1. Indexing 360°: Multi-Factor Investing

With the growing popularity of smart-beta investing and the many new solutions available on the market, potential buyers are considering ways to add these to their port- folios. One approach is to invest in single factors such as value, quality, dividend, low volatility etc., all of which are now available via passive vehicles including ETFs. They provide investors with  exibility to select one or several preferred factors and can also be used for timing or rotating between factors, along business cycles or as market valuation change. Alternatively, one can strategically invest into a larger number of factors, while holding such positions for the long term. This approach can also be accessed passively via multi-factor ETFs, which provide a well-balanced risk-return exposure and turnover efficiency.

 

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2. Indexing 360°: Choosing the right alternative beta index

The choice for an investor in the passive space is two dimensional. First, an investor has to decide on the right benchmark from a wide array of opportunities, which include market cap-weighted, sector, smart-beta, SRI, theme and other indices, not to mention those with embedded currency hedged overlays. These provide good flexibility as building blocks for passive as well as active portfolio management. Second, an investor needs to decide on the most appropriate passive product for a given index. While there is an extensive number of passive fund alternatives tracking each of the seemingly similar indices offering exposure to, European value for example, we argue that choosing the right underlying benchmark easily outweighs the merits of selecting one ETF over another.

 

High quality stocks at discount prices.

MSCI EMU Prime Value delivered the best overall performance amongst different value factors considered. The distinguishing feature of the Prime Value concept is that it selects relatively “cheap” stocks, but only from a

universe of higher quality ones. 

 

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Five concerns with low volatility index ETFs

Equity investors have a choice between active low volatility managers and low volatility index ETFs. Index strategies offer a transparent and often cheaper alternative to active low volatility investing, but in our view this comes with several drawbacks.

 

  • Low volatility index ETFs offer transparent exposure to the low risk factor
  • We do have concerns about index arbitrage, factor exposures, breadth, complexity and rebalancing
  • We address these concerns in our active Conservative Equities strategy

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Mergers

& Acquisitions 

Acquisitions are good for the economy when they allocate resources more efficiently between owners. However, empirical evidence shows that only a minority of acquisitions are good for the shareholders of the acquirers. Most acquisitions create more value for the shareholders of the target company than for those of the buyer. 

This is perhaps not surprising when we recall that acquisitions can create value for acquirers only if the target company’s performance improves by more than the value of the premium over the target’s intrinsic value that the acquirer had to offer for the target in order to persuade its shareholders to part with it.”

—Valuation: Measuring and Managing the Value of Companies, Fifth Edition, p. 489

 

 


Return on Invested Capital (ROIC): With or Without Goodwill?

“Start by analyzing ROIC, both with and without goodwill. ROIC with goodwill measures the company’s ability to create value over and above premiums paid for acquisitions. ROIC without goodwill is a better measure of the company’s performance compared with that of its peers.”

—Valuation: Measuring and Managing the Value of Companies, Fifth Edition, p. 165


Our new Benelux top pick list for 2017 is composed of the following 10 companies:

• The synergies within AB InBev and other costs savings are expected accelerate earnings growth in FY17, while solid FCF generation will allow for an attractive dividend and a gradual deleveraging.

• Aedifica is benefiting fully from the demographic ageing in Western Europe. In combination with its strong market position and well-established relationships, we see strong earnings and value growth ahead.

• We like Ahold Delhaize for the attractive valuation, ongoing self-help measures, expected synergies of € 500m, the healthy balance sheet, the strong cash flow profile and high ROCE. We think the stock’s recent underperformance is overdone.

• For Econocom we now see significant margin expansion potential, from 5.6% REBITA margin in FY17E to 8- 10% by FY22E, closer to European IT services, thanks to faster growing, higher margin bundled offers combining leasing and services, as well as higher software content.

• We like Galapagos very strong cash position combined with its main asset Filgotinib in phase III studies in different indications. Due to the limited risk of negative news flow of their biggest value driver.

• We see a potential catalyst for NN Group in the acquisition of Delta Lloyd while we also see attractive value in a standalone basis, where NN could accelerate its share buyback program.

• Orange Belgium remains significantly undervalued trading at a discount of more than 25% to EU altnet peers. A resolution of the pending pylon tax dispute, cost-plus pricing for the sale of DTV & broadband services, reinstated dividends, and a probable corporate tax reform could unlock value for investors.

• Refresco posted reassuring 3Q16 results and, with the acquisition of Whitlock, made a promising first step into the US. We think today’s valuation – 30/40% discount to peers – does not reflect the company’s potential.

• SBM Offshore should be able to generate strong excess cash flows, supported by the lease fleet while we see an increasingly promising pipeline for new projects and FID potential for deep-water prospects in FY17.

• We see attractive upside for TKH Group, based on our earnings scenario for the coming years supported by ambitious targets for its seven vertical markets, which we believe have a strong margin profile.

 

We select Beter Bed, Biocartis, Immobel, Nyrstar and Recticel as our smallcap ideas for 2017.


BNP Paribas Research : The theory of low-volatility investing 

  • We have been managing low-volatility equities portfolios for many years, employing the low-volatility anomaly returns for clients and we aim to drive better risk-adjusted performance over the long term compared with traditional market-cap-weighted portfolios.
  • Our extensive research shows that the low-risk anomaly can be found in all sectors and we believe low-volatility investing can significantly improve the Sharpe ratio of equity investments, while providing some level of downside mitigation in bear markets.
  • Through our ongoing research we have continued to evolve our approach, moving from managing minimum variance type strategies into more efficient approaches. In particular, we invest in all sectors to improve diversification and to avoid the bias towards defensive stocks. 

Robeco Research : A critical eye on low-volatility investing

  • Low-volatility shares can be more volatile than the wider market over shorter periods
  • Investors need a horizon of at least one market cycle for low-volatility investing
  • Enhanced approach can offer support when rates increase
  • Five things to look for in product or manager selection