In recent years, catchphrases like FAANG, Magnificent Seven, and GRANOLA have highlighted the narrow market leadership that has increased concentration risk in market-cap-weighted indices. While these indices have recently outperformed equal-weighted ones, history suggests this won’t always be the case, leaving investors vulnerable to the performance of a few dominant stocks. Given its active nature, Enhanced Indexing can potentially mitigate these concentration risks.

In addition, the current macro environment, characterized by high interest rates and increasing geopolitical instability, coupled with high equity market valuations, might lead to lower future equity returns in the next 10 to 15 years. In this scenario, the low tracking error nature of Enhanced Indexing can allow investors to allocate their risk budget elsewhere while still harvesting the equity premium (market-beating returns after cost).

Robeco’s Enhanced Indexing strategies have shown strong risk-adjusted performance, distinguishing themselves in both developed and emerging markets. This can be seen in the figure below, which uses data gleaned from the eVestment database - a reliable manager search database for many professional investors.

Our 20-year track record in Enhanced Indexing demonstrates stable alpha and a high information ratio. The Developed Markets (DM) strategy boasts an information ratio (IR) of 0.75, placing it in the top 2% of its peers in terms of IR. Our Emerging Markets (EM) strategy ranks first in its peer group with an IR of 1.26. These high IRs indicate an efficient use of the risk budget (c. 1%) in generating alpha for clients.¹

Source: Robeco²

The strategy is built on decades of investment research and uses proven return signals. It avoids arbitrage risk, which can impact passive solutions due to front-running ahead of index rebalances, and can, in fact, take advantage of these opportunities. Moreover, our rich heritage in quant and sustainable investing allows us to effectively integrate sustainability into these strategies according to evolving sustainability preferences.

Moreover, the big data revolution and exponential growth in computational power are opening up more possibilities in the world of quant investing. Given its research-driven culture, Robeco is well-positioned to navigate and exploit these opportunities. Our cautious pioneering mindset serves us well: we have a robust infrastructure, a notably large quant team, and a history of innovation. To this end, our research agenda continues to focus on refining and diversifying our investment approach, for example, through the use of uncorrelated alternative signals from novel data sources and advanced modeling techniques.

We aim to deliver the best of Enhanced Indexing in terms of risk, return, and sustainability. Importantly, as a cost-effective, low-tracking error solution, this strategy is also well-placed to mitigate concerns about fees.