August 11, 2025 • 40 mins
Stepping beyond America's borders might be the smartest move for savvy investors right now. Phil Wool of Raliant Capital makes a compelling case for international equities—particularly emerging markets—at a time when U.S. stocks trade at historically high valuations.
The numbers tell a striking story: U.S. equities currently command a Shiller-CAPE ratio of 38 times earnings—three standard deviations above historical averages. While this doesn't predict an imminent crash, it strongly suggests lower-than-average returns over the next decade. Meanwhile, international markets offer better growth prospects at more attractive valuations.
Wool challenges the oversimplified narrative that international stocks have performed well this year solely because of dollar weakness. He highlights how emerging markets contain significant technology exposure, with many companies either competing with or supplying critical components to U.S. tech giants driving the AI revolution. This mirrors patterns from the dot-com era, when companies supplying internet infrastructure in emerging markets ultimately outperformed many headline-grabbing U.S. names.
For investors concerned about selecting winners in unfamiliar markets, Raliant's "quantamental" approach offers a solution. Their systematic strategies analyze billions of data points to identify companies with strong fundamentals flying under the radar. They incorporate market-specific factors that pure fundamental investors might miss, like foreign institutional investor holdings in South Korea or retail investor behavior in Taiwan.
Recent trade policy developments, including the Japan-U.S. trade agreement, demonstrate how market overreactions to political theater create opportunities for patient investors focused on fundamentals. These dislocations generate alpha for systematic strategies that can identify when stocks have unreasonably discounted good news or failed to properly price in positive developments.
Ready to diversify globally? Consider using the ACWI as your benchmark, with approximately 60% in U.S. stocks and 15% in emerging markets—then adjust based on current valuations and opportunities. With today's pronounced valuation disparities, overweighting international exposure might be the prudent choice for investors seeking both diversification and potential outperformance in the coming years.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Yeah, so this is kind of a mixed bag.
There were some things thatwere preventing the Bank of
Japan from hiking, so if theBank of Japan hikes, that's
obviously going to lead to yenstrengthening.
This is bad for the carry trade, potentially bad for Japanese
stocks if monetary policy getstoo restrictive although rates
(00:24):
in Japan are still really low,so we weren't too worried about
that.
But I think the removal oftrade policy uncertainty that
could lead the Bank of Japan tohike sooner.
The fact that the trade dealwas announced, though it
actually, I think, paves the wayfor the prime minister to
(00:45):
resign.
This prime minister wasactually viewed as relatively
hawkish.
Speaker 2 (00:56):
My name is Michael Guy.
I'm publisher of the LeadLaguerre Porte.
Joining me here is Mr Phil Woolof Ralliance.
Ralliance has a number ofdifferent funds.
We'll touch on Phil.
I sent you an email asking whatkind of topics you want to
cover.
You want to focus on valuationsNow.
International has done reallyquite well and international, as
we know, is cheap relative tothe US, and those that are
negative on international stockswill say well, if it's cheap,
(01:17):
it's cheap for a reason.
Let's talk about why valuationshad been cheap for
international and why it mightnot be that cheap going forward.
Speaker 1 (01:26):
Yeah, well, thanks for having me, michael, it's
always good to chat with you.
Valuations I think they'reinteresting now because we've
gone through a period of a lotof volatility and I think at
this point, really sincemid-August it's been full risk
on.
We've seen stocks that hadcratered around the time of
(01:50):
Liberation Day and these tariffannouncements.
They've rebounded and now theUS market is making record highs
again.
And so because we at Reliantinvest internationally, so we
certainly invest in US stocksthrough our developed markets
fund, rayd, but we also have anemerging markets ex-China fund,
(02:11):
raye, and we have a China fund,rayc, and then finally we've got
a Japan fund, rayj.
So we're thinking about USstocks and where they're priced,
but we're also always thinkingabout international and where
they're priced.
But we're also always thinkingabout international and, as you
said, international has beencheap.
(02:34):
There are reasons for that, butI guess as global equity
allocators we're just thinkingwhere are the best opportunities
, where can we buy growth at themost reasonable price?
And I think when you look at USvaluations and I think when you
look at US valuations andthere's so many different
metrics you can look at, I likethe Shiller-Cape ratio, so this
is just like a PE ratio for theS&P 500.
(02:54):
It's just adjusted becauseearnings are cyclical, we have
business cycles and if you lookat the Cape ratio, it's trading
at 38 times, which is like threestandard deviations above the
long run average.
Now, the long run average goesback 150 years, so that's
(03:17):
probably not relevant data, buteven looking over the last 20
years, we're at like two plusstandard deviations above the
last 20 years average CAPE ratio.
So US stocks are expensive.
It doesn't mean that the marketis going to crash tomorrow, but
as quants we're kind of lookingat historical patterns.
What it does suggest is thatthe next 10 years return on US
(03:41):
stocks is going to be lower thanaverage, and so we would tend
to look outside the US foropportunity.
You can be active within the US, but I think there's much more
interesting opportunity when yougo to international markets,
particularly emerging and Asiain general.
Speaker 2 (03:58):
Are all international markets the same in the way
that those valuations play out?
I mean there's got to be somevariability across those.
Speaker 1 (04:04):
Yeah, you know the reason that international
markets, especially emergingmarkets, typically trade at
lower valuations than US stocks.
There are a couple of reasons.
One is that growth rates vary.
So there are markets you know,if you look at Europe, for
example trades at a discount tothe US, but that's just because
(04:25):
growth is so much slowerearnings growth in Europe than
it is in the US, so that's cheapfor a reason in some sense.
Now you can ask yourself howcheap is Europe?
And is it too cheap givengrowth rates, even though
they're lower than the US?
Maybe there's a bargain there.
(04:47):
And then within emerging marketswhere growth is higher than it
is in the US, often the discountis because of things like
regulation, corporate governance, geopolitical risk and so forth
.
There are economies in LatinAmerica, for example, where you
know they're they're sort oftied to the business cycle
(05:07):
because they might be netcommodity exporters, and so
there you can understand whythere's a lot of risk.
You know you're getting sort ofthe same business cycle risk
that you get investing in USstocks, but these are really
commodity driven economies.
So that's where, as an activemanager, my job is to go in and,
within these countries wherethere might be a persistent
discount.
(05:28):
Find the stocks that aretrading at an unreasonable
discount, given they might havefeatures that compare quite
favorably even to US stocks.
Speaker 2 (05:38):
I want to talk about that term unreasonable, right.
So what makes somethingunreasonably cheap and what are
some of the metrics you look atto determine if something's
cheap?
Speaker 1 (05:47):
So we look at all sorts of things, our strategies.
We call ourselves quantamental.
Now we're really much morefocused on systematic stock
picking.
So we use models that are builton billions of data points.
We use machine learning to putall the information together,
but ultimately all of thetrading signals that we're using
(06:08):
these are intuitive things thatwould make a lot of sense to a
fundamental stock picker and infact what we're trying to do is
kind of replicate what a goodlocal fundamental analyst would
be doing in their own research,but just apply that to thousands
of stocks across the globalequity universe.
So things we look at certainlyeverything in the financial
(06:29):
statements.
We look at sentiment, we lookat smart money insiders, we look
at institutional investors whatare they doing?
We look at analyst sentimentand then we have all the usual
technical indicators as well.
So we're just trying to put allthat information together in
such a way that we can determinewhich stocks have super solid
(06:50):
fundamentals but somehow they'rejust under the radar, maybe
they're not getting a lot ofattention from irrational retail
traders and so they'reunderpriced.
There's an opportunity there.
Equally important in EM islooking for companies that are
trading at unreasonably highprices, because if we can avoid
those stocks so these would bestocks that maybe have been bid
(07:13):
up too high by irrationalindividual investors then we can
avoid those and again we canoutperform a passive strategy.
That's ultimately what we'retrying to do with each of these
active funds that I mentioned.
Speaker 2 (07:25):
There's this notion out there that international has
performed well this year purelybecause of dollar weakness.
Let's attack that for a littlebit, because it's far more than
just currency.
Speaker 1 (07:35):
Yeah, so dollar weakness is certainly a part of
it.
You know, when the Fed startedraising rates and the dollar got
super strong, that's a hugeheadwind to international
markets.
It's both in terms of unhedgedexposure that you might have to
stocks that trade in thosecurrencies.
But a strong dollar is also notnecessarily good for emerging
(07:58):
markets that might have debtdenominated in dollars.
It makes things a bit harder onthe monetary side for EM, but,
as you say, it's not allcurrencies.
So when I look at emergingmarkets, for example, one of the
things that's striking about EMis that there's a lot of
technology within emergingmarkets and amidst the AI boom
(08:22):
in US stocks know, we thinkabout Magnificent Seven when we
think about NVIDIA and all ofthose names that have garnered
so much attention for generativeAI.
There are a lot of companies inemerging markets that either
compete with NVIDIA or supplyNVIDIA or they build components
that are going into data centersthat now have to be expanded
(08:44):
because there's so much moredemand for AI compute and those
stocks really lagged behind.
So part of this year is thoseinternational AI stocks really
catching up with their UScounterparts.
And then we've also seenimprovements in governance.
When I look at South Korea, forexample, they've implemented
reforms that are meant to unlockvalue for shareholders, and so
(09:10):
those sorts of improvements.
We expect to see that evolutionover time in these emerging
markets, and we've seen a lot ofit this year.
Speaker 2 (09:18):
All right.
So let's let's keep going withthis sort of emerging market
side of things.
I have had myself plenty oftimes in my career where I
thought this is the yearemerging markets really start to
work.
This is the year, this is thecycle, this is the start, and it
starts and then stops.
Start, it's like death by athousand cuts right With a lot
of the emerging market relativestrength.
(09:39):
Is there anything fundamentallydifferent that suggests that
maybe we could be on the cusp ofsome sort of multi-year cycle
where emerging markets inparticular are?
Speaker 1 (09:50):
a place to invest.
Yeah, I mean we just touched on, I think, two big trends.
One is dollar weakening so it'snot the whole story, but it is
part of the story.
And if the dollar weakens inthe long run story, but it is
part of the story.
And if the dollar weakens inthe long run, then of course
(10:11):
that would be as I suggested.
It would be a big tailwind foremerging markets.
Why might we think the dollaris going to weaken?
Well, the reason the dollar gotso strong over the last few
years was that the Fed wasraising interest rates.
Naturally, even though there'sa lot of debate over when the
Fed is going to start cutting,it's going to happen at some
point, and that's going to leadto some dollar weakening.
I think the more interestingtrend, though, is the secular
(10:31):
trend.
It's de-dollarization, the factthat the US has really not been
shy about weaponizing thedollar.
Of course, there are countriesaround the world who don't want
to be tied to a currency thatcan be used against them if they
rub Washington the wrong way.
There's also clearly a lot ofconcern about political
(10:52):
instability in the US, that thisis not the super stable, super
safe place to park cash, and sothat would contribute to
de-dollarization.
And then think about theinflationary trend.
You know it's not just the USdeficit, it is policies like
tariffs which, even if they'renot as high as many feared at
(11:16):
the beginning of April, they'regoing to be higher than they
have been in many decades.
And, you know, immigrationpolicies all these things kind
of tend toward inflation.
And so for these reasons, Ithink sort of long term, we
should expect the dollar to losesome of its strength and that's
good for EM.
The other big one is justtechnology.
Like I said, when you thinkabout periods in which EM really
(11:40):
flourished, think about theturn of the millennium, think
about the dot-com bubble and thefact that there were US stocks
that went really high and thencrashed and Cisco is a prime
example.
But the stocks that really didwell were companies in EM that
(12:01):
were supplying theinfrastructure that enabled the
internet and e-commerce and allthe things that we appreciate
were a game changer for the waythat we do business and the way
that we consume.
That was really driven by EM.
So I think AI it's going to betransformative.
A lot of the benefits areactually going to flow to
(12:21):
companies that supply theinfrastructure to make that
possible and most of thosecompanies, like I said, are
actually in emerging markets.
Speaker 2 (12:28):
So I think it was yesterday that Trump made the
bold move of lowering tariff foran emerging market in Indonesia
from 20% to 19% was likebreaking news, right as far as
that goes.
But let's talk about the tariffside of things because there
was a deal that was struck.
I don't know as far as thatgoes.
But let's talk about the terrorside of things, because there
was a deal that was struck,supposedly as far as we can tell
, with Japan.
I have not really tracked thisthat much but of course, because
(12:50):
I talk about Japan quite a biton X, people are asking for my
opinion.
Speaker 1 (13:06):
So I'm going to ask for your opinion and get some
thoughts from you on what thisall means.
Yeah, so Japan is a great casebecause this is one of the US's
biggest trading partners.
It was a counterparty innegotiations that Trump labeled
as very tough and he actuallysaid he didn't think there would
be a deal with Japan before theAugust 1st deadline when the
tariffs that were written inthese letters he sent kicked in.
So I think the stakes werepretty high in terms of
negotiation with Japan Japan somost of us don't follow politics
(13:27):
in Japan.
Since I'm a portfolio manageron RAYJ, which is our Japan
active ETF, I have to pay closerattention and it's been pretty
volatile really over the courseof the last year in terms of
Japan's domestic politics of thelast year.
In terms of Japan's domesticpolitics and just over the
(13:48):
weekend, the ruling party theylost the second house of
parliament, so they lost thelower house of the diet, which
is Japan's parliament, towardthe end of last year, and then
over the weekend they lostcontrol of the upper house and
it's the first time since theparty's founding in 1955 that
they have had minority status inboth houses of the Diet.
So that was a big deal goinginto August 1st because the
(14:10):
prime minister of the rulingparty he is now a lame duck, and
so the theory was maybe hewould be entering negotiations
in this final stretch in a muchweaker position and if a deal
was done, it might be veryunfavorable to Japan.
So I think the deal that wasjust announced yesterday was 15%
(14:33):
tariff on some goods.
Okay, trump had threatened 30%,so 15% is much better than 30%.
It's not much higher than thebaseline minimum 10% tariff.
Japan did not have to give upvery much in concessions, so
there was some number 550billion of Japanese investment
in the US.
(14:53):
The details on that are prettysketchy.
Japan had to give US automakerssome access to Japan's market.
Again, not a lot of detail onthat, but I think this was a
positive surprise versusexpectations, which were that
Japan would have to give up alot if there was even a chance
of a deal before August 1st.
(15:14):
So all that's good news and Ithink when Japan's market opens
we're going to see that futuresare indicating.
Speaker 2 (15:21):
It's going to be a very good day for those invested
in Japan, right now Any senseof how that might impact the yen
or currency movement with Japan?
Speaker 1 (15:35):
Yeah, so this is kind of a mixed bag.
There were some things thatwere preventing the Bank of
Japan from hiking.
So if the Bank of Japan hikes,that's obviously going to lead
to yen strengthening.
That's obviously going to leadto yen strengthening.
This is bad for the carry trade, potentially bad for Japanese
stocks if monetary policy getstoo restrictive although rates
in Japan are still really low,so we weren't too worried about
(15:56):
that.
But I think the removal oftrade policy uncertainty that
could lead the Bank of Japan tohike sooner, the fact that the
trade deal was announced, thoughit actually, I think, paves the
way for the prime minister toresign.
This prime minister was actuallyviewed as relatively hawkish.
(16:18):
This prime minister was allabout fiscal discipline, and so
there is the prospect, I think,that we end up with someone
replacing Prime Minister Ishibawho is much more accommodative,
much more dovish, will push theBank of Japan in the same way
that Trump is trying to pressurethe Fed to keep interest rates
(16:43):
low.
The Fed to keep interest rateslow, and so, of course, that
would suggest a weaker yen, andso I think that remains to be
seen.
Long term, though, I do thinkthe yen has to strengthen,
because Japan is now on a pathto growth.
They're on a path tonormalizing their monetary
policy, so long term, I don'tknow how viable the carry trade
(17:04):
is going to growth.
They're on a path tonormalizing their monetary
policy, so long term, I don'tknow how viable the carry trade
is going to be that will be funfor me on X whenever that long
term becomes short term.
Speaker 2 (17:11):
Let's talk about tariffs in general.
Everyone freaked out abouttariffs at the start of the year
.
Now it seems like nobody reallycares very much.
But has the tariff dynamic atall impacted the relative
strength or relative argumentsfor you know, this country
versus that country?
I mean, what are your thoughtson where we are on that?
Speaker 1 (17:28):
Yeah, so one of the things that tariffs have done
and, in particular, kind of thedramatic, you know the political
theater of the way that thetariffs have been announced and
then paused and then escalatedand then paused again, tariffs
have been announced and thenpaused and then escalated and
then paused again, and then thissort of you know day by day
(17:51):
deal making that's happening.
It's just meant that when youthink about how we invest, you
know we're trying to pick stocksthat have strong fundamentals,
you know, maybe stocks that havegood longer term or medium term
sentiment.
This market has just gotten alot more emotional.
If you look at a chart ofpretty much any market around
the world, you're going to seethis massive crash at the
(18:13):
beginning of April and thenstocks bounce back.
It's like a V-shaped rebound instocks.
That is emotional trading.
It is policy shocks that havethe potential to just ripple
across markets, and so I thinkin the short run for rational,
(18:33):
systematic investors, that canbe frustrating because stocks
don't always trade in line withfundamentals.
It's more about what investorsare feeling on any given day,
but I think long term it createsgreat opportunities.
You know, these are the sortsof dislocations that that really
generate alpha for quants inthe long run, because we can put
(18:53):
on good trades now and thenover time, fundamentals are
obviously going to be importantand prices converge.
So you know, that's kind of howwe look at it from a trading
perspective.
I would say the otherimplication of the deal that
Trump struck with Japan that Ithink is really important is it
reinforces this narrative.
Michael, as you said, investorswere very concerned at the
(19:16):
beginning of April.
Over time we had the taco tradeand this notion that Trump was
always going to back down.
This reinforces the notion thatultimately it's not about those
initial threats.
There is going to be a deal ineach of these cases where
everyone can look like a winnerand you know again, to the
(19:37):
extent people are still pricingin any uncertainty around
tariffs.
That would be good news, do you?
Speaker 2 (19:43):
think that the market will still be most concerned
about tariffs with China or kindof hone in much more on that
than other emerging markets.
Speaker 1 (19:51):
Yeah, china is the market that we should be most
concerned about.
You know it's certainly themarket that's.
You know, among the largemarkets it's the one that's most
at risk if they get a bad dealwith the US.
But I think ultimately, inChina's case too, we're going to
get a good outcome, because thecost of having trade war
(20:15):
escalation with China of courseit hurts China.
You know.
China, I think, has been ableto kind of put off the pain by
just ramping up manufacturingand exporting to other countries
.
That can't sustain indefinitely.
But if we end up with reallyhigh tariffs against China it's
(20:36):
really going to hurt USconsumers.
And we've got midterm electionscoming up in just about a year.
You know that's what Trump doesnot want.
Going into midterms is superhigh inflation, more
unemployment in the US and justgeneral frustration.
So I think there will be a deal.
(20:57):
China is a special case becauseWashington has to look really
tough on China, so there mightbe more bluster, but I think
ultimately we'll get a dealthere.
Speaker 2 (21:07):
So bluster is hard to model quantitatively, right?
So I'm curious you mentionedthe quantamental approach.
You know kind of overarchingwith Rayleigh in itself how do
you model and how do you doquant work when, yes, there's
bluster but sometimes the thebluff ends up being cold?
Speaker 1 (21:28):
right With macro dynamics and politics, yeah,
Right, yeah, I mean, you hit thenail on the head.
That is really hard to model.
So I think about what, whathappens in this kind of
environment.
You know that bluster is partof the political shocks that
we've seen and that's reallybeen driving things since, you
(21:49):
know, at least since thebeginning of this year, but it
really goes back to last year'selection this year, but it
really goes back to last year'selection.
That's difficult in general forquants.
It's difficult in terms of thatkind of market timing aspect of
it.
You know, quants are good andwhen I think about where we
(22:13):
focus our energy, we're good atpicking the winners and losers
from among a pool of stocks.
It's much harder for a quant totell you is the whole market
going to go up or down tomorrow?
Maybe I can say something aboutthe medium term or the long
term, but it's hard for us tomodel these shocks.
One reason is just that wedon't have a lot of data.
When we're looking atindividual stocks, I've got data
(22:35):
on tens of thousands of issuersand I've got data going back
decades and decades.
But if you're talking abouttrade wars, you know we don't
have too many examples that wecan use to try to learn from
past data.
So that's one challenge is justthat you know, sort of in
statistics we say it's a lowpower test when we don't have a
(22:57):
lot of examples to test on.
But then the other issue isthese are extreme times.
So if a quant's job is to learnfrom data and find those
repeatable patterns that lead topredictability, usually the
data, by definition, is comingfrom the middle of the
distribution.
Right now we're in the tails.
(23:17):
Think about how many timeswe've seen an up move or a down
move by at least 3%.
These are really extremecircumstances.
So I'm not trying to predictthe bluster or the deal that's
going to be made tomorrow.
I would leave that to policyexperts and fundamental analysts
.
From a quant perspective, whatwe're trying to do is just come
(23:40):
up with rules that would help uslong term to identify good and
bad companies and then, like Isaid, the goal is not
necessarily to put on a tradetoday that's going to be a
winner when the next trade dealis announced and then take the
trade off.
It's looking at which stocksright now seem like they've
overreacted to negative news orunderreacted to positive news
(24:04):
Companies that have goodfundamentals and then tilt into
those companies, and then longerterm when that underreaction or
overreaction resolves.
When things go to fundamentals,we should be winners.
So that's kind of how quantswould tend to look at an
environment like this.
Speaker 2 (24:22):
You mentioned the four different funds you have.
I'm a believer in theinternational emerging market
side, but international when yousay international it tends to
be more developed.
So let's talk about the prosand cons of choosing if you're
going to go international,developed versus emerging
markets.
Speaker 1 (24:38):
I think in developed markets.
You know one aspect to this isthinking about asset allocation.
Developed is clearly going tobe the biggest part of an
investor's asset allocation.
I think developed markets tendto be more efficient.
So you certainly want exposureto developed markets to be more
efficient.
So you certainly want exposureto developed markets.
(24:58):
But I don't think generally youexpect a lot of your alpha is
going to come from developedlarge cap stocks, certainly not
developed US stocks.
So you want exposure.
You know these are markets thatare not particularly
inefficient.
I think you can still go foractive management if you're
(25:20):
looking at sort of amulti-factor construct and the
alpha is going to be smaller.
But I think there's still achance for outperformance.
And so we've built a strategythat is developed.
It includes US stocks, so like70% of the portfolio on average
is going to be US exposure.
There the goal is you know it'sa market that is kind of
(25:44):
top-heavy.
There's a lot of weight inMagnificent Seven stocks, but we
don't have to hold all of them.
So there our goal is let's findthe stocks that may be at the
margin are over or undervalued,and kind of tilt towards stocks
that we think have betterfundamentals at the margin are
over or undervalued and kind oftilt towards stocks that we
think have better fundamentalsat the margin and we can get a
bit of an edge there, thenyou've got about 30% of that
(26:05):
developed strategy that isinternational developed.
So I think Japan and Europe arethe really big exposures.
There there's probably moreopportunity in those markets.
They're a bit less efficientand right now valuations, I
think, are much more attractiveand so you'll get some exposure
to that too.
I think emerging markets it'snot going to be the core of your
(26:29):
equity exposure, but growth ishigher and there's much more
inefficiency.
So I think when you imaginewhere you're going to get that
outperformance, where's thealpha gonna come from?
Most of the alpha is probablygoing to come from within the US
and develop maybe small capstocks, but emerging markets
also very inefficient, and sothat's a place where there is a
(26:53):
lot less institutional investingand a lot more potential that
you can find companies that aretrading at really compelling
discounts and allocate to thosenow and then again, when
fundamentals win out, you shouldearn alpha on those positions.
Speaker 2 (27:11):
I forget the percentage, but when we look at
the ACWI All Country World Index, I mean it's almost all US.
I mean it says it's global butUS is pretty much the global
equity market cap.
If somebody's thinking about aninternational allocation,
should they be looking at thatas a benchmark in terms of
weightings?
Or do you think maybetactically it's worth sort of
(27:31):
taking a more outsized bet oninternational?
Speaker 1 (27:34):
So I think the, the Acqui, is a good baseline.
That would be a good startingpoint.
So if you look at the Acqui,maybe you have 15% as a baseline
in emerging.
The rest is developed.
Something like 60% of Acqui isUS stocks, so that's the
(27:55):
baseline.
60% of Acqui is US stocks, sothat's the baseline.
And then, I think, for investorsthat want to take a tactical
view, so if you think about thevaluation ratios that we talked
about at the top of this call,you might say to yourself well,
us stocks are a bit expensiveright now, so I'm going to tilt
more toward emerging markets.
So maybe instead of 15% in EM,so I'm going to tilt more toward
(28:16):
emerging markets, so maybeinstead of 15% in EM, you
allocate 25% to EM.
So you're betting on highergrowth in emerging markets.
Maybe you're betting on asecular resurgence in EM.
Maybe you're just looking forgreater alpha and you know that
if you invest in a good activemanager, they might have more
opportunity to outperform withinEM.
So I think Acqui is a goodstarting point.
(28:37):
But then of course, you canlook at valuations or you can
look at alpha opportunity andmaybe overweight the
international component.
We certainly see some of ourclients doing that.
Speaker 2 (28:47):
Talk about some of the pushback.
There must be some people thatthink, yeah, international has
got some momentum, but you knowthey're still not as innovative
as the US.
They're still slower to respondfrom a fiscal monetary
perspective.
What do you say to thepushbacks?
Speaker 1 (29:00):
Yeah, I think so.
One of the pushbacks is justthat the US has done so well
over the last 10 years 15 yearswhy would any investor do
anything else?
Like you said, Michael, one ofthe experiences that clients
have of emerging markets is thatthey were told that it's
growing so fast that it has tooutperform.
(29:21):
They were told that there'sdiversification in EM, and then
it only provided diversificationin the sense that it
underperformed US stocks, and soclearly that's not what
investors want.
Now to those investors.
My pushback is look at otherperiods.
So certainly over the last 15years, US stocks have done
(29:43):
better than anything else.
But if you look at otherperiods, so, like I said, at the
beginning of this century, EMstocks strongly outperform US
stocks.
If you look at this year, yearto date, again, EM stocks have
done better than US stocks.
So that is not a hard and fastrule that the US is always the
(30:06):
exception to equity marketperformance.
I think another pushback when itcomes to emerging markets is
that there's so much uncertaintyabout companies.
Accounting is one I hear a lot.
There's uncertainty aboutcorporate governance and you're
always worried that, as aminority shareholder these
(30:26):
family-owned companies, thesebig conglomerates that somehow
you're going to be at adisadvantage.
There's political risk, allsorts of risks, and those
concerns are valid.
Now, what I would suggest is,if you're an active manager,
then again your job becomessorting those risks out and
(30:46):
avoiding companies that havepoor governance, avoiding
companies where there might besome accounting issues, and if
you can do that, there's a hugeopportunity, because all of
these stocks trade at the samediscount more or less, and so if
you can find the good actorsversus the bad actors, that only
enhances the opportunity tooutperform in those markets.
(31:08):
But you have to be active totake advantage of those
opportunities.
Speaker 2 (31:11):
Not all active is created equal.
Active is obviously a big partof really the way that you
manage the funds.
But talk to me about.
You mentioned quantum mental,but let's get a little bit more
in depth.
How does that active approach,that framework, compare to other
active strategies when it comesto international?
Speaker 1 (31:37):
right approach to emerging markets or to stock
picking in general.
There's a lot of merit to afundamental approach.
Now I think one of thedistinctions is that fundamental
portfolios tend to be moreconcentrated, and that's
understandable.
You know, if you're afundamental manager, you only
have so much bandwidth to lookat stock.
So a fundamental manager can doa deeper dive on an individual
company.
They may be able to do betterkind of macro timing and overlay
(32:01):
that on the portfolio, butnaturally their universe is
going to be smaller.
Our portfolios will haveanywhere from 70 to 200 stocks,
and so, whereas we might nothave as big an edge on every
(32:24):
trade as a fundamental managerdoes, I think if we have a small
edge and we make lots ofuncorrelated bets, it's easier
for us to grind out thatadvantage and also to provide a
very diversified exposure toclients who you know it's not
all about the alpha, they wantthe beta exposure as well, and
so we're trying to deliver thebeta that you expect when you
(32:47):
invest in EM.
So you're not when you investin our EMX China strategy.
You're not getting companieslike NVIDIA that just have
international earnings orsomething like that.
You're getting actual EM stocksacross markets outside of China
.
So that's kind of portfolioconstruction where we differ, I
(33:07):
think, quantamental for us.
So where do we differ from otherquants?
It is that we look at a muchbroader set of signals,
including signals that arelocalized to the markets that we
trade in, a much broader set ofsignals, including signals that
are localized to the marketsthat we trade in the ETF.
So, for example, in that EMXChina ETF, we're looking at all
of the financial statement datathat you would look at when you
(33:27):
were analyzing US stocks.
But we're also looking atthings like in South Korea, for
example, foreign institutionalinvestors holdings in South
Korea.
For example, foreigninstitutional investors holdings
in South Korean stocks.
In Taiwan, we're looking atretail investors buying and
selling of Taiwanese stocks sowe can actually take the other
side of biased retail trades.
We're looking at all kinds ofother localized data sets that
(33:50):
allow us to say something reallyspecific about, for example,
governance in South Korea oraccounting quality in India, and
so those are the sorts ofsignals that we can use.
I think we bring to bear adifferent set of inputs.
That kind of distinguishes ourprocess from other quants.
Speaker 2 (34:09):
Does it make sense to have your holdings or your
funds alongside passivestrategies in the international
space?
Or would you say if you'regoing to do active and make that
the allocation?
Speaker 1 (34:21):
So we've tried to build strategies that you could
use as your core developedmarkets equity exposure or your
core EMX China holdings.
What I would suggest is that inmarkets like the emerging
markets that are veryinefficient, in developed
markets, looking at small capstocks active, in my opinion, is
(34:45):
the way to go, because there isjust so much more inefficiency
and I would really want someonewith that kind of active
mentality to be managing therisk in those markets as well.
Where we've seen people usemore passive is in developed,
particularly within the USmarket.
But again there I would arguethat where US stocks are trading
(35:10):
today in terms of valuation, Ithink investors have to be a
little bit more careful andmaybe, again, even if you have a
little bit of passive exposure,it probably makes sense to
blend in some active.
So you know, folks can mix andmatch.
We've tried to create buildingblocks, but I'm a big advocate
for sort of smart, systematic,active investing.
Speaker 2 (35:33):
Do you think that we miss fill that you think is
worth sort of focusing on ormentioning?
Look like I said I'm a believerin the idea.
I think it becomes a lot easierto beat the S&P 500 when you
get momentum outside of the US,because everyone, no matter what
, whether you're internationalor domestic, will compare
everything against the homecountry.
Home bias is real, but is thereanything you think, maybe from
(35:54):
a behavioral bias perspective,that people should keep in mind
when they think aboutinternational investing?
Speaker 1 (35:58):
Yeah, I mean, I think , behaviorally.
Why is their home bias?
Well, part of it is rational.
We just know the domesticmarket better than we know other
markets.
Part of it is irrational.
Potentially, we we we are muchmore exposed to the US stock
(36:37):
market If I went down the top 10holdings in our EM opportunity
set within global equities.
Or are they just sticking withwhat they're familiar with,
because it feels morecomfortable increasing
international diversificationwhen those valuations that we
talked about at the beginning ofthis conversation are so skewed
(37:01):
right now away frominternational and toward the US?
But I think we've covered a lotof ground and I think it should
be helpful for anyone trying tomake these sorts of allocation
decisions.
Speaker 2 (37:11):
Phil, if you just want to learn more about Raliant
and the funds, where would youpoint them to?
Speaker 1 (37:15):
So you can go to our website, fundsraliantcom.
You'll get information on allthe ETFs, fact sheets, slide
decks that explain themethodology, even video
descriptions of what we're doing.
So I would recommend that.
And then, of course, email us.
You'll find our email on thewebsite.
We're happy to answer questions.
Speaker 2 (37:33):
Appreciate those that watch this live stream.
Again, this will be an editedpodcast.
It has been a very busy day forme but thankfully things will
start to open up next week,given some additional help I'm
bringing onto the team.
So special thanks to Phil,special thanks to all of you for
watching.
We'll see you all in the nextepisode.
Thanks, Phil, Cheers everybody.
Yeah, so this is kind of a mixed bag.
There were some things thatwere preventing the Bank of
Japan from hiking, so if theBank of Japan hikes, that's
obviously going to lead to yenstrengthening.
This is bad for the carry trade, potentially bad for Japanese
stocks if monetary policy getstoo restrictive although rates
(00:24):
in Japan are still really low,so we weren't too worried about
that.
But I think the removal oftrade policy uncertainty that
could lead the Bank of Japan tohike sooner.
The fact that the trade dealwas announced, though it
actually, I think, paves the wayfor the prime minister to
(00:45):
resign.
This prime minister wasactually viewed as relatively
hawkish.
Speaker 2 (00:56):
My name is Michael Guy.
I'm publisher of the LeadLaguerre Porte.
Joining me here is Mr Phil Woolof Ralliance.
Ralliance has a number ofdifferent funds.
We'll touch on Phil.
I sent you an email asking whatkind of topics you want to
cover.
You want to focus on valuationsNow.
International has done reallyquite well and international, as
we know, is cheap relative tothe US, and those that are
negative on international stockswill say well, if it's cheap,
(01:17):
it's cheap for a reason.
Let's talk about why valuationshad been cheap for
international and why it mightnot be that cheap going forward.
Speaker 1 (01:26):
Yeah, well, thanks for having me, michael, it's
always good to chat with you.
Valuations I think they'reinteresting now because we've
gone through a period of a lotof volatility and I think at
this point, really sincemid-August it's been full risk
on.
We've seen stocks that hadcratered around the time of
(01:50):
Liberation Day and these tariffannouncements.
They've rebounded and now theUS market is making record highs
again.
And so because we at Reliantinvest internationally, so we
certainly invest in US stocksthrough our developed markets
fund, rayd, but we also have anemerging markets ex-China fund,
(02:11):
raye, and we have a China fund,rayc, and then finally we've got
a Japan fund, rayj.
So we're thinking about USstocks and where they're priced,
but we're also always thinkingabout international and where
they're priced.
But we're also always thinkingabout international and, as you
said, international has beencheap.
(02:34):
There are reasons for that, butI guess as global equity
allocators we're just thinkingwhere are the best opportunities
, where can we buy growth at themost reasonable price?
And I think when you look at USvaluations and I think when you
look at US valuations andthere's so many different
metrics you can look at, I likethe Shiller-Cape ratio, so this
is just like a PE ratio for theS&P 500.
(02:54):
It's just adjusted becauseearnings are cyclical, we have
business cycles and if you lookat the Cape ratio, it's trading
at 38 times, which is like threestandard deviations above the
long run average.
Now, the long run average goesback 150 years, so that's
(03:17):
probably not relevant data, buteven looking over the last 20
years, we're at like two plusstandard deviations above the
last 20 years average CAPE ratio.
So US stocks are expensive.
It doesn't mean that the marketis going to crash tomorrow, but
as quants we're kind of lookingat historical patterns.
What it does suggest is thatthe next 10 years return on US
(03:41):
stocks is going to be lower thanaverage, and so we would tend
to look outside the US foropportunity.
You can be active within the US, but I think there's much more
interesting opportunity when yougo to international markets,
particularly emerging and Asiain general.
Speaker 2 (03:58):
Are all international markets the same in the way
that those valuations play out?
I mean there's got to be somevariability across those.
Speaker 1 (04:04):
Yeah, you know the reason that international
markets, especially emergingmarkets, typically trade at
lower valuations than US stocks.
There are a couple of reasons.
One is that growth rates vary.
So there are markets you know,if you look at Europe, for
example trades at a discount tothe US, but that's just because
(04:25):
growth is so much slowerearnings growth in Europe than
it is in the US, so that's cheapfor a reason in some sense.
Now you can ask yourself howcheap is Europe?
And is it too cheap givengrowth rates, even though
they're lower than the US?
Maybe there's a bargain there.
(04:47):
And then within emerging marketswhere growth is higher than it
is in the US, often the discountis because of things like
regulation, corporate governance, geopolitical risk and so forth
.
There are economies in LatinAmerica, for example, where you
know they're they're sort oftied to the business cycle
(05:07):
because they might be netcommodity exporters, and so
there you can understand whythere's a lot of risk.
You know you're getting sort ofthe same business cycle risk
that you get investing in USstocks, but these are really
commodity driven economies.
So that's where, as an activemanager, my job is to go in and,
within these countries wherethere might be a persistent
discount.
(05:28):
Find the stocks that aretrading at an unreasonable
discount, given they might havefeatures that compare quite
favorably even to US stocks.
Speaker 2 (05:38):
I want to talk about that term unreasonable, right.
So what makes somethingunreasonably cheap and what are
some of the metrics you look atto determine if something's
cheap?
Speaker 1 (05:47):
So we look at all sorts of things, our strategies.
We call ourselves quantamental.
Now we're really much morefocused on systematic stock
picking.
So we use models that are builton billions of data points.
We use machine learning to putall the information together,
but ultimately all of thetrading signals that we're using
(06:08):
these are intuitive things thatwould make a lot of sense to a
fundamental stock picker and infact what we're trying to do is
kind of replicate what a goodlocal fundamental analyst would
be doing in their own research,but just apply that to thousands
of stocks across the globalequity universe.
So things we look at certainlyeverything in the financial
(06:29):
statements.
We look at sentiment, we lookat smart money insiders, we look
at institutional investors whatare they doing?
We look at analyst sentimentand then we have all the usual
technical indicators as well.
So we're just trying to put allthat information together in
such a way that we can determinewhich stocks have super solid
(06:50):
fundamentals but somehow they'rejust under the radar, maybe
they're not getting a lot ofattention from irrational retail
traders and so they'reunderpriced.
There's an opportunity there.
Equally important in EM islooking for companies that are
trading at unreasonably highprices, because if we can avoid
those stocks so these would bestocks that maybe have been bid
(07:13):
up too high by irrationalindividual investors then we can
avoid those and again we canoutperform a passive strategy.
That's ultimately what we'retrying to do with each of these
active funds that I mentioned.
Speaker 2 (07:25):
There's this notion out there that international has
performed well this year purelybecause of dollar weakness.
Let's attack that for a littlebit, because it's far more than
just currency.
Speaker 1 (07:35):
Yeah, so dollar weakness is certainly a part of
it.
You know, when the Fed startedraising rates and the dollar got
super strong, that's a hugeheadwind to international
markets.
It's both in terms of unhedgedexposure that you might have to
stocks that trade in thosecurrencies.
But a strong dollar is also notnecessarily good for emerging
(07:58):
markets that might have debtdenominated in dollars.
It makes things a bit harder onthe monetary side for EM, but,
as you say, it's not allcurrencies.
So when I look at emergingmarkets, for example, one of the
things that's striking about EMis that there's a lot of
technology within emergingmarkets and amidst the AI boom
(08:22):
in US stocks know, we thinkabout Magnificent Seven when we
think about NVIDIA and all ofthose names that have garnered
so much attention for generativeAI.
There are a lot of companies inemerging markets that either
compete with NVIDIA or supplyNVIDIA or they build components
that are going into data centersthat now have to be expanded
(08:44):
because there's so much moredemand for AI compute and those
stocks really lagged behind.
So part of this year is thoseinternational AI stocks really
catching up with their UScounterparts.
And then we've also seenimprovements in governance.
When I look at South Korea, forexample, they've implemented
reforms that are meant to unlockvalue for shareholders, and so
(09:10):
those sorts of improvements.
We expect to see that evolutionover time in these emerging
markets, and we've seen a lot ofit this year.
Speaker 2 (09:18):
All right.
So let's let's keep going withthis sort of emerging market
side of things.
I have had myself plenty oftimes in my career where I
thought this is the yearemerging markets really start to
work.
This is the year, this is thecycle, this is the start, and it
starts and then stops.
Start, it's like death by athousand cuts right With a lot
of the emerging market relativestrength.
(09:39):
Is there anything fundamentallydifferent that suggests that
maybe we could be on the cusp ofsome sort of multi-year cycle
where emerging markets inparticular are?
Speaker 1 (09:50):
a place to invest.
Yeah, I mean we just touched on, I think, two big trends.
One is dollar weakening so it'snot the whole story, but it is
part of the story.
And if the dollar weakens inthe long run story, but it is
part of the story.
And if the dollar weakens inthe long run, then of course
(10:11):
that would be as I suggested.
It would be a big tailwind foremerging markets.
Why might we think the dollaris going to weaken?
Well, the reason the dollar gotso strong over the last few
years was that the Fed wasraising interest rates.
Naturally, even though there'sa lot of debate over when the
Fed is going to start cutting,it's going to happen at some
point, and that's going to leadto some dollar weakening.
I think the more interestingtrend, though, is the secular
(10:31):
trend.
It's de-dollarization, the factthat the US has really not been
shy about weaponizing thedollar.
Of course, there are countriesaround the world who don't want
to be tied to a currency thatcan be used against them if they
rub Washington the wrong way.
There's also clearly a lot ofconcern about political
(10:52):
instability in the US, that thisis not the super stable, super
safe place to park cash, and sothat would contribute to
de-dollarization.
And then think about theinflationary trend.
You know it's not just the USdeficit, it is policies like
tariffs which, even if they'renot as high as many feared at
(11:16):
the beginning of April, they'regoing to be higher than they
have been in many decades.
And, you know, immigrationpolicies all these things kind
of tend toward inflation.
And so for these reasons, Ithink sort of long term, we
should expect the dollar to losesome of its strength and that's
good for EM.
The other big one is justtechnology.
Like I said, when you thinkabout periods in which EM really
(11:40):
flourished, think about theturn of the millennium, think
about the dot-com bubble and thefact that there were US stocks
that went really high and thencrashed and Cisco is a prime
example.
But the stocks that really didwell were companies in EM that
(12:01):
were supplying theinfrastructure that enabled the
internet and e-commerce and allthe things that we appreciate
were a game changer for the waythat we do business and the way
that we consume.
That was really driven by EM.
So I think AI it's going to betransformative.
A lot of the benefits areactually going to flow to
(12:21):
companies that supply theinfrastructure to make that
possible and most of thosecompanies, like I said, are
actually in emerging markets.
Speaker 2 (12:28):
So I think it was yesterday that Trump made the
bold move of lowering tariff foran emerging market in Indonesia
from 20% to 19% was likebreaking news, right as far as
that goes.
But let's talk about the tariffside of things because there
was a deal that was struck.
I don't know as far as thatgoes.
But let's talk about the terrorside of things, because there
was a deal that was struck,supposedly as far as we can tell
, with Japan.
I have not really tracked thisthat much but of course, because
(12:50):
I talk about Japan quite a biton X, people are asking for my
opinion.
Speaker 1 (13:06):
So I'm going to ask for your opinion and get some
thoughts from you on what thisall means.
Yeah, so Japan is a great casebecause this is one of the US's
biggest trading partners.
It was a counterparty innegotiations that Trump labeled
as very tough and he actuallysaid he didn't think there would
be a deal with Japan before theAugust 1st deadline when the
tariffs that were written inthese letters he sent kicked in.
So I think the stakes werepretty high in terms of
negotiation with Japan Japan somost of us don't follow politics
(13:27):
in Japan.
Since I'm a portfolio manageron RAYJ, which is our Japan
active ETF, I have to pay closerattention and it's been pretty
volatile really over the courseof the last year in terms of
Japan's domestic politics of thelast year.
In terms of Japan's domesticpolitics and just over the
(13:48):
weekend, the ruling party theylost the second house of
parliament, so they lost thelower house of the diet, which
is Japan's parliament, towardthe end of last year, and then
over the weekend they lostcontrol of the upper house and
it's the first time since theparty's founding in 1955 that
they have had minority status inboth houses of the Diet.
So that was a big deal goinginto August 1st because the
(14:10):
prime minister of the rulingparty he is now a lame duck, and
so the theory was maybe hewould be entering negotiations
in this final stretch in a muchweaker position and if a deal
was done, it might be veryunfavorable to Japan.
So I think the deal that wasjust announced yesterday was 15%
(14:33):
tariff on some goods.
Okay, trump had threatened 30%,so 15% is much better than 30%.
It's not much higher than thebaseline minimum 10% tariff.
Japan did not have to give upvery much in concessions, so
there was some number 550billion of Japanese investment
in the US.
(14:53):
The details on that are prettysketchy.
Japan had to give US automakerssome access to Japan's market.
Again, not a lot of detail onthat, but I think this was a
positive surprise versusexpectations, which were that
Japan would have to give up alot if there was even a chance
of a deal before August 1st.
(15:14):
So all that's good news and Ithink when Japan's market opens
we're going to see that futuresare indicating.
Speaker 2 (15:21):
It's going to be a very good day for those invested
in Japan, right now Any senseof how that might impact the yen
or currency movement with Japan?
Speaker 1 (15:35):
Yeah, so this is kind of a mixed bag.
There were some things thatwere preventing the Bank of
Japan from hiking.
So if the Bank of Japan hikes,that's obviously going to lead
to yen strengthening.
That's obviously going to leadto yen strengthening.
This is bad for the carry trade, potentially bad for Japanese
stocks if monetary policy getstoo restrictive although rates
in Japan are still really low,so we weren't too worried about
(15:56):
that.
But I think the removal oftrade policy uncertainty that
could lead the Bank of Japan tohike sooner, the fact that the
trade deal was announced, thoughit actually, I think, paves the
way for the prime minister toresign.
This prime minister was actuallyviewed as relatively hawkish.
(16:18):
This prime minister was allabout fiscal discipline, and so
there is the prospect, I think,that we end up with someone
replacing Prime Minister Ishibawho is much more accommodative,
much more dovish, will push theBank of Japan in the same way
that Trump is trying to pressurethe Fed to keep interest rates
(16:43):
low.
The Fed to keep interest rateslow, and so, of course, that
would suggest a weaker yen, andso I think that remains to be
seen.
Long term, though, I do thinkthe yen has to strengthen,
because Japan is now on a pathto growth.
They're on a path tonormalizing their monetary
policy, so long term, I don'tknow how viable the carry trade
(17:04):
is going to growth.
They're on a path tonormalizing their monetary
policy, so long term, I don'tknow how viable the carry trade
is going to be that will be funfor me on X whenever that long
term becomes short term.
Speaker 2 (17:11):
Let's talk about tariffs in general.
Everyone freaked out abouttariffs at the start of the year
.
Now it seems like nobody reallycares very much.
But has the tariff dynamic atall impacted the relative
strength or relative argumentsfor you know, this country
versus that country?
I mean, what are your thoughtson where we are on that?
Speaker 1 (17:28):
Yeah, so one of the things that tariffs have done
and, in particular, kind of thedramatic, you know the political
theater of the way that thetariffs have been announced and
then paused and then escalatedand then paused again, tariffs
have been announced and thenpaused and then escalated and
then paused again, and then thissort of you know day by day
(17:51):
deal making that's happening.
It's just meant that when youthink about how we invest, you
know we're trying to pick stocksthat have strong fundamentals,
you know, maybe stocks that havegood longer term or medium term
sentiment.
This market has just gotten alot more emotional.
If you look at a chart ofpretty much any market around
the world, you're going to seethis massive crash at the
(18:13):
beginning of April and thenstocks bounce back.
It's like a V-shaped rebound instocks.
That is emotional trading.
It is policy shocks that havethe potential to just ripple
across markets, and so I thinkin the short run for rational,
(18:33):
systematic investors, that canbe frustrating because stocks
don't always trade in line withfundamentals.
It's more about what investorsare feeling on any given day,
but I think long term it createsgreat opportunities.
You know, these are the sortsof dislocations that that really
generate alpha for quants inthe long run, because we can put
(18:53):
on good trades now and thenover time, fundamentals are
obviously going to be importantand prices converge.
So you know, that's kind of howwe look at it from a trading
perspective.
I would say the otherimplication of the deal that
Trump struck with Japan that Ithink is really important is it
reinforces this narrative.
Michael, as you said, investorswere very concerned at the
(19:16):
beginning of April.
Over time we had the taco tradeand this notion that Trump was
always going to back down.
This reinforces the notion thatultimately it's not about those
initial threats.
There is going to be a deal ineach of these cases where
everyone can look like a winnerand you know again, to the
(19:37):
extent people are still pricingin any uncertainty around
tariffs.
That would be good news, do you?
Speaker 2 (19:43):
think that the market will still be most concerned
about tariffs with China or kindof hone in much more on that
than other emerging markets.
Speaker 1 (19:51):
Yeah, china is the market that we should be most
concerned about.
You know it's certainly themarket that's.
You know, among the largemarkets it's the one that's most
at risk if they get a bad dealwith the US.
But I think ultimately, inChina's case too, we're going to
get a good outcome, because thecost of having trade war
(20:15):
escalation with China of courseit hurts China.
You know.
China, I think, has been ableto kind of put off the pain by
just ramping up manufacturingand exporting to other countries
.
That can't sustain indefinitely.
But if we end up with reallyhigh tariffs against China it's
(20:36):
really going to hurt USconsumers.
And we've got midterm electionscoming up in just about a year.
You know that's what Trump doesnot want.
Going into midterms is superhigh inflation, more
unemployment in the US and justgeneral frustration.
So I think there will be a deal.
(20:57):
China is a special case becauseWashington has to look really
tough on China, so there mightbe more bluster, but I think
ultimately we'll get a dealthere.
Speaker 2 (21:07):
So bluster is hard to model quantitatively, right?
So I'm curious you mentionedthe quantamental approach.
You know kind of overarchingwith Rayleigh in itself how do
you model and how do you doquant work when, yes, there's
bluster but sometimes the thebluff ends up being cold?
Speaker 1 (21:28):
right With macro dynamics and politics, yeah,
Right, yeah, I mean, you hit thenail on the head.
That is really hard to model.
So I think about what, whathappens in this kind of
environment.
You know that bluster is partof the political shocks that
we've seen and that's reallybeen driving things since, you
(21:49):
know, at least since thebeginning of this year, but it
really goes back to last year'selection this year, but it
really goes back to last year'selection.
That's difficult in general forquants.
It's difficult in terms of thatkind of market timing aspect of
it.
You know, quants are good andwhen I think about where we
(22:13):
focus our energy, we're good atpicking the winners and losers
from among a pool of stocks.
It's much harder for a quant totell you is the whole market
going to go up or down tomorrow?
Maybe I can say something aboutthe medium term or the long
term, but it's hard for us tomodel these shocks.
One reason is just that wedon't have a lot of data.
When we're looking atindividual stocks, I've got data
(22:35):
on tens of thousands of issuersand I've got data going back
decades and decades.
But if you're talking abouttrade wars, you know we don't
have too many examples that wecan use to try to learn from
past data.
So that's one challenge is justthat you know, sort of in
statistics we say it's a lowpower test when we don't have a
(22:57):
lot of examples to test on.
But then the other issue isthese are extreme times.
So if a quant's job is to learnfrom data and find those
repeatable patterns that lead topredictability, usually the
data, by definition, is comingfrom the middle of the
distribution.
Right now we're in the tails.
(23:17):
Think about how many timeswe've seen an up move or a down
move by at least 3%.
These are really extremecircumstances.
So I'm not trying to predictthe bluster or the deal that's
going to be made tomorrow.
I would leave that to policyexperts and fundamental analysts
.
From a quant perspective, whatwe're trying to do is just come
(23:40):
up with rules that would help uslong term to identify good and
bad companies and then, like Isaid, the goal is not
necessarily to put on a tradetoday that's going to be a
winner when the next trade dealis announced and then take the
trade off.
It's looking at which stocksright now seem like they've
overreacted to negative news orunderreacted to positive news
(24:04):
Companies that have goodfundamentals and then tilt into
those companies, and then longerterm when that underreaction or
overreaction resolves.
When things go to fundamentals,we should be winners.
So that's kind of how quantswould tend to look at an
environment like this.
Speaker 2 (24:22):
You mentioned the four different funds you have.
I'm a believer in theinternational emerging market
side, but international when yousay international it tends to
be more developed.
So let's talk about the prosand cons of choosing if you're
going to go international,developed versus emerging
markets.
Speaker 1 (24:38):
I think in developed markets.
You know one aspect to this isthinking about asset allocation.
Developed is clearly going tobe the biggest part of an
investor's asset allocation.
I think developed markets tendto be more efficient.
So you certainly want exposureto developed markets to be more
efficient.
So you certainly want exposureto developed markets.
(24:58):
But I don't think generally youexpect a lot of your alpha is
going to come from developedlarge cap stocks, certainly not
developed US stocks.
So you want exposure.
You know these are markets thatare not particularly
inefficient.
I think you can still go foractive management if you're
(25:20):
looking at sort of amulti-factor construct and the
alpha is going to be smaller.
But I think there's still achance for outperformance.
And so we've built a strategythat is developed.
It includes US stocks, so like70% of the portfolio on average
is going to be US exposure.
There the goal is you know it'sa market that is kind of
(25:44):
top-heavy.
There's a lot of weight inMagnificent Seven stocks, but we
don't have to hold all of them.
So there our goal is let's findthe stocks that may be at the
margin are over or undervalued,and kind of tilt towards stocks
that we think have betterfundamentals at the margin are
over or undervalued and kind oftilt towards stocks that we
think have better fundamentalsat the margin and we can get a
bit of an edge there, thenyou've got about 30% of that
(26:05):
developed strategy that isinternational developed.
So I think Japan and Europe arethe really big exposures.
There there's probably moreopportunity in those markets.
They're a bit less efficientand right now valuations, I
think, are much more attractiveand so you'll get some exposure
to that too.
I think emerging markets it'snot going to be the core of your
(26:29):
equity exposure, but growth ishigher and there's much more
inefficiency.
So I think when you imaginewhere you're going to get that
outperformance, where's thealpha gonna come from?
Most of the alpha is probablygoing to come from within the US
and develop maybe small capstocks, but emerging markets
also very inefficient, and sothat's a place where there is a
(26:53):
lot less institutional investingand a lot more potential that
you can find companies that aretrading at really compelling
discounts and allocate to thosenow and then again, when
fundamentals win out, you shouldearn alpha on those positions.
Speaker 2 (27:11):
I forget the percentage, but when we look at
the ACWI All Country World Index, I mean it's almost all US.
I mean it says it's global butUS is pretty much the global
equity market cap.
If somebody's thinking about aninternational allocation,
should they be looking at thatas a benchmark in terms of
weightings?
Or do you think maybetactically it's worth sort of
(27:31):
taking a more outsized bet oninternational?
Speaker 1 (27:34):
So I think the, the Acqui, is a good baseline.
That would be a good startingpoint.
So if you look at the Acqui,maybe you have 15% as a baseline
in emerging.
The rest is developed.
Something like 60% of Acqui isUS stocks, so that's the
(27:55):
baseline.
60% of Acqui is US stocks, sothat's the baseline.
And then, I think, for investorsthat want to take a tactical
view, so if you think about thevaluation ratios that we talked
about at the top of this call,you might say to yourself well,
us stocks are a bit expensiveright now, so I'm going to tilt
more toward emerging markets.
So maybe instead of 15% in EM,so I'm going to tilt more toward
(28:16):
emerging markets, so maybeinstead of 15% in EM, you
allocate 25% to EM.
So you're betting on highergrowth in emerging markets.
Maybe you're betting on asecular resurgence in EM.
Maybe you're just looking forgreater alpha and you know that
if you invest in a good activemanager, they might have more
opportunity to outperform withinEM.
So I think Acqui is a goodstarting point.
(28:37):
But then of course, you canlook at valuations or you can
look at alpha opportunity andmaybe overweight the
international component.
We certainly see some of ourclients doing that.
Speaker 2 (28:47):
Talk about some of the pushback.
There must be some people thatthink, yeah, international has
got some momentum, but you knowthey're still not as innovative
as the US.
They're still slower to respondfrom a fiscal monetary
perspective.
What do you say to thepushbacks?
Speaker 1 (29:00):
Yeah, I think so.
One of the pushbacks is justthat the US has done so well
over the last 10 years 15 yearswhy would any investor do
anything else?
Like you said, Michael, one ofthe experiences that clients
have of emerging markets is thatthey were told that it's
growing so fast that it has tooutperform.
(29:21):
They were told that there'sdiversification in EM, and then
it only provided diversificationin the sense that it
underperformed US stocks, and soclearly that's not what
investors want.
Now to those investors.
My pushback is look at otherperiods.
So certainly over the last 15years, US stocks have done
(29:43):
better than anything else.
But if you look at otherperiods, so, like I said, at the
beginning of this century, EMstocks strongly outperform US
stocks.
If you look at this year, yearto date, again, EM stocks have
done better than US stocks.
So that is not a hard and fastrule that the US is always the
(30:06):
exception to equity marketperformance.
I think another pushback when itcomes to emerging markets is
that there's so much uncertaintyabout companies.
Accounting is one I hear a lot.
There's uncertainty aboutcorporate governance and you're
always worried that, as aminority shareholder these
(30:26):
family-owned companies, thesebig conglomerates that somehow
you're going to be at adisadvantage.
There's political risk, allsorts of risks, and those
concerns are valid.
Now, what I would suggest is,if you're an active manager,
then again your job becomessorting those risks out and
(30:46):
avoiding companies that havepoor governance, avoiding
companies where there might besome accounting issues, and if
you can do that, there's a hugeopportunity, because all of
these stocks trade at the samediscount more or less, and so if
you can find the good actorsversus the bad actors, that only
enhances the opportunity tooutperform in those markets.
(31:08):
But you have to be active totake advantage of those
opportunities.
Speaker 2 (31:11):
Not all active is created equal.
Active is obviously a big partof really the way that you
manage the funds.
But talk to me about.
You mentioned quantum mental,but let's get a little bit more
in depth.
How does that active approach,that framework, compare to other
active strategies when it comesto international?
Speaker 1 (31:37):
right approach to emerging markets or to stock
picking in general.
There's a lot of merit to afundamental approach.
Now I think one of thedistinctions is that fundamental
portfolios tend to be moreconcentrated, and that's
understandable.
You know, if you're afundamental manager, you only
have so much bandwidth to lookat stock.
So a fundamental manager can doa deeper dive on an individual
company.
They may be able to do betterkind of macro timing and overlay
(32:01):
that on the portfolio, butnaturally their universe is
going to be smaller.
Our portfolios will haveanywhere from 70 to 200 stocks,
and so, whereas we might nothave as big an edge on every
(32:24):
trade as a fundamental managerdoes, I think if we have a small
edge and we make lots ofuncorrelated bets, it's easier
for us to grind out thatadvantage and also to provide a
very diversified exposure toclients who you know it's not
all about the alpha, they wantthe beta exposure as well, and
so we're trying to deliver thebeta that you expect when you
(32:47):
invest in EM.
So you're not when you investin our EMX China strategy.
You're not getting companieslike NVIDIA that just have
international earnings orsomething like that.
You're getting actual EM stocksacross markets outside of China
.
So that's kind of portfolioconstruction where we differ, I
(33:07):
think, quantamental for us.
So where do we differ from otherquants?
It is that we look at a muchbroader set of signals,
including signals that arelocalized to the markets that we
trade in, a much broader set ofsignals, including signals that
are localized to the marketsthat we trade in the ETF.
So, for example, in that EMXChina ETF, we're looking at all
of the financial statement datathat you would look at when you
(33:27):
were analyzing US stocks.
But we're also looking atthings like in South Korea, for
example, foreign institutionalinvestors holdings in South
Korea.
For example, foreigninstitutional investors holdings
in South Korean stocks.
In Taiwan, we're looking atretail investors buying and
selling of Taiwanese stocks sowe can actually take the other
side of biased retail trades.
We're looking at all kinds ofother localized data sets that
(33:50):
allow us to say something reallyspecific about, for example,
governance in South Korea oraccounting quality in India, and
so those are the sorts ofsignals that we can use.
I think we bring to bear adifferent set of inputs.
That kind of distinguishes ourprocess from other quants.
Speaker 2 (34:09):
Does it make sense to have your holdings or your
funds alongside passivestrategies in the international
space?
Or would you say if you'regoing to do active and make that
the allocation?
Speaker 1 (34:21):
So we've tried to build strategies that you could
use as your core developedmarkets equity exposure or your
core EMX China holdings.
What I would suggest is that inmarkets like the emerging
markets that are veryinefficient, in developed
markets, looking at small capstocks active, in my opinion, is
(34:45):
the way to go, because there isjust so much more inefficiency
and I would really want someonewith that kind of active
mentality to be managing therisk in those markets as well.
Where we've seen people usemore passive is in developed,
particularly within the USmarket.
But again there I would arguethat where US stocks are trading
(35:10):
today in terms of valuation, Ithink investors have to be a
little bit more careful andmaybe, again, even if you have a
little bit of passive exposure,it probably makes sense to
blend in some active.
So you know, folks can mix andmatch.
We've tried to create buildingblocks, but I'm a big advocate
for sort of smart, systematic,active investing.
Speaker 2 (35:33):
Do you think that we miss fill that you think is
worth sort of focusing on ormentioning?
Look like I said I'm a believerin the idea.
I think it becomes a lot easierto beat the S&P 500 when you
get momentum outside of the US,because everyone, no matter what
, whether you're internationalor domestic, will compare
everything against the homecountry.
Home bias is real, but is thereanything you think, maybe from
(35:54):
a behavioral bias perspective,that people should keep in mind
when they think aboutinternational investing?
Speaker 1 (35:58):
Yeah, I mean, I think , behaviorally.
Why is their home bias?
Well, part of it is rational.
We just know the domesticmarket better than we know other
markets.
Part of it is irrational.
Potentially, we we we are muchmore exposed to the US stock
(36:37):
market If I went down the top 10holdings in our EM opportunity
set within global equities.
Or are they just sticking withwhat they're familiar with,
because it feels morecomfortable increasing
international diversificationwhen those valuations that we
talked about at the beginning ofthis conversation are so skewed
(37:01):
right now away frominternational and toward the US?
But I think we've covered a lotof ground and I think it should
be helpful for anyone trying tomake these sorts of allocation
decisions.
Speaker 2 (37:11):
Phil, if you just want to learn more about Raliant
and the funds, where would youpoint them to?
Speaker 1 (37:15):
So you can go to our website, fundsraliantcom.
You'll get information on allthe ETFs, fact sheets, slide
decks that explain themethodology, even video
descriptions of what we're doing.
So I would recommend that.
And then, of course, email us.
You'll find our email on thewebsite.
We're happy to answer questions.
Speaker 2 (37:33):
Appreciate those that watch this live stream.
Again, this will be an editedpodcast.
It has been a very busy day forme but thankfully things will
start to open up next week,given some additional help I'm
bringing onto the team.
So special thanks to Phil,special thanks to all of you for
watching.
We'll see you all in the nextepisode.
Thanks, Phil, Cheers everybody.
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