Lead-Lag Live

Global Market Valuations: Finding Alpha Beyond US Shores with Phil Wool

• Michael A. Gayed, CFA

Share episode

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.

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.


Foodies unite…with HowUdish!

It’s social media with a secret sauce: FOOD! The world’s first network for food enthusiasts. HowUdish connects foodies across the world!

Share kitchen tips and recipe hacks. Discover hidden gem food joints and street food. Find foodies like you, connect, chat and organize meet-ups!

HowUdish makes it simple to connect through food anywhere in the world.

So, how do YOU dish? Download HowUdish on the Apple App Store today: Support the show

Speaker 1:

Yeah, so this is kind of a mixed bag. There were some things that were preventing the Bank of Japan from hiking, so if the Bank of Japan hikes, that's obviously going to lead to yen strengthening. This is bad for the carry trade, potentially bad for Japanese stocks if monetary policy gets too restrictive although rates in Japan are still really low, so we weren't too worried about that. But I think the removal of trade policy uncertainty that could lead the Bank of Japan to hike sooner. The fact that the trade deal was announced, though it actually, I think, paves the way for the prime minister to resign. This prime minister was actually viewed as relatively hawkish.

Speaker 2:

My name is Michael Guy. I'm publisher of the Lead Laguerre Porte. Joining me here is Mr Phil Wool of Ralliance. Ralliance has a number of different funds. We'll touch on Phil. I sent you an email asking what kind of topics you want to cover. You want to focus on valuations Now. International has done really quite well and international, as we know, is cheap relative to the US, and those that are negative on international stocks will say well, if it's cheap, it's cheap for a reason. Let's talk about why valuations had been cheap for international and why it might not be that cheap going forward.

Speaker 1:

Yeah, well, thanks for having me, michael, it's always good to chat with you. Valuations I think they're interesting now because we've gone through a period of a lot of volatility and I think at this point, really since mid-August it's been full risk on. We've seen stocks that had cratered around the time of Liberation Day and these tariff announcements. They've rebounded and now the US market is making record highs again. And so because we at Reliant invest internationally, so we certainly invest in US stocks through our developed markets fund, rayd, but we also have an emerging markets ex-China fund, raye, and we have a China fund, rayc, and then finally we've got a Japan fund, rayj. So we're thinking about US stocks and where they're priced, but we're also always thinking about international and where they're priced. But we're also always thinking about international and, as you said, international has been cheap. There are reasons for that, but I guess as global equity allocators we're just thinking where are the best opportunities, where can we buy growth at the most reasonable price?

Speaker 1:

And I think when you look at US valuations and I think when you look at US valuations and there's so many different metrics you can look at, I like the Shiller-Cape ratio, so this is just like a PE ratio for the S&P 500.

Speaker 1:

It's just adjusted because earnings are cyclical, we have business cycles and if you look at the Cape ratio, it's trading at 38 times, which is like three standard deviations above the long run average. Now, the long run average goes back 150 years, so that's probably not relevant data, but even looking over the last 20 years, we're at like two plus standard deviations above the last 20 years average CAPE ratio. So US stocks are expensive. It doesn't mean that the market is going to crash tomorrow, but as quants we're kind of looking at historical patterns. What it does suggest is that the next 10 years return on US stocks is going to be lower than average, and so we would tend to look outside the US for opportunity. You can be active within the US, but I think there's much more interesting opportunity when you go to international markets, particularly emerging and Asia in general.

Speaker 2:

Are all international markets the same in the way that those valuations play out? I mean there's got to be some variability across those.

Speaker 1:

Yeah, you know the reason that international markets, especially emerging markets, 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 to the US, but that's just because growth is so much slower earnings growth in Europe than it is in the US, so that's cheap for a reason in some sense. Now you can ask yourself how cheap is Europe? And is it too cheap given growth rates, even though they're lower than the US? Maybe there's a bargain there.

Speaker 1:

And then within emerging markets where growth is higher than it is in the US, often the discount is because of things like regulation, corporate governance, geopolitical risk and so forth. There are economies in Latin America, for example, where you know they're they're sort of tied to the business cycle because they might be net commodity exporters, and so there you can understand why there's a lot of risk. You know you're getting sort of the same business cycle risk that you get investing in US stocks, but these are really commodity driven economies. So that's where, as an active manager, my job is to go in and, within these countries where there might be a persistent discount. Find the stocks that are trading at an unreasonable discount, given they might have features that compare quite favorably even to US stocks.

Speaker 2:

I want to talk about that term unreasonable, right. So what makes something unreasonably cheap and what are some of the metrics you look at to determine if something's cheap?

Speaker 1:

So we look at all sorts of things, our strategies. We call ourselves quantamental. Now we're really much more focused on systematic stock picking. So we use models that are built on billions of data points. We use machine learning to put all the information together, but ultimately all of the trading signals that we're using these are intuitive things that would make a lot of sense to a fundamental stock picker and in fact what we're trying to do is kind of replicate what a good local fundamental analyst would be doing in their own research, but just apply that to thousands of stocks across the global equity universe.

Speaker 1:

So things we look at certainly everything in the financial statements. We look at sentiment, we look at smart money insiders, we look at institutional investors what are they doing? We look at analyst sentiment and then we have all the usual technical indicators as well. So we're just trying to put all that information together in such a way that we can determine which stocks have super solid fundamentals but somehow they're just under the radar, maybe they're not getting a lot of attention from irrational retail traders and so they're underpriced. There's an opportunity there. Equally important in EM is looking for companies that are trading at unreasonably high prices, because if we can avoid those stocks so these would be stocks that maybe have been bid up too high by irrational individual investors then we can avoid those and again we can outperform a passive strategy. That's ultimately what we're trying to do with each of these active funds that I mentioned.

Speaker 2:

There's this notion out there that international has performed well this year purely because of dollar weakness. Let's attack that for a little bit, because it's far more than just currency.

Speaker 1:

Yeah, so dollar weakness is certainly a part of it. You know, when the Fed started raising rates and the dollar got super strong, that's a huge headwind to international markets. It's both in terms of unhedged exposure that you might have to stocks that trade in those currencies. But a strong dollar is also not necessarily good for emerging markets that might have debt denominated in dollars. It makes things a bit harder on the monetary side for EM, but, as you say, it's not all currencies.

Speaker 1:

So when I look at emerging markets, for example, one of the things that's striking about EM is that there's a lot of technology within emerging markets and amidst the AI boom in US stocks know, we think about Magnificent Seven when we think about NVIDIA and all of those names that have garnered so much attention for generative AI. There are a lot of companies in emerging markets that either compete with NVIDIA or supply NVIDIA or they build components that are going into data centers that now have to be expanded because there's so much more demand for AI compute and those stocks really lagged behind. So part of this year is those international AI stocks really catching up with their US counterparts. And then we've also seen improvements in governance. When I look at South Korea, for example, they've implemented reforms that are meant to unlock value for shareholders, and so those sorts of improvements. We expect to see that evolution over time in these emerging markets, and we've seen a lot of it this year.

Speaker 2:

All right. So let's let's keep going with this sort of emerging market side of things. I have had myself plenty of times in my career where I thought this is the year emerging markets really start to work. This is the year, this is the cycle, this is the start, and it starts and then stops. Start, it's like death by a thousand cuts right With a lot of the emerging market relative strength. Is there anything fundamentally different that suggests that maybe we could be on the cusp of some sort of multi-year cycle where emerging markets in particular are?

Speaker 1:

a place to invest. Yeah, I mean we just touched on, I think, two big trends. One is dollar weakening so it's not the whole story, but it is part of the story. And if the dollar weakens in the long run story, but it is part of the story. And if the dollar weakens in the long run, then of course that would be as I suggested. It would be a big tailwind for emerging markets. Why might we think the dollar is going to weaken? Well, the reason the dollar got so strong over the last few years was that the Fed was raising interest rates. Naturally, even though there's a 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 lead to some dollar weakening.

Speaker 1:

I think the more interesting trend, though, is the secular trend. It's de-dollarization, the fact that the US has really not been shy about weaponizing the dollar. Of course, there are countries around the world who don't want to be tied to a currency that can be used against them if they rub Washington the wrong way. There's also clearly a lot of concern about political instability in the US, that this is not the super stable, super safe place to park cash, and so that would contribute to de-dollarization. And then think about the inflationary trend. You know it's not just the US deficit, it is policies like tariffs which, even if they're not as high as many feared at the beginning of April, they're going to be higher than they have been in many decades. And, you know, immigration policies all these things kind of tend toward inflation. And so for these reasons, I think sort of long term, we should expect the dollar to lose some of its strength and that's good for EM.

Speaker 1:

The other big one is just technology. Like I said, when you think about periods in which EM really flourished, think about the turn of the millennium, think about the dot-com bubble and the fact that there were US stocks that went really high and then crashed and Cisco is a prime example. But the stocks that really did well were companies in EM that were supplying the infrastructure that enabled the internet and e-commerce and all the things that we appreciate were a game changer for the way that we do business and the way that we consume. That was really driven by EM. So I think AI it's going to be transformative. A lot of the benefits are actually going to flow to companies that supply the infrastructure to make that possible and most of those companies, like I said, are actually in emerging markets.

Speaker 2:

So I think it was yesterday that Trump made the bold move of lowering tariff for an emerging market in Indonesia from 20% to 19% was like breaking news, right as far as that goes. But let's talk about the tariff side of things because there was a deal that was struck. I don't know as far as that goes. But let's talk about the terror side of things, because there was a deal that was struck, supposedly as far as we can tell, with Japan. I have not really tracked this that much but of course, because I talk about Japan quite a bit on X, people are asking for my opinion.

Speaker 1:

So I'm going to ask for your opinion and get some thoughts from you on what this all means. Yeah, so Japan is a great case because this is one of the US's biggest trading partners. It was a counterparty in negotiations that Trump labeled as very tough and he actually said he didn't think there would be a deal with Japan before the August 1st deadline when the tariffs that were written in these letters he sent kicked in. So I think the stakes were pretty high in terms of negotiation with Japan Japan so most of us don't follow politics in Japan. Since I'm a portfolio manager on RAYJ, which is our Japan active ETF, I have to pay closer attention and it's been pretty volatile really over the course of the last year in terms of Japan's domestic politics of the last year. In terms of Japan's domestic politics and just over the weekend, the ruling party they lost the second house of parliament, so they lost the lower house of the diet, which is Japan's parliament, toward the end of last year, and then over the weekend they lost control of the upper house and it's the first time since the party's founding in 1955 that they have had minority status in both houses of the Diet. So that was a big deal going into August 1st because the prime minister of the ruling party he is now a lame duck, and so the theory was maybe he would be entering negotiations in this final stretch in a much weaker position and if a deal was done, it might be very unfavorable to Japan.

Speaker 1:

So I think the deal that was just announced yesterday was 15% tariff on some goods. Okay, trump had threatened 30%, so 15% is much better than 30%. It's not much higher than the baseline minimum 10% tariff. Japan did not have to give up very much in concessions, so there was some number 550 billion of Japanese investment in the US. The details on that are pretty sketchy. Japan had to give US automakers some access to Japan's market. Again, not a lot of detail on that, but I think this was a positive surprise versus expectations, which were that Japan would have to give up a lot if there was even a chance of a deal before August 1st. So all that's good news and I think when Japan's market opens we're going to see that futures are indicating.

Speaker 2:

It's going to be a very good day for those invested in Japan, right now Any sense of how that might impact the yen or currency movement with Japan?

Speaker 1:

Yeah, so this is kind of a mixed bag. There were some things that were 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 lead to yen strengthening. This is bad for the carry trade, potentially bad for Japanese stocks if monetary policy gets too restrictive although rates in Japan are still really low, so we weren't too worried about that. But I think the removal of trade policy uncertainty that could lead the Bank of Japan to hike sooner, the fact that the trade deal was announced, though it actually, I think, paves the way for the prime minister to resign.

Speaker 1:

This prime minister was actually viewed as relatively hawkish. This prime minister was all about fiscal discipline, and so there is the prospect, I think, that we end up with someone replacing Prime Minister Ishiba who is much more accommodative, much more dovish, will push the Bank of Japan in the same way that Trump is trying to pressure the Fed to keep interest rates low. The Fed to keep interest rates low, and so, of course, that would suggest a weaker yen, and so I think that remains to be seen. Long term, though, I do think the yen has to strengthen, because Japan is now on a path to growth. They're on a path to normalizing their monetary policy, so long term, I don't know how viable the carry trade is going to growth. They're on a path to normalizing their monetary policy, so long term, I don't know how viable the carry trade is going to be that will be fun for me on X whenever that long term becomes short term.

Speaker 2:

Let's talk about tariffs in general. Everyone freaked out about tariffs at the start of the year. Now it seems like nobody really cares very much. But has the tariff dynamic at all impacted the relative strength or relative arguments for you know, this country versus that country? I mean, what are your thoughts on where we are on that?

Speaker 1:

Yeah, so one of the things that tariffs have done and, in particular, kind of the dramatic, you know the political theater of the way that the tariffs have been announced and then paused and then escalated and then paused again, tariffs have been announced and then paused and then escalated and then paused again, and then this sort of you know day by day deal making that's happening. It's just meant that when you think about how we invest, you know we're trying to pick stocks that have strong fundamentals, you know, maybe stocks that have good longer term or medium term sentiment. This market has just gotten a lot more emotional. If you look at a chart of pretty much any market around the world, you're going to see this massive crash at the beginning of April and then stocks bounce back. It's like a V-shaped rebound in stocks. That is emotional trading. It is policy shocks that have the potential to just ripple across markets, and so I think in the short run for rational, systematic investors, that can be frustrating because stocks don't always trade in line with fundamentals. It's more about what investors are feeling on any given day, but I think long term it creates great opportunities. You know, these are the sorts of dislocations that that really generate alpha for quants in the long run, because we can put on good trades now and then over time, fundamentals are obviously going to be important and prices converge. So you know, that's kind of how we look at it from a trading perspective.

Speaker 1:

I would say the other implication of the deal that Trump struck with Japan that I think is really important is it reinforces this narrative. Michael, as you said, investors were very concerned at the beginning of April. Over time we had the taco trade and this notion that Trump was always going to back down. This reinforces the notion that ultimately it's not about those initial threats. There is going to be a deal in each of these cases where everyone can look like a winner and you know again, to the extent people are still pricing in any uncertainty around tariffs. That would be good news, do you?

Speaker 2:

think that the market will still be most concerned about tariffs with China or kind of hone in much more on that than other emerging markets.

Speaker 1:

Yeah, china is the market that we should be most concerned about. You know it's certainly the market that's. You know, among the large markets it's the one that's most at risk if they get a bad deal with the US. But I think ultimately, in China's case too, we're going to get a good outcome, because the cost of having trade war escalation with China of course it hurts China. You know. China, I think, has been able to kind of put off the pain by just ramping up manufacturing and exporting to other countries. That can't sustain indefinitely. But if we end up with really high tariffs against China it's really going to hurt US consumers. And we've got midterm elections coming up in just about a year. You know that's what Trump does not want. Going into midterms is super high inflation, more unemployment in the US and just general frustration. So I think there will be a deal. China is a special case because Washington has to look really tough on China, so there might be more bluster, but I think ultimately we'll get a deal there.

Speaker 2:

So bluster is hard to model quantitatively, right? So I'm curious you mentioned the quantamental approach. You know kind of overarching with Rayleigh in itself how do you model and how do you do quant work when, yes, there's bluster but sometimes the the bluff ends up being cold?

Speaker 1:

right With macro dynamics and politics, yeah, Right, yeah, I mean, you hit the nail on the head. That is really hard to model. So I think about what, what happens in this kind of environment. You know that bluster is part of the political shocks that we've seen and that's really been driving things since, you know, at least since the beginning of this year, but it really goes back to last year's election this year, but it really goes back to last year's election. That's difficult in general for quants. It's difficult in terms of that kind of market timing aspect of it.

Speaker 1:

You know, quants are good and when I think about where we focus our energy, we're good at picking the winners and losers from among a pool of stocks. It's much harder for a quant to tell you is the whole market going to go up or down tomorrow? Maybe I can say something about the medium term or the long term, but it's hard for us to model these shocks. One reason is just that we don't have a lot of data. When we're looking at individual stocks, I've got data on tens of thousands of issuers and I've got data going back decades and decades. But if you're talking about trade wars, you know we don't have too many examples that we can use to try to learn from past data. So that's one challenge is just that you know, sort of in statistics we say it's a low power test when we don't have a lot of examples to test on.

Speaker 1:

But then the other issue is these are extreme times. So if a quant's job is to learn from data and find those repeatable patterns that lead to predictability, usually the data, by definition, is coming from the middle of the distribution. Right now we're in the tails. Think about how many times we've seen an up move or a down move by at least 3%. These are really extreme circumstances. So I'm not trying to predict the bluster or the deal that's going to be made tomorrow.

Speaker 1:

I would leave that to policy experts and fundamental analysts. From a quant perspective, what we're trying to do is just come up with rules that would help us long term to identify good and bad companies and then, like I said, the goal is not necessarily to put on a trade today that's going to be a winner when the next trade deal is announced and then take the trade off. It's looking at which stocks right now seem like they've overreacted to negative news or underreacted to positive news Companies that have good fundamentals and then tilt into those companies, and then longer term when that underreaction or overreaction resolves. When things go to fundamentals, we should be winners. So that's kind of how quants would tend to look at an environment like this.

Speaker 2:

You mentioned the four different funds you have. I'm a believer in the international emerging market side, but international when you say international it tends to be more developed. So let's talk about the pros and cons of choosing if you're going to go international, developed versus emerging markets.

Speaker 1:

I think in developed markets. You know one aspect to this is thinking about asset allocation. Developed is clearly going to be the biggest part of an investor's asset allocation. I think developed markets tend to be more efficient. So you certainly want exposure to developed markets to be more efficient. So you certainly want exposure to developed markets. But I don't think generally you expect a lot of your alpha is going to come from developed large cap stocks, certainly not developed US stocks. So you want exposure. You know these are markets that are not particularly inefficient. I think you can still go for active management if you're looking at sort of a multi-factor construct and the alpha is going to be smaller. But I think there's still a chance for outperformance.

Speaker 1:

And so we've built a strategy that is developed. It includes US stocks, so like 70% of the portfolio on average is going to be US exposure. There the goal is you know it's a market that is kind of top-heavy. There's a lot of weight in Magnificent Seven stocks, but we don't have to hold all of them. So there our goal is let's find the stocks that may be at the margin are over or undervalued, and kind of tilt towards stocks that we think have better fundamentals at the margin are over or undervalued and kind of tilt towards stocks that we think have better fundamentals at the margin and we can get a bit of an edge there, then you've got about 30% of that developed strategy that is international developed.

Speaker 1:

So I think Japan and Europe are the really big exposures. There there's probably more opportunity in those markets. They're a bit less efficient and right now valuations, I think, are much more attractive and so you'll get some exposure to that too. I think emerging markets it's not going to be the core of your equity exposure, but growth is higher and there's much more inefficiency. So I think when you imagine where you're going to get that outperformance, where's the alpha gonna come from? Most of the alpha is probably going to come from within the US and develop maybe small cap stocks, but emerging markets also very inefficient, and so that's a place where there is a lot less institutional investing and a lot more potential that you can find companies that are trading at really compelling discounts and allocate to those now and then again, when fundamentals win out, you should earn alpha on those positions.

Speaker 2:

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 but US is pretty much the global equity market cap. If somebody's thinking about an international allocation, should they be looking at that as a benchmark in terms of weightings? Or do you think maybe tactically it's worth sort of taking a more outsized bet on international?

Speaker 1:

So I think the, the Acqui, is a good baseline. That would be a good starting point. 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 is US stocks, so that's the baseline. 60% of Acqui is US stocks, so that's the baseline.

Speaker 1:

And then, I think, for investors that want to take a tactical view, so if you think about the valuation ratios that we talked about at the top of this call, you might say to yourself well, us stocks are a bit expensive right 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 emerging markets, so maybe instead of 15% in EM, you allocate 25% to EM. So you're betting on higher growth in emerging markets. Maybe you're betting on a secular resurgence in EM. Maybe you're just looking for greater alpha and you know that if you invest in a good active manager, they might have more opportunity to outperform within EM. So I think Acqui is a good starting point. But then of course, you can look at valuations or you can look at alpha opportunity and maybe overweight the international component. We certainly see some of our clients doing that.

Speaker 2:

Talk about some of the pushback. There must be some people that think, yeah, international has got some momentum, but you know they're still not as innovative as the US. They're still slower to respond from a fiscal monetary perspective. What do you say to the pushbacks?

Speaker 1:

Yeah, I think so. One of the pushbacks is just that the US has done so well over the last 10 years 15 years why would any investor do anything else? Like you said, Michael, one of the experiences that clients have of emerging markets is that they were told that it's growing so fast that it has to outperform. They were told that there's diversification in EM, and then it only provided diversification in the sense that it underperformed US stocks, and so clearly that's not what investors want. Now to those investors.

Speaker 1:

My pushback is look at other periods. So certainly over the last 15 years, US stocks have done better than anything else. But if you look at other periods, so, like I said, at the beginning of this century, EM stocks strongly outperform US stocks. If you look at this year, year to date, again, EM stocks have done better than US stocks. So that is not a hard and fast rule that the US is always the exception to equity market performance.

Speaker 1:

I think another pushback when it comes to emerging markets is that there's so much uncertainty about companies. Accounting is one I hear a lot. There's uncertainty about corporate governance and you're always worried that, as a minority shareholder these family-owned companies, these big conglomerates that somehow you're going to be at a disadvantage. There's political risk, all sorts of risks, and those concerns are valid. Now, what I would suggest is, if you're an active manager, then again your job becomes sorting those risks out and avoiding companies that have poor governance, avoiding companies where there might be some accounting issues, and if you can do that, there's a huge opportunity, because all of these stocks trade at the same discount more or less, and so if you can find the good actors versus the bad actors, that only enhances the opportunity to outperform in those markets. But you have to be active to take advantage of those opportunities.

Speaker 2:

Not all active is created equal. Active is obviously a big part of 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 comes to international?

Speaker 1:

right approach to emerging markets or to stock picking in general. There's a lot of merit to a fundamental approach. Now I think one of the distinctions is that fundamental portfolios tend to be more concentrated, and that's understandable. You know, if you're a fundamental manager, you only have so much bandwidth to look at stock. So a fundamental manager can do a deeper dive on an individual company. They may be able to do better kind of macro timing and overlay that on the portfolio, but naturally their universe is going to be smaller. Our portfolios will have anywhere from 70 to 200 stocks, and so, whereas we might not have as big an edge on every trade as a fundamental manager does, I think if we have a small edge and we make lots of uncorrelated bets, it's easier for us to grind out that advantage and also to provide a very diversified exposure to clients who you know it's not all about the alpha, they want the beta exposure as well, and so we're trying to deliver the beta that you expect when you invest in EM. So you're not when you invest in our EMX China strategy. You're not getting companies like NVIDIA that just have international earnings or something like that. You're getting actual EM stocks across markets outside of China. So that's kind of portfolio construction where we differ, I think, quantamental for us.

Speaker 1:

So where do we differ from other quants? It is that we look at a much broader set of signals, including signals that are localized to the markets that we trade in, a much broader set of signals, including signals that are localized to the markets that we trade in the ETF. So, for example, in that EMX China ETF, we're looking at all of the financial statement data that you would look at when you were analyzing US stocks. But we're also looking at things like in South Korea, for example, foreign institutional investors holdings in South Korea. For example, foreign institutional investors holdings in South Korean stocks. In Taiwan, we're looking at retail investors buying and selling of Taiwanese stocks so we can actually take the other side of biased retail trades. We're looking at all kinds of other localized data sets that allow us to say something really specific about, for example, governance in South Korea or accounting quality in India, and so those are the sorts of signals that we can use. I think we bring to bear a different set of inputs. That kind of distinguishes our process from other quants.

Speaker 2:

Does it make sense to have your holdings or your funds alongside passive strategies in the international space? Or would you say if you're going to do active and make that the allocation?

Speaker 1:

So we've tried to build strategies that you could use as your core developed markets equity exposure or your core EMX China holdings. What I would suggest is that in markets like the emerging markets that are very inefficient, in developed markets, looking at small cap stocks active, in my opinion, is the way to go, because there is just so much more inefficiency and I would really want someone with that kind of active mentality to be managing the risk in those markets as well. Where we've seen people use more passive is in developed, particularly within the US market. But again there I would argue that where US stocks are trading today in terms of valuation, I think investors have to be a little bit more careful and maybe, 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 and match. We've tried to create building blocks, but I'm a big advocate for sort of smart, systematic, active investing.

Speaker 2:

Do you think that we miss fill that you think is worth sort of focusing on or mentioning? Look like I said I'm a believer in the idea. I think it becomes a lot easier to beat the S&P 500 when you get momentum outside of the US, because everyone, no matter what, whether you're international or domestic, will compare everything against the home country. Home bias is real, but is there anything you think, maybe from a behavioral bias perspective, that people should keep in mind when they think about international investing?

Speaker 1:

Yeah, I mean, I think, behaviorally. Why is their home bias? Well, part of it is rational. We just know the domestic market better than we know other markets. Part of it is irrational. Potentially, we we we are much more exposed to the US stock market If I went down the top 10 holdings in our EM opportunity set within global equities. Or are they just sticking with what they're familiar with, because it feels more comfortable increasing international diversification when those valuations that we talked about at the beginning of this conversation are so skewed right now away from international and toward the US? But I think we've covered a lot of ground and I think it should be helpful for anyone trying to make these sorts of allocation decisions.

Speaker 2:

Phil, if you just want to learn more about Raliant and the funds, where would you point them to?

Speaker 1:

So you can go to our website, fundsraliantcom. You'll get information on all the ETFs, fact sheets, slide decks that explain the methodology, 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 the website. We're happy to answer questions.

Speaker 2:

Appreciate those that watch this live stream. Again, this will be an edited podcast. It has been a very busy day for me 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 next episode. Thanks, Phil, Cheers everybody.

People on this episode

Head Shot

Michael A. Gayed, CFA

Host