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Guide to low-volatility investingFROM THEORY TO PORTFOLIO

2 • Guide to low-volatility investing

The past and present The history and basics

Why does low-volatility investing work?

Low-volatility investing today

The strategy How to avoid the pitfalls of a generic low-vol approach

The construction of a Conservative equities portfolio

Losing less in down markets

The portfolio How can low-volatility investing be applied in an equity portfolio?

Impact on a portfolio with bonds and equities

The funds Robeco Global All Countries Conservative Equities

Robeco European Conservative Equities

Robeco US Conservative Equities

Robeco Emerging Conservative Equities

Investment team

Extra information Terms and definitions

Recommended articles

Contact details and information

Content

Rotterdam, October 2015

Dear reader,

It gives us great pleasure to present you with this ‘Guide to low-volatility investing’. It describes

the basics of low-volatility investing, provides insight into the volatility effect and shows how

the Robeco Conservative Equities strategies work. This guide introduces the key features of

Robeco’s Conservative Equities and explains how the strategy can be used in a portfolio.

The objective of Robeco’s Conservative Equities strategies is to achieve a long-term full-cycle

performance equal to or greater than the equity market with substantial lower downside risk.

According to the Capital Asset Pricing Model (CAPM) theory, risk and return should go hand

in hand. However, 40 years of empirical studies have proved that the relationship between

risk and return is flat or even negative. Strategies based on this phenomenon are therefore a

promising option for investors.

Robeco was one of the first companies to make research contributions to the academic

debate on low-volatility investing. And we have been a leader in successfully putting the

concept into practice. We launched our first Conservative Equity strategy for developed

markets in 2006 and an emerging markets strategy in 2011.

Currently Robeco manages over EUR 24 billion in quantitative strategies. A significant

proportion of this sum is invested in low volatility strategies: with over EUR 11 billion in

assets under management, Robeco can be considered one of the world’s biggest active low-

volatility equity managers.

We hope this guide will give you an insight into how to achieve your long-term investment

goals and convince you of the benefits of our low-volatility approach.

Portfolio Managers Robeco Conservative Equities

Pim van Vliet Maarten PolflietArlette van Ditshuizen Jan Sytse Mosselaar

Guide to low-volatility investing • 3


The past and present

– Lower-risk stocks actually generate higher returns, which contradics the

CAPM theory

– Low-volatility investing works because investors are biased towards high-risk

stocks and are willing to overpay for these

– Despite the growing interest in low-volatility investing, total assets under

management for these strategies are estimated to be relatively low


Already in the early 1970s, academic research reported

that the risk-return relationship is flat for the US equity

market.

Discovery of the volatility effectThe CAPM (Capital Asset Pricing Model) predicts a positive

relationship between risk and return. In other words, taking

a higher degree of risk should, on average, be rewarded with

a higher level of return. However, the first empirical tests

carried out on the CAPM documented that the risk-return

relationship is flatter than the theory predicts. In fact, a study

by Haugen and Heins (1972) showed that low-beta stocks in

the United States outperformed in the period 1929-1971.

Award-winning research by Robeco confirmed this ‘beta

effect’ for other equity markets and documented a related

‘volatility effect‘: stocks with lower risk (as measured by

beta or volatility) actually generate higher returns, which

contradicts the CAPM theory. Figure 1 shows that stocks

with a beta lower than 1 have similar returns. As this

phenomenon cannot be explained by standard theories like

the CAPM, it is defined as an anomaly (see Figure 1). Other

academic research by Robeco shows that the volatility effect

is growing stronger in the European, Japanese and Emerging

equity markets.

A generic low-volatility strategy selects stocks based on the

volatility of past returns. From an investor’s point of view,

such a quantitative strategy offers offers higher risk-adjusted

returns as measured by the Sharpe Ratio. This ratio indicates

the extent to which investors are rewarded for the (absolute)

risk they take. In other words, how much return they receive

per unit of risk they take.

Source: Blitz, David, Eric Falkenstein, and Pim van Vliet (2014), “Explanations for the Volatility Effect: An Overview Based on the

CAPM Assumptions”, Journal of Portfolio Management.

Figure 1: Risk-return relationship US, 1931 - 2002

0%

3%

6%

9%

12%

15%

0 0,5 1 1,5 2

High beta Low beta

Retu

rn a

bove

cas

h

Risk (beta)

Simple average Compounded averageMarket

Risk (beta)

The history and basics of low-volatility investing


Because empirical evidence documents a flat or even

a negative relationship between risk and return, the

volatility effect in essence challenges the well-known

CAPM model. This model assumes a positive and linear

relationship between risk and return.

Explanations for this so-called low-risk anomaly1 come

from both rational professional investor behavior (market

structure and regulation) and behavioral finance (irrational

behavior by market participants). These are explained in

more detail below.

– The goals and incentives of investors, asset managers,

analysts and asset management firms can lead to

investors overpaying for high-beta stocks. This is due

to the fact that in the investment industry ‘the winner

often takes it all’. This means that based on performance

only the best investors receive inflow. That is why some

are even willing to take unrewarded risks to become the

winner. This means they overpay for high-risk assets. This

behavior is confirmed by empirical evidence that shows

that mutual funds hold a disproportionally large amount

of high-beta stocks.

– From a behavioral perspective market participants are

known not to behave completely rationally. Usually

they act on only a fraction of all the available relevant

information. A well-known example is that high-risk

stocks receive a lot of attention from investors, for

example by making headlines in the news, whereas more

boring low-risk stocks don’t.

– Another well-documented aspect is the overconfidence of

active investment managers in their ability to select the

right stocks. This overconfidence leads to a bias towards

more volatile assets.

– Whenever an asset does not yield the return that

corresponds with its risk profile, it is considered too

expensive. A rational investor will try to sell this expensive

asset to lock in a profit. There is still an incentive to sell,

even if the investor does not hold the asset itself. All

he needs to do is to borrow the assets and sell them

short. However, this is not always possible because

of the market structure (the ability to borrow and sell

short) or regulatory requirements. These constraints

prevent so-called arbitrageurs (and short-sellers) from

re-establishing the fair risk-return relationship when

high-beta stocks become overpriced.

– A similar situation occurs when an investor cannot switch

between the following two types of portfolio: a portfolio

of high-risk stocks and a portfolio of low-risk stocks where

leverage is used to increase the risk level to that of the

high-risk stock portfolio. The application of leverage is

sometimes not permitted by regulators or is against

client wishes.

These factors will persist unless fundamental changes in law,

regulations or industry structure occur or the behavior of

market participants changes. Therefore, investors are likely

to remain biased towards high-risk stocks, and willing to

overpay for them. This disturbs the system of a fair reward

for risk and gives low-volatility investors the opportunity to

exploit this.

Why does low-volatility investing work?

1 Van Vliet, Pim (2004), “Downside Risk and Empirical Asset Pricing”, PhD thesis Erasmus School of Economics


Whereas only ten years ago hardly anyone had

heard about low-volatility investing, nowadays many

professional investors allocate to low-volatility stocks and

many asset managers offer a variety of related products.

Following the success of active managers, index providers

and passive managers have also jumped on the bandwagon

by introducing low-volatility indices and ETFs. The names

might vary from minimum volatility to managed volatility,

minimum variance. They all try to exploit the low-volatility

effect in one way or another.

In response to the popularity of these new products some

investors have become concerned that low-volatility is

starting to become an overcrowded trade and that the

anomaly might disappear. However, there is no empirical

evidence to support these concerns. Like other well-known

effects in financial markets (for example, the value and

momentum effect) the volatility effect can be considered

persistent.

Despite the growing interest, we estimate total assets under

management in low-volatility strategies at around USD 200

billion as2. Total assets under management in active low-

volatility products amounts to around USD 75 billion in Q2

2014 (Figure 1). Therefore, low-volatility is still in its infancy.

International Emerging Markets Global/ACWI United States

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

004Q1

04Q3

05Q1

05Q3

06Q1

06Q3

07Q1

07Q3

08Q1

08Q3

09Q1

09Q3

00Q1

00Q3

01Q1

01Q3

02Q1

02Q3

03Q1

03Q3

04Q1

Asse

t und

er M

anag

emen

t (in

USD

mill

ions

)

Global mandates have the largest AuM

Figure 2: AuM of low-volatility products in eVestment Alliance database over time

Source: eVestment Alliance, Citi Research

2 Are low-volatility stocks overcrowded? David Blitz and Pim van Vliet, Robeco Research Paper, November 2014

Low-volatility investing today


– Investors should be aware of the potential pitfalls of low-volatility investing

– The Robeco approach successfully avoids these pitfalls

– Significant reduction of losses in down markets ensures capital preservation

The strategy


Before investors start investing in low-volatility stocks,

they should be aware of the potential pitfalls of a generic

strategy. The four most common pitfalls are summarized

below.

Pitfalls and solutions of low-volatility investing

Pitfall Robeco approach

1 One-dimensional view of risk Multi-dimensional risk approach

2 High trading costs Robust portfolio-construction process

3 Limited up-capture and valuation risk Valuation and momentum factors in the stock-selection model

4 Concentration risk Strict concentration limits for region, country, (sub)sector, size and single stock weights

Source: Robeco

How to avoid the pitfalls of a generic low-vol approach

For each of the pitfalls, Robeco offers a solution and

identifies the most attractive low-volatility stocks.

These are stocks with low absolute risk, low distress risk and

attractive upside potential. Our prudent and systematic

process for selecting stocks and constructing the portfolio

leads to a low turnover and enhanced long-term returns.


Pitfall 2

High trading costsSecond, a low-volatility strategy can lead to high trading

costs, because of high turnover. Generic low-volatility

managers typically have a turnover rate of more than 50%

and some in excess of 100%. This high turnover is often

the result of the optimization method used to construct

portfolios. The optimization method is very sensitive to

assumptions on parameters, especially the correlations

between individual stocks in the investment universe and

in the portfolio. At first glance, portfolio turnover might

look like a relatively minor issue. After all, the impact of a

single transaction on net performance is minimal for most

stocks. This is not always the case in emerging markets

where these costs are relatively high compared to those in

developed markets. But when all the individually modest

costs are bundled together, they can take a big bite out of

net performance. Transaction costs are the silent killer of

performance, making them a major consideration.

Robeco approachIn order to prevent unnecessary trading costs and enhance

returns in the long run, Robeco’s Conservative Equities

strategy has a robust portfolio-construction process which

is different from most other asset managers. The portfolio-

construction process uses a ranking method. A ranking

method is less sensitive to changing inputs and avoids high

turnover. Furthermore, the portfolio-construction process

incorporates a sell-driven investment discipline. This means

that stocks are only sold when they end up in the bottom

40% of the ranking. This results in an expected annual

one-way turnover of only around 25%. In other words,

on average a stock is held in the portfolio for four years.

Robeco approachRobeco adopts a multi-dimensional risk approach, which

also includes forward looking risk measures. The Robeco

distress-risk model takes into account how balance sheet

leverage of a company might translate into future distress

(e.g. credit rating downgrade or insolvency). The Robeco risk

approach also incorporates other forward-looking financial

information about the firm’s corporate structure.

Based on extensive testing over the period 1991-2009,

Robeco has found that the distress-risk model has strong

predictive power and is an effective indicator of future

financial distress. This predictive power is especially

important to a low-volatility strategy, because one of its

main goals is to preserve equity capital by minimizing losses

in down markets and realizing positive excess returns versus

regular market indices.

Pitfall 1 One-dimensional view of riskFirst, a low-volatility portfolio focusing only on past volatility

has a one-dimensional view of risk.

An important risk dimension, future expectations, is

excluded if the analysis relies solely on on historical

statistical risk factors.


Pitfall 4

Concentration riskLow-volatility indices and portfolios constructed using the

optimization method can heighten the concentration risk.

The S&P 500 Low-volatility Index is a good example. It

does not constrain sector weights, which can result in a

huge sector concentration. For example, in December 2012

around 60% of this index was invested in only two sectors,

utilities and consumer staples. This means that any sector-

specific developments can have a large negative impact on

total performance. Optimized portfolios, which construct

low-volatility portfolios by taking correlations between

stocks into account, are also vulnerable to increased

concentration risk. These portfolios are highly dependent

on input data like correlation estimates, which can result in

extreme portfolio positions.

Pitfall 3

Limited up-capture and valuation riskDue to its focus only on low volatility, a generic strategy

tends to lag during an up market: this is called limited

up-capture. Valuation risk is the risk of overpaying for low-

volatility stocks because the actual valuation (price relative

to fundamentals) is ignored.

Most generic low-volatility strategies do not take valuation

into account. This can be a risk as during some periods, low-

volatility stocks can be more expensive. This was for example

the case in the 1940s and 1950s, when people were willing

to pay for stability, which resulted in relatively low returns in

the following years. Also, in the years after the financial crisis

(2008) low-volatility stocks became relatively expensive.

Robeco approachIn order to enhance the risk-return profile and to mitigate

the valuation risk, Robeco Conservative Equities has added

return factors to its stock-selection model. Adding the

momentum factor, for example via earnings revisions,

helps to improve up-capture. Adding the valuation factor

mitigates valuation risk. Incorporating these two factors into

a low-volatility strategy enables us to realize our objective of

maximizing Sharpe ratios.

Robeco approachRobeco mitigates concentration risk by having strict

research-based concentration limits for region, country,

(sub-)sector, size and single stock weights. Furthermore,

Robeco combines low-volatility, valuation and momentum,

which have low correlations, in its selection model. This

leads to a varied stock selection while avoiding excessive

sector and country tilts.


In order to realize the goal of the Conservative Equities

strategy, the model not only focusses on the generic low-

volatility characteristics of stocks but also takes distress risk,

valuation and momentum factors into account to further

enhance the portfolio’s risk-return profile. In our approach

we focus first on reducing risk by using a combination of

statistical low-risk factors and proprietary distress factors

and secondly on enhancing return by adding customized

valuation and momentum factors to the model (Figure 3).

The stock-selection model produces a total score for

each stock in the investable universe by combining the

outcomes on the different factors (low risk, valuation and

momentum).

The aim of the Robeco Conservative Equities strategy is

to realize a long-term full-cycle performance equal to, or

greater than, the equity market with substantially lower

downside risk. Pure bottom-up stock selection is the sole

performance driver of the strategy.

I. Stock ranking The starting point is the definition of an investment universe.

Our investment universe is based on the S&P Broad Market

Index, the MSCI indices and the S&P IFC and FTSE Emerging

Markets Index for emerging markets. Dual listings and stocks

with data issues are excluded and a liquidity screen based on

a minimum average trading volume and minimum market

cap. This results in a total investable universe of 3500,

2000, 1400 and 1000 stocks for Global, US, Emerging and

European Conservative Equities respectively.

Risk

Retu

rn

Conservative Equities

Low Risk factors Low Volatility

The construction of a Robeco Conservative Equity portfolio

Figure 3: Conservative Equities: improved risk-return ratio

Source: Robeco

Brand portfolio of low-volatility stocks

– Single statistical risk measure

– Low conviction, large numbers of stocks

Robeco proprietary low-risk factors

– Combination of statistical factors

– Proprietary distress factors

Robeco Conservative Equity

– Integration of valuation and momentum factors

– High conviction, higher active share


II. Portfolio constructionThe next phase consists of model portfolio construction. The

model’s results (the stock ranking) are implemented using

a proprietary portfolio-construction algorithm, which uses

validated rankings from the stock-selection model to create

a portfolio. The tool’s objective is to construct the portfolio

by selecting the highest ranked stocks with low expected

risk and attractive upside potential. It aims to maximize

the exposure of the portfolio to the highest ranked stocks.

Portfolio turnover is regulated by only selling stocks when

they fall into the bottom 40% of the ranked. In the long run

this approach leads to lower transaction costs and higher

returns. Figure 4 provides an overview of this process.

Source: Robeco

Figure 4: Portfolio management: A disciplined process to manage client portfolios

1) StockRanking

3) Execution & Monitoring

2) Portfolio Optimization

ClientPortfolio

III. Execution & MonitoringThe portfolio consists of approximately 150 (European and

US Conservative Equities) or 200 (Global, All Countries

and Emerging Markets Conservative Equities) positions. It

follows a monthly cycle of ranking the stocks and adjusting

the portfolio accordingly. The portfolio is continuously

monitored between monthly rebalancing dates. Corporate

actions, position limits, foreign currency exposure and

performance are constantly assessed.

If it is necessary to take action intra-month for example

due to significant cash inflows or outflows, or to reduce

unintended risks, an extra portfolio adjustment takes place.

Portfolio managers carefully check all proposed transactions

and the new portfolio as they have final responsibility for

buy-sell decisions.

Monthly rebalancing process

1) Stock Ranking

– Proprietary quantitative stock-selection model

– Qualitative review on stock rankings

2) Portfolio Optimization

– Proprietary portfolio-construction algorithm

– Determine most efficient instruments

– Check proposed trades

3) Execution and Monitoring

– Order execution by trading desks

– Continuous monitoring of portfolio

– Portfolio rebalancing aligned with cash flows

Objectives portfolio-management process> Obtain the highest possible model exposure> Lower costs by avoiding unnecessary transactions> Control risks by maintaining a human overview


Capital preservation can be achieved due to significant

reduction of losses during down markets.

The main objective of the Robeco Conservative Equities

strategy is to achieve a long-term full-cycle performance

equal to, or greater than, the MSCI Index, but with a lower

degree of volatility. An advantage of Robeco’s low-volatility

strategy is that, in a declining market, the stocks in the

portfolio typically fall less than other stocks. Once the market

recovers, low-volatility stocks have less ground to make up.

The preservation of capital compensates for the fact that the

strategy may lag the MSCI Index in a strong

(thematic) up market.

Losing less in down marketsFigure 5 provides details of the risk-reduction potential in

three scenarios: down markets (negative one year rolling

returns), moderate up markets (returns between 0% to 15%)

and strong up markets (returns above >15%).

The chart on the right-hand side of Figure 5 shows the ‘hit

ratio’ of the Conservative Equity Strategy since its inception.

Investors should be aware that the probabilities indicated

below for the three scenarios are no guarantee that positive

excess returns will always be generated in declining markets.

Figure 5: Conservative Equity strategy: Losing less in down markets

The average return series are based on the net asset values of three funds since inception until December 2014: Robeco Institutional Conservative Equity Fund (October 2006), Robeco

European Conservative Equity (September 2007) and Robeco Emerging Conservative Equities (March 2011), gross of fees. The Robeco Institutional Conservative Equity Fund and Robeco

European Conservative Equity and its reference indices have been unhedged for currency risk since 30 June 2012. The value of your investments may fluctuate. Results obtained in the past

are no guarantee for the future.

See also: Blitz, David, and Pim van Vliet (2014), “Low-Volatility Investing: Expect the Unexpected”, Robeco research paper.

MSCI Index Conservative Equities Negative excess returns

Positive excess returns

-20%

-10%

0%

10%

20%

30%

< 0% 0% to 15% > 15%

0%

25%

50%

75%

100%

< 0% 0% to 15% > 15%

Losses are not reduced in all cases: the graph above shows the probabilities of positive and negative excess returns for the three scenarios.

MSCI versus Conservative 1Y rolling returns since inception

Hit ratio


‘Robeco Conservative

Equity strategies

are based on the

revolutionary idea that

risk and return do not

go hand in hand. This

anomaly forms the basis

of our philosophy’

Portfolio Manager Pim van Vliet


The portfolio

– The Robeco Conservative Equity strategy not only improves the risk-return

profile, it also offers good opportunities for income generation and capital

preservation

– The Robeco Conservative Equity strategy can be effectively combined with

other strategies in the portfolio

– Including Robeco Conservative Equities helps to improve the risk-return profile

of the total portfolio


The Robeco Conservative Equity strategy is designed

for clients who are interested in capital preservation,

dividend income or diversification.

Investors should also consider how Robeco’s Conservative

Equity strategy can be applied to an existing portfolio of

equity funds. It can be combined with a benchmark-driven

or higher risk investment strategy or combined with high

dividend funds.

Combined with benchmark-driven funds The Conservative Equity strategy can offer diversification

benefits when it is combined with a benchmark-driven

investment strategy (beta close to 1), because it has a less

volatile return pattern than many traditional equity funds.

This means the volatility of the combined portfolio will

go down. However, the tracking error will go up because

Conservative Equity has different stocks to the benchmark.

Combined with higher risk funds The total volatility of an equity portfolio can decrease if you

invest a larger proportion in a Conservative fund. And

investors can therefore make use of the lower risk this

creates to seek out higher risk investments (beta larger

than 1) in other parts of the portfolio. Consider, for instance,

investments in small caps or thematic investing.

How can low-volatility investing be applied to an equity portfolio?

Table 1: Adding Robeco Conservative Equity to a beta 1.0 portfolio

% Invested in Conservative Equity 0% 15% 30% 45% 100%

Return % 4.2 4.8 5.2 5.5 7.3

Volatility % 15.1 14.0 13.5 13.0 10.6

Tracking error % - 1.4 2.2 2.9 7.2

Table 2: Adding Robeco Conservative Equity to a beta 1.1 portfolio

% Invested in Conservative Equity 0% 15% 30% 45% 100%

Return % 4.5 5.1 5.4 5.7 7.3

Volatility % 16.6 15.2 14.6 13.9 10.6

Tracking error % 1.5 0.9 1.5 2.3 7.2

Source: Robeco Performance Measurement. Monthly data from October-06 through December-14, gross of fees, based on net

asset value of Robeco Institutional Conservative Equity Fund. For beta 1.0 portfolio we use the MSCI World and for beta 1.1 we use

110% MSCI World excluding lending costs. For a better comparison, prior to July 2012 the index returns were hedged to the euro.

The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.


Combined with high dividend fundsConservative Equity can also offer good opportunities for

income generation. Low-volatility stocks are generally

characterized by above-average dividend yields. A Robeco

Conservative Equity fund and a high-dividend fund go

together well, because they offer a clear diversification

benefit when they are combined.

The reason is that the stock in both strategies are selected

in different ways. Low-volatility takes low risk as the starting

point with a high dividend yield as a by-product, while a high

dividend strategy focuses first on dividend yield. Also, high-

dividend funds typically don’t offer downside protection to

the extent that Conservative Equities does.

Figure 6 shows that the dividend yield of Global Conservative

Equities is consistently higher than the MSCI World and MSCI

World Min Vol.

Figure 6: Dividend yield Global Conservative Equities

Conservative Equities MSCI World MSCI World MinVol

1.0

2.0

3.0

4.0

5.0

6.0

09-0

6

09-0

7

09-0

8

09-0

9

09-1

0

09-1

1

09-1

2

09-1

3

09-1

4

Source: Robeco.

‘The advantage of the

strategy is that its stocks fall

less in declining markets’

Portfolio manager Jan Sytze Mosselaar


Including Robeco Conservative Equities in a portfolio helps

to improve the overall risk-return profile.

In this section, we will look into the effects of including

Conservative Equities in a diversified portfolio of equities

and bonds. Robeco Investment Research has developed the

Strategic Asset Allocation (SAA) tool in order to analyze the

risk and return profile. This enables us to assess the effects of

including assets in a client’s portfolio and test the robustness

of the portfolio in various economic scenarios.

The effect of Robeco Conservative Equities on your portfolioRobeco analyzed the impact of Robeco Conservative Equities

on a commonly used strategic, diversified portfolio of 60%

equities and 40% bonds. What are the effects of replacing

half of the equity portfolio with Robeco Conservative

Equities?

Initial strategic portfolio Portfolio including Robeco

Conservative Equities

60% MSCI World 30% MSCI World

30% Global Conservative Equites

40% Euro All Strategies Bonds 40% Euro All Strategies Bonds

For this exhibit we use two economic scenarios: the ‘last five

years’ and the ‘2015-2019’ scenario. These scenarios are

based on historical and forward-looking regimes, which are

published in Robeco’s annual Expected Returns publication.

On the one hand the ‘last five years’ scenario shows the

realized historical performance of the portfolios. On the

other hand, we use Robeco’s view on the current market

environment to give a forward looking insight to show the

future potential added value of incorporating Conservative

equities to the strategic portfolio.

In Figure 7, we show the improvement in the portfolio risk-

return profile for both scenarios. In the last five years, which

Initial strategic portfolio Portfolio including Conservative Equities

14%

12%

10%

8%

6%

4%

2%

0%0% 2% 4% 6% 8% 10% 12% 14%

Last 5 years

2015-2019

Return

Risk

Impact on a diversified portfolio

were characterized by high equity returns (‘last five years’),

the portfolio with Robeco Conservative Equity had returns

similar to the market.

In our ‘2015-2019’ scenario we expect a gradual

normalization of the world economy, where the hangovers

from the financial crisis eventually lift. The strengthening

economic growth and return of inflation should create a

more favorable environment for equities than bonds. In our

view, the combination of somewhat stretched valuations

and an ongoing economic recovery will lead to below

historical average returns for major asset classes in the next

five years. As we also expect higher volatility, Conservative

Equity could be an important risk-reduction tool for your

portfolio.

Replacing half the equity exposure with Robeco Conservative

Equities is an effective way of reducing total portfolio risk

in both scenarios. We conclude that the addition of Robeco

Conservative Equities to a portfolio will improve the overall

risk-return profile.

Figure 7: Risk-return plot: Impact of including Conservative Equities in two scenarios

Source: Robeco. The period 30-6-2010 to 30-6-2015 is used for the ‘last five years’ scenario.


The funds

– Stock selection that ensures low absolute and distress risk and offers attractive

returns

– Distinctive active approach based on award-winning research

– Prudent systematic investment process with low turnover

– Proven track record since 2006 with lower volatility and enhanced returns

– Experienced team committed to quantitative investing


The low-risk anomaly is exploited by Robeco’s highly

successfull Conservative Equities strategy. The strategy

can be applied in developed markets as well as emerging

markets.

Proven track record since 2006 with lower volatility and enhanced returnsRobeco Global Conservative Equities was launched on

14 December 2006. Although the strategy does not refer to

a benchmark in its investment process, its aim is to achieve

a long-term full-cycle performance equal to, or greater than,

global equity markets with substantial lower downside risk.

Faster recovery by limiting lossesIn order to capitalize effectively on the low-risk anomaly, a

long-term investment approach is required. The advantage

of Robeco’s low-volatility strategy is that, in a declining

market, the stocks involved typically fall less than other

stocks. Once the market recovers, low-volatility stocks have

less ground to make up to recover and start yielding positive

returns again. This compensates for the fact that the strategy

may lag the MSCI Index in a strong up market. The main

objective of the funds is to achieve a long-term full-cycle

performance equal to, or greater than, the MSCI Index, but

with a lower degree of volatility.

Absolute risk is part of the strategyRobeco’s Conservative approach does not look at relative

risk, but at absolute downside risk. Over the period since

inception, our Conservative Equity Funds have had a

historical volatility lower than that of the reference indexes,

while they have outperformed the index in terms of market

returns. For institutional investors, such as pension funds,

this lower downside risk is interesting, because it can help to

stabilize funding ratios or free up risk budget.

Factors that improve the risk-return profileStock selection is not only based on volatility, but also on low

distress risk and valuation- and momentum-driven factors.

This balanced approach distinguishes Robeco from other

providers who only focus on historical data. The combination

of losing less in down markets and capturing a reasonable

rate of return in up markets enables Robeco Conservative

Equity to achieve a long-term full-cycle equity market

performance with a lower level of volatility

The product range consists of:

Global Developed

(Institutional)*

Global All Country

European US Emerging Markets

Legal status Dutch Inst. Fund* Lux SICAV, UCITS IV Lux SICAV, UCITS IV Lux SICAV, UCITS IV Lux SCIAV, UCITS IV

Inception date September 2006 December 2011 August 2007 December 2013 February 2011

Source: Robeco 2015

* This fund is only available for institutional investors and not for wholesale distributors. Since 17 September 2015 a Global Developed Equities Fund has been available for professional investors in the wholesale distribution.


Robeco Global All Countries Conservative Equities

Characteristics

– Invests in low-volatility stocks in both developed and emerging markets

– MSCI All Country World Index is the reference index


Track recordRobeco Global AC Conservative Equities started in December 2011. Its aim is to achieve a long

term full cycle performance equal to or greater than global markets with substantial lower

downside risk. In the period January 2012 to September 2015, the fund posted an average

gross return in EUR of 14.6%, against a return of 13.5% for the MSCI AC (All Country) World.

The strategy does not apply a benchmark in its investment process. The MSCI All Country

Figure 8: Global All Countries Conservative is losing less in down markets and keeping track in up markets since inception

MSCI World ACGlobal AC Conservative Equities

0%

5%

10%

15%

20%

2012 2013 2014 2015 Dec-12 Dec-13 Dec-14

-10%

-5%

0%

5%

10%

15%

20%

Left-hand graph: We use monthly return series based on the net asset value in EUR of Robeco Global All Countries Conservative Equities from January 20012-June 2015, gross of fees. The

fund and reference index have been unhedged for currency risk since 30 June 2012.. Right-hand graph: Rolling 260 days annualized volatility, daily data in EUR, gross of fees, based on net

asset value of Robeco Global All Countries Conservative Equities. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

Volatility reductionMin-Max: 9-24%Average: 16%

World Index is therefore presented as a reference. Moreover, the fund achieved this return

with significantly lower risk – the volatility of Robeco Global AC Conservative Equities over this

period was 9.0%, compared with 9.3% for the reference index.


Fund data Robeco Global All Countries Conservative Equities

Category Developed Markets

Established in Luxemburg

Currency EUR

Tradability Daily

Date of inception December 2011

Availability AT, BE, FR, DE, HK, LU, NL, SG, ES, CH, GB

Morningstar (31-05-15)

Benchmark MSCI All Country World Index (Total Return) (EUR)

Annual dividend no

ISIN-code LU0705782398

Source: Robeco Performance Measurement

Table 3: Track record Robeco Global All Countries Conservative Equities (in EUR)

Return Volatility Return/volatility

30-09-2015 1 year 3 year Inception 3 year Inception 3 year Inception

Global AC Conservative Equities 13.4% 13.1% 14.6% 9.4% 9.0% 1.39 1.62

MSCI AC World 5.6% 12.1% 13.5% 9.6% 9.3% 1.26 1.45

MSCI AC World MinVol 13.3% 11.6% 12.6% 10.5% 9.8% 1.10 1.28

30-09-2015 YTD 2014 2013 2012

Global AC Conservative Equities 6.1% 23.9% 11.5% 13.7%

MSCI AC World 0.8% 18.6% 17.5% 14.3%

MSCI AC World MinVol 6.1% 21.1% 11.9% 8.4%

Source: Robeco Performance Measurement. Monthly data since inception September-07, gross of fees, based on net asset value of Robeco European Conservative Equity Fund. The fund and

reference indices have been unhedged for currency risk since 30 June 2012. The value of your investments may fluctu-ate. Results obtained in the past are no guarantee for the future. MSCI

Minimum Volatility base currency for optimization is EUR. Inception date of this index is June 2011, prior index data based on backfilled results as provided by MSCI.

Figure 8, the left hand graph, shows the returns of Robeco Global AC Conservative Equities

compared with the reference index on a quarterly basis. The third quarter of 2015 shows the

effectiveness of the Conservative equity strategy in reducing losses in strong down markets.

Figure 8, the right hand graph, shows just that volatility was reduced through time. During

the entire period since inception, the volatility of Global AC Conservative Equities was lower.

This graph gives the rolling 260-day volatility of Robeco Global AC Conservative Equities

(blue) compared with that of the MSCI Robeco Global AC Conservative Equities (red).


Characteristics

– Invests in low-volatility stocks in European markets

– MSCI Europe Index is the reference index


Track recordRobeco European Conservative Equities (D-shares) started in January 2008. Its aim is to

achieve a long term full cycle performance equal to or greater than European markets with

substantial lower downside risk. In the period January 2008 to September 2015, the fund

posted an average gross return in EUR of 5.9%, against a return in EUR of 1.7% for the MSCI

Europe. The strategy does not apply a benchmark in its investment process. The MSCI Europe

Figure 9: European Conservative is losing less in down markets and keeping track in up markets since inception

Index is therefore presented as a reference. Moreover, the fund achieved this return with

significantly lower risk – the volatility of Robeco European Conservative Equities over this

period was 11.8%, compared with 16.3% for the reference index. Low-volatility strategies are

generally known to significantly reduce losses in most bear markets and low-volatility stocks

perform in line to better during years of moderate returns. It is generally the case that low-

volatility stocks lag in strong thematic bull markets.

Robeco European Conservative Equities

MSCI WorldEuropean Conservative Equities

25%

20%

15%

10%

5%

0%

-5%

-10%

-15%

-20%

2008 2009 2010 2011 2012 2013 2014 20150%

10%

20%

30%

40%

2008 2009 2010 2011 2012 2013 2014 2015 09- 09- 09- 09- 09- 09- 09- 09-

Left-hand graph: We use monthly return series based on the net asset value in EUR of Robeco European Conservative Equity from September 2007-December 2014, gross of fees. The fund

and reference index ahave been unhedged for currency risk since 30 June 2012. Right-hand graph: Rolling 260 days annualized volatility, daily data in EUR, gross of fees, based on net asset

value of Robeco European Conservative Equities Fund. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

Volatility reductionMin-Max: 13-36%Average: 25.5%


Fund data Robeco European Conservative Equities D-shares



Currency EUR

Tradability Daily

Date of inception 25-01-2008

Availability AT, BE, CL, FI, FR, DE, IE, LU, NL, NO, ES, CH, GB


Benchmark MSCI Europe Index (Net Return) (EUR)

Annual dividend no



Figure 9, the left hand graph, shows the returns of Robeco European Conservative Equities

compared with the reference index on a quarterly basis. The third and fourth quarters of

2008, the third quarter of 2011 and also the third quarter of 2015 show the effectiveness of

the Conservative equity strategy in reducing losses in strong down markets.


the entire period since inception, the volatility of European Conservative Equities was lower

than the volatility of the reference index. This graph gives the rolling 260-day volatility of

Robeco European Conservative Equities (blue) compared with that of the MSCI Europe (red).

Table 4: Track record Robeco European Conservative Equities (in EUR)



European Conservative Equities 10.8% 14.5% 5.9% 9.9% 11.8% 1.46 0.50

MSCI Europe 2.6% 11.2% 1.7% 11.3% 16.3% 0.99 0.10

MSCI Europe MinVol 10.7% 13.7% 4.1% 9.9% 12.1% 1.38 0.34

30-09-2015 YTD 2014 2013 2012 2011 2010 2009

European Conservative Equities 8.2% 13.4% 20.0% 15.6% -1.6% 10.6% 19.0%

MSCI Europe 2.8% 6.8% 19.8% 15.6% -9.3% 6.4% 27.6%

MSCI Europe MinVol 7.9% 15.2% 16.5% 12.0% 3.1% 8.7% 20.3%

Source: Robeco Performance Measurement. Monthly data since inception September-07, gross of fees, based on net asset value of Robeco European Conservative Equity Fund. The fund and

reference indices have been unhedged for currency risk since 30 June 2012. The value of your investments may fluctu-ate. Results obtained in the past are no guarantee for the future. MSCI

Minimum Volatility base currency for optimization is EUR. Inception date of this index is June 2011, prior index data based on backfilled results as provided by MSCI.


Robeco US Conservative Equities

Characteristics

– Invests in equity markets in the US and Canada

– MSCI North America Index is the reference index

– Track record since 2013 with lower volatility and enhanced returns

Track recordRobeco US Conservative Equities (D-shares) started in March 2014. Its aim is to achieve a

long term full cycle performance equal to or greater than US and Canadian markets with

substantial lower downside risk.

In the period March 2014 to September 2015, the fund posted an average gross return (in

EUR) of 19.8%, against a return of 17.3% for the MSCI North America Index. The strategy

Figure 10: US Conservative Equities is losing less in down markets and keeping track in up markets since inception

does not apply a benchmark in its investment process. The MSCI North America Index is

therefore presented as a reference. Moreover, the fund achieved this return with significantly

lower risk - the volatility of Robeco US Conservative Equities over this period was 10.66%,

compared with 12.03% for the reference index. Low-volatility strategies are generally known

to significantly reduce losses in most bear markets and low-volatility stocks perform in line to

better during years of moderate returns. It is generally the case that low-volatility stocks lag

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

MSCI North America US Conservative Equities MSCI NACGF NACE

2014 2015

0%

5%

10%

15%

20%

25%

Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15

Left-hand graph: We use monthly return series based on the net asset value in EUR of Robeco European Conservative Equity from September 2007-December 2014, gross of fees. The fund

and reference index have been unhedged for currency risk since 30 June 2012. Right-hand graph: Rolling 260 days annualized volatility, daily data in EUR, gross of fees, based on net asset

value of Robeco European Conservative Equities Fund. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.



Fund data Robeco US Conservative Equities D-shares



Currency EUR

Tradability Daily

Date of inception December 2013

Availability BE, FR, DE, LU, ES, CH

Benchmark MSCI North America Index (Total Return) (EUR)

Annual dividend no



in strong thematic bull markets. Figure 10, the left hand graph, shows the returns of Robeco

US Conservative Equities compared with the reference index on a quarterly basis. The third

quarter of 2015 shows the effectiveness of the Conservative equity strategy in reducing losses

in strong down markets (-2.24% for the fund vs -7.5% for the index).


the entire period since inception, the volatility of Robeco US Conservative Equities was lower


Robeco US Conservative Equities (blue) compared with that of the MSCI North America

Index(red).

Table 5: Track record Robeco US Conservative Equities (in EUR)


30-09-2015 1 Year Inception 1 Year Inception 1 Year Inception

US Conservative Equities 14.95% 19.75% 12.34% 10.66% 1.21 1.85

MSCI NA 10.03% 17.30% 13.87% 12.03% 0.72 1.44

MSCI NA MinVol 15.60% 19.97% 13.74% 11.60% 1.14 1.72

30-09-2015 YTD

US Conservative Equities 4.63%

MSCI North America 1.36%

MSCI NA MinVol 4.47%

Source: Robeco Performance Measurement. Monthly data since inception April-14, gross of fees, based on net asset value of Robeco US Conservative Equities I EUR. All figures in EUR. The

value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. MSCI Minimum Volatility base currency for optimization is EUR.


Robeco Emerging Conservative Equities

Characteristics

– Invests in emerging markets such as Taiwan, South Africa and Malaysia


– Benefits from higher-than-average dividend yields within emerging markets

– MSCI Emerging Markets Index is the reference index

Track recordRobeco Emerging Conservative Equities (D-shares) started in February 2011. Its aim is to

achieve a long term full cycle performance equal to or greater than emerging markets with

substantial lower downside risk. In the period February 2008 to September 2015, the fund

posted an average gross return in EUR of 8.0%, against a return in EUR of -0.1% for the

Figure 11: Emerging Conservative is losing less in down markets and keeping track in up markets

MSCI Europe. The strategy does not apply a benchmark in its investment process. The MSCI

Emerging Markets Index is therefore presented as a reference. Moreover, the fund achieved

this return with significantly lower risk – the volatility of Robeco Emerging Conservative

Equities over this period was 11.5%, compared with 14.7% for the reference index. Low-

volatility strategies are generally known to significantly reduce losses in most bear markets

and low-volatility stocks perform in line to better during years of moderate returns. It is

generally the case that low-volatility stocks lag in strong thematic bull markets. But this fund

MSCI Emerging Markets Emerging Conservative Equities

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

2011 2012 2013 2014 2015 0%

10%

20%

30%

feb.2012

feb.2013

feb.2014

feb.2015

Left-hand graph: We use monthly return series based on the net asset value in EUR of Robeco Emerging Conservative Equities from January 2011-March 2015, gross of fees. The fund and

reference index have been unhedged for currency risk since 30 June 2012. Right-hand graph: Rolling 260 days annualized volatility, daily data in EUR, gross of fees, based on net asset value

of Robeco Emerging Conservative Equities. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.



Fund data Robeco Emerging Conservative Equities D share & B share

Category Emerging Markets


Currency EUR

Tradability Daily

Date of inception 14-02-2011


Benchmark MSCI Europe Index (Net Return) (EUR)

Annual dividend goal 5%

ISIN-code D share LUO582533245

B share LUO582532197 (distributing)

sometimes performed better in up markets than the index, as shown in the Figure.

Figure 11, the left hand graph, shows the returns of Robeco Emerging Conservative Equities

compared with the reference index on a quarterly basis. The third quarter of 2011 and the

second quarter of 2013 show the effectiveness of the Conservative equity strategy in reducing

losses in strong down markets. Another example of limiting loss is more recently the third

quarter of2015 (-14.5% for the fund vs -18.0% for the index).


the entire period since inception, the volatility of Emerging Conservative Equities was lower


Robeco European Conservative Equities (blue) compared with that of the MSCI Europe (red).

Table 6: Track record Robeco Emerging Conservative Equities (in EUR)



Emerging Conservative Equities -3.9% 4.0% 8.0% 11.8% 11.5% 0.34 0.69

MSCI Emerging Markets -8.7% -0.7% -0.1% 13.1% 14.7% -0.05 0.00

MSCI Emerging MinVol -3.8% 2.3% 6.3% 11.8% 11.8% 0.19 0.54

30-09-2015 YTD 2014 2013 2012

Emerging Conservative Equities -4.1% 16.4% -1.8% 22.7%

MSCI Emerging Markets -8.4% 11.4% -6.8% 16.4%

MSCI Emerging MinVol -4.6% 15.1% -4.4% 20.4%

Source: Robeco Performance Measurement. Monthly data since inception March 2011, gross of fees, based on net asset value of Robeco Emerging Conservative Equities Fund. All figures in

EUR. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future. MSCI minimum volatility base currency for optimization is USD. Annualized

(for periods longer than one year).


Michael Strating

Head of Quantitative Equities

25 years’ experience

Tim Dröge

Emerging Markets


Wilma de Groot, CFA

Emerging Markets


Machiel Zwanenburg

Developed Markets


Rob van Bommel

Factor Investing


Pim van Vliet, PhD

Low Volatility


Arlette van Ditshuizen

Low Volatility


Jan Sytze Mosselaar, CFA

Low Volatility


Maarten Polfliet, CEFA

Value, Low Volatility


Willem Jellema, CFA

Momentum, Factor Investing


Portfolio Management

Investment team

Robeco’s Low-Volatility strategies are managed by an experienced team of investment

professionals within an organization that is fully committed to quantitative investing.

It brings together a portfolio-management team and a research team focusing on

quantitative research and model development.


Mike McCune, CFA

Region focus: Americas


Jan de Koning, CAIA

Region focus: Europe


David Blitz, PhD

Head of Selection Research


Weili Zhou, CFA

Selection Research


Bart van der Grient

Selection Research


Jornt Beetstra, CFA

Data Management


Frank Wirds, CFA

Region focus: Asia-Pacific


Bernhard Breloer, PhD

Region focus: Germany/Switzerland


Joop Huij, PhD

Head Factor Investing Research


Simon Lansdorp, PhD

Factor Investing Research


Matthias Hanauer, PhD, CFA

Selection Research


Tom Naaijkens

Region focus: Asia-Pacific


Client Portfolio Management

Research


1994Stock SelectionModel GlobalMarkets

2001Stock SelectionModelEmergingMarkets

2002CoreGlobalMarkets

2006ConservativeGlobal Markets& Core EmergingMarkets

2008ActiveEmergingMarkets

2011ConservativeEmergingMarkets

2012Momentum GlobalMarkets

2013Value Global Markets

2014Factor Investing Solutions

Robeco: a long history in quantitative equity investing


Extra information

Terms and definitions

AnomalyThis is a phenomenon that cannot be explained by

standard theories. In the case of investing, these are often

divergences from the CAPM*, which assumes that investors

are rational and that there is a linear correlation between

risk and return.

Capital Asset Pricing Model (CAPM)The Capital Asset Pricing Model (CAPM) is the product of

a financial investment theory that reflects the relationship

between risk and expected return. The model assumes a

linear relationship.

DiversificationExposing the portfolio to a variety of factors improves

diversification. The aim of diversifying according to

underlying factors is to make the portfolio more robust.

Downside riskDownside risk in financial terms is the chance of an

unexpected and undesirable event occurring that will impair

the value of an investment.

Efficient (advanced) approachAn investment approach that uses smart rules for stock

selection and portfolio construction. The aim of this is to

increase returns and to lower both risks and costs.

Passive investingPassive investing is following a (market-weighted) index

without deviating from it to achieve market-like returns.

Investors thus obtain the index returns (beta) adjusted for

costs.

PremiumReward or extra return for taking risk or exposure to factors.

Risk factorIn factor investing, the term ‘factor premium’ can be

replaced with ‘risk factor’ or ‘risk premium’, on the supposi-

tion that a factor premium represents compensation for

higher risk.

Sharpe ratioThe Sharpe ratio describes the extent to which an

investment offers compensation for extra risk

Unrewarded riskHigher risk that is not rewarded with higher returns.

Robeco Conservative Equity strategiesRobeco applies factor investing via different strategies, such

as the Developed and Emerging Quant strategies, and also

uses it for the return portfolio of professional parties.


Recommended articles

– Risk and the Rate of Return on Financial Assets: Some Old

Wine in New Bottles,

Robert A. Haugen and A. James Heins, Journal of

Financial and Quantitative Analysis Fall 1972.

– The volatility effect: lower risk without lower return

David Blitz and Pim van Vliet, Journal of Portfolio

Management, Fall 2007, pp. 102-113

– Enhancing a low-volatility strategy is particularly helpful

when generic low volatility is expensive

Pim van Vliet, Robeco Research Paper, June 2012

– How distress risk improves low-volatility strategies: lessons

learned since 2006

Joop Huij, Pim van Vliet, Weili Zhou and Wilma de Groot,

Robeco Research Paper, February 2012

– The volatility effect in emerging markets

David Blitz, Juan Pang and Pim van Vliet, Emerging

Markets Review, April 2012, pp 31-45

– Are low-volatility stocks overcrowded?

David Blitz and Pim van Vliet, Robeco Research Paper,

June 2014

Collected Robeco Articles

Over recent years, Robeco’s researchers have written several

articles on low-volatility investing and these have been

collected into a book. This 2015 limited edition of Robeco’s

book on the volatility effect contains 24 separate articles

divided into five parts and offers the most extensive overview

of research on the volatility effect available today.

Low-volatility investing is a perfect example of how we put

our investment beliefs into practice and this is also reflected

in the structure of this book.

The book first focusses on the anomaly and possible

explanations for it. It then discusses how low-volatility

investing fits into a strategic portfolio and gives insights into

efficient implementation.

Finally, the book responds to questions that have been

raised on the strategy. We hope you will find inspiration and

new insights in this book of articles.

This book is intended for

professional investors and can be

requested from Robeco at

www.robeco.com/lowvolatility or

www.robeco.com/conservative


ContactFor further information about low-volatity investing and the

Robeco Conservative Equity approach, please ask your contact

person or get in touch via www.robeco.com/contact.

Robeco contact details

RobecoCoolsingel 120

3011 AG Rotterdam

Netherlands

T +31 10 224 1 224

I www.robeco.com

More informationIf you have any questions, ideas for additional research

topics or would like more information on Robeco Conservative

Equity Strategy, please contact us or visit

www.robeco.com/lowvolatility or www.robeco.com/conservative

Follow usLinkedin.com/company/robeco

Twitter @robeco

Important Information

This statement is intended for professional investors. Robeco Institutional Asset Management B.V. has a license as manager of

UCITS and AIFs from the Netherlands Authority for the Financial Markets in Amsterdam. This document is intended to provide

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. The prospectus and the Key Investor Information Document for the Robeco Funds

can all be obtained free of charge at www.robeco.com.


‘Our advanced

Conservative

approach improves

the risk-return

profile by limiting

unrewarded risk and

increasing returns’

Portfolio Manager Arlette van Ditshuizen

1125

_E-1

0'1

5

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