Earlier this year, Roger Federer gave an insightful commencement address at Dartmouth College.1 Reflecting on his tennis career, Federer revealed an intriguing statistic: despite winning nearly 80% of his more than 1,500 singles matches, he won just 54% of all points played. This means that even for one of the most dominant tennis players of all time, the likelihood of winning a single point is comparable to a coin flip. However, it also means that gaining a small competitive advantage over and over, point by point, set by set, and match by match, gradually builds into a great success story.
Let’s explore how this analogy relates to the world of investing. Like Federer, our Enhanced Indexing strategies have shown a strong performance over their up to 20-year track record, with their small, incremental wins translating to robust outperformance over time. Imagine, if you will, a point corresponding to daily, a game to monthly, a set to yearly, and a match to multi-year hit ratios, i.e., the ratio showing a strategy has outperformed its corresponding benchmark.
Figure 1 shows these hit ratios for different investment horizons for both Robeco enhanced indexing equity and credit strategies. You can see clearly that the hit ratios increase with the investment horizons. While the daily hit ratios are all between 52% and 53% (so just slightly below Federer’s hit point win rate of 54%), these ratios increase to about 60% (monthly), 75% (quarterly), 80% (yearly), and, in the case of Enhanced Indexing in emerging market equities and investment grade credits, to 100% for five-year horizons.2
Source: Robeco, MSCI. The figure shows hit ratios over different frequencies for our Enhanced Indexing strategies for both developed markets (DM) and emerging markets (EM) equities as well as investment grade credit markets. The hit ratio for DM equities is based on the Robeco Composite Global Developed Enhanced Indexing versus the MSCI World Index (net dividends reinvested). For EM equities, it is based on the Robeco Composite Emerging Enhanced Indexing versus the MSCI Emerging Markets Index3(net dividends reinvested). For credit, it is based on the Robeco Composite Global Multi-Factor Credits (hedged into EUR) versus the Bloomberg Global Aggregate Corporates Index (hedged into EUR). All figures are in EUR. Data is from strategy inception4 to 29 November 2024. Further notes.5
This analysis shows that in investing, consistently applying a Federer-like edge can lead to extraordinary outcomes over time. However, like in professional sports, steady improvement is necessary to stay at the top of your game. For quant investing, this means the enhancement of existing factors. It also means integrating new signals based, for instance, on more short-term information, or the use of machine learning and natural language processing. Equally important is a portfolio construction algorithm that efficiently balances risk, return, and sustainability considerations while avoiding unnecessary turnover and unrewarded risks—ensuring that you bring the power of your engine (your quant model) effectively to the court.
Notas al pie
[1] Federer, R. (2024) 2024 Commencement Address, Dartmouth College.
[2] Please note that this development is actually not that surprising. Assuming Federer’s point win rate of 54% as a daily hit ratio and assuming independent identically distributed hit ratios, one would expect hit ratios of 64.5%, 73.8%, 88.7%, and 99.8% for monthly, quarterly, yearly, and 5-year hit-ratios, respectively. However, slightly lower daily hit ratios of 53%, 52%, or 51% lead to 5-year hit ratios of ‘only’ 98%, 92%, and 75%, respectively. Furthermore, in real-life, investment returns are usually not independent and identically distributed.
[3] As of 1 January 2008, the benchmark changed from S&P/IFC EM Regional Investable Composite (net dividends reinvested) to the MSCI Emerging Markets index (net dividends reinvested).
[4] The inception of the Composite Global Developed Enhanced Indexing was in November 2004, and of the Composite Emerging Markets Enhanced Index Equities in July 2007. Daily hit ratios are based on data starting in January 2010. The inception of the Composite Global Multi-Factor Credits was in August 2015.
[5] Portfolios in the composite are based globally and can have different tax implications, which may impact performance figures. The value of your investments may fluctuate. Past performance is no guarantee of future results. Returns gross of fees, based on gross asset value. In reality, costs (such as management fees and other costs) are charged. These have a negative effect on the returns shown.
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