Wilma de Groot

Robeco has launched its Enhanced Indexing strategy for Australian equities. Backed by more than 20 years of live Enhanced Indexing experience, the strategy offers superannuation funds and other institutional investors a core option between passive exposure and high-conviction active management.

The Australian market-capitalisation-weighted benchmark is heavily concentrated in a small number of large banks and miners, creating significant market concentration. Traditional active management can target meaningful alpha, but large stock or sector positions often introduce more benchmark-relative risk than institutions want in a core allocation. A systematic, enhanced indexing approach, on the other hand, aims to generate meaningful alpha without taking on excessive benchmark-relative risk.

Wilma de Groot, Head of Core Quant Equity and Head of Quant Portfolio Management at Robeco, who has portfolio oversight of the strategy, said the approach was designed to address the specific challenge in the Australian market.

“While Australia is a concentrated market, it is broad and liquid enough to support a diversified systematic approach – where quantitative stock selection combined with disciplined risk control offers an alternative to relying on passive exposure alone,” de Groot said.

“We’re giving investors a way to stay close to a benchmark while managing a concentration problem that passive exposure alone doesn’t solve.”

The Your Future, Your Super performance test has sharpened the focus among superannuation funds on benchmark-relative outcomes. This has increased pressure on core allocations to perform predictably and consistently, rather than relying on a small number of high-conviction stock calls.

The Australian strategy is benchmarked against the S&P/ASX 300 Index and is expected to hold around 150 positions spread across the entire universe. Tracking error is managed through Robeco’s in-house risk model, which assesses various sector, style, macro and statistical exposures together.

Because the strategy is offered as a mandate rather than a pooled fund, institutional investors can define risk budgets, exclusions, sustainability preferences, and implementation requirements at the outset, rather than adopting a one-size-fits-all product.

Stephen Dennis, Head of Robeco Australia and New Zealand, said the launch marked a significant step for the firm’s Australian business and for local institutional investors.

“Australian institutional investors have been telling us they want a core equity solution that can navigate the concentration of the local market without taking on the swings that come with high-conviction active management,” Dennis said.

“Bringing our globally established Enhanced Indexing capability to Australian equities is a direct response to that. It gives superannuation funds and other institutions a research-led option that stays close to the benchmark, manages risk deliberately, and can be tailored to their own requirements.”

“For our Australian business, this is a significant step in building out the range of strategies we can offer locally, and it reflects growing demand for more efficient, risk-aware core allocations.”

The day-to-day management of the strategy is led by Robeco’s quantitative portfolio management team, with human overview support from Hong Kong based Joshua Crabb – head of APAC fundamental, and on-the-ground support from Sydney based client portfolio manager Michael Lin.

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Joshua Crabb

There is a long-term opportunity for investors to gain exposure to Asia Pacific equities given low absolute and relative valuations which are being obscured by geopolitical and interest rate concerns. However, this ignores the region’s solid macroeconomic advantages, according to Robeco’s head of Asia Pacific equities, Joshua Crabb.

Despite headline concerns with some emerging market currencies and banking sector events in the US and Europe continuing to impact sentiment, Mr Crabb said financial risks are lower in Asia given more conservative monetary and fiscal policies over the last few years, and the ongoing reopening backdrop.

“The last time Asia was this cheap, fiscal and monetary policy was a lot weaker than now, yet subsequent market outperformance was dramatic.

“South-east Asian countries in particular are in the sweet spot: supply chain diversification benefits these countries as suppliers of materials, receivers of capex and the home to the next wave consumers. India feels expensive but is becoming more attractive for its structural growth opportunities. Markets such as Korea and Taiwan carry strong prospects of a semiconductor recovery against low valuations. Japan is benefitting from mild inflation and more shareholder friendly policies.

“The long-term structural foundations of the Asia Pacific region will assert themselves over time, making it an opportune time to invest in Asia Pacific ahead of the next era of growth,” he said.

Mr Crabb said despite the promising outlook, the first half of 2023 has been a false start in the asset class, with optimism over China’s re-opening fading and the Federal Reserve’s hawkish stance surviving the ongoing sequence of mid-size US bank failures, supporting the US dollar.

“This has left Asia Pacific markets treading water somewhat and especially as concerns over the outlook for high value exports like semiconductors to the slowing US economy have increased. This absence of short-term catalysts is keeping investors on the sidelines but this creates the opportunity for longer term orientated investors,” he said.

In these periods of risk-off, the US dollar tends to firm and is a headwind for Asia Pacific equities, however this should be viewed by investors as a window to increase allocation to the region.

“Asia Pacific is strategic to the world’s two dominant economies – the US and China – and exposure now will capture upside as the valuation gap narrows. The valuation gap remains enormous, despite the slow-burning banking crisis in the US, and the S&P 500 has outperformed relative to Asia Pacific markets.

“In previous cycles, post the dotcom bubble and after the GFC, this kind of gap has heralded a strong and long period of outperformance for Asia Pacific.

“In addition, Asia Pacific economies are not suffering from high inflation in the same way as Europe, the US or some emerging economies. This is giving governments in the region policy flexibility, and supports the view that macro fundamentals will start to be reflected in relative equity valuations,” he said.

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