructure, better economic and social mobility, and more managed urbanization.”

Emerging markets label is misleading “The truth is that India should not be compared with China at all,” he says. “India compares more to Africa if you look at its key indicators of per-capita income, its level of internet penetration and connectivity, its corruption ranking and the life expectancy of its people.

ROBECO WORLD INVESTMENT FORUM | 2014

The differences between the two nations highlight the problem of grouping them under the common label of ‘emerging markets’, he says. “Look at how useless the label ‘emerging markets’ has become: you have a country like Greece demoted by the MSCI,” Khanna

says. “No-one is really looking for that kind of stamp of approval; you should not be basing investment decisions on the short-term constituents of indices.”

“When we say ‘emerging markets’ we really mean ‘growth markets’. Investors focus too much on things like currency swings and forget the longer-term perspective. I take an ecosystem view of drivers; a lot of people like to make sure they cover various bases by looking at political, demographic or financial market angles, but you need to look at them together.”

He also regales against viewing these markets as recovering from their recent equity market and currency problems. “What does recovery mean?” he asks. “It depends on the sectors.

I particularly promote the asset class of infrastructure, which is usually considered to be long term and low return.”

“But the volume of infrastructure being built is very significant, and offers the possibility of making pretty significant returns if one is willing to look at a 10-year time horizon.” > To read the full article, click here.

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What they’re saying ‘We should leave our desks and get out there to see trends happening.’ | Roderick Munsters ‘One of the biggest trends is not what is possible, but what is the reaction to it?’ | Ben Hammersley ‘India is basically an African country. India should not be compared with China at all.’ | Parag Khanna ‘In investing, you take the stairs up but the elevator down.’ | Paul Craven ‘The best investments will be in communications or connectivity apps.’ | Jack Neele ‘Every 20 or 30 years, humanity generates an enormous bubble.’ | Victor Verberk ‘I really wouldn’t want to think that the leaders of today are central bankers.’ | George Papandreou ‘By letting the numbers speak you improve the quality of your decisions.’

| Joop Huij

‘A lot of investors out there apparently invest in the wrong kind of stocks.’ | David Blitz

Robeco Coolsingel 120, 3011 AG Rotterdam, The Netherlands forum@robeco.com www.robecoworldinvestmentforum.com Important Information This document is solely intended for professional investors under the Dutch Act on the Financial Supervision (Wet financieel toezicht) Robeco Institutional Asset Management B.V.( (trade register number: 24123167) has a license of the Netherlands Authority for the Financial Markets in Amsterdam. It is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. The information contained in this document is solely intended for professional investors under the Dutch Act on the Financial Supervision (Wet financieel toezicht) or persons who are authorized to receive such information under any other applicable laws. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. The value of your investments may fluctuate.

Past results are no guarantee of future performance. All copyrights, patents and other property in the information contained in this document are held by Robeco. The views expressed by the speakers do not necessarily represent the views of Robeco. Robeco Institutional Asset Management B.V.( (trade register number: 24123167) has a license of the Netherlands Authority for the Financial Markets in Amsterdam. The prospectus and the Key Investor Information Document for Robeco Global Consumer Trends Equities can be all be obtained free of charge at www.robeco.com.

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