E-magazine: Spotlight on New Zealand

In this issue

FINDING THE RIGHT FACTORS Page 8 NEW ZEALAND’S CASH COW

Page 10 RIDING THE WAVE IN AUSTRALIA

Page 15

SPOTLIGHT ON NEW ZEALAND A collection of articles to commemorate Robeco’s sponsorship of the Volvo Ocean Race MAR/APR 2015

CONTENTS 3 Foreword 4 Diverging tides for New Zealand and Australia 6 Malaysia: a wealth of low-volatility stocks 8 Finding the right factors 10 New Zealand’s cash cow 12 A day in the life of the on-board reporter 15 Riding the wave in Australia 16 Contact

For professional investors 4-11 October

Alicante

14-15 March

Auckland

14-17 June

Lorient

15-19 November

Cape Town

18-19 April

ItajaĂ­

19 June

The Hague (Pit Stop)

2-3 January

Abu Dhabi

16-17 May

Newport

27 June

Gothenburg

6-7 June

Lisbon

7-8 February Sanya 2|

FOREWORD The Volvo Ocean Race is now at the half-way stage, on the other side of the world from the race start in Europe six months ago. It has seen a great deal of thrills and spills as the brave teams of sailors have navigated their way from Spain to South Africa, the United Arab Emirates, China, and now into New Zealand.

Robeco has been very proud to be an official sponsor of Team Brunel, the Dutch entry into this awe-inspiring global challenge. There are many parallels between successful investing and sailing, not least in navigating choppy waters and using state-of-the-art quantitative techniques to get the best out of data. And few things better embody our ‘pioneering but cautious’ heritage than a roundthe-world ocean race.

In short, the race has proved ideal in supporting our ambitious strategy to raise our profile and grow significantly outside of the Netherlands.

We were particularly looking for a sponsorship that can increase our rapport with clients while attracting new prospects around the world.

Staging hospitality events at the 10 stopover ports has helped us to achieve this, winning many new friends in places where Robeco was not as wellknown as it is now.

And so as the race arrives in Auckland, we will once again be inviting clients to take part in a unique sailing experience, enjoy a meet & greet with the race teams, and share our knowledge of investing.

Our magazine aims to highlight our capabilities and thought leadership in each region that the race visits. We feature some of Robeco’s leading figures outlining their views and strategies, along with stories from the Team Brunel crew.

In this edition we feature a double interview with Joop Huij, Robeco’s head of factor investing, and Gerd-Jan Poortman, Team Brunel’s bowman. Both men describe what factors they look for when trying to get the best out of markets and sails respectively. You can also find out why portfolio manager Pim van Vliet believes Malaysian stocks are attractive for low-volatility investors; why falling commodity prices are good for Australian bonds; how the huge New Zealand dairy industry is dealing with sustainability challenges; and what are the economic prospects for the region as a whole.

We hope you enjoy our magazine and will continue to follow the world’s most exciting race with us.

Roderick Munsters Chief Executive Officer

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‘After the investment boom in the mining industry over the last ten years, disinvestment is now the name of the game’ 4|

DIVERGING TIDES FOR NEW ZEALAND AND AUSTRALIA Peter van der Welle Economic developments in Australia and New Zealand are not running in tandem.

Commodity-price developments play a role, but this is not the only explanation, according to strategist Peter van der Welle.

Rising unemployment and an unexpected rate cut by the central bank are just two signs that the Australian economy is currently not looking too bright. For a long time, the land ‘down under’ has performed better than most other industrial countries. Driven by its rapid growth, China’s insatiable demand for commodities pulled Australia pretty much unscathed through the financial crisis. With around two recession-free decades behind it, exports of iron ore, coal and other hard commodities continued the country’s run of good fortune.

Commodity prices are falling The deterioration in the economic climate is also partly down to China, says Van der Welle. “The Chinese economy is not only showing decelerating growth, but there is also a gradual shift from an export-lead economy to one driven by domestic spending. And this will have a negative impact on Australia. Commodity prices are falling, and after the investment boom in the mining industry over the last ten years, disinvestment is now the name of the game.”

Cheaper energy is positive On the other side of the Tasman Sea, in New Zealand, the rise and fall of commodity prices has played less of a significant role. The economy is robust now, with strong domestic demand and low unemployment. That exports are primarily made up of agricultural products is not the main reason for the growth differential relative to Australia, suggests Van der Welle. “You have to see it in perspective. Farming accounts for just 7% of GDP. New Zealand is benefiting in particular from lower oil prices now. Cheaper energy is positive for consumer purchasing power and resulting in lower costs to industry. What’s more, it is offsetting inflationary pressures from strong wage increases, so the central bank can keep rates at the same level for the time being.”

ahead, one key factor is that if China positions itself higher in the value chain in production terms and raises its energy efficiency, the demand for raw materials will decline.”

A second threat relates to energy commodities.

The Japanese government has plans to restart nuclear power plants, which were closed after the Fukushima disaster; and Canada and the US will start exporting liquefied natural gas (LNG) in two years. This will have serious consequences for the price of Australian coal and LNG,” warns Van der Welle. “Australian businesses will have to focus more on services, such as consultancy activities relating to resource extraction in China and tourism.”

pursue an expansionary budget policy to transition the Australian economy to the next phase” Growth recovery will not come soon for Australia, he says. “While the tide is in New Zealand’s favor, it will remain against Australia for the meantime.”

Silver lining In Australia, the central bank has lowered rates, but investors shouldn’t pin too much hope on this, according to the strategist. “Australia should focus on changing its export mix. The Chinese government has gradually tightened monetary conditions, and this is already having an effect on Australian commodity exports. Looking further

However, Van der Welle sees a silver lining for the Australian economy. “The government debt level is low, so fiscal stimulus is possible without immediately raising issues about debt sustainability. As easy monetary policy runs into the diminishing returns (as the RBA recently acknowledged), the government would do well to

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

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MALAYSIA: A WEALTH OF LOW-VOLATILITY STOCKS Pim van Vliet Malaysia is an important country for the Emerging Conservative Equities portfolio. Portfolio Manager Pim van Vliet discusses what makes many Malaysian stocks attractive for low-volatility investors.

Equity investors in emerging markets often focus on large markets such as China, and Brazil. A country which attracts relatively little attention is the relatively small and open economy of Malaysia.

With its 30 million inhabitants, Malaysia is dwarfed by its giant near neighbor Indonesia, which has a population of a quarter of a billion.

“As a smaller emerging market, Malaysia often receives less attention from international investors,” says Van Vliet. Malaysian stocks represent just over 10% of the Emerging Conservative portfolio (31-012015).

Good scores on volatility and low default risk

Importance of diversification

Malaysia’s growth has been sustained despite the challenging global economic environment. GDP grew around 5.8% in 2014, supported mainly by strong domestic demand and improved export performance. This was the second highest growth in the group of ten ASEAN countries, just behind Philippines’ growth of 6.1%.

So what makes many stocks from Malaysia attractive for this strategy? “They tend to score well on low volatility and have a low default risk.

They often also offer an attractive dividend yield of between two and six percent, while momentum is mixed.”

Although Malaysia is an important country for the portfolio, it will never become a dominant one, says Van Vliet. “Because we mitigate concentration risk by having strict limits in place for regions, countries and sectors and these concentration limits ensure diversification.”

The country’s political environment is considered stable compared with other emerging markets.

Furthermore, its stock universe is diverse, although the country is an oil and gas producer. But unlike countries such as Russia, the stock universe is not dominated by more volatile commodities stocks.

Malaysian telecom and utility stocks are particularly attractive for low-volatility investors, Van Vliet says.

“These are stable mature sectors. Examples in our portfolio are Tenaga Nasional and Maxis.”

He emphasizes that he does not have a top down country approach. We do not have a favorite country for our strategy, but we select individual stocks, he emphasizes. “And because there are large differences between the individual stocks within each country, our allocation differs strongly from the MSCI Emerging Markets Index.”

Just as some countries receive relatively little attention, some stocks also tend to be overlooked: low-volatility stocks. These rather ordinary stocks have lower risk, more stable returns and unexpected upside potential. Many attractive lowvolatility stocks can be found in Malaysia. “Stocks are not just chosen on historical volatility, but we also look at other factors to enhance returns and avoid unnecessary risks and costs.”

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

Risk management essential The Conservative approach has advantages for

investors in emerging markets, says Van Vliet.

“Risk management is essential, as the risks and volatility are higher than in developed markets.

Investors in these markets also have to deal with greater political and currency risks. But on the plus side, these higher risks in emerging markets also positively enhance the effects of risk reduction.”

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

‘Malaysia’s growth has been sustained despite the challenging global economic environment’

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FINDING THE RIGHT FACTORS Joop Huij and Gerd-Jan Poortman Interest in factor investing has increased substantially, and the philosophy of pursuing factors such as momentum is very much part of Team Brunel’s game plan to win the Volvo Ocean Race.

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

Joop Huij

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While the concept of factor investing is relatively new, it has a long history in terms of academic research into how it leads to better returns for less risk. The main concern for asset owners is how to find the best way to implement it, says Joop Huij, Robeco’s head of factor investing research, who recommends a prudent approach.

Different roads to Rome

“In the wake of the financial crisis of 2007-2009, institutional asset owners made achieving diversification their top priority. But this was more difficult than expected because equities, high yield bonds, hedge funds and private equity all proved to be closely correlated in times of distress,” says Huij.

“We’re always trying to change the sails to achieve the best possible setting,” he says. “We always keep adjusting and changing the settings during a leg.

There is no perfect trim, because the circumstances are always different.”

Team Brunel’s bowman Gerd-Jan Poortman also follows the factors of momentum and low volatility in his sailing role. Maintaining momentum is of course all important in an ocean race, which means that he and his team mates must perfectly align the sails to get the most out of the prevailing wind.

“Now that asset owners are able to obtain greater insight into the under¬lying factors relating to risk and return, we see an increasing desire to construct robust portfolios designed to withstand shocks.”

“There are different ways to Rome – maximizing momentum is not an exact science. Some boats can use the balance of the boat to go faster while others can trim the sails better, and a good trim can make a big difference.”

“It is very important that there is strong evidence for the existence of a premium. We study academic literature and do our own empirical research in order to identify factors. Value, momentum and low volatility are the most convincing.”

So with so many roads to Rome how can investors implement a successful factor investing strategy?

“It should all start with the investment policy and evaluation of how the current portfolio is loaded to factors before really going into recommending

certain strategies. If this step is not implemented properly then it may result in undesired factor exposures,” Huij says.

Three things to avoid Huij says there are three things which are important to avoid when selecting stocks and constructing a portfolio: – Avoiding unnecessary turnover leads to better after-cost returns, because trading costs eat directly into net performance. Smart rules to select stocks and construct a portfolio can result in more stable portfolio weights and hence lower turnover.

– Avoiding risks that are not properly rewarded.

For example, the extra premium gained when investing in value stocks is typically attributed to bankruptcy risk, but we found that this value premium is not related to distress risk alone.

– Avoiding counteracting other factor premiums, because negative exposure to other factors will hurt performance. A stock may be attractive from a momentum perspective, but if its price continues to rise it may no longer offer value.

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

Similarly, Team Brunel must avoid overlapping factors, such as raising the volatility of the boat – potentially dangerously so – in the pursuit for momentum. “I constantly keep an eye on the state of the sails, the sea state and what the wind is doing,” says Poortman. “Do we need a sail change? And when I get the call from the captain I will prepare the new sail, so that we can change it quickly.”

“I’m always keeping an eye on the bow, so that is basically everything in the front of the mast,” says Poortman. “I need to deal with a lot of water and the big waves that crash over the bow.”

Poortman knows from first-hand experience the dangers of these big waves. During a sail change in the dead of night, the bowman was caught by a wave and thrown against one of the raised dagger boards, sustaining a burst eardrum and a bruised arm. He was immediately packed off to his bunk with a heavy dose of painkillers and ordered to remain there.

Getting the timing right While investors won’t face the kind of physical pain that Poortman has experienced, getting the timing right is similarly important in avoiding unwanted collisions, especially when chasing factors across different asset classes.

only a limited number of independent investment decisions have a large impact on returns. All the potential added value can easily evaporate if investors incorrectly time factors, or as a result of the extra turnover timing factors requires.”

And the unknown factors? Snakes!

“The evidence for factor investing isn’t just limited to equities – it has also been found in other asset classes such as bonds,” says Huij. “The presence of factors across multiple asset classes gives asset owners the option of introducing factor investing throughout an entire portfolio, or limit it to just a part of it.”

“However, timing these factors is extremely difficult, and investors should be very cautious in attempting this. We have carried out a lot of research on this important topic, but our results have not given us sufficient confidence to claim that we can consistently effectively time these factors,” admits Huij.

“Limited breadth is one of the reasons why we are skeptical on the timing issue. In other words,

So what factors remain undiscovered for Poortman after reaching the half-way stage in New Zealand after months at sea? What has surprised him was the level of plastic he has seen in the oceans – and he didn’t welcome an encounter with a sea snake that became tangled on the boat’s keel.

“I was really amazed how much pollution there was in the sea,” he says. “I realized now that the world is really small. We live in a small village that is called the world. We must take better care of it. And I hate snakes!”

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

Gerd-Jan Poortman

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NEW ZEALAND’S CASH COW Jürgen Siemer The dairy industry is faced with sustainability challenges such as food safety and greenhouse gas emissions. “Companies that are able to address these challenges can benefit from a fast-growing market with very good prospects,” says Jürgen Siemer, RobecoSAM’s agribusiness analyst.

For a rainy island such as New Zealand, cows are the best way to utilize the land. The grassland is very productive as it grows almost throughout the year, it protects the soil from erosion, and the cows can be used for various ends, including milk, meat and leather. Dairy farming is still a family business (although the farms are pretty large) and provides jobs for families in rural areas, and opportunities for rural entrepreneurs.

Chinese mothers looking for infant formula.”

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

Dairy is important

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

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

excellent opportunities in this growth market,” says Siemer. “New Zealand’s dairy industry is in a unique position, as this country has enough grass and the necessary scientific knowledge to find the optimum feed composition that would ensure animal health and productivity while minimizing any negative effects.”

Greenhouse gas emissions “Dairy is an important growth market,” says Siemer.

“Demand is growing quickly as many emerging markets have been shifting to a more Western diet. Demand growth is expected to exceed supply growth in important markets like China, India, the Middle East and North Africa by 2020.”

These lofty growth prospects come with their own challenges. Food safety, for example, is a top priority in the dairy industry. If not treated right, milk is highly susceptible to bacteria and degradation. “Companies in New Zealand are doing a good job in this respect,” Siemer says.

“Their products are highly valued, for instance by

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

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

“Dairy product manufacturers that deal with these challenges in a sustainable way have a competitive edge and are very well equipped to benefit from the

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

‘There are excellent growth opportunities for dairy product manufacturers that meet strict safety standards’

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A DAY IN THE LIFE OF THE ON-BOARD REPORTER Stefan Coppers Team Brunel’s on-board reporter Stefan Coppers is the boat’s media link with the outside world as well as its official photographer and film-maker. However, as he describes here, he actually spends most of his time cooking and cleaning.

My daily routine I sleep for four hours a night (between 11pm and 3am), though sometimes I find that this is too little, and so I take a nap for an hour in the afternoon. But if there are many maneuvers or sail changes it may be that I do not sleep at all.

During the day I make media content and provide the sailors with food and drinks. Cooking is spread throughout the day. When the boys are changing a watch at 4am, I set my alarm for 3am, as boiling water takes about 20 minutes and making the food takes another 20 minutes.

go back down below deck to clean the boat. I try to finish my movies before lunch, when I have to begin cooking for the 11am eating shift. And so my routine goes on – I go back to cleaning, and then prepare for the 4pm and 6pm crew changeovers when the guys need to eat.

Control using a special chat program link. I upload my movies using a secure Inmarsat uplink. The boats have no access to the internet but only to a private network from Inmarsat. Emailing is quite fast, though uploading a movie of around 200MB takes an hour.

At about 6pm I sit on deck to chat with the captain, Bouwe Bekking. I might take a couple of nice pictures, and when night falls, I sit back downstairs.

And after the last eating shift of the day at 10pm I go to sleep at about 11pm.

How I got the job with Team Brunel

My equipment when at sea The two men get out their bunks at 3:30am, put their clothing on and at around 3.35am, and then they can eat. Then promptly at 4am, the two sailors on the deck will come down, and the two fresh men will go up. The men who come down immediately eat their meal. These switches take place every two hours. It’s also a nice moment as there is much talk.

After washing, I write my little blog, and then prepare for the next eating shift at 6am. At sunrise I go upstairs to film and take photographs. At 9am I

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For equipment I use two of the newest GoPro movie cameras, a Sony handheld camera and a waterproof Panasonic. The boat has five fixed cameras onboard which I can control from my media desk in the aft of the boat. All the fixed cameras have microphones, so I can hear the guys at the aft or the bow. I use part of the mainsail as a perch for my GoPro to take shots of the whole boat.

We communicate with the ground by email and satellite phone, and I can chat live with Race

I worked for RTV Rijnmond in the Netherlands, and when the Volvo Ocean Race was in Rotterdam in June 2006, I was sent to make some brief items about it. At the dock I met Yvo Janssen, the current Head of Media Productions and Operations of the Volvo Ocean Race, who at the time was the public relations manager of Team ABN AMRO. While we were enjoying a drink, I said he can always call me if he is looking for an on-board reporter, which at that time was a dream for me.

Two years later - when Janssen was responsible for the PR for Team Delta Lloyd - I made some videos for the Dutch Volvo Ocean Race team, and got the job as on-board reporter shortly afterwards.

When I’m on board, I like sailing hard when

there is a lot of the wind. And I like to have good conversations with the guys. The thing I like the least about it is when the seas are rough; it’s true that I have been sick a few times!

‘If there are many maneuvers or sail changes it may be that I do not sleep at all’

Steffan Coppers

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VOLVO OCEAN RACE Facts & Figures – This is the 12th edition of the race, and the 5th under the name Volvo Ocean Race – The Netherlands and Sweden (Volvo’s home country) have the strongest history in the race in terms of the number of teams and sailors taking part – 7 teams are in this edition, including the first women’s team (Sweden) in over a decade – Each boat has 8 sailing crew and one on-board reporter – Some 22,000 corporate guests will be invited at stopovers and other hospitality events by sponsors of the race and the teams – The total TV audience is expected to be 1.65 billion people, on a par with the Olympics and World Cup The teams in the race are: – The Netherlands: Team Brunel – Abu Dhabi: Abu Dhabi Ocean Racing – China: Dongfeng Race Team – Sweden: Team SCA (all-female) – America/Turkey: Team Alvimedica – Spain: Team España – Denmark: Team Vestas Wind The other sponsors of Team Brunel are: – Brunel: project management, staff secondment and consultancy – Schouten Global: training and development – Moduleo IVC: premium vinyl flooring – Sub-sponsors: Gaastra (teamwear); Ernst & Young (accountancy)

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‘Another trump card is the fact that Australia still has a solid AAA-rating and hardly any debt’

RIDING THE WAVE IN AUSTRALIA Rikkert Scholten Commodity paradise Australia is suffering from lower prices for its natural resources.

The economy is struggling to keep its head above water, but the country does offer interesting opportunities for fixed income investors right now.

For years the Australian economy blossomed, thanks to its natural resources. Not only did the mining industry have its finest hour, but suppliers and infrastructure also profited from the insatiable demand for commodities from China. The demand for iron ore and coal is still there, but prices and margins have collapsed.

Liquefied natural gas (LNG) is the next big thing, especially for exports to Japan, but the plants have already been built, and the immediate benefit for the economy from their construction has faded away. Although this is of course a major headwind for the Australian economy, there is some hope.

In a transition phase Away from the headlines and spotlights, the country is in a transition phase, with a far more important role for services and consumer spending, says Rikkert Scholten, senior portfolio manager at Robeco and member of the rates team, who does call it a “a slow and tricky process”.

Yet, a struggling economy is often bad news for equity investors and good news for their fixed

income counterparts. The role of the central bank is important. “The Reserve Bank of Australia (RBA) has kept the interest rate stable for more than a year, but we saw the first rate cut on 3 February,” says Scholten.

“The central bank’s policy has come under pressure, with the decline in economic growth. The falling commodity prices have lowered inflationary pressure as well and in Australia it also took away wage inflation pressure.”

An economy which is losing speed and an interest rate of 2.25% with room for further rate cuts is an attractive environment for fixed income investors, he says. This was reason enough for Rorento to raise the stakes. “We did buy Australian bonds and added a short position in the Australian dollar to it, which makes an interesting investment opportunity,” says Scholten.

“Another trump card is the fact that Australia still has a solid AAA-rating and hardly any debt. The country has a history of prudent government policy.

The net debt to GDP ratio is now at a modest 10%.

Before the financial crisis, Australia even had a budget surplus for years.”

The value of the Aussie dollar, a classic commodity currency, has come down with, but not at the same speed as, commodity prices. “For the RBA it is important that the Australian dollar remains rather weak, in order to guarantee the transition of the economy to a more balanced one,” Scholten says.

the bond market is immune for risk appetite in the rest of the world. A second risk is that the housing market is still strong: further improvement could make the RBA wary of stimulating lending further.”

Many of the major central banks have gone far into QE-territory. The Reserve Bank of Australia however still has plenty of room for conventional measures, such as lowering the interest rate step by step, which is a favorable environment for fixed income investors, says Scholten.

Potential turning points Just as water flows to the lowest point, money flows to the scarce yield opportunities. There are some potential turning points, however, that investors should keep an eye on.

“Australia may be a couple of months sailing away from the US or Europe but that does not mean

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

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In our next edition Dodging icebergs and ‘Rounding the Horn’: managing risk on the race to Brazil In this issue

CHINA GOES FOR ‘GENTLY DOES IT’ Page 5

Check out our previous editions

SOME ARE MORE EQUAL THAN OTHERS

Page 6

> Spain: Leaving Alicante as Spanish bonds also enjoy a rising tide

CHINA’S MOUTH-WATERING INVESTMENT OPPORTUNITIES

Page 8

> South Africa: arriving in Cape Town’s new land of opportunity > UAE: capitalizing on the Gulf gateway between East and West in Abu Dhabi

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

> China: sailing into Sanya as Asian equities face a renaissance

JAN/FEB 2015

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