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Robeco Boston Partners: 2014 U.S. Equity Large-Cap SMA Manager of the Year

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This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor’s July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.

In assessing our second SMA honoree in the large-cap space, Envestnet | PMC’s analysts highlighted the minimal turnover on Boston Partners’ research team of 23 experienced analysts (nearly all of whom are CFAs) and the portfolio’s identifiable and sustainable competitive advantages, along with its clearly articulated alpha thesis and consistent alpha generation. There’s another, more illustrative way of thinking of Robeco Boston Partners’ Large-Cap Value portfolio: Think of a Venn diagram with three circles representing valuation, business momentum and business fundamentals.

“Where they intersect,” said David Pyle, “that’s what we buy.” Pyle, who has been co-portfolio manager on the strategy since 2000 (lead manager Mark Donovan started the portfolio in 1995), said that the approach is based on the work of John Fullerton of The Boston Company in 1987, which he said was “controversial back then because value managers didn’t look at” business momentum and fundamentals.

That approach is followed religiously not just on the large-cap value strategy, but throughout Boston Partners, where Todd Knightly is director of research. The managers ask on valuation: “How much are we paying?” On business fundamentals they ask, “What are we buying?” On business momentum, they ask, “Is the business getting better, staying the same or getting worse?” Pyle said that “what we don’t try to do is predict the future,” whether it’s corporate earnings, the economy or the actions of politicians. “We simply look at any company and ask those three questions. Does it have those characteristics? We’re not trying to develop an informational edge, because there are too many people trying to do that. We look at the same data as everybody else.”

On valuation, Pyle said, “we’re willing to pay more for a superior business […] but there are some businesses we won’t buy at any price.” On momentum, the managers and analysts explore how well the business is doing today, and if “management is doing something to make the business better—selling off unprofitable businesses, making spinoffs, starting to pay higher dividends or buying back stock.” The fundamentals analysis is meant “to identify what’s really going on in the business,” and if “there’s a sufficient upside, it becomes a candidate for the portfolio.”

Once a stock finds a home in the portfolio, the analysts don’t forget about it. Each week every name in the portfolio is subject to that same three-question inquisition. “Fundamentals may not change much,” said Pyle, “but valuations will as the market changes.” The team’s intent each week is to “make sure the reasons you bought it are still the reasons you’ll own it.”

Regarding its low human capital turnover, Pyle said “we like to hire people early in their careers as research analysts.” It’s not uncommon that those analysts will turn “eventually into portfolio managers.” All the analysts and managers stay focused on asking those three questions, Pyle said: “It’s so much more efficient if we’re trying to do the same thing.”

What about the strategy’s approach to risk? First, he said, focus on “winning by not losing. Keep pace in rising markets, outperform in falling markets and diversify your exposure.” Beyond that, Pyle said it’s important to separate risk into “two major buckets”: statistical risk and the “risk of losing money.” On the first measure, Pyle said that as a large-cap manager he must be aware of issues like tracking errors, but an over-emphasis on statistical risk “can lead you astray.” For instance, he said, “I’ve never seen an optimizer that doesn’t tell us to sell our overweight [positions] or buy underweight.” However, “we don’t let the tools make portfolio decisions,” but rather allow them to “reference where our statistical risk lies.”

And the risk of losing money? “I’ve never met a client who has to pay their bills with relative money. The laws of compounding mathematically dictate that protecting capital is the only risk that matters.”  

The portfolio’s best performance has come when the markets are stable or weak, Pyle reported. “So from 2007 to March 2009 we outperformed, but from March 2009 we just kept up with the market, which was fine: By losing less, you’re winning.” Particularly at bad times, “good valuation is always the best defense in a weak market.” He admitted that“we tend not to do well when we’re coming out of recession.” Why? Because, he said, the “best performing stocks tend to be the cruddier companies that went to $1 [during the recession] and in three months went to $3. So our fundamentals keeps us out of those poor companies.” That helps because “We didn’t lose it in the first place, so we don’t have to make it up.” He also cheerfully admitted that “we don’t market time; we don’t think we’re good at it.”

This is part of a series of extended profiles of the 2014 Separately Managed Account Managers of the Year. Briefer profiles and an overview of the 10th annual SMA Managers of the Year can be found in Investment Advisor’s July 2014 cover story. Additional reporting and video interviews of the winning managers can be found on our 2014 SMA Managers of the Year home page.


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