We’re going to see dramatic changes in the global investment industry over the next few years. Next frontier.
First, as you would expect me to say, the massive shift we’re witnessing in the US from expensive, actively managed funds to low-cost, index-style investments, is likely to spread across the world, as more and more people are presented with the evidence on how they should be saving for retirement.
Secondly, there’s going to be a huge increase in assets under management. At the last count, global AuM was nudging $80 trillion. Depending on what happens to asset prices in the meantime, we can expect to see that figure rise to well in excess of $100 trillion by 2020. The reason for that is growing prosperity in South America, Africa, the Middle East and, especially, in Asia. Another crucial factor is the likely internationalisation of the Chinese renminbi, which will open what will eventually become the biggest asset management market on the planet.
For me, the rise of evidence-based investing and the growth of global AuM go hand in hand. Yes, growing global prosperity presents huge opportunities to asset managers, but they shouldn’t expect an easy ride. Tighter regulation, better investor education on the internet through websites such as TEBI, and a greater emphasis on transparency, will increasingly force advisers to put their clients’ interests first —and force providers of financial products to offer genuine value for money.
To gauge what’s happening in Asia at the moment, I’ve been speaking to Jason Hsu. Jason is one of the co-founders, with Rob Arnott, of Research Affiliates, based in California, and a pioneer of so-called smart beta. An adjunct professor in finance at UCLA, he has authored more than 40 peer-reviewed articles. Jason is currently heading up Rayliant Global Advisors, which is seeking to disrupt the investment ecosystem in China and the wider Asian region. I hope you enjoy this interview.
Jason, thank you for your time. How is Rayliant progressing, and when are you looking to launch?
Things are progressing fantastically well. We are partnering with a few organisations in China to offer cost-effective advice and products. We are also building A-shares equity management capabilities in parallel, to provide low-cost China exposure for US and European institutional investors. You should be hearing regularly about Rayliant Global Advisors by the end of this year. For now, I want to get everything right and do everything deliberately. A big part is to get the right people on board, to clearly communicate to everyone the values and the purpose of this new organisation.
How much potential is there for disruption in the Asian investing industry?
There is tremendous potential. For one, much of Asia, and specifically China, is 20 or maybe 30 years behind the US in terms of its wealth management and investment management industry. Doing a few simple things right can disrupt very substantially. Additionally, the extant practices have resulted in speculative bubbles, massive Ponzi schemes, outrageous fees, self-dealing and undisclosed conflicts. Investors are ready for some truth — as unpleasant as the truth might be. The craving for real investment advice is what will allow the disruption to take root.
What exactly is Rayliant going to be offering? And how does that differ from what is currently available?
Rayliant is going to offer what we call quantamental (that is, both quantitative and fundamental research) strategies based on emerging Asian equities. The core of our strategies is a low-cost, low-turnover, multi-factor smart beta portfolio and with satellite strategies that are more active and higher turnover. Asian equities is a space where I believe in both the long-term growth of the corporate fundamental (demographics, technological convergence, learning by doing, and so on) and in the possibility of sustained alpha (80%+ of the market is dominated by naïve retail trading).
There’s now a reasonable level of awareness of the advantages of passive investing and smart beta in the US. Presumably it’s a a very different story in Asia?
Asia has not embraced passive investing or smart beta to the same magnitude as the US or even Europe. In fact, benchmarking (relative return strategies) is not as common as one would imagine. For smart beta to have success in Asia, a lot more education is necessary — which I feel I am up for the task as I am by nature an educator.
Asia is culturally very different to the US. There’s also something of a gambling culture in the region. How receptive do you think Asian investors will be to the evidence-based approach?
You are right about the gambling culture in Asia. That is going to take a very long time to change. And some investors, who really do see the stock market as a casino rather than a place for long-term investing, will not be receptive to the evidence-based approach. However, institutions in Asia, especially pensions, are very open to passive and factor investing through smart beta indexes. On the other side of the gambling culture is this tremendously agile learning culture. Many Asian pensions imitate the best practices from the West. This means passive investing is already a substantial part of the pension portfolios and smart beta is also rapidly gaining interest.
How excited are you personally by this challenge?
This is a phenomenal opportunity for me. Building a new business is exhilarating. Few things offer as many opportunities to fail, to be humbled and to learn. Very importantly, this new challenge gives me an opportunity to appreciate all of the people and things that I have perhaps not fully appreciated — from the mentorship that I received from working closely with Rob Arnott to all of the infrastructure and behind-the-scenes support system and the people who made them possible. I am incredibly grateful for having this opportunity to hone my ability to notice and appreciate people.
For more information on the smart-beta in China:
Does factor-based investing work in China?
Photo: Andrew Colin
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Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
