July 6, 2025 • 40 mins
The global investment landscape is shifting as international markets gain momentum despite lingering trade tensions. After years of US stock dominance creating stretched valuations, investors are increasingly looking abroad for more reasonably priced opportunities with similar growth potential.
Phil Wool, Chief Research Officer at Rayliant, makes a compelling case for emerging markets as fertile ground for active management strategies. Markets like Taiwan, South Korea, and China feature 80-90% retail trading volume, creating inefficiencies that systematic approaches can exploit by targeting strong fundamentals and positive sentiment.
One of the most overlooked aspects of emerging markets is their substantial technology exposure. South Korea's market comprises roughly 50% tech stocks yet trades at just 10x forward earnings—compared to the S&P 500's 23x. Taiwan's market is approximately 75% tech-focused but remains more affordable than US indices. These markets offer exposure to companies building critical components for data centers and AI infrastructure that often don't receive the same attention as the Magnificent Seven.
Japan represents another intriguing opportunity with its broad market featuring limited analyst coverage beyond top companies. After decades of deflation and stagnation, Japan is experiencing an economic inflection point with normalizing monetary policy and significant corporate governance reforms unlocking previously trapped value.
For investors concerned about international risk, Wool notes that much potential downside is already priced into these markets, unlike US equities where the recent recovery suggests investors may be underestimating lingering uncertainties. While emerging markets carry additional geopolitical and governance risks, these create opportunities for disciplined active managers who can identify well-governed companies.
The evolution toward sophisticated multi-factor frameworks has transformed international investing. Rather than relying on traditional value or growth tilts alone, advanced systematic strategies now incorporate diverse signals including market-specific factors accounting for local regulations and institutions—particularly valuable when navigating diverse global markets with varying characteristics.
Ready to explore international opportunities? Visit rayliant.com to learn more about their quantamental ETFs designed to capture behavioral alpha across global markets.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
All right, let's talk about on on Ray E how the
country mix looks, what emergingmarkets are in the top and how
do you go about selecting thoseweightings.
Speaker 2 (00:10):
This is a systematic strategy.
I mentioned that we're reallyfocused on behavioral economics.
We think that if you're runningan active strategy, there's a
pool of alpha in a market that'snot perfectly efficient.
And there's a pool of alpha ina market that's not perfectly
efficient and so, in our mind,you want to run an active
(00:34):
strategy in markets like Taiwan,south Korea, india, certainly
China, you know, if you includethat within the global EM mix.
And then you have to askyourself well, how do you
extract that behavioral alpha?
And in our view, these areperfect markets to run a
systematic strategy, because youknow systematic strategy.
Ultimately we're really justtrying to tilt the portfolio in
the direction of strongfundamentals, positive sentiment
(00:57):
under reaction to good news.
Speaker 1 (01:08):
My name is Michael Guyette, publisher of the Lead
Lag Report.
This is a sponsoredconversation by Raylian.
This is Mr Phil Wool fromRaylian and it's going to be a
well-timed conversation, givenwhat looks like some interesting
movement on the internationalmarket side.
So we'll talk about Raylian,their approach approach and how
they are looking at the currentenvironment.
So, phil, welcome.
It's been a while since we'vedone one of these.
(01:29):
I think it'd be good to just dosome table stakes talk about
your background, what you do atRayleigh and what Rayleigh does.
Speaker 2 (01:35):
Yeah, so I am the chief research officer at
Rayleigh and the portfoliomanager on Rayleigh's suite of
quantamental ETFs.
Rayleigh is an asset managerthat runs a series of equity
ETFs.
These are active funds that usea quantum mental process.
So it's a blend of systematicinvesting but it's really all
(01:58):
based on behavioral psychologyand just sort of fundamental
insights and we're just tryingto systematize that and make it
rigorous and use that to scorestocks around the world.
So the strategies that we run,they all have an international
flavor.
We've got a developed marketstrategy RAYD is the ticker on
(02:19):
that one.
That's about 70% US on averagebut it includes developed
international markets.
We've got an emerging marketsex-China strategy that's RAYE,
and then we've got a China ETFRAYC.
So you can kind of mix andmatch those two to create a
global emerging markets exposure.
And we also run in partnershipwith a big active management
(02:42):
firm in Japan called SumitomoMitsui DS Asset Management.
We run RAYJ, which is a Japangrowth strategy.
So we kind of run the gamut interms of global equities.
And you know, just veryinteresting, as you said, to
look across the equity worldthese days and I think
international stocks are gettinga lot more attention we would
(03:05):
argue, deservedly so.
Speaker 1 (03:07):
All right, let's get into that because, yes, the
momentum has clearly been therefor Europe, developed right and
emerging markets broadly looklike they want to move despite
tariffs.
First of all, I want to justkind of get your take on why is
it that there seemingly is amove outside of the US in terms
of these equity markets whenthese tariff fears are still
(03:27):
lingering?
Speaker 2 (03:28):
Yeah, I mean, I think a big part of it is investors
over the last few years did wellnot to diversify
internationally US stocks havejust done phenomenally well.
A big part of that has beenjust sort of the macroeconomic
trend which was toward a softlanding prior to Trump's second
(03:50):
term and all of this anxietyover tariffs.
There was immense positivesentiment around the AI theme,
data centers and just the notionof this AI revolution that's
going to be transformative, anda lot of that was really
centered around US stocks andthe Magnificent Seven.
(04:10):
But I think the upshot of thatwas valuations in the US were
baking in a lot of good news.
Globally things were a bitdifferent, I think stocks around
the world particularly inemerging markets where you still
get a lot of exposure to the AIand data center theme those
stocks just hadn't reallyparticipated as much in that
(04:33):
rally and so valuations weredepressed.
Those stocks internationallyhad an overhang associated with
fears around a potential hardlanding and maybe a more patient
Fed.
That didn't ease as quickly andso there was just sort of a
valuation disconnect.
Now I think now with moreconcern around US fiscal
(04:57):
discipline, concern aroundtariffs and the impact that's
going to have on US growth andjust just judging that, you know
, valuations didn't leave a lotof room for error.
Investors started lookinginternationally at what seemed
to be stocks that were priced abit more forgivingly.
Speaker 1 (05:17):
I want to hit on the valuation point, but I want to
go back to this point about thedebt on the US for a bit.
You see a lot of people sayingthe US bond market is behaving
like an emerging markets bondmarket behaves.
Maybe that's a little bombastic, but any any thoughts on sort
(05:39):
of sort of the idea that now theUS is not no longer a premier
place for relatively safeinvesting?
Speaker 2 (05:44):
So I think, as with most of the narratives that we
read about in the financialpress, the most extreme views
you know, sort of this notion ofthe end of American
exceptionalism.
I think there may be a bit toomuch negative hype there.
That said, and you know, wethink a lot about dollar
(06:06):
strength, about the US bondmarket, when we look at
international markets, becauseobviously dollar weakening would
be a big tailwind forinternational investors.
I think there are some trendstoward certainly
de-dollarization, trends towardcertainly de-dollarization,
(06:31):
dollar weakening, a lot moreconcern that, regardless of
which party happens to be inpower, that there's just not
much discipline.
And I do think there's been anerosion of confidence that you
know treasuries are going toremain the safe haven that they
once were and I think you knowthere's some truth to those
concerns.
(06:51):
So I think it's not going to bea messy blow up in my mind but
more of sort of a slow erosionin that confidence.
And we're going to see that interms of, you know, higher
yields at the long end of thecurve, a weakening dollar.
And then you know some of thesetrends towards stable coin and
(07:13):
you know potential alternativesto the regime that we've been in
for as long as anyone canremember.
Speaker 1 (07:19):
So you mentioned with one of your funds is an
ex-China EM play.
Let's talk about the reasonsfor excluding China as an
emerging market.
Speaker 2 (07:28):
Yeah, this is something that we've been
talking about for a long time.
So, before China became sounpopular with US investors
around the trade war and thesanctions list and just the
general escalation in tensionbetween the US and China, we
(07:48):
were saying it makes sense toview China within EM in the same
way that we tend to view the USwithin developed markets.
Prior to China's market goinginto kind of stagnation, it made
up over a third of the emergingmarkets basket.
(08:11):
Depending on how you count itand if you counted all of the A
shares, the onshore China stocks, it would be considerably
bigger.
And so the question is ifyou've got one exposure within
sort of a global emergingmarkets portfolio that is going
to disproportionately impact theperformance of that basket,
does it make sense to pull itout?
(08:32):
And you might want to do thatbecause within emerging markets,
if China is that important, itmight make sense to hire a China
specialist to manage that partof the portfolio as opposed to
an EM generalist.
So that was one rationale, andwe actually published a paper
kind of explaining why thatmight make sense.
But then, of course, as the USand China got into this
(08:57):
increasingly difficultrelationship, I think there was
a lot of demand for an EMproduct, that just stripped out
China because investors didn'twant the headline risk, and so,
in our view, one of the beautiesof ETFs is that we can use them
as building blocks and prettymuch create what investors would
need so that they couldformulate any sort of exposure
(09:19):
to EM that they could imagine.
Maybe an overweight to China,if they think that maybe the
bear case toward China isoverplayed.
Or, again, you could just stripChina out if you don't want to
take that risk and just sort offorget about the potential
drawdowns there.
So that was the rationale forus.
Speaker 1 (09:40):
All right, let's talk about on on Ray E how the
country mix looks, what emergingmarkets are in the top and how
do you go about selecting thoseweightings if you're running an
(10:07):
active strategy, there's a poolof alpha in a market that's not
perfectly efficient.
Speaker 2 (10:08):
Where does that come from?
It comes from investors who aremaking mistakes, and in
emerging markets.
One of the interesting featuresthat you find is there's a lot
more retail trading.
We look at the US market, wethink about Reddit and meme
stocks like GameStop and AMC andimagine that there's probably a
lot of noise there.
But in emerging markets there'sso much less sophisticated
(10:32):
institutional trading going on.
So your counterparty, if youtrade in EM, is much more likely
to be an individual investor.
And so in our mind, you want torun an active strategy in
markets like Taiwan, south Korea, india, certainly China, you
know, if you include that withinthe global EM mix.
(10:53):
And then you have to askyourself well, how do you
extract that behavioral alpha?
And in our view, these areperfect markets to run a
systematic strategy, because youknow systematic strategy.
Ultimately, we're really justtrying to tilt the portfolio in
the direction of strongfundamentals, positive sentiment
(11:13):
, under reaction to good news,of factors you know, looking for
high quality companies,companies with good governance.
If we can make enough of thosebets in a diversified way, we
should be able to just sort ofgrind out that behavioral alpha.
So that's the approach.
It's really a bottom upstrategy, which means that if
(11:35):
you looked at Ray E in terms ofindustries, in terms of country
exposure, it's going to look alot like the MSCI EMX China
Index.
So there's no sort of top-downoverlay in terms of country
timing.
But what you will find is thatif stocks within a particular
(11:56):
country become less attractive,we might end up with modest
underweight.
So, for example, we wereunderweight India as Indian
valuations got a bit stretchedand that actually paid off when
when investors sort of realizedtheir expectations for Indian
earnings growth were too high.
So that's kind of how we lookat country weightings within EMX
(12:17):
China.
Speaker 1 (12:18):
Now, of course, you do have a China focused fund as
well in Ray C.
So for those that want to takemore of an active stance when it
comes to China, which I happento think is probably going to be
a big outperformer, make thecase for that process when it
comes to, admittedly, agovernment that's not exactly
free markets friendly.
Speaker 2 (12:35):
Yeah, with China.
I think right now it reallydoes come down to a question of
what you think is going tohappen with the beta.
Of course, in China retailtrading is extremely pronounced,
so it's anywhere from 80% to90% of trading volume individual
investor trades.
So there's a lot of alpha there, I think, for investors that
(12:57):
take an active stance, andthat's kind of irrespective of
the state's policies.
I mean, we find plenty ofopportunity companies, even
among the state-owned firmswithin China, that are really
well run, they have policysupport and they have extremely
high quality fundamentals and sothere are opportunities there.
(13:18):
But I think whether you want tohave exposure to China, whether
you want to be overweight China,depends on what you think is
going to happen.
I tend to think that China hasbeen really disciplined in terms
of its propensity to enactfiscal stimulus and for a real
(13:40):
turn in sentiment in China we'regoing to see we'll need to see
more of a fiscal push.
I think the tariff policieshave kind of limited what China
is going to do.
So I believe as we get moreclarity on what Trump's tariff
endgame looks like toward China,that'll allow China to start
doing more stimulus, this demandoriented try toto-turn-consumer
(14:03):
sentiment around.
So, michael, I tend to agreewith you that I think China is
sort of just waiting for thatcatalyst for a big revaluation.
How?
Speaker 1 (14:12):
does secular trends in currency impact international
investing and maybe impact thequantum mental approach?
Speaker 2 (14:19):
Our view on currency.
These are unhedged ETFs, soyou're getting the currency
exposure associated with thesemarkets.
Our view is that we kind ofleave that up to the end
investor.
If you want to hedge currencyrisk, that's up to you.
We think it's generallyexpensive and it's probably good
(14:40):
to have some diversification interms of your FX exposure.
That said, I think right now inparticular because of that
secular trend towardde-dollarization, the fact that
the dollar is naturally going toweaken as the Fed inevitably
does start to ease, those willbe tailwinds for international
(15:02):
investors who don't have hedgedexposure to these markets.
So I think it's just sort of acoincidence of the timing here,
but in my view it's a good timeto get exposure to other
currencies around the world.
Speaker 1 (15:17):
Let's talk about China in the context of when
it's included in broad emergingmarkets.
I think typically it's in the25 to 30 percent range.
Let's say somebody is bullishon China and emerging markets
broadly.
Do you think that range fromthe MSCI perspective, that
percentage right?
Does that make sense?
Does it make more sense tounderweight China relative to
(15:40):
other emerging markets?
Speaker 2 (15:41):
independent of one's views, If an investor is bullish
on China.
I think China isunderrepresented in the MSCI
benchmarks.
That is to do with sort of thelegacy of Chinese equities,
especially onshore equities,being really difficult to access
for foreign investors.
That's changed, so now it'sreally easy to trade onshore
(16:06):
stocks through Stock Connect,which is a program that was
launched to connect Hong Kongwith the mainland exchanges, and
so those constraints have beenremoved.
I think that merits a biggerweighting to onshore stocks,
which just weren't included inthe MSCI benchmarks.
Even today they're onlyweighted at around a fifth of
(16:26):
their free flow market cap.
So I think China is just sortof structurally underrepresented
.
I would actually argue thatinvestors, if they want to
approach China as an overweight,they should think seriously
about also overweighting theonshore shares versus the Hong
Kong listings or the ADRs.
I think a lot of investors, ifyou ask them about China, they
(16:50):
would be familiar with nameslike Alibaba and Tencent and
Pinduoduo.
These are companies that listin Hong Kong where they've got
US ADRs.
But I believe a lot of thegrowth going forward in China
it's going to be onshorecompanies that are much more
tied to China's real economy andin RAYC that is almost
(17:12):
exclusively what we trade.
Are the A shares onshore.
Speaker 1 (17:15):
The thing with cycle changes is you don't know if a
cycle's changed until two tothree years after a cycle's
changed right, and I think,anybody that's tried to invest
or trade emerging markets ingeneral.
They've been whipsawed.
Every time it looks likethey're about to have a secular
run, kind of pewters out, makethe case for why maybe this is a
secular shift.
Speaker 2 (17:34):
So you see sort of waves of US outperforming EM and
then, for a long period,emerging markets will outperform
the US.
We've just gone through a cyclein which, as I said,
diversifying into EM was onlydiversification in the sense
(17:57):
that your US stocks went way upand EM was just sort of treading
water or declining.
So I think the perception of alot of investors is that there's
a lot of volatility.
They've probably had a badexperience with EM at some point
and that kind of turns them offtoward emerging markets.
There's also the fact that EMit is riskier.
(18:21):
So there are risk factors in EMthat you just don't experience
to the same extent in developedmarkets.
I mentioned governance.
In markets like China, southKorea, taiwan, india governance
is a huge issue.
India governance is a hugeissue, and so this is another
(18:43):
one of those features that Ithink points in the direction of
active management within thesemarkets.
So for an investor gettingpassive exposure to EM, I think
there are legitimate questions.
You really would want to havesome means of timing the beta.
I think, regardless of thosecycles, there's an argument to
be made for active managementwithin emerging markets, and so
(19:06):
if you look at 2025, for example, it's clearly been a good year
to be invested internationally.
Of those four ETFs investedinternationally, of those four
ETFs, three of them that we runare beating the S&P 500 this
year.
Our EM strategy is performingbetter than the S&P 500.
(19:30):
We're trailing the benchmark,but I think historically there
have been years when the S&Poutperformed EM and because
we're active, we've still donebetter than the S&P because we
were able to take advantage ofsome of those mispricings that I
mentioned, and so I think foran active investor, it's sort of
a different question.
But, as I mentioned, we're in aphase now where the Fed is
(19:52):
going to be easing.
That's good for EM.
The dollar is likely to weakenas a result of that easing, but
also because of these seculartrends that we mentioned, that's
good for emerging markets.
Emerging markets haven'tparticipated as much in the
valuation inflation associatedwith this AI theme in EM.
I think that's where we'regoing to see a lot of the real
(20:13):
winners as this data centerbuild out happens.
You know those are companieslisted in Taiwan, south Korea,
china, and so I think there area lot of features just pointing
in the favor of a biggerallocation to EM.
Speaker 1 (20:25):
Let's talk about one of my favorite countries, japan.
I say that jokingly and notjokingly, because I always talk
about the reverse carry trade,which I still believe is
somewhere out there, but it's amoment in time, and who knows
exactly when I mean right now.
It doesn't seem like it's ahuge risk, especially if oil
breaks down, which is part of mythesis.
But let's talk about Japan, theopportunities there from a very
(20:46):
long term perspective and thecase for active management.
Speaker 2 (20:49):
So I think that, again, with Japan, the case for
active management has alwaysbeen there.
This is a market that's reallybroad in terms of the number of
stocks that are listed in Japan,but analyst coverage is pretty
weak once you get outside, likethe Nikkei stocks.
So the top couple hundredstocks Analyst coverage starts
(21:12):
to thin out and I think there'sa lot more information asymmetry
there.
So for an active manager thatcan do a good job evaluating
those companies and this is oneof the reasons we partnered with
a local firm to launch a JapanETF if you've got the kind of
fundamental expertise, that canbe a huge advantage within Japan
relative to other markets.
(21:33):
Japan, like emerging markets,has a strong culture of
individual investor trading.
So it's not we're not talking80 to 90 percent of volume, but
20 to 30 percent of volume isretail trading, and so there's
also arguably a lot ofbehavioral bias within the
Japanese market.
(21:53):
Those would be, I think youknow, great features of a market
under any circumstances.
But you've also got Japan nowat an inflection point and it's
not a coincidence that welaunched a Japan fund in 2024.
So this ETF just launched Aprilof last year.
We were looking at some of themacro trends that we think are
(22:17):
long-term trends toward Japan'sexit from this deflationary,
economically stagnant period andan emergence of new growth in
Japan and eventual normalizationof Japanese monetary policy,
where we're seeing Japanactually increasing rates as
(22:37):
inflation sets in.
And then, on top of all that, ahuge push for reforms in
corporate governance and I thinkfor investors that are
positioned in companies wheregovernance improvement is likely
, that's another big catalystfor kind of a medium term
revaluation of Japan's market.
So I'm a huge fan of Japaneseequities and I think there's
(23:01):
really a lot of room for them torun going forward.
Speaker 1 (23:04):
Actually one thing about that versus developed
Europe.
Speaker 2 (23:07):
Yeah.
So I think developed Europe,when you look at the valuations,
also quite cheap.
But I think developed Europe ismore cheap for a reason, but
without a clear catalyst.
I just mentioned corporatereform in Japan.
That's a reason to imagine thatmaybe there's a lot of value to
(23:30):
be unlocked there.
I think within Europe again,for an active investor that can
pick and choose, there's a lotof opportunity.
Europe has a lot of the sameproblems that the US has, though
in terms of fiscal discipline.
I think European industry,unlike the US, it's not exactly
a hotbed for tech innovation andso in terms of the beta, I
(23:55):
would argue EM, japan, just muchmore interesting places for an
active investor to play in longonly strategies.
Speaker 1 (24:07):
Okay, so we might be in a cycle for international.
Part of that is sort ofthinking around how one should
view different sectors of themarketplace.
Right, I myself have made thepoint that one of the biggest
differences between the US andanything outside the US is that
we have tech.
A lot of these other countriesobviously don't have large
exposure there.
How should one viewinternational investing if they
(24:30):
are bullish on tech?
Are there any interesting sortof tech plays that maybe in the
funds they've got exposure to?
Speaker 2 (24:36):
Yeah, so I think within global markets, you know,
if you look at developedmarkets, it's true that outside
of the US, you know, maybe Japan, they've got a significant tech
component to their market index.
But within developed markets,certainly the US is the place to
(24:58):
go if you want tech exposure.
I think within emerging marketsthe amount of exposure
investors get to tech isunderappreciated.
So if you look at South Korea'smarket, for example, 50% of the
index is technology stocks ofthe index is technology stocks.
(25:23):
When you look at valuations inKorea, whereas, so think about
50% tech, that's like sort ofblending the S&P and the NASDAQ.
The S&P trades at 23 timesforward earnings today.
The NASDAQ is at like 30 timesforward earnings, so it's
cheaper than it was a few monthsago it was trading closer to 40
times but at 30 times.
You kind of imagine blendingthose two to get 50% tech.
(25:43):
It's going to be somewherebetween 20 and 30 times earnings
.
In Korea the market is trading.
The overall market is tradingat 10 times forward earnings.
Now, a big part of that, as Isaid, is a discount because
there's geopolitical risk.
There's tons of risk aroundgovernance.
But for an active investor thatcan pick and choose companies,
(26:03):
you can find well-governedcompanies.
You can find great companies inthe tech sector with great
fundamentals.
The pricing is just so muchbetter in South Korea.
Taiwan is like 75% tech if youlook at the benchmark.
I mean, we're all familiar withTaiwan semiconductor
manufacturing.
There are plenty ofunder-the-radar tech plays in
Taiwan and, again, taiwan, it'snot trading at South Korea
(26:29):
valuations, but we're talkingabout closer to 20 times forward
earnings, so it's still cheaperthan the S&P 500.
And the thing about thesemarkets is it's not the
magnificent seven names thateveryone associates with tech.
It's the companies that areactually building the components
that go into those data centers, and so one of the reasons that
(26:49):
they haven't shot up with therest of the AI theme companies
is that they're just sort ofunder the radar, but they are
going to generate cash flowswithin that theme as the AI
revolution plays out.
So I think EM is a great placeto go for tech exposure, and we
have plenty of it within RAYE,do you think?
Speaker 1 (27:06):
we're at a point now where it becomes easier to beat
the MSCI World's index.
I mean, so much of that hasover time become increasingly US
heavy right.
I mean it seems to me that it'slike if that's a benchmark and
that's been hard to beat, it maybe a lot easier going forward.
Speaker 2 (27:23):
I think active investors, you know,
increasingly have opportunitieswithin a US market which, as I
said, you know it makes up likethree quarters of the MSCI World
Index, but valuations arepretty high right now and
there's a lot of good news inthe prices.
So I think active managers havean opportunity to be selective
(27:46):
and pick the companies that aregoing to be more robust as risks
, like we've observed over thelast few months, emerge.
And then, I think, within theinternational component again,
these are markets that are justless efficient.
So, as managers take a closerlook at developed XUS, at the
(28:17):
rest of the MS, I think there'sa lot of opportunity within
systematic strategies that takethis bottom-up approach and do
it in a diversified way.
So I do agree, I think activemanagement has good days ahead
of it.
Speaker 1 (28:33):
As you think, through the various funds that you have
which are resonating the mostat this moment in time and
typically would an allocatorposition to your funds, as well
as a passive emerging marketproxy.
Speaker 2 (28:46):
You know, typically what we see is allocators.
They would have a mix of activeand passive.
They would prefer active amongsmall caps within the US.
They would prefer active amongsmall caps within the US.
But then when you gointernational we see allocators
leaning more toward activebecause they so we're systematic
(29:06):
kind of diversified portfoliosand then we'll often be matched
up with more of a concentratedfundamental manager and so
(29:29):
allocators will take that kindof diversified approach at the
manager level.
Within our suite of ETFs, Ithink the fund that's most
interesting to me at this momentis RAYE.
In part I mentioned it'sunderperformed the MSCI EMX
China index this year.
That is largely a result, ifyou sort of look at the
(29:50):
attribution, of poor performanceof the momentum factor, but
also poor performance ofsentiment factors in general.
We look at all kinds of smartmoney sentiment.
We look at what analysts aredoing, and analysts within EM
actually tend to have a lot ofinformation in their
recommendations, if you know howto process the data.
(30:11):
We look at other forms of smartmoney and dumb money,
information flow, and thosefactors have underperformed this
year.
Why?
It's because of all of thisvolatility, including all of the
trade policy uncertainty.
But what I often tell clientswho are asking well, what do you
expect going forward?
(30:32):
Times like this are generallydifficult for quant strategies
because when markets are drivenby emotion and we saw sort of
this V-shaped drop and thenbounce in equities around the
world, that's a period whereprices are moving generally away
from fundamentals.
Quant strategies make moneywhen this sort of noisy
(30:55):
deviation from fundamentalsreverts.
So you don't make the mostalpha in volatile markets like
this, but you do tend to put onyour best trade.
So in that sense I feel that ifyou view these strategies as
sort of a coiled spring that'spoised for reversion, I think
there's a good opportunity inEMX China right now.
Speaker 1 (31:16):
Let's talk about how to think about risk, right?
So obviously you've got theproducts you want to see people
in the space.
But for those that are nervousabout international investing,
what are some of the things youwould say okay, these are worth
paying attention to independentof your own funds?
Speaker 2 (31:33):
Yeah, it's a great question.
So when I think about riskassociated with the heightened
volatility that we're allexperiencing right now and
that's financial volatility, butit's also just uncertainty in
terms of the macro landscapemore significantly priced in
(32:01):
right now, so within US stocks,when I see how strongly the
market has recovered since thebeginning of April, I think
investors have swung fromextreme fear back to greed and
even though when I look at sortof macro survey data, which is
the confidence of consumers andthe confidence of businesses,
investors seem to be shruggingthat off and assuming that we're
(32:26):
on the right track and thatthere aren't going to be so many
more bumps in the road, thatmakes me nervous.
When I look at emerging markets, even though they've also
rebound since the April lows,emerging markets have for the
last year or more been pricingin a lot more negativity, as I
said, negativity not just aroundTrump 2.0 policy but also the
(32:51):
prospects for a US and a globalhard landing, and so I think
that kind of risk is alreadymore than baked into EM.
So I'm less concerned aboutthat in terms of valuations.
But I did note that emergingmarkets are generally more risky
.
They just look at what'shappening in the Middle East.
(33:11):
There's huge geopolitical risk,there's risk on the governance
front, there's risk associatedwith just weaker institutions in
general.
So then the question is do youhave a manager who can correctly
identify firms that are more orless subject to that risk?
And so that's where I thinkthere's a huge opportunity.
(33:32):
If those markets are beingdiscounted because of that risk
and you have an active managerwho can go in and pick the right
companies, that's a hugeopportunity in my view.
Speaker 1 (33:41):
What do you think we've missed?
And we talked about the casefor international.
We talked about Japan, china,ex-china.
What else should we be thinkingabout?
I mean, my mind also goestowards sort of a mindset around
style, tilt right.
Growth versus value, growthobviously being much more
associated with the US Value,much more associated with US
(34:03):
value, much more associated withinternational.
Speaker 2 (34:04):
Could it be that if we're in this broader cycle,
that favors international, thatvalue across the globe becomes
where it'd be?
That's a great question, Ithink one of the developments.
So, when you look at systematicinvesting over the decades,
it's clear that there's beenvery broad adoption of smart
beta strategies and, inparticular, we've entered a
paradigm where people start tothink I'm a former academic so I
(34:29):
love the fact that we've sortof evolved in the way that we
look at investing to favor thiskind of a factor-based paradigm
for how we think about ourportfolio's exposure.
That's a really positivedevelopment.
I think one of the areas wherethere's still a lot of room for
(34:51):
improvement is, once you takethat factor view, you know that
you are building portfolios thathave a certain type of exposure
.
I think there's room forimprovement in terms of thinking
single factor versusmulti-factor.
So, like you, I tend to sort ofassociate different markets with
different factor tilts thathave worked historically, but I
(35:15):
think what we've seen among ourinstitutional clients is that
they've gravitated from singlefactor, smart beta to thinking
multi-factor and they've gonefrom multi-factor, which is just
a small handful of the mosttraditional factors, to
multi-factor, in the sense of avast array of trading signals in
(35:37):
different factor groups andthen putting those together in a
more sophisticated manner.
So our funds, we've kind ofeschewed that single factor or
really simple heuristic-basedmulti-factor approach in favor
of a very wide array, a biglibrary of trading signals.
Some of them fit intotraditional factor buckets like
(35:59):
value or growth, but many ofthem are associated with really
nuanced types of quality.
Some of them, especially withinemerging markets, are localized
, so we're using local data,we're taking account of local
institutions like microstructurein different countries,
regulation in specific markets,and then we put it all together
(36:24):
with one another.
You know what the correlationsare among those signals and so I
would argue, you know whenyou're deploying systematic
(36:46):
strategies in these markets.
You want to take a much morediversified, multi-factor
approach.
Speaker 1 (36:52):
Phil, for those who want to learn more about
Rayleigh-Ence funds and kind ofget access to your various
research, where would you pointthem to?
Speaker 2 (36:57):
You can go to our website, wwwrayleighandcom.
We have a funds page whereyou'll find information about
all four of those ETFs,including slide decks and
descriptions of the types ofsignals that we use.
I think there's a lot ofinformation.
I've even got some videos onthe site where I walk investors
through RAYE, for example.
(37:18):
So it's plenty of informationthere on the web.
Speaker 1 (37:20):
Appreciate those that watch this Again.
Folks, this will be an editedpodcast under Lead Leg Live and
hopefully we'll see you all onthe next episode.
Thank you, phil, appreciate it.
Thanks, michael, cheerseverybody.
All right, let's talk about on on Ray E how the
country mix looks, what emergingmarkets are in the top and how
do you go about selecting thoseweightings.
Speaker 2 (00:10):
This is a systematic strategy.
I mentioned that we're reallyfocused on behavioral economics.
We think that if you're runningan active strategy, there's a
pool of alpha in a market that'snot perfectly efficient.
And there's a pool of alpha ina market that's not perfectly
efficient and so, in our mind,you want to run an active
(00:34):
strategy in markets like Taiwan,south Korea, india, certainly
China, you know, if you includethat within the global EM mix.
And then you have to askyourself well, how do you
extract that behavioral alpha?
And in our view, these areperfect markets to run a
systematic strategy, because youknow systematic strategy.
Ultimately we're really justtrying to tilt the portfolio in
the direction of strongfundamentals, positive sentiment
(00:57):
under reaction to good news.
Speaker 1 (01:08):
My name is Michael Guyette, publisher of the Lead
Lag Report.
This is a sponsoredconversation by Raylian.
This is Mr Phil Wool fromRaylian and it's going to be a
well-timed conversation, givenwhat looks like some interesting
movement on the internationalmarket side.
So we'll talk about Raylian,their approach approach and how
they are looking at the currentenvironment.
So, phil, welcome.
It's been a while since we'vedone one of these.
(01:29):
I think it'd be good to just dosome table stakes talk about
your background, what you do atRayleigh and what Rayleigh does.
Speaker 2 (01:35):
Yeah, so I am the chief research officer at
Rayleigh and the portfoliomanager on Rayleigh's suite of
quantamental ETFs.
Rayleigh is an asset managerthat runs a series of equity
ETFs.
These are active funds that usea quantum mental process.
So it's a blend of systematicinvesting but it's really all
(01:58):
based on behavioral psychologyand just sort of fundamental
insights and we're just tryingto systematize that and make it
rigorous and use that to scorestocks around the world.
So the strategies that we run,they all have an international
flavor.
We've got a developed marketstrategy RAYD is the ticker on
(02:19):
that one.
That's about 70% US on averagebut it includes developed
international markets.
We've got an emerging marketsex-China strategy that's RAYE,
and then we've got a China ETFRAYC.
So you can kind of mix andmatch those two to create a
global emerging markets exposure.
And we also run in partnershipwith a big active management
(02:42):
firm in Japan called SumitomoMitsui DS Asset Management.
We run RAYJ, which is a Japangrowth strategy.
So we kind of run the gamut interms of global equities.
And you know, just veryinteresting, as you said, to
look across the equity worldthese days and I think
international stocks are gettinga lot more attention we would
(03:05):
argue, deservedly so.
Speaker 1 (03:07):
All right, let's get into that because, yes, the
momentum has clearly been therefor Europe, developed right and
emerging markets broadly looklike they want to move despite
tariffs.
First of all, I want to justkind of get your take on why is
it that there seemingly is amove outside of the US in terms
of these equity markets whenthese tariff fears are still
(03:27):
lingering?
Speaker 2 (03:28):
Yeah, I mean, I think a big part of it is investors
over the last few years did wellnot to diversify
internationally US stocks havejust done phenomenally well.
A big part of that has beenjust sort of the macroeconomic
trend which was toward a softlanding prior to Trump's second
(03:50):
term and all of this anxietyover tariffs.
There was immense positivesentiment around the AI theme,
data centers and just the notionof this AI revolution that's
going to be transformative, anda lot of that was really
centered around US stocks andthe Magnificent Seven.
(04:10):
But I think the upshot of thatwas valuations in the US were
baking in a lot of good news.
Globally things were a bitdifferent, I think stocks around
the world particularly inemerging markets where you still
get a lot of exposure to the AIand data center theme those
stocks just hadn't reallyparticipated as much in that
(04:33):
rally and so valuations weredepressed.
Those stocks internationallyhad an overhang associated with
fears around a potential hardlanding and maybe a more patient
Fed.
That didn't ease as quickly andso there was just sort of a
valuation disconnect.
Now I think now with moreconcern around US fiscal
(04:57):
discipline, concern aroundtariffs and the impact that's
going to have on US growth andjust just judging that, you know
, valuations didn't leave a lotof room for error.
Investors started lookinginternationally at what seemed
to be stocks that were priced abit more forgivingly.
Speaker 1 (05:17):
I want to hit on the valuation point, but I want to
go back to this point about thedebt on the US for a bit.
You see a lot of people sayingthe US bond market is behaving
like an emerging markets bondmarket behaves.
Maybe that's a little bombastic, but any any thoughts on sort
(05:39):
of sort of the idea that now theUS is not no longer a premier
place for relatively safeinvesting?
Speaker 2 (05:44):
So I think, as with most of the narratives that we
read about in the financialpress, the most extreme views
you know, sort of this notion ofthe end of American
exceptionalism.
I think there may be a bit toomuch negative hype there.
That said, and you know, wethink a lot about dollar
(06:06):
strength, about the US bondmarket, when we look at
international markets, becauseobviously dollar weakening would
be a big tailwind forinternational investors.
I think there are some trendstoward certainly
de-dollarization, trends towardcertainly de-dollarization,
(06:31):
dollar weakening, a lot moreconcern that, regardless of
which party happens to be inpower, that there's just not
much discipline.
And I do think there's been anerosion of confidence that you
know treasuries are going toremain the safe haven that they
once were and I think you knowthere's some truth to those
concerns.
(06:51):
So I think it's not going to bea messy blow up in my mind but
more of sort of a slow erosionin that confidence.
And we're going to see that interms of, you know, higher
yields at the long end of thecurve, a weakening dollar.
And then you know some of thesetrends towards stable coin and
(07:13):
you know potential alternativesto the regime that we've been in
for as long as anyone canremember.
Speaker 1 (07:19):
So you mentioned with one of your funds is an
ex-China EM play.
Let's talk about the reasonsfor excluding China as an
emerging market.
Speaker 2 (07:28):
Yeah, this is something that we've been
talking about for a long time.
So, before China became sounpopular with US investors
around the trade war and thesanctions list and just the
general escalation in tensionbetween the US and China, we
(07:48):
were saying it makes sense toview China within EM in the same
way that we tend to view the USwithin developed markets.
Prior to China's market goinginto kind of stagnation, it made
up over a third of the emergingmarkets basket.
(08:11):
Depending on how you count itand if you counted all of the A
shares, the onshore China stocks, it would be considerably
bigger.
And so the question is ifyou've got one exposure within
sort of a global emergingmarkets portfolio that is going
to disproportionately impact theperformance of that basket,
does it make sense to pull itout?
(08:32):
And you might want to do thatbecause within emerging markets,
if China is that important, itmight make sense to hire a China
specialist to manage that partof the portfolio as opposed to
an EM generalist.
So that was one rationale, andwe actually published a paper
kind of explaining why thatmight make sense.
But then, of course, as the USand China got into this
(08:57):
increasingly difficultrelationship, I think there was
a lot of demand for an EMproduct, that just stripped out
China because investors didn'twant the headline risk, and so,
in our view, one of the beautiesof ETFs is that we can use them
as building blocks and prettymuch create what investors would
need so that they couldformulate any sort of exposure
(09:19):
to EM that they could imagine.
Maybe an overweight to China,if they think that maybe the
bear case toward China isoverplayed.
Or, again, you could just stripChina out if you don't want to
take that risk and just sort offorget about the potential
drawdowns there.
So that was the rationale forus.
Speaker 1 (09:40):
All right, let's talk about on on Ray E how the
country mix looks, what emergingmarkets are in the top and how
do you go about selecting thoseweightings if you're running an
(10:07):
active strategy, there's a poolof alpha in a market that's not
perfectly efficient.
Speaker 2 (10:08):
Where does that come from?
It comes from investors who aremaking mistakes, and in
emerging markets.
One of the interesting featuresthat you find is there's a lot
more retail trading.
We look at the US market, wethink about Reddit and meme
stocks like GameStop and AMC andimagine that there's probably a
lot of noise there.
But in emerging markets there'sso much less sophisticated
(10:32):
institutional trading going on.
So your counterparty, if youtrade in EM, is much more likely
to be an individual investor.
And so in our mind, you want torun an active strategy in
markets like Taiwan, south Korea, india, certainly China, you
know, if you include that withinthe global EM mix.
(10:53):
And then you have to askyourself well, how do you
extract that behavioral alpha?
And in our view, these areperfect markets to run a
systematic strategy, because youknow systematic strategy.
Ultimately, we're really justtrying to tilt the portfolio in
the direction of strongfundamentals, positive sentiment
(11:13):
, under reaction to good news,of factors you know, looking for
high quality companies,companies with good governance.
If we can make enough of thosebets in a diversified way, we
should be able to just sort ofgrind out that behavioral alpha.
So that's the approach.
It's really a bottom upstrategy, which means that if
(11:35):
you looked at Ray E in terms ofindustries, in terms of country
exposure, it's going to look alot like the MSCI EMX China
Index.
So there's no sort of top-downoverlay in terms of country
timing.
But what you will find is thatif stocks within a particular
(11:56):
country become less attractive,we might end up with modest
underweight.
So, for example, we wereunderweight India as Indian
valuations got a bit stretchedand that actually paid off when
when investors sort of realizedtheir expectations for Indian
earnings growth were too high.
So that's kind of how we lookat country weightings within EMX
(12:17):
China.
Speaker 1 (12:18):
Now, of course, you do have a China focused fund as
well in Ray C.
So for those that want to takemore of an active stance when it
comes to China, which I happento think is probably going to be
a big outperformer, make thecase for that process when it
comes to, admittedly, agovernment that's not exactly
free markets friendly.
Speaker 2 (12:35):
Yeah, with China.
I think right now it reallydoes come down to a question of
what you think is going tohappen with the beta.
Of course, in China retailtrading is extremely pronounced,
so it's anywhere from 80% to90% of trading volume individual
investor trades.
So there's a lot of alpha there, I think, for investors that
(12:57):
take an active stance, andthat's kind of irrespective of
the state's policies.
I mean, we find plenty ofopportunity companies, even
among the state-owned firmswithin China, that are really
well run, they have policysupport and they have extremely
high quality fundamentals and sothere are opportunities there.
(13:18):
But I think whether you want tohave exposure to China, whether
you want to be overweight China,depends on what you think is
going to happen.
I tend to think that China hasbeen really disciplined in terms
of its propensity to enactfiscal stimulus and for a real
(13:40):
turn in sentiment in China we'regoing to see we'll need to see
more of a fiscal push.
I think the tariff policieshave kind of limited what China
is going to do.
So I believe as we get moreclarity on what Trump's tariff
endgame looks like toward China,that'll allow China to start
doing more stimulus, this demandoriented try toto-turn-consumer
(14:03):
sentiment around.
So, michael, I tend to agreewith you that I think China is
sort of just waiting for thatcatalyst for a big revaluation.
How?
Speaker 1 (14:12):
does secular trends in currency impact international
investing and maybe impact thequantum mental approach?
Speaker 2 (14:19):
Our view on currency.
These are unhedged ETFs, soyou're getting the currency
exposure associated with thesemarkets.
Our view is that we kind ofleave that up to the end
investor.
If you want to hedge currencyrisk, that's up to you.
We think it's generallyexpensive and it's probably good
(14:40):
to have some diversification interms of your FX exposure.
That said, I think right now inparticular because of that
secular trend towardde-dollarization, the fact that
the dollar is naturally going toweaken as the Fed inevitably
does start to ease, those willbe tailwinds for international
(15:02):
investors who don't have hedgedexposure to these markets.
So I think it's just sort of acoincidence of the timing here,
but in my view it's a good timeto get exposure to other
currencies around the world.
Speaker 1 (15:17):
Let's talk about China in the context of when
it's included in broad emergingmarkets.
I think typically it's in the25 to 30 percent range.
Let's say somebody is bullishon China and emerging markets
broadly.
Do you think that range fromthe MSCI perspective, that
percentage right?
Does that make sense?
Does it make more sense tounderweight China relative to
(15:40):
other emerging markets?
Speaker 2 (15:41):
independent of one's views, If an investor is bullish
on China.
I think China isunderrepresented in the MSCI
benchmarks.
That is to do with sort of thelegacy of Chinese equities,
especially onshore equities,being really difficult to access
for foreign investors.
That's changed, so now it'sreally easy to trade onshore
(16:06):
stocks through Stock Connect,which is a program that was
launched to connect Hong Kongwith the mainland exchanges, and
so those constraints have beenremoved.
I think that merits a biggerweighting to onshore stocks,
which just weren't included inthe MSCI benchmarks.
Even today they're onlyweighted at around a fifth of
(16:26):
their free flow market cap.
So I think China is just sortof structurally underrepresented
.
I would actually argue thatinvestors, if they want to
approach China as an overweight,they should think seriously
about also overweighting theonshore shares versus the Hong
Kong listings or the ADRs.
I think a lot of investors, ifyou ask them about China, they
(16:50):
would be familiar with nameslike Alibaba and Tencent and
Pinduoduo.
These are companies that listin Hong Kong where they've got
US ADRs.
But I believe a lot of thegrowth going forward in China
it's going to be onshorecompanies that are much more
tied to China's real economy andin RAYC that is almost
(17:12):
exclusively what we trade.
Are the A shares onshore.
Speaker 1 (17:15):
The thing with cycle changes is you don't know if a
cycle's changed until two tothree years after a cycle's
changed right, and I think,anybody that's tried to invest
or trade emerging markets ingeneral.
They've been whipsawed.
Every time it looks likethey're about to have a secular
run, kind of pewters out, makethe case for why maybe this is a
secular shift.
Speaker 2 (17:34):
So you see sort of waves of US outperforming EM and
then, for a long period,emerging markets will outperform
the US.
We've just gone through a cyclein which, as I said,
diversifying into EM was onlydiversification in the sense
(17:57):
that your US stocks went way upand EM was just sort of treading
water or declining.
So I think the perception of alot of investors is that there's
a lot of volatility.
They've probably had a badexperience with EM at some point
and that kind of turns them offtoward emerging markets.
There's also the fact that EMit is riskier.
(18:21):
So there are risk factors in EMthat you just don't experience
to the same extent in developedmarkets.
I mentioned governance.
In markets like China, southKorea, taiwan, india governance
is a huge issue.
India governance is a hugeissue, and so this is another
(18:43):
one of those features that Ithink points in the direction of
active management within thesemarkets.
So for an investor gettingpassive exposure to EM, I think
there are legitimate questions.
You really would want to havesome means of timing the beta.
I think, regardless of thosecycles, there's an argument to
be made for active managementwithin emerging markets, and so
(19:06):
if you look at 2025, for example, it's clearly been a good year
to be invested internationally.
Of those four ETFs investedinternationally, of those four
ETFs, three of them that we runare beating the S&P 500 this
year.
Our EM strategy is performingbetter than the S&P 500.
(19:30):
We're trailing the benchmark,but I think historically there
have been years when the S&Poutperformed EM and because
we're active, we've still donebetter than the S&P because we
were able to take advantage ofsome of those mispricings that I
mentioned, and so I think foran active investor, it's sort of
a different question.
But, as I mentioned, we're in aphase now where the Fed is
(19:52):
going to be easing.
That's good for EM.
The dollar is likely to weakenas a result of that easing, but
also because of these seculartrends that we mentioned, that's
good for emerging markets.
Emerging markets haven'tparticipated as much in the
valuation inflation associatedwith this AI theme in EM.
I think that's where we'regoing to see a lot of the real
(20:13):
winners as this data centerbuild out happens.
You know those are companieslisted in Taiwan, south Korea,
china, and so I think there area lot of features just pointing
in the favor of a biggerallocation to EM.
Speaker 1 (20:25):
Let's talk about one of my favorite countries, japan.
I say that jokingly and notjokingly, because I always talk
about the reverse carry trade,which I still believe is
somewhere out there, but it's amoment in time, and who knows
exactly when I mean right now.
It doesn't seem like it's ahuge risk, especially if oil
breaks down, which is part of mythesis.
But let's talk about Japan, theopportunities there from a very
(20:46):
long term perspective and thecase for active management.
Speaker 2 (20:49):
So I think that, again, with Japan, the case for
active management has alwaysbeen there.
This is a market that's reallybroad in terms of the number of
stocks that are listed in Japan,but analyst coverage is pretty
weak once you get outside, likethe Nikkei stocks.
So the top couple hundredstocks Analyst coverage starts
(21:12):
to thin out and I think there'sa lot more information asymmetry
there.
So for an active manager thatcan do a good job evaluating
those companies and this is oneof the reasons we partnered with
a local firm to launch a JapanETF if you've got the kind of
fundamental expertise, that canbe a huge advantage within Japan
relative to other markets.
(21:33):
Japan, like emerging markets,has a strong culture of
individual investor trading.
So it's not we're not talking80 to 90 percent of volume, but
20 to 30 percent of volume isretail trading, and so there's
also arguably a lot ofbehavioral bias within the
Japanese market.
(21:53):
Those would be, I think youknow, great features of a market
under any circumstances.
But you've also got Japan nowat an inflection point and it's
not a coincidence that welaunched a Japan fund in 2024.
So this ETF just launched Aprilof last year.
We were looking at some of themacro trends that we think are
(22:17):
long-term trends toward Japan'sexit from this deflationary,
economically stagnant period andan emergence of new growth in
Japan and eventual normalizationof Japanese monetary policy,
where we're seeing Japanactually increasing rates as
(22:37):
inflation sets in.
And then, on top of all that, ahuge push for reforms in
corporate governance and I thinkfor investors that are
positioned in companies wheregovernance improvement is likely
, that's another big catalystfor kind of a medium term
revaluation of Japan's market.
So I'm a huge fan of Japaneseequities and I think there's
(23:01):
really a lot of room for them torun going forward.
Speaker 1 (23:04):
Actually one thing about that versus developed
Europe.
Speaker 2 (23:07):
Yeah.
So I think developed Europe,when you look at the valuations,
also quite cheap.
But I think developed Europe ismore cheap for a reason, but
without a clear catalyst.
I just mentioned corporatereform in Japan.
That's a reason to imagine thatmaybe there's a lot of value to
(23:30):
be unlocked there.
I think within Europe again,for an active investor that can
pick and choose, there's a lotof opportunity.
Europe has a lot of the sameproblems that the US has, though
in terms of fiscal discipline.
I think European industry,unlike the US, it's not exactly
a hotbed for tech innovation andso in terms of the beta, I
(23:55):
would argue EM, japan, just muchmore interesting places for an
active investor to play in longonly strategies.
Speaker 1 (24:07):
Okay, so we might be in a cycle for international.
Part of that is sort ofthinking around how one should
view different sectors of themarketplace.
Right, I myself have made thepoint that one of the biggest
differences between the US andanything outside the US is that
we have tech.
A lot of these other countriesobviously don't have large
exposure there.
How should one viewinternational investing if they
(24:30):
are bullish on tech?
Are there any interesting sortof tech plays that maybe in the
funds they've got exposure to?
Speaker 2 (24:36):
Yeah, so I think within global markets, you know,
if you look at developedmarkets, it's true that outside
of the US, you know, maybe Japan, they've got a significant tech
component to their market index.
But within developed markets,certainly the US is the place to
(24:58):
go if you want tech exposure.
I think within emerging marketsthe amount of exposure
investors get to tech isunderappreciated.
So if you look at South Korea'smarket, for example, 50% of the
index is technology stocks ofthe index is technology stocks.
(25:23):
When you look at valuations inKorea, whereas, so think about
50% tech, that's like sort ofblending the S&P and the NASDAQ.
The S&P trades at 23 timesforward earnings today.
The NASDAQ is at like 30 timesforward earnings, so it's
cheaper than it was a few monthsago it was trading closer to 40
times but at 30 times.
You kind of imagine blendingthose two to get 50% tech.
(25:43):
It's going to be somewherebetween 20 and 30 times earnings
.
In Korea the market is trading.
The overall market is tradingat 10 times forward earnings.
Now, a big part of that, as Isaid, is a discount because
there's geopolitical risk.
There's tons of risk aroundgovernance.
But for an active investor thatcan pick and choose companies,
(26:03):
you can find well-governedcompanies.
You can find great companies inthe tech sector with great
fundamentals.
The pricing is just so muchbetter in South Korea.
Taiwan is like 75% tech if youlook at the benchmark.
I mean, we're all familiar withTaiwan semiconductor
manufacturing.
There are plenty ofunder-the-radar tech plays in
Taiwan and, again, taiwan, it'snot trading at South Korea
(26:29):
valuations, but we're talkingabout closer to 20 times forward
earnings, so it's still cheaperthan the S&P 500.
And the thing about thesemarkets is it's not the
magnificent seven names thateveryone associates with tech.
It's the companies that areactually building the components
that go into those data centers, and so one of the reasons that
(26:49):
they haven't shot up with therest of the AI theme companies
is that they're just sort ofunder the radar, but they are
going to generate cash flowswithin that theme as the AI
revolution plays out.
So I think EM is a great placeto go for tech exposure, and we
have plenty of it within RAYE,do you think?
Speaker 1 (27:06):
we're at a point now where it becomes easier to beat
the MSCI World's index.
I mean, so much of that hasover time become increasingly US
heavy right.
I mean it seems to me that it'slike if that's a benchmark and
that's been hard to beat, it maybe a lot easier going forward.
Speaker 2 (27:23):
I think active investors, you know,
increasingly have opportunitieswithin a US market which, as I
said, you know it makes up likethree quarters of the MSCI World
Index, but valuations arepretty high right now and
there's a lot of good news inthe prices.
So I think active managers havean opportunity to be selective
(27:46):
and pick the companies that aregoing to be more robust as risks
, like we've observed over thelast few months, emerge.
And then, I think, within theinternational component again,
these are markets that are justless efficient.
So, as managers take a closerlook at developed XUS, at the
(28:17):
rest of the MS, I think there'sa lot of opportunity within
systematic strategies that takethis bottom-up approach and do
it in a diversified way.
So I do agree, I think activemanagement has good days ahead
of it.
Speaker 1 (28:33):
As you think, through the various funds that you have
which are resonating the mostat this moment in time and
typically would an allocatorposition to your funds, as well
as a passive emerging marketproxy.
Speaker 2 (28:46):
You know, typically what we see is allocators.
They would have a mix of activeand passive.
They would prefer active amongsmall caps within the US.
They would prefer active amongsmall caps within the US.
But then when you gointernational we see allocators
leaning more toward activebecause they so we're systematic
(29:06):
kind of diversified portfoliosand then we'll often be matched
up with more of a concentratedfundamental manager and so
(29:29):
allocators will take that kindof diversified approach at the
manager level.
Within our suite of ETFs, Ithink the fund that's most
interesting to me at this momentis RAYE.
In part I mentioned it'sunderperformed the MSCI EMX
China index this year.
That is largely a result, ifyou sort of look at the
(29:50):
attribution, of poor performanceof the momentum factor, but
also poor performance ofsentiment factors in general.
We look at all kinds of smartmoney sentiment.
We look at what analysts aredoing, and analysts within EM
actually tend to have a lot ofinformation in their
recommendations, if you know howto process the data.
(30:11):
We look at other forms of smartmoney and dumb money,
information flow, and thosefactors have underperformed this
year.
Why?
It's because of all of thisvolatility, including all of the
trade policy uncertainty.
But what I often tell clientswho are asking well, what do you
expect going forward?
(30:32):
Times like this are generallydifficult for quant strategies
because when markets are drivenby emotion and we saw sort of
this V-shaped drop and thenbounce in equities around the
world, that's a period whereprices are moving generally away
from fundamentals.
Quant strategies make moneywhen this sort of noisy
(30:55):
deviation from fundamentalsreverts.
So you don't make the mostalpha in volatile markets like
this, but you do tend to put onyour best trade.
So in that sense I feel that ifyou view these strategies as
sort of a coiled spring that'spoised for reversion, I think
there's a good opportunity inEMX China right now.
Speaker 1 (31:16):
Let's talk about how to think about risk, right?
So obviously you've got theproducts you want to see people
in the space.
But for those that are nervousabout international investing,
what are some of the things youwould say okay, these are worth
paying attention to independentof your own funds?
Speaker 2 (31:33):
Yeah, it's a great question.
So when I think about riskassociated with the heightened
volatility that we're allexperiencing right now and
that's financial volatility, butit's also just uncertainty in
terms of the macro landscapemore significantly priced in
(32:01):
right now, so within US stocks,when I see how strongly the
market has recovered since thebeginning of April, I think
investors have swung fromextreme fear back to greed and
even though when I look at sortof macro survey data, which is
the confidence of consumers andthe confidence of businesses,
investors seem to be shruggingthat off and assuming that we're
(32:26):
on the right track and thatthere aren't going to be so many
more bumps in the road, thatmakes me nervous.
When I look at emerging markets, even though they've also
rebound since the April lows,emerging markets have for the
last year or more been pricingin a lot more negativity, as I
said, negativity not just aroundTrump 2.0 policy but also the
(32:51):
prospects for a US and a globalhard landing, and so I think
that kind of risk is alreadymore than baked into EM.
So I'm less concerned aboutthat in terms of valuations.
But I did note that emergingmarkets are generally more risky
.
They just look at what'shappening in the Middle East.
(33:11):
There's huge geopolitical risk,there's risk on the governance
front, there's risk associatedwith just weaker institutions in
general.
So then the question is do youhave a manager who can correctly
identify firms that are more orless subject to that risk?
And so that's where I thinkthere's a huge opportunity.
(33:32):
If those markets are beingdiscounted because of that risk
and you have an active managerwho can go in and pick the right
companies, that's a hugeopportunity in my view.
Speaker 1 (33:41):
What do you think we've missed?
And we talked about the casefor international.
We talked about Japan, china,ex-china.
What else should we be thinkingabout?
I mean, my mind also goestowards sort of a mindset around
style, tilt right.
Growth versus value, growthobviously being much more
associated with the US Value,much more associated with US
(34:03):
value, much more associated withinternational.
Speaker 2 (34:04):
Could it be that if we're in this broader cycle,
that favors international, thatvalue across the globe becomes
where it'd be?
That's a great question, Ithink one of the developments.
So, when you look at systematicinvesting over the decades,
it's clear that there's beenvery broad adoption of smart
beta strategies and, inparticular, we've entered a
paradigm where people start tothink I'm a former academic so I
(34:29):
love the fact that we've sortof evolved in the way that we
look at investing to favor thiskind of a factor-based paradigm
for how we think about ourportfolio's exposure.
That's a really positivedevelopment.
I think one of the areas wherethere's still a lot of room for
(34:51):
improvement is, once you takethat factor view, you know that
you are building portfolios thathave a certain type of exposure
.
I think there's room forimprovement in terms of thinking
single factor versusmulti-factor.
So, like you, I tend to sort ofassociate different markets with
different factor tilts thathave worked historically, but I
(35:15):
think what we've seen among ourinstitutional clients is that
they've gravitated from singlefactor, smart beta to thinking
multi-factor and they've gonefrom multi-factor, which is just
a small handful of the mosttraditional factors, to
multi-factor, in the sense of avast array of trading signals in
(35:37):
different factor groups andthen putting those together in a
more sophisticated manner.
So our funds, we've kind ofeschewed that single factor or
really simple heuristic-basedmulti-factor approach in favor
of a very wide array, a biglibrary of trading signals.
Some of them fit intotraditional factor buckets like
(35:59):
value or growth, but many ofthem are associated with really
nuanced types of quality.
Some of them, especially withinemerging markets, are localized
, so we're using local data,we're taking account of local
institutions like microstructurein different countries,
regulation in specific markets,and then we put it all together
(36:24):
with one another.
You know what the correlationsare among those signals and so I
would argue, you know whenyou're deploying systematic
(36:46):
strategies in these markets.
You want to take a much morediversified, multi-factor
approach.
Speaker 1 (36:52):
Phil, for those who want to learn more about
Rayleigh-Ence funds and kind ofget access to your various
research, where would you pointthem to?
Speaker 2 (36:57):
You can go to our website, wwwrayleighandcom.
We have a funds page whereyou'll find information about
all four of those ETFs,including slide decks and
descriptions of the types ofsignals that we use.
I think there's a lot ofinformation.
I've even got some videos onthe site where I walk investors
through RAYE, for example.
(37:18):
So it's plenty of informationthere on the web.
Speaker 1 (37:20):
Appreciate those that watch this Again.
Folks, this will be an editedpodcast under Lead Leg Live and
hopefully we'll see you all onthe next episode.
Thank you, phil, appreciate it.
Thanks, michael, cheerseverybody.
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