Enhanced Indexing equity strategy benefits from RobecoSAM scores

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1 ARTICLE June 2014 For professional investors Enhanced Indexing equity strategy benefits from RobecoSAM scores ESG factors integrated in Robeco Enhanced Indexing RobecoSAM scores in the stock selection model since 2010 RobecoSAM scores contribute to performance Strong performance Michael Strating Head Quantitative Equities Bart van der Grient Quantitative Researcher Wilma de Groot Portfolio manager Quantitative Equities Robeco Enhanced Indexing is an example of Core Quant Investing in developed markets. The strategy s performance has been strong in recent years. In this paper we focus on one element that distinguishes the Robeco strategy from those of others: integrating sustainability in the investment process. An important step forward was the integration of RobecoSAM s sustainability scores in the stock selection model in In this paper we investigate whether this has added value over the past three years. Track record Robeco Institutional Global Enhanced Index Fund Annualized performance YTD 1-year 3-year 5-year Inception Robeco Enhanced Indexing 1.99% 13.86% 13.28% 18.79% 7.27% MSCI World (net return) 1.24% 10.94% 11.30% 17.40% 6.11% Relative performance 0.75% 2.93% 1.98% 1.39% 1.16% Information ratio Tracking error 1.00% 1.21% 1.12% Source: Robeco Global Performance Measurement. Composite Enhanced Indexing Global, gross of fees, based on Net Asset Value, all figures in EUR, inception date November The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. Integrating sustainability: RobecoSAM scores Founded in 1995, RobecoSAM was one of the first asset managers to focus exclusively on sustainability investing. It was acquired by Robeco Group in 2006 in line with Robeco s strategic ambition to further develop into the thought leader in the field. Every year since 1999, RobecoSAM obtains financially material information directly from companies by inviting them to the annual Corporate Sustainability Assessment (CSA) survey. RobecoSAM has one of the largest proprietary corporate sustainability databases with over 2,500 companies. There are some 20 researchers, around 10 of which are dedicated to ESG integration since 2010 Article 1

2 corporate sustainability research across 59 industries. Companies receive a RobecoSAM score between on environmental, social and corporate governance factors and are ranked against other companies in their industry. ESG integration in Robeco Enhanced Indexing Within our Global Enhanced Indexing strategy, ESG factors have been explicitly incorporated in the investment process since the end of 2010, both in the stock selection model and in the portfolio construction. The Quantitative Equities team has access to the scores that result from the ESG analyses performed by RobecoSAM s researchers. Stock selection model Incorporation of factors that measure corporate responsibility management is not new in Robeco s quantitative stock selection model for enhanced indexing. For many years the model has contained factors that attach value to management policy aimed at increasing shareholder value. As we believe that integrating ESG factors into our investment process can improve the long-term risk-return profile of our portfolios, we have back-tested several ESG databases from both internal and external providers. The results of those back-tests were mixed. Some measures of ESG criteria showed disappointing results, while most others contributed only marginally to an improved risk-return profile. By contrast, a backtest of the RobecoSAM Corporate Sustainability Assessment showed strong results on a stand-alone basis. These results have been documented earlier in RobecoSAM s white paper Alpha from Sustainability 1. Our research in 2010 found that addition of the RobecoSAM sustainability scores to the responsible management factor of the existing stock selection model improved the model s risk-return profile and style characteristics. Given the growing importance of sustainability criteria in the investment industry, we expected this factor to continue to make a positive contribution to our portfolios. Stocks with higher RobecoSAM scores are ranked higher and stocks with lower RobecoSAM scores get lower rankings in our model. High ranked stocks are more likely to be included in the portfolio than low ranked stocks. Robeco implements the RobecoSAM score in a proprietary way based on our belief in integrated risk management. This belief emphasizes the elimination of unrewarded risks. Biases towards, for example, regions or size segments are therefore removed at an early stage. Portfolio construction In addition to incorporating ESG factors in the stock selection model, our portfolio construction guidelines do not allow overweight positions for companies with the lowest RobecoSAM scores in each global sector since The RobecoSAM white paper Alpha from Sustainability by C. Churet and W. de Groot is available at Article 2

3 Performance of the ESG factor since inclusion in the model in 2010 ESG factor The chart shows that the ESG factor - as we include it in the enhanced indexing strategy - performed well on a standalone basis since it was included in the model at the end of The factor was able to separate the winners from the losers: initially by correctly identifying losers, more recently by correctly identifying winners. Performance top and bottom 20% ESG scores as included in the model 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Top Bottom -4.0% -5.0% -6.0% -7.0% Source: Robeco. The graph does not represent returns of an actual portfolio. It depicts returns of securities as ranked by the ESG factor, as used by the Quantitative Equities team. Securities ranked in the top or bottom quintile may or may not have been included in the actual portfolio. Results are shown gross of fees. Results would be reduced by application of fees and expenses incurred in the management of the account. Returns shown do not represent the results of actual trading. Actual results could have been different, and potentially lower than the hypothetical results that are presented. Robeco Responsible Management Basket The ESG factor is included in the Responsible Management basket of the stock selection model. The chart below shows that the Responsible Management basket benefited from the addition of the ESG factor. As you can see, the basket including the ESG factor performed better than the basket without this factor. Article 3

4 Performance Responsible Management basket with and without ESG top/bottom scores 6.0% 4.0% 2.0% 0.0% No ESG factor Top -2.0% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 No ESG factor Bottom With ESG factor Top -4.0% With ESG factor Bottom -6.0% -8.0% -10.0% Source: Robeco. The graph does not represent returns of an actual portfolio. It depicts returns of securities as ranked by the Responsible Management basket, as used by the Quantitative Equities team. Securities ranked in the top or bottom quintile may or may not have been included in the actual portfolio. Results are shown gross of fees. Results would be reduced by application of fees and expenses incurred in the management of the account. Returns shown do not represent the results of actual trading. Actual results could have been different, and potentially lower than the hypothetical results that are presented. RobecoSAM spider analysis In addition to benefiting performance, integrating sustainability has helped the fund to achieve an above-average sustainability profile. This profile is based on 9 distinctive ESG criteria for each company in the portfolio. Average ESG score Robeco Institutional Global Enhanced Index Fund Source: RobecoSAM, as of 31 December 2013, based on companies assessed Article 4

5 Summary Robeco Enhanced Indexing shows a strong investment performance. Over the past three years, the integration of the RobecoSAM sustainability scores in the investment process has contributed to this performance. Sustainability integration differentiates the Robeco strategy from other strategies with similar investment objectives. We are convinced that the integration of sustainability will continue to add value in the future. Article 5

6 Appendix Robeco corporate policy on sustainability Sustainability Investing ( SI ) is a true commitment and an explicit strategic choice for Robeco. We aim to give responsibility and sustainability a prominent position in our strategy and operations. Our objective is to turn SI into a competitive advantage and to be regarded as market leader. Robeco expects that SI, especially the integration of ESG factors into the investment analysis and decision-making process, will improve risk-return ratios; SI leads to more comprehensive company assessments and results in the earlier discovery of investment opportunities. By exercising ownership rights through voting and engagement, we expect to be able to create additional long-term value while also taking responsibility as an asset owner. Furthermore, by advocating sustainability investing we meet the demands of clients and society at large. Governance and Active Ownership department Engagement and voting activities are the responsibility of Robeco s Governance and Active Ownership department. This department was established as a centralized competence center in April 2005, when Robeco decided to make Sustainability Investing a spearhead of its strategy. Robeco s Governance and Active Ownership department is primarily responsible for engagement activities (thematic and enhanced engagement), for exercising voting rights and for the firm s Corporate Responsibility in operational management. It consists of eight professionals and is headed by Edith Siermann. Edith Siermann reports directly to Roderick Munsters, CEO of Robeco s Management Board. RobecoSAM SAM was founded in 1995 and has been a subsidiary of the Robeco Group since Over the years it has developed into one of the world s leading sustainability investing specialists, providing its clients with a wide range of specialist sustainability investingrelated research, products and services. SAM was renamed RobecoSAM in 2013, and its sustainability expertise and insights benefit investment processes and products throughout the Robeco group. With around 130 specialist staff located in Zurich and Rotterdam, RobecoSAM s sustainability team includes experts in both financial and sustainability analysis. In addition to the comprehensive range of sustainability investment solutions and services it provides, RobecoSAM takes an active approach to company engagement and voting. Other papers on integrating sustainability in Robeco Enhanced Indexing Alpha from Sustainability, Wilma de Groot & Christophe Churet, 2009 ESG integration into Robeco s quantitative stock selection model, Daniel Haesen & Michael Strating, 2011 Article 6

7 Important information This document has been carefully prepared by Robeco Institutional Asset Management B.V. (Robeco). It is intended to provide the reader with information on Robeco s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Any investment is always subject to risk. Investment decisions should therefore only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. The information contained in this document is solely intended for professional investors under the Dutch Act on the Financial Supervision (Wet financieel toezicht) or persons who are authorized to receive such information under any other applicable laws. The content of this document is based upon sources of information believed to be reliable, but no warranty or declaration, either explicit or implicit, is given as to their accuracy or completeness. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco s expectations for the future. Past performances may not be representative for future results and actual returns may differ significantly from expectations expressed in this document. The value of your investments may fluctuate. Past results are no guarantee of future performance. All copyrights, patents and other property in the information contained in this document are held by Robeco. No rights whatsoever are licensed or assigned or shall otherwise pass to persons accessing this information. The information contained in this publication is not intended for users from other countries, such as US citizens and residents, where the offering of foreign financial services is not permitted, or where Robeco's services are not available. Robeco Institutional Asset Management B.V. (trade register number: ) has a license of the Netherlands Authority for the Financial Markets in Amsterdam. The prospectus and the Key Investor Information Document for Robeco Institutional Global Enhanced Index Fund (which is registered with the Netherlands Authority for the Financial Markets in Amsterdam) can all be obtained free of charge at Article 7