Annual report & accounts

 

 

 

 

Paulus C. van den Hoek, chairman (68)

Dutch nationality. Appointed in 1990 and last reappointed in 2005.

Lawyer and partner at Stibbe, lawyers and notaries, in Amsterdam, the Netherlands, since 1965. Former Dean of the Dutch National Bar (81/84). Supervisory director of ASM International, Bührmann, Wavin, Robeco Groep, Rolinco and Rorento.

Gilles Izeboud (64)

Dutch nationality. Appointed in 2004.

Former partner and director at PricewaterhouseCoopers. Deputy justice of the Enterprise Section of the Amsterdam Court of Appeal. Supervisory director of Buhrmann, Robeco Groep, Rolinco and Rorento.

 

Philip Lambert (60)

Dutch nationality. Appointed in 2005.

Former head of Corporate Pensions of Unilever N.V. and PLC in London. Supervisory director of Robeco Groep, Rolinco and Rorento.

 

Dirk P.M. Verbeek (56)

Dutch nationality. Appointed in 2001 and last reappointed in 2006.

Member of the executive board of Aon Group in Chicago, USA, and chairman/CEO of the executive board of Aon Holdings in Rotterdam, the Netherlands. Supervisory director of Robeco Groep, Rolinco and Rorento.

 

 

 

 

 

The past year has been an excellent one for the world economy, with growth recorded at around 5%. However, the composition of growth was somewhat different from past years. Growth in the United States slowed down in the course of the year, while Japan and the euro area recorded higher growth rates. The emerging economies continued their process of catching up with the developed economies.

Inflationary pressures increased worldwide after oil prices rose to well above USD 70 per barrel early in the year. Actual inflation remained contained under the influence of tighter monetary polices in many countries. The fact that oil prices moved back to levels around USD 60 per barrel later in the year contributed to a more benign development of inflation, in combination with restrained wage increases in many countries.

 

The combination of high economic growth and modest inflation was a splendid one for equity markets. Generally corporate earnings continued strongly, while price/earnings ratios were reasonable at the beginning of the year. Many central banks around the world hiked interest rates in the course of the year. On balance, long-term government yields also increased, although less so than the short-term interest rates. However, bond yields remained low from a historical perspective, as a result of which yield developments were no threat for equity markets.

The second quarter saw a correction, which was more than reversed in the remainder of the year. In the end most equity markets have recorded double-digit increases in their indices. After the strong increase in 2005 the Japanese stock market index recorded a relatively small increase in 2006. Although the US stock markets had a favorable year, the outcome for investors with euro-denominated investments was not that good, because the dollar depreciated by more than 10% against the euro. The stock markets in the euro area had a better than average performance.

 

In the course of the year, the US economy slowed down. The interest-rate hikes by the US central bank (the Fed) since mid 2004 started to take their toll. The Fed funds rate ended the year 2006 at 5.25%. On balance, long-term interest rates increased to around 4.7% by the end of the year.

The housing market in particular was responsible for the slowdown in US growth. The marked increase of prices and volumes in the housing market came to an end in the past year. For the time being the US consumer appeared to be unaffected by the developments in the housing market. Consumption continued to grow at a healthy pace, further facilitated by strong conditions in the labor market.

Initially, core inflation went up, but fell to just above 2% in the final months of the year.

 

Last year, the Japanese economy continued its recovery. This led the Bank of Japan to abandon its zero interest-rate policy. The policy rate was increased once by 25 basis points. The recovery was not convincing in all respects. The Japanese consumer remains hesitant to spend. Inflation is still very low. Under these circumstances, the long-term interest rates fluctuated mainly within a bandwidth of 1.5% and 1.75%.

 

Last year, economic performance in the euro area was strong. Economic growth amounted to more than 2.5%. Initially inflation increased on the back of higher oil prices, but ended the year at a level just below 2%. Strong economic growth, a substantial increase in money supply and credit growth, and just over 2% projected inflation over the medium term prompted the European Central Bank (ECB) to increase interest rates from 2.25% to 3.5%. Long-term rates increased by no more than 60 basis points.

 

The world economy is continuing to grow rapidly, albeit at a slower pace than last year. The emerging economies are maintaining their catching-up course, and Japan and the euro area will record growth rates of some 2%. For the US economy, a slowdown of growth to around 2% is being penciled in. The ECB and Bank of Japan have not yet finished their hiking cycle and this is also true for a number of other central banks. The Fed will probably start to ease its monetary policy as inflation gets under control. The development of long-term rates will remain moderate.

All in all this year more or less average returns of around 8% are to be expected.

 

Overview 2002 - 2006
(in %)		2006	2005	2004	2003	2002	Average over last 5 years
Based on:
- market price		7.5	28.6	5.0	1.4	-34.8	?
- net asset value		7.0	28.3	5.1	5.4	-34.1	0.1
MSCI World Index1)		7.9	26.8	6.9	11.3	-31.7	?
Dividend in euros2)		0.60	0.48	0.40	0.36	0.44	0.46
Total net assets3)		7.1	7.2	6.2	6.5	6.1
1) Currencies have been converted at rates supplied by World Market Reuters.
2) Proposed for 2006.
3) EUR x billion.

 

During 2006, the share price of Robeco rose from EUR 27.31 to EUR 28.87. Assuming reinvestment of the dividend of EUR 0.48 per share distributed in May 2006, this was an investment result of 7.5%. Based on net asset value, which rose from EUR 27.38 to EUR 28.80, the investment result was 7.0%.

The fund's benchmark, the MSCI World Index, rose 7.9% over the same period. After deduction of the management fee the fund slightly underperformed the benchmark.

During the period under review, the active investment policy led to an outperformance of 0.2% (before deduction of the management fee) relative to the benchmark. Sound stock selection in the various sectors was the driving force behind this performance. Of the 0.2% mentioned above, 0.9% was attributable to stock selection, -0.4% to sector-allocation policy and -0.3% to currency policy.

Stock selection was excellent within the consumer-staples, telecom and energy sectors. The result of the stock selection in utilities and health care lagged the average. Within the other sectors the result was average.

The fund Robeco aims to realize a stable outperformance relative to the benchmark and has been using a more moderate investment policy since 2004. The fund's performance is generated by a broad range of stocks rather than just a limited selection. We would nevertheless like to single out some stocks which realized an above-average performance.

BellSouth, the US telecom company that operates in the southern states, rose 80%. The company was taken over by AT&T and also benefited from the sound stock-price increases in the US telecom sector as a whole. A similar increase of 77% was booked by Telenor, a Norwegian telecom company with interests in many emerging markets. ABB, a company which makes products for  electricity transmission, is also worth mentioning here as it rose 67%. However not all the portfolio picks were successful. Partygaming dropped no less than 76% due to the cancellation of its license for online poker games in North America.

 

 

Robeco's investment policy focuses on making a global selection of stocks within business sectors, and determining the relative weights of those sectors. Regional allocation is mainly determined by this selection. The sales volume amounted to 39% of the portfolio during the reporting year.

Robeco does make use of financial instruments, the associated risks of which are specified in the financial statements. The fund uses liquidity limits based on market capitalization and tradability for the stocks in which it invests.  The fund invests in 207 names (excluding the midcap portfolio) diversified over 24 countries and 10 sectors resulting in wide diversification and limited price risk. Investments are made within the limits stated in the prospectus. On the basis of reports the management board discussed risk-management and compliance issues, subjects which were also covered in meetings with the supervisory board.

 

At the beginning of the year this sector was doing very well. Oil prices rose steadily to a level around USD 80. However, the situation started to change in August. Demand slowed partially as a result of the warm winter weather in the US and inventories rose because supply was not hampered by hurricanes this year. Within this sector we primarily reduced our holding in former favorite Valero Energy. In the previous annual report this stock was still the fund's top performer. Slowly but steadily refinery capacity will increase and together with the decline in consumer spending demand for gasoline will also slow down in the US. The proceeds of the sale of Valero Energy were invested in Chevron, which is a more diversified company with interests in oil production, refinery and marketing.

 

During the year the fund had an underweight position in materials. The interest in Inco was sold after a takeover battle between Phelps Dodge and CVRD. For several months nickel producer Inco was the object of takeover battles but eventually Brazilian company CVRD made the highest bid and paid in cash. The proceeds were invested in gold producer Newmont Mining. The outlook for gold is favorable, particularly because many Asian central banks are expected to want to diversify their currency reserves over more currencies than just the US dollar and gold also qualifies as such an investment. Within this sector we also have interests in agrochemical companies such as Syngenta and Monsanto. Prices for soft commodities, such as grain, soy beans and corn will rise due to increased demand from Asia, but also because these commodities are being used as alternative energy sources. Syngenta's and Monsanto's products help farmers cultivate their land as productively  as possible.

 

The industrials sector was overweight throughout the year. European industrial companies represented a large part of the portfolio. Besides ABB mentioned above, Vinci (construction and toll roads in France), Volvo (trucks) and Adecco (temping agency) realized excellent results. Capital gains on Japanese stocks were disappointing.  Japanese trading company Mitsubishi Corp's performance suffered as a result of the decrease in oil and coal prices from the second quarter onwards. During the year the portfolio's cyclical sensitivity to this sector was reduced by purchasing defense companies. In the US L-3 Communications (defense software) and Raytheon (defense equipment) were added to the portfolio.

 

The consumer-discretionary sector was underweight in the portfolio throughout the year. In the second half of 2006 US consumers finally scaled down their spending due to the weakening housing market. As a result, our interests in KB Home and D.R. Horton suffered, but this was offset by our interests in Coach (luxury handbags), Kohl's (a North American retailer of good-quality yet reasonably priced clothes) and, last but not least, Esprit Holding, already a familiar name in Germany, the Netherlands, Belgium and Hong Kong and now also successful in France. The media sector did remarkably well and the portfolio benefited from its holdings in VNU (taken over), News Corp (Australian media company headed by media tycoon Rupert Murdoch) and Time Warner (which, after the unsuccessful merger with AOL at the height of the Internet bubble, is now increasingly getting its business in order).

 

The weight of this sector was above average throughout the year. Environmental legislation in the United States means that ethanol must be added to refined oil from now on. As a result of this the portfolio's position in Archer Daniels Midland, which processes corn into ethanol, recorded a considerable price gain. Another rewarding position was Japan Tobacco, which enjoyed a strong performance in total contrast to the moderate advance of the Japanese stock market as a whole. Japan Tobacco is a typical example of a stock which makes Japan an interesting country for investing. The company was financed far too conservatively and so its takeover of British cigarette maker Gallagher and share buy-back swiftly resulted in a sound increase in the company's  earnings per share. Avoiding large US companies such as Coca-Cola and Wal-Mart Stores clearly contributed to the good relative performance within this sector. In the course of the year Molson Coors was added to the portfolio as after four consecutive profit warnings the stock had become very cheap. To finance this purchase we sold Energizer Holding (batteries and razor blades, comparable to Gillette before the takeover by Procter & Gamble) and Colgate-Palmolive (tooth paste and shampoo) after both had realized sharp price increases.

 

The weight in this sector was kept at overweight. Unfortunately the sector once again lagged the average. In the second quarter the sector had a short-lived recovery when the growth outlook for the global economy dropped and inflation concerns emerged at the same time. This sector usually holds up well in turbulent economic times. At the end of the year the sector lost ground again, not helped by the fact that Pfizer cancelled the development of a promising cholesterol drug. It seems that the large pharmaceuticals companies are just not able to launch new innovative drugs. During the year the fund preferred the services (Aetna, Wellpoint), suppliers (Medtronic) and biotechnology (Amgen) subsectors, but this year these stocks realized disappointing results as well. The Democrats' election victory In the US was the final blow, as for this sector a Democrat majority is synonymous with government interference and price restrictions.

 

The sector was underweight throughout the year. Yet, its performance was slightly above average. Investment banks in particular realized huge profits.  Goldman Sachs's EPS, for instance, rose almost 80% and the share itself rose 57%. Investment banks were well represented in the portfolio with positions in Goldman Sachs, UBS and later in the year in Credit Suisse. There were no portfolio holdings in regional banks in the United States as mortgage growth was expected to slow down and interest-rate margins, in particular, to come under pressure. Short-term interest rates have risen, as a result of which banks have to pay more to attract money. Competition for savings has also increased due to the fact that Internet banks (such as ING Direct) offer a higher interest rate on savings than regional banks. Indirect real estate has also done very well within the sector. Investors were looking for dividend return and found it from real-estate companies which distribute their rent income entirely in the form of dividend. Due to the increase in stock prices dividend return on real-estate stocks has now dropped to a level below that of bond yields in many countries. In other words, these stocks have become too expensive.

 

During the year this sector's weight was increased to overweight. Large portfolio positions such as Cisco and Oracle realized good returns and their share prices rose accordingly. We lost some money on our interest in ADC Telecom, a company which supplies equipment to the telecom industry. The telecom industry spent less than we expected and the emphasis remains on software. This is a segment with an average valuation combined with enormous cash flow as investment is limited and licenses generate a constant cash flow.

 

The telecommunication sector was kept at market weight. Telephone rates (fixed and mobile) are still under pressure. As mentioned before, we achieved good results with our interest in BellSouth. The interests in Telenor and Singapore Telecom also contributed to the excellent results in this sector. Both companies have large interests in telecommunication services in emerging markets, where growth is considerably higher than in mature markets.

 

The utilities sector had another good performance in 2006. This sector has a relatively high dividend return, which made it once again popular among investors  The fund's underweight here thus did not yield the desired result. The valuation of utilities companies has risen again causing the sector to become still more expensive. We will therefore maintain our underweight position.

 

The fund Robeco strives to be a reliable partner for investing in global equities in mature markets. This goal must be reflected by a stable outperformance against the MSCI World Index. This index contains many smallcaps. If these rise sharply, as was the case in recent years, this will negatively impact Robeco's result compared to the index. Smallcaps often have reduced liquidity which makes it difficult to select a limited number of stocks for investment. This is the reason why this year we built up a position in this segment through a smallcaps portfolio which was developed especially for the fund Robeco. The stocks in this portfolio are selected using a quantitative model. Smallcaps slightly outperformed largecaps. Stock selection using the quantitative model turned out well.

 

Top 10 stocks
			Country		Interest in % 31/12/2006			Performance in % 01/01-31/12/2006
						In euros			In local currency
1.	Total		France	1.7		7.8%			7.8%
2.	Royal Dutch Shell A		Netherlands	1.6		7.5%			7.5%
3.	Bank of America		United States	1.3		8.0%			20.7%
4.	Citigroup		United States	1.3		6.9%			19.6%
5.	Amgen		United States	1.1		-22.5%			-13.4%
6.	Royal Bank of Scotland		United Kingdom	1.1		20.8%			18.4%
7.	Exxon Mobil		United States	1.1		24.4%			39.1%
8.	J.P. Morgan Chase		United States	1.1		12.4%			25.6%
9.	Cisco Systems		United States	1.0		42.8%			59.6%
10.	GlaxoSmithKline		United Kingdom	1.0		-3.6%			-5.5%

 

 

The Dutch Financial Supervision Act [Wet op het financieel toezicht (Wft)] became effective on 1 January 2007. This act regulates supervision of the Dutch financials sector. The Wft has replaced existing supervision legislation (including the Dutch Investment Institutions Supervision Act [Wet toezicht beleggingsinstellingen]).

Outlook

We expect that 2007 will be an average to good year for equities. Growth will continue, albeit at a lower level. Bond yields could pick up slightly, however, this increase will not amount to much. Equity valuations are below the long-term average. A clear cause for concern is earnings growth. In many sectors (such as raw materials and energy), costs are increasing, whereas the prices of raw materials are leveling off.  Labor costs could demand a larger piece of the pie which will have a stabilizing effect on profit margins, after years of growth. Earnings will then grow at the same rate as nominal GDP growth at most, which means at a slower rate than  last year.

 

 

The administrative organization and internal control of the Management Company Robeco Fund Management BV are discussed below insofar as these target the activities of the investment institution. Administrative organization and internal control are both geared to the size of the organization and meet the requirements of article 8 of the 2005 Dutch Investment Institutions Supervision Decree [Besluit toezicht beleggingsinstellingen 2005, or 'Btb']. Administrative organization and internal control can never offer absolute guarantees, rather they are designed to provide reasonable assurance of the effectiveness of internal-control measures in relation to the risks of the activities of the investment institution.

The assessment of the effectiveness and good functioning of administrative organization and internal control is the responsibility of the Management Company.

 

Within the scope of the application for a license under the 2005 Dutch Investment Institutions Supervision Act [Wet toezicht beleggingsinstellingen 2005, or 'Wtb'], the structural aspects of the administrative organization and internal control applied were assessed and adjusted to the Wtb. The relevant risks were identified and corresponding internal-control measures formulated.

The effectiveness and good functioning of administrative organization and internal control are assessed in various ways. The management board is informed periodically by means of control reports which are based on the process descriptions and the internal-control measures included therein. Furthermore, there are incident and complaints procedures.

In 2006, the effective functioning of the internal-control measures was tested by means of partial tests to verify their design, existence and effectiveness. This involved generic test activities that were carried out in a process-oriented way for the various investment institutions for which Robeco Fund Management B.V. acts as management company. The test activities may  therefore differ for the individual investment institutions. The tests were executed by various departments at group and business-unit level, in consultation with internal and external auditors.

The tests did not lead to relevant findings for this annual report.

 

In 2006, we assessed the various aspects of administrative organization and internal control. In our assessment we noted nothing that would lead us to conclude that the description of the structural aspects of administrative organization and internal control within the meaning of article 8 of the 2005 Dutch Investment Institutions Supervision Decree failed to meet the requirements as specified in said decree and related regulations. Neither did we conclude that the internal-control measures were ineffective or failed to function according to the description provided.

 

Rotterdam, 22 March 2007

 

The management board

Robeco Fund Management B.V.

 

 

 

Financial statements

Balance sheet
before profit appropriation, EUR x thousand
		31/12/2006		31/12/2005
Investments
Financial investments
Stocks	1	7,188,880		7,192,191
Derivatives	2, 11	9,660		8,941
Total investments		7,198,540		7,201,132
Accounts receivable
Dividends and interest receivable	3	4,442		3,819
Receivables on securities transactions		12,227		14,114
Receivables on affiliated companies	4	393		199
Sundry debtors	5	35,373		29,686
		52,435		47,818
Other assets
Cash	6	15,081		3,280
Accounts payable
Obligations arising from derivative instruments	2, 11	6,629		2,635
Payable to credit institutions		99,209		17,659
Payable to affiliated companies	7	9,617		6,486
Sundry creditors	8	13,030		2,184
		128,485		28,964
Accounts receivable and other assets less accounts payable		-60,969		22,134
Shareholders' equity	9	7,137,571		7,223,266
Composition of shareholders' equity
Issued capital	10	247,849		263,797
Other reserves	9	6,406,071		5,325,545
Net result	9	483,651		1,633,924
		7,137,571		7,223,266

 

The numbers of the items in the financial statements refer to the numbers in the Notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

Profit and loss account
EUR x thousand
		2006		2005
Investment income	12, 21	149,720		115,350
Changes in value	1, 2, 12	413,476		1,591,383
		563,196		1,706,733
Costs	13
Management costs	14	71,283		65,168
Service fee	14	6,946		6,417
Other costs	15	1,316		1,224
		79,545		72,809
Net result		483,651		1,633,924

 

The numbers of the items in the financial statements refer to the numbers in the Notes.

 

 

Cash-flow summary
indirect method, EUR x thousand
	2006		2005
Cash flow from investment activities
Net result	483,651		1,633,924
Realized and unrealized results	-413,476		-1,591,383
Purchase of investments	-2,199,823		-3,010,642
Sale of investments	2,625,807		3,686,733
Increase(-)/decrease(+) accounts receivable	-4,617		-35,586
Increase(+)/decrease(-) accounts payable	10,256		-3,444
	501,798		679,602
Cash flow from financing activities
Received for shares subscribed	794,588		643,625
Paid for repurchase of own shares	-1,238,931		-1,116,590
Profit distribution	-125,003		-108,390
Increase(+)/decrease(-) accounts payable	3,721		-
	-565,625		-581,355
Net cash flow	-63,827		98,247
Currency and cash revaluation	-5,922		-174
Increase(+)/decrease(-) cash	-69,749		98,073
Cash at opening date	3,280		1,743
Accounts payable to credit institutions at opening date	-17,659		-114,195
Total cash at opening date	-14,379		-112,452
Cash at closing date	15,081		3,280
Accounts payable to credit institutions at closing date	-99,209		-17,659
Total cash at closing date	-84,128		-14,379

 

Notes

 

Robeco N.V. (hereafter also referred to as 'the fund') is a Dutch investment company with a variable capital within the meaning of article 28 of the 1969 Dutch Corporate Income Tax Act [Wet op de Vennootschapsbelasting 1969]. This means that no corporate-income tax is due, providing that the fund makes its profit available for distribution to shareholders in the form of dividend within eight months of the close of the financial year and satisfies any other relevant regulations.

As a result of the appointment as Manager of Robeco Fund Management B.V., which holds a license from the AFM [the Netherlands Authority for the Financial Markets] under the Dutch Investment Institutions Supervision Act [Wet toezicht beleggingsinstellingen, or 'Wtb'], the license in accordance with article 5 of the 1990 Dutch Investment Institutions Supervision Act has been legally cancelled. Since 26 April 2002, Robeco N.V. is subject to the EC directive containing rules for Undertakings for Collective Investment in Transferable Securities (UCITS). Under the terms of article 6 of Part II of the Dutch Investment Institutions Supervision Act, Robeco N.V. was granted a license as of the same date by the AFM, permitting trade of its shares in other EC member states.

 

The fund appointed Robeco Fund Management B.V. as Manager of the fund as of 1 January 2006. The tasks for which the Manager will be responsible include the execution of the investment policy, management of the fund assets as well as handling the fund's financial administration, marketing and distribution. Robeco Fund Management B.V. is part of the Robeco Group and was granted a license by the Netherlands Authority for the Financial Markets to act as manager on 29 December 2005. The agreement between the fund's management board and the Manager includes the stipulation that the Manager will comply with the provisions of the prospectus, the Articles of Association and the directives of the fund's management board, insofar as these are in line with the shareholders' interests, and that the Manager will observe the applicable legislation and regulations. The Manager will also regularly report to the management board on its duties. At the General Meeting of Shareholders held on 27 April 2006 Robeco Fund Management B.V. was appointed as director of the company.

 

The annual financial statements have been drawn up in conformity with the models provided by Dutch legislature. In certain areas, descriptions have been used which better express the nature of the items and relate better to the characteristics of an investment company.

Robeco N.V. is an open-end investment company, meaning that, barring exceptional circumstances, Robeco N.V. issues and repurchases its shares on a daily basis at prices approximating net asset value. A fixed spread between the bid and offer price applies to cover costs related to issuance and repurchase of own shares. The issue price will not be more than 0.5% higher than the net asset value and the repurchase price will not be more than 0.5% lower than the net asset value. The abovementioned margin between the net asset value and the issue and repurchase prices, and the associated costs, are for the account and risk of Robeco Investment Consulting B.V., as a result of which Robeco N.V. issues and repurchases its shares at net asset value. Robeco Investment Consulting B.V. will distribute any positive spread results to the funds, in proportion to each fund's positive contribution to the spread result. A buffer is maintained to cover any future losses. As of 26 February 2007, the new trading system for open-end investment institutions on Euronext Amsterdam will be implemented. For the Ccmpany this means that the bid and offer system described above will no longer be valid. According to the Euronext guidelines, orders can be placed until 16:00 hours (cut-off time). Orders that are placed via Euronext Amsterdam will be processed once a day only and will be executed on the next stock-exchange day at the net asset value, augmented or reduced by a limited surcharge or discount. The only purpose of this surcharge or discount is to cover the costs made by the company related to the entry and exit of investors.

 

 

Shares may be held in non-certificated form in Robeco Direct N.V. or via the affiliated branches of Rabobank in the Rabo Securities Account. Participants pay costs on the sum deposited for each purchase, and in the event of a sale a percentage of the sum withdrawn. These participation costs are currently a maximum of 0.4% via Robeco Direct and a maximum of 0.5% via Rabobank, depending on the channel selected. These sums will accrue to Robeco Direct and Rabobank respectively.

 

As a result of the appointment of the Manager, outsourcing of the administration has been terminated as of 1 January 2006. These costs were covered by the service fee. Agreements have been made with the aforementioned party relating to the provision of information and performance standards.

Unless stated otherwise, items shown in the annual financial statements are included at nominal value and expressed in thousands of euros.

Unless stated otherwise, financial investments are included at fair value. The fair value of stocks is determined on the basis of market prices or other market quotations at closing date. For derivatives such as forward exchange transactions, this value is based on the currency rates and reference interest rates at closing date and for futures the value is determined on the basis of the market price and other market quotations at closing date. Transaction costs incurred in the purchase and sale of investments are included in the purchase or sale price as appropriate.

Investments for which the legal ownership has been transferred by the fund for a given period of time as a result of securities-lending transactions, will continue to be included in the fund's balance sheet during this period, since their economic advantages and disadvantages, in the form of investment income and changes in value, will be added to or deducted from the fund's result. The way in which collateral ensuing from securities-lending transactions is reported depends on the nature of this collateral. If the collateral is received in the form of investments these will not be included in the Balance sheet as the economic advantages and disadvantages relating to the collateral will be for the account and risk of the counterparty. If the collateral is received in cash it will be included in the Balance sheet as, in this case, the economic advantages and disadvantages will be for the account and risk of the fund.

Both the fund and its Manager are affiliated to entities belonging to Robeco Groep N.V. The affiliation with Robeco Groep N.V. stems from its capacity to have decisive control or a substantial influence on the fund's or the Manager's business policy. Robeco Groep N.V. is part of the Rabobank Group. The management structure of Robeco Groep N.V., in which significant authority is allocated to its independent supervisory board, is such that Rabobank does not have a meaningful say in or influence on the fund's business policy. Robeco Groep N.V. pursues an independent investment policy on behalf of its affiliated investment companies, taking into account the interests of the investors involved. Besides services of other market parties, Robeco N.V. also uses the services of one or more of these affiliated entities including transactions relating to securities, treasury, derivatives, custody, securities lending, sale and purchase of its own shares, fund-administration services, as well as management activities. Transactions are executed at market rates.

The schematic diagram below shows the position of the entities referred to in the annual report and their mutual relationship within the Robeco Group. Only the relationships that are relevant to the investment institution have been included in the flow chart.

 

 

 

 

Investment results are determined by investment income, rises or declines in stock prices, rises or declines in foreign exchange rates and results of transactions in currencies, including forward transactions, and derivatives. The results are accounted for in the Profit and loss account.

 

Net cash dividends declared during the year under review, the nominal value of stock dividends declared, interest received and paid and proceeds from loan transactions. Accrued interest at balance-sheet date is taken into account.

 

Realized and unrealized capital gains and losses on securities and currencies.

Transactions in currencies other than the euro are converted into euros at the exchange rates valid at the time. Assets and liabilities expressed in other currencies are converted into euros at the exchange rate prevailing at balance-sheet date. Any exchange differences arising are accounted for in the Profit and loss account.

 

 

Transactions in financial instruments may lead to the fund being subject to the risks described below or to the fund transferring these risks to another party.

Currency risk is the risk that the value of a financial instrument will fluctuate as a result of changes in exchange rates. Interest-rate risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market rates. Market risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, caused by factors that exclusively apply to the individual instrument or its issuer or caused by factors that affect all instruments traded in the market.

The fund minimizes the risks by investing mainly in large and well-known companies and by making a balanced selection with regard to distribution across regions, sectors, individual stocks and currencies.

Credit risk is the risk that the counterparty of a financial instrument will no longer meet its obligations, as a result of which the fund will suffer a financial loss. The fund minimizes this risk by trading exclusively with reputable counterparties. Wherever it is customary in the market, the fund will demand and obtain collateral. As of balance-sheet date collateral ensuing from securities-lending transactions was received. More information can be found in the Notes to the balance sheet.

Liquidity risk is the risk that the fund is not able to obtain the financial means required to meet the obligations arising from financial instruments. The fund minimizes this risk by mainly investing in financial instruments that are tradable on a daily basis.

 

The Report of the management board, the Balance sheet, the Notes to the balance sheet and the Spread of net assets, which includes the geographic distribution of the investments, the net currency position and distribution over sectors, give an insight into the actual risks at balance-sheet date.

 

Managing risk is a part of the investment process as a whole and with the help of advanced systems, the risks outlined above are limited, measured and monitored on the basis of fixed risk measures.

Investing implies that positions are taken. As it is possible to use various instruments, including derivative instruments, to construct an identical position, the selection of derivatives is subordinate to the positioning of a portfolio. In our published information, attention is given primarily to the overall position, and secondarily to the nature and volume of the financial instruments employed.

 

The market value of derivatives is reported in the Balance sheet. The presentation of the market value is based on the liabilities and receivables per counterparty. The receivables are reported under Financial investments and the liabilities are reported under Accounts payable. The value of the derivatives' underlying instruments is not included in the Balance sheet. If applicable, they are explained under the heading Commitments not shown in the balance sheet.

Notes to the balance sheet

 

Movements in the stock portfolio
EUR x thousand
		2006		2005
Book value (market value) at opening date		7,192,191		6,293,582
Purchases		2,172,727		3,010,642
Sales		-2,625,807		-3,629,005
Realized and unrealized results:
stocks		857,083		1,055,095
currencies		-407,314		461,877
Book value (market value) at closing date		7,188,880		7,192,191

 

A breakdown of the portfolio and overviews of purchases and sales exceeding an amount of EUR 20 million and the spread of net assets can be found at the end of this report. Shares worth EUR 921.6 million (EUR 1,103.8 million at the end of 2005) were lent at balance-sheet date. To cover the risk of non-restitution, adequate collateral with a value of EUR 1,003.5 million (EUR 1,149.5 million at the end of last year) was demanded and obtained; this collateral is not included in the Balance sheet.

Movements in derivatives
EUR x thousand
	Forward exchange transactions			Futures			Total
	2006	2005		2006	2005		2006	2005
Book value (market value) at opening date	2,413	-14,140		3,893	3,589		6,306	-10,551
Sales/expirations	19,334	-16,657		7,762	-41,071		27,096	-57,728
Realized and unrealized results	-25,410	33,210		-4,961	41,375		-30,371	74,585
Book value (market value) at closing date	-3,663	2,413		6,694	3,893		3,031	6,306

The presentation of derivatives in the balance sheet is based on the liabilities and receivables per counterparty.

 

Presentation of derivatives in the Balance sheet
EUR x thousand
	Under financial investments			Under accounts payable
	2006	2005		2006		2005
Type of derivative
Forward exchange transactions	2,966	5,048		6,629		2,635
Futures	6,694	3,893		-		-
Total	9,660	8,941		6,629	2,635

Concerns dividends declared but not yet received.

This is income receivable ensuing from securities-lending transactions and recoverable transaction costs.

 

This includes recoverable dividend tax, tax withheld at source outside the Netherlands on behalf of the Dutch Tax Office, in accordance with article 6 of the Dutch Investment Institutions Decree ['Btb', Besluit toezicht beleggingsinstellingen] and suspense items.

 

Includes balances in current accounts at banks.

These are debts arising from issuance and repurchase of own shares and management and service fees to be paid.

 

Current liabilities such as unpaid expenses and suspense items.

Composition of and changes in shareholders' equity
EUR x thousand
	2006		2005
Issued capital
Situation at opening date	263,797		283,879
Received on shares issued	29,031		27,169
Paid for shares repurchased	-44,979		-47,251
Situation at closing date	247,849		263,797
Other reserves
Situation at opening date	5,325,545		5,562,719
Received on shares issued	765,557		616,456
Paid for shares repurchased	-1,193,952		-1,069,339
Net result from previous financial year	1,633,924		324,099
Profit distribution	-125,003		-108,390
Situation at closing date	6,406,071		5,325,545
Net result	483,651		1,633,924
Shareholders' equity	7,137,571		7,223,266

 

The company's authorized share capital amounts to EUR 800 million, divided into 800,000,000 ordinary shares with a nominal value of EUR 1 each.

 

Survey of movements in net assets
EUR x thousand
	2006		2005
Assets at opening date	7,223,266		6,170,697
Company shares issued	794,588		643,625
Company shares repurchased	-1,238,931		-1,116,590
	6,778,923		5,697,732
Investment income	149,720		115,350
Management costs	-71,283		-65,168
Service fee	-6,946		-6,417
Custody costs	-795		-752
Other costs	-521		-472
	70,175		42,541
Movements in value	413,476		1,591,383
Net result	483,651		1,633,924
Profit distribution	-125,003		-108,390
Assets at closing date	7,137,571		7,223,266

 

Assets, shares outstanding and net asset value per share
	31/12/2006		31/12/2005		31/12/2004
Assets EUR x thousand	7,137,571		7,223,266		6,170,697
Shares issued in financial year	29,031,142		27,169,492		39,255,017
Shares repurchased in financial year	-44,978,555		-47,251,035		-63,097,588
Number of shares outstanding	247,849,812		263,797,225		283,878,768
Net asset value per share in EUR	28.80		27.38		21.74

The forward exchange transactions current at closing date represent purchases of AUD 75 million, CAD 102 million, JPY 33,439 million and GBP 135 million, against sales of CHF 250 million, EUR 266 million, NOK 165 million, SEK 255 million and USD 78 million. Futures contracts purchased at balance-sheet date represent an increase in assets invested of JPY 24,948 million; futures contracts sold represent a decrease in assets invested of EUR 178 million. Forward exchange transactions and futures contracts have been included in the Spread of net assets at the end of this report. Unrealized results of these transactions at closing date are included in the Profit and loss account.

 

Notes to the profit and loss account

Performance per share*
EUR x 1
	2006		2005		2004		2003		2002
Investment income	0.58		0.43		0.37		0.37		0.45
Changes in value	1.60		5.89		0.92		0.91		-10.93
Management costs, service fee and other costs	-0.31		-0.27		-0.20		-0.17		-0.22
Net result	1.87		6.05		1.09		1.11		-10.70
*) Based on the average amount of shares outstanding during the reporting year. The average amount of shares outstanding is calculated on a daily basis for the years 2006, 2005, 2004 and 2003 and on a monthly basis for 2002.

Costs

Total expense ratio
in %			Maximum
	2006		prospectus		2005
Cost item
Management costs	1.00		1.00		1.00
Service fee	0.10		0.12		0.10
Other costs	0.02		0.02		0.02
Total	1.12		1.14		1.12

 

The total expense ratio expresses the costs charged to the fund during the reporting period as a percentage of the average assets entrusted during the reporting period. The total expense ratio as shown does not include transaction costs. The total expense ratio was 1.12% during the reporting period. The management costs relate to all of the fund's current costs, which include the fees paid for registering shareholders and all costs resulting from the management of the fund, with the exception of costs relating to investments and taxes. The service fee covers the administration, the costs of the external auditor, other external advisers, regulators, costs relating to reports required by law, such as the annual and semiannual reports, and the costs relating to the meetings of shareholders. Other costs relate to bank charges and the custody fee charged by third parties for the custody of the fund's securities portfolio. The custody fee is EUR 795 thousand (last year EUR 752 thousand).

Management costs relate exclusively to the management fee of 1.00% per year. The service fee amounts to 0.12% per year. Formal and operational expenses are paid from the service fee. These are explained in the notes to the total expense ratio. For assets exceeding EUR 1 billion the service fee is 0.10%; for assets exceeding EUR 5 billion the service fee is 0.08%. The management fee and service fee are charged by the Manager. These fees are calculated on a daily basis, based on the average assets entrusted. Wherever in this report mention is made of the average assets entrusted this is also calculated on a daily basis, unless stated otherwise.

 

This includes custody costs and bank charges.

 

Robeco N.V. is not subject to a performance fee.

Brokerage costs and exchange fees relating to investment transactions are discounted in the cost price or the sales value of the investment transactions. These costs and fees are charged to the result ensuing from changes in value. The quantifiable transaction costs are shown below. The transaction volume of the quantifiable transaction costs is 95.0 % (previous year 99.6%) of the total transaction volume.

 

Transaction costs
EUR x thousand
	2006		2005
Transaction type
Stocks	7,756		10,682
Futures	436		428

18 Commission-sharing arrangements, soft-dollar arrangements and hard commissions

Various independent research institutions/third parties provide services to the company to support its decision-making process. Part of the commission paid to brokers is used to pay for these services through commission-sharing arrangements.. In such cases the commission is exclusively for research services. In 2006 commission-sharing arrangements represented an amount of EUR 1.905 thousand (last year EUR 1.567 thousand).

Furthermore, there are so-called soft-dollar arrangements to pay for financial-service companies' services and products. These services and products are covered by part of the commissions paid to brokers in connection with the execution of securities transactions. Only the aforementioned commission-sharing arrangements were used during the reporting year. There were no soft-dollar arrangements (previous year EUR 622 thousand) or hard commissions (return commissions) during the reporting year.

This shows the turnover of the investments against the average assets entrusted and is a measure of the incurred transaction costs resulting from the portfolio policy pursued and the ensuing investment transactions. In the calculation method used, the amount of the turnover is determined by the sum of the purchases and sales of investments less the sum of issuance and repurchase of own shares. If the outcome is negative, the turnover ratio is 0. The turnover ratio is determined by expressing the amount of turnover as a percentage of the average assets entrusted. The turnover ratio over 2006 is 39% (versus 76% in the previous year).

 

Part of the transaction volume over the reporting period relates to transactions with affiliated parties. The table below shows the various types of transactions where this was the case.

 

Transactions with affiliated parties
Part of the total volume in %
	2006		2005
Transaction type
Stocks	-		0.3
Forward exchange transactions	10.3		4.1
Deposits	100.0		100.0
Call money	80.7		95.8

Robeco Securities Lending B.V. is the intermediary for all Robeco N.V.'s securities-lending transactions. As compensation for its services Robeco Securities Lending B.V. receives a fee of 40% of the gross income resulting from these securities-lending transactions. An external agency periodically assesses whether the agreements between the fund and Robeco Securities Lending B.V. are still in line with the market. In 2006 the proceeds for the fund amounted to EUR 3,305 thousand (last year EUR 1,821 thousand). For Robeco Securities Lending B.V. this was EUR 2,203 thousand (last year EUR 1,214 thousand).

Robeco N.V. does not employ personnel. Robeco Nederland B.V. is the employer of Robeco N.V.'s management board and personnel in the Netherlands. Their remuneration is paid out of the management fees received.

Robeco Nederland B.V.'s remuneration policy for fund managers consists of both fixed and variable income. The secondary conditions of employment are in line with what is common practice in the financial-services industry.

The fixed income offers a good and competitive remuneration basis within the Dutch asset-management market. A fund manager is assigned to a salary scale with a minimum and maximum income based on the level of responsibility of his function (Hay method for function valuation). Growth within this scale is linked to (performance) results and competencies.

The variable income offers the fund manager remuneration for his individual, long-term outperformance. Payment is related to the outperformance relative to a preset target. The track record over both a 1-year and 3-year period is taken into account when determining the variable remuneration. The variable remuneration to which the fund manager is entitled for any single year, is paid out over a three-year period (60% in the first year, 30% in the second and 10% in the third year).

Fund managers are given the opportunity to participate directly in Robeco's future through virtual shares (E-notes). The  allocation of E-notes is linked to individual performance and the contribution to the realization of the strategic targets of Robeco as a whole and the individual's own business unit. The E notes represent a value which is directly linked to Robeco Groep N.V.'s value. 

 

Rotterdam, 22 March 2007

P.C. van den Hoek, chairman

G. Izeboud

Ph. Lambert

D.P.M. Verbeek

 

Robeco Fund Management B.V.

 

Other data

The ordinary bearer shares are listed on Eurolist by Euronext Amsterdam N.V. in Amsterdam, the Netherlands. In addition, Robeco N.V. has a stock-exchange quotation in Paris, Brussels, Luxembourg, London, Berlin, Dusseldorf, Frankfurt, Hamburg, Munich, Vienna and Zurich.

According to article 39 of the Articles of Association, the profit less allocations to the reserves deemed desirable by the management board in agreement with the supervisory board shall be at the disposal of the General Meeting of Shareholders.

 

We propose to declare a dividend of EUR 0.60 per share for the 2006 financial year (previous year EUR 0.48). If this proposal is accepted, the dividend will be available on Friday 11 May 2007. With effect from Monday 30 April 2007, Robeco shares will be listed ex-dividend coupon no. 105 on the stock exchange.

Shareholders will be offered the opportunity to reinvest the dividend (less dividend tax) in Robeco shares at the company's expense. The price used to calculate this is the opening price of the shares on the stock market of Euronext Amsterdam N.V. on Friday 11 May 2007. Any collection commissions charged by banks in line with the relevant regulations in their respective countries will be borne by the shareholder. In some countries, reinvestment will not be possible for technical reasons.

 

An amount of EUR 32,670 (previous year EUR 32,670) has been allocated from the profit appropriation for this purpose. The chairman of the supervisory board receives a remuneration of EUR 10,890 and an ordinary member of the supervisory board receives a remuneration of EUR 7,260.

 

Statement pursuant to article 45, paragraph 3, of the 2005 Dutch Investment Institutions Supervision Decree [Besluit toezicht beleggingsinstellingen, or 'Btb']. The table below shows the total personal interests in the investments of the investment institution held by the directors of the investment institution and/or the management company on 1 January 2006 and 31 December 2006.

 

Supervisory directors held a joint interest of 4,708 and 4,769 Robeco N.V. shares on 1 January 2006 and 31 December 2006, respectively. The managing directors of the management company held a joint interest of 11,237 and 11,893 Robeco N.V. shares on 1 January 2006 and 31 December 2006, respectively. On 1 January 2006 and 31 December 2006, no options had been granted to supervisory directors; managing directors of the management company held options to acquire 18,030 and 14,999 Rolinco N.V. shares on the respective dates.

 

Directors' interests in the investments of Robeco N.V.
	Description	Supervisory directors Quantity	Management Board Quantity	Total Quantity
At 1 Januari 2006
AXA	stocks	11,239	-	11,239
BNP Paribas	stocks	2,460	-	2,460
Buhrmann	Supervisory directorships	2	-	2
Buhrmann	stocks	41,133	-	41,133
ING Groep	stocks	20,294	-	20,294
Intel	stocks	5,000	-	5,000
KPN	stocks	4,199	-	4,199
Nestlé	stocks	315	-	315
Novartis	stocks	1,962	-	1,962
Pfizer	stocks	1,000	-	1,000
Reed Elsevier	stocks	5,299	-	5,299
Royal Bank of Scotland	stocks	2,539	-	2,539
Royal Dutch Shell A	stocks	14,785	400	15,185
Syngenta	stocks	4	-	4
Telenor	stocks	15,000	-	15,000
TNT	stocks	3,800	-	3,800
Total	stocks	610	-	610
Unicredito Italiano	stocks	12,950	-	12,950
VNU	stocks	6,294	-	6,294
At 1 December 2006
Axa	stocks	11,239	-	11,239
BNP Paribas	stocks	2,706	-	2,706
E.ON	stocks	770	-	770
HSBC Holdings	stocks	4,550	-	4,550
ING Groep	stocks	13,200	-	13,200
Intel	stocks	5,000	-	5,000
Nestlé	stocks	315	-	315
Novartis	stocks	3,062	-	3,062
Reed Elsevier	stocks	5,299	-	5,299
Royal Bank of Scotland	stocks	2,539	-	2,539
Royal Dutch Shell A	stocks	18,692	400	19,092
SNS Reaal	stocks	577	-	577
Syngenta	stocks	4	-	4
Telenor	stocks	15,000	-	15,000
TNT	stocks	1,000	-	1,000
Total	stocks	3,700	-	3,700
Unicredito Italiano	stocks	12,950	-	12,950

Under the option scheme, Robeco Groep N.V. grants the right, at its own expense, to purchase Robeco N.V. shares for 5 years, the value of the shares being at least the opening price on the first trading day following the day on which the options are granted.

Aon Risk Services International, of which Dirk P.M. Verbeek is a director, acted as an intermediary for various insurance policies concluded at Rabobank Group level, including a Bankers, General Liability and D&O liability policy. Furthermore Aon Risk Services International insures several of Robeco's art objects. Apart from the above, during the period under review there were no business relationships between supervisory directors and the company other than that of their membership of the supervisory board.

The fund manager should act in accordance with Dutch legislation and, insofar as is relevant, legislation in other countries. As an employee of Robeco Nederland B.V. he is bound by Robeco's internal regulations and procedures, including the Rules and regulations regarding private investment transactions, which are based on the Dutch Securities Transactions Supervision Act. These Rules should guarantee that insider trading and mixing of business and private interests, or semblance thereof, are avoided at all times.

At 1 January 2006 and 31 December 2006 the fund manager held an interest of 5,047 and 5,271 Robeco N.V. shares, respectively. Furthermore, at these same dates he held interests in the following Robeco N.V. investments: 1,170 Royal Dutch Shell A shares and 3,500 Reed Elsevier shares.

The members of the supervisory board and the management board of Robeco N.V. hereby declare that their beneficial interests and those of their children below the age of 18 years do not in the aggregate exceed 5% of the company, in respect of either share capital or voting control.

 

Rotterdam, 22 March 2007

 

 

To the General Meeting of Shareholders and members of the supervisory board.

 

Auditor's report

We have audited the financial statements 2006 of Robeco N.V., Rotterdam, which comprise the balance sheet as at 31 December 2006, the profit and loss account for the year then ended and the notes.

The company's management is responsible for the preparation and fair presentation of the financial statements and for the preparation of the report of the management board, both in accordance with Part 9 of Book 2 of the Netherlands Civil Code and the Investment Institutions Supervision Act. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.

Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes an evaluation of how appropriate the  accounting policies and how  reasonable the  management's accounting estimates are, as well as an evaluation of the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

In our opinion, the financial statements give a true and fair view of the financial position of Robeco N.V. as at 31 December, 2006, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code and the Investment Institutions Supervision Act.

Pursuant to the legal requirement under 2:393 sub 5 part e of the Netherlands Civil Code, we report, to the extent of our competence, that the report of the management board is consistent with the financial statements as required by 2:391 sub 4 of the Netherlands Civil Code.

 

The Hague, 22 March 2007

 

for Ernst & Young Accountants

signed by Joost Hendriks