Defense and financials bring strong run for value strategy

The fund has significantly outperformed its benchmark so far in 2025, making excess returns (alpha) of 12.14% over those of the MSCI World Index. It’s been partly thanks to strong performance of the defense sector and European banks, to which the strategy has been significantly overweight.

Both sectors have offered excellent opportunities for the value investing style, which seeks stocks whose valuation does not reflect their underlying potential for cashflow and earnings growth. Value stocks can largely be considered ‘bargains’ in a market environment that has become dominated by expensive tech stocks.

The defense sector has outperformed the rest of the stock market since the beginning of 2025, with price-to-earnings multiples in the aerospace and defense industry rising from 23.8 times in December of 2024 to 27.6 times by the end of June. This success follows the reappraisal of defense spending in Europe after Russia invaded Ukraine, leading the EU to allocate EUR 800 billion in a ReArm Europe initiative in 2024.

ReArm Europe runs in tandem with President Trump’s calls for the 32 NATO members to increase defense spending to at least 2% of GDP, rising to 5% by 2035 under an agreement signed at the NATO summit in The Hague in June 2025.

From the sustainable investing perspective, the defense spectrum is subject to strict exclusions banning investments in controversial weapons like cluster bombs. However, mainstream defense investing has always been possible for the majority of Robeco’s strategies, so long as a company is not involved in severe ESG controversies.

“We’ve always had defense exposure in the fund over the long term,” says Chris Hart, Portfolio Manager of Global Premium Equities since 2008. “Defense in Europe became a theme very quickly last year, and we had good exposure to the sector as this emerged, both in the US and in Europe.”

“All those stocks, in my view, have now become full value, or even expensive. They’re still pricing in a significant increase in European defense spending as a percentage of GDP. So, it will be interesting to see over the next several months how much of that comes to fruition; Spain is already balking at 5% of GDP.”

“I would say that across Europe and even in the US, Europe is priced for perfection in defense, while the US is fair to full value. I don’t really see significant opportunities in the defense industry entering the portfolio anytime soon.”

The top individual contributor in the defense space for the fund was Rheinmetall. The German firm makes tanks, armored vehicles and ammunition alongside a significant civilian engineering and robotics business. The fund first bought Rheinmetall stock in November 2019 at around USD 100 per share. The position added notably over the holding period, even prior to the Russia/Ukraine conflict.

“Rheinmetall was bought and added to over time because it offered great value, with consistent long-term free cash flow generation and a stabilizing mix of industrial and defense exposure,” Hart says.

The shares hit USD 200 in early 2022, USD 500 in early 2024, and USD 1,500 in early 2025, as the company saw massive spending commitments on contract wins from rising NATO defense spending rises.

“While much of the rise in the share price is deserved, it has now peaked, and is priced for not only continued spending increases, but for ongoing long-term conflicts which are not guaranteed,” Hart says.

“So we decided to sell the stock in the second quarter, as its price-to-earnings ratio has soared. It still reflects strong quality and momentum, but our approach will always remain price-sensitive.”

The stock’s sale made way for other new positions across the all-cap global universe that Hart selects securities from.

“Not many investors want to talk about names outside of the Magnificent Seven, but Rheinmetall has easily outpaced Nvidia in recent years,” he says. “Through our bottom-up stock picking, we aim to continue to fill our portfolios with underpriced businesses that can outperform, whether they are in the headlines or not.”

Another success story has been the once troubled European banks, which have also outperformed the general market for the past year thanks to strong cash flows, increasing profitability, strong balance sheets, and good prospects for future lending margins.

“We’re still significantly overweight European financials, but it wasn’t always like this due to regulatory overhangs that changed significantly over the last four to five years,” Hart says. The strategy historically has been underweight European financials for the majority of its existence.

“Today, they still provide a significant amount of value in the portfolio – not as much as they did say a year ago, but they’re still very interesting from the three circles perspective.”

“The banks that we own for the most part are in spread lending – traditional banks that earn the overwhelming majority of their net interest income from lending and not trading. They are very well positioned from a hedging perspective, regardless of what occurs with the yield curves going forward.”

Such has been the success of European banks that they have outpaced US mega-cap tech stocks since the middle of 2022, as seen in Figure 3 below:

However, rates are now falling after the European Central Bank cut the base rate across the 20-nation eurozone to 2% from 2.25% on 5 June, citing fears of economic slowdown that a defense spending surge could theoretically exacerbate.

“We think this year is somewhat of an air pocket where interest margins might deteriorate somewhat as interest rates go down,” Hart says. “But we’ve done a lot of work on 2026 and 2027 numbers, and we still see net interest margins remaining very favorable going into 2027.”

“We see earnings based on low single-digit loan growth. There’s no signs of credit deterioration in Europe or the US; historically you get credit issues when you have excessive amount of lending.”

“But over the last six to seven years, there hasn’t been an excessive amount of loan growth, either in the US or in Europe. Lending is probably pretty stable and credit quality has not shown a significant deterioration.”

“Importantly, they also continue to return a significant amount of capital, both through share buybacks and dividends.”

For more on the value concept, tune into our podcast with Chris Hart.