Lead-Lag Live

Phillip Wool on Machine Learning in Investing, US Equities Strategy, and Emerging Market Opportunities

• Michael A. Gayed, CFA

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Unlock the secrets of strategic investing with Phil Wool from Reliant Global Advisors as he shares how machine learning is revolutionizing portfolio management by focusing on individual company analysis over macroeconomic speculation. Gain insights into the current dynamics of US equities as they navigate through expectations of a soft landing and the Federal Reserve's cautious stance. Explore the complexities of how policy volatility and tariff changes can shape market sentiment and investment opportunities.

Discover why emerging markets remain sensitive to US Federal Reserve policies and how a mix of policy uncertainty and insufficient Chinese stimulus is impacting global economic outlooks. Phil discusses the potential overstatements in market valuations due to US tariffs and our active management strategies that have consistently outperformed benchmarks, thanks to a multi-factor approach. Learn how active management, particularly within our US funds, is crucial for navigating market volatility and capitalizing on valuation, quality, and governance insights.

Delve into the promising tech sector opportunities in emerging markets, with a focus on tech-heavy regions like Korea and Taiwan. As we highlight the growth dynamics in China's market and the challenges faced by other emerging regions, Phil explains the role of active stock picking and quantitative scoring in identifying underappreciated growth prospects. From our Japan ETF collaboration to the transformative impact of AI, this episode is packed with strategies for harnessing emerging market potential and optimizing your global equity portfolio.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Columbia Threadneedle and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the part

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Speaker 1:

US equities have been baking in a lot of good news, a lot of good news in terms of a soft landing, and I don't think we've seen much evidence to contradict that soft landing narrative. But I also think that the market has been pricing in pretty aggressive Fed easing. Let's talk about sort of how sensitive emerging economies, emerging markets and the US economy have only become more intertwined over time. Buy signal. When I hear that and I think China is just sort of a characteristic deep value play at this point I think that a soft landing at this point is the base case, and so that's really good news. The American consumer has been surprisingly resilient, I think, given how much inflation we've observed over the last couple of years and how much budgets have been stretched. But you know, a strong job market helps along those lines.

Speaker 2:

This is a sponsor conversation by Raelian. We'll be talking about some of their funds and some of the interesting things that they are noting in their research. So, with all that said, my name is Michael Guyatt, publisher of the Lead Lager. Before we join me, here is Phil Wool, who I've had on these podcasts before. But, phil, for those who are not familiar with your background, introduce yourself. Who are you, who have you been throughout your career and what do you do in that really?

Speaker 1:

Oh, it's great to be back on the podcast, michael. So I'm Phil Wool. I'm the head of research, the head of portfolio management at Reliant Global Advisors. We're an asset manager that specialize in equities. In particular, we built some active strategies, some quantum mental strategies that apply a systematic process to select stocks across international markets. So we'll talk about developed markets, including the US, but also including developed markets outside the United States. We can talk about emerging markets, ex-china, china, and then we've also got a Japan fund that we just launched earlier this year and that's obviously an interesting market. Railways purchase, as I said, is quantum mental, so you can think about these as factor strategies, but they're a bit more sophisticated than simple smart beta strategies. We're using a much bigger library of trading signals. We use machine learning to put all those trading signals together and the result is active strategies that have high conviction but still offer broad exposure to these international markets, where I think a lot of investors often consider diversifying some of their equity exposure.

Speaker 2:

How does machine learning work when you're under an administration that could be characterized as volatile, or it's hard to really sort of have data? Yes, we have the precedent of the first administration of Trump, but how does the second one factor into machine learning?

Speaker 1:

Yeah, you know we think of machine learning as using sophisticated statistics to try to find structure and patterns in past data. So when you think about a volatile environment in terms of policy, it may seem like you're going to have a lot of trouble applying machine learning to make predictions about stocks performance, about stocks performance. Now, I think the critical thing is we're not using machine learning really to try to gauge these kind of top-down macro calls that some fundamental managers would be making. Our strategies are really primarily bottom-up, so machine learning comes into play when you have loads of information about individual companies in your universe. The question then becomes well, I've got these signals that represent things like valuation, different aspects of quality you know the quality of a firm's fundamentals, the quality of the firm's management team and then I've got a range of signals related to sentiment and how should I put all those things together? And that's where machine learning is helpful.

Speaker 1:

So we were actually using AI before it became really trendy and for us it's just a tool for putting all that information together. So it helps us to make better bottom-up distinctions among companies. Now, that kind of policy uncertainty and market participants' expectations for how to take one example, trump's tariffs might affect stocks in various emerging markets. That can show up in terms of sentiment. It can show up in terms of smart money sentiment where we see analysts and we see other professional investors kind of baking those predictions they have for some of that macro and geopolitical action into their forecast, into their trading. But it can also show up in terms of retail sentiment where individual investors, who are behaviorally biased, they might actually overreact to some of that noise that's going on out there and that can create opportunities as well. So machine learning again, just helping us put all that information together to make forecasts of individual companies' performance.

Speaker 2:

I'm glad you mentioned the word noise, because that's always the challenge with any data set Noise can have big impacts right from a compounding perspective in terms of just market movement cumulatively over time. In terms of just market movement cumulatively over time, since we're talking here on December 19, the day after the FOMC meeting, and we saw that pretty sizable drop that occurred there. I'm curious if you think what happened yesterday was noise or maybe the market being a signal of some interesting changes to come.

Speaker 1:

Well, I think that what you're seeing is a reflection of something else we can talk about, which is valuations, and particularly with respect to US stocks.

Speaker 1:

Us equities have been baking in a lot of good news, a lot of good news in terms of a soft landing, and I don't think we've seen much evidence to contradict that soft landing narrative.

Speaker 1:

But I also think that the market has been pricing in pretty aggressive Fed easing and that's something we've seen since the beginning of this year, when the market was expecting something like seven rate cuts by the end of 2024. And we obviously haven't seen that. So I think the market's reacting to. It's really actually the market's reacting to. It's really actually, I guess, a gradual recognition that the Fed is probably going to proceed more cautiously, more patiently than many expected. And we certainly got a raft of hawkish surprises, not just in the decision where there was a dissenting vote, but the statement of economic projections, that quarterly list of views of the FOMC, where we see that the committee is shading its forecast for how low rates are going to go in the long run. They are increasing their forecast of inflation next year and I think that just speaks to, you know, maybe slower easing, and that's what the market's reacting to, maybe on a delay.

Speaker 2:

I wonder if you think emerging markets are less sensitive to what's going on now with Fed policy than they have been in the past, or maybe they're more intertwined. I mean, we're seeing divergent policies obviously take place and a lot of that also is being reflected in the currency movement, as we know. But let's talk about sort of how sensitive emerging economies are now to the US Fed policy.

Speaker 1:

Yeah, I think they're just as sensitive as ever, if not more sensitive, because emerging markets and the US economy have only become more intertwined over time. I think the reason that you don't see as much movement in EM around this particular FOMC is that emerging markets have already been pricing in pretty bad news in terms of Fed policy. I think around September, when the Fed made that 50 basis point cut, the initial cut in this pivot that they've made, em got really excited and EM investors were sort of thinking these are perfect conditions. You know, inflation coming down, the Fed is loosening policy. You can expect the US dollar to weaken under those circumstances, but there was still a lot of excitement about a soft landing. So all of that is really good news for emerging markets.

Speaker 1:

The weakening dollar, fed loosening is obviously a big tailwind. It allows those emerging markets central banks to ease more, which obviously promotes their growth. So all of that is good news. But what we've seen since then is that emerging markets versus the US stocks have really come off because there has been this sense now that well, even though policies, how those could impact future Fed policy and, of course, the tariffs and how those will ripple through EM. And then you've also got China, where I think most people had been counting China out prior to the end of September, when we did get some announcements, some really hopeful announcements on monetary but also fiscal stimulus from China, and since then there just hasn't been enough follow-up in terms of detailed policy announcements to convince EM investors that maybe China demand was going to come back online. So all of these things have created this doom and gloom sentiment among emerging markets and a lot of it really is related to, of course, trump, china, but really also Fed policy.

Speaker 2:

Okay, so help me out with this. On the tariff side and emerging markets, the narrative that I keep hearing is okay, yeah, trump's talking tough on tariffs, but it's really just a negotiating tactic, right? But if that's the case, then if markets are forward-looking, then emerging markets should not be that negatively impacted by all the talk around tariffs. But then there's a part of this where there's almost like a reflexivity aspect to it, whereas if everyone suddenly is assuming that it's just a negotiating tactic, then maybe Trump has to call the bluff and actually do it right. So what is the interaction here of emerging markets pricing in tariffs?

Speaker 1:

How are emerging markets behaving so again, I think EM is pricing in pretty much the worst case scenario in terms of tariffs.

Speaker 1:

Em stocks look today to me on a valuation basis is investors are expecting that Trump is going to follow through with the harshest version of trade policy that he espoused on the campaign trail.

Speaker 1:

Now, our view is that that's probably not going to happen, that Trump talks really tough on tariffs. We actually saw this play out in circa 2018, the first incarnation of Trump's trade war with China. But I think, in fact, trump is very transactional. He's someone that other world leaders can deal with, and I think, in particular, on the selection of Scott Besson as the treasury secretary. You know, to me, this signals that trade policy is going to be tough, but it's going to be reasonable and rational. Scott Besson is someone who's actually written about using tariffs as a negotiating tool, about surgically deploying tariffs to impact certain strategic industries, and so I would tend to think that EM stocks have been oversold on maybe fears that are overdone when it comes to tariffs. That's not to say that tariffs and trade policy in general aren't going to create winners and losers. I think that's where active managers like us have a potential opportunity when we see this kind of volatility and policy uncertainty.

Speaker 2:

I'm glad you mentioned that you're an active manager because you've got skin in the game. I want to go through your performance, which has been fairly strong. Let's, I'm going to share my screen here to talk through it. So you've got skin in the game. I want to go through your performance, which has been fairly strong. I'm going to share my screen here to talk through it. So you've got how many funds?

Speaker 1:

So we have four active ETFs listed in the US market and they run the gamut in terms of equity exposure around the world. We can start with the US funds. So RAYD, that's our developed market strategy. So that includes the US, but, as I said, it also includes developed markets outside the US the UK, germany, japan and so forth and the performance there has been really strong. So if you look through November, the MSCI World Index is up about 22%. Our strategy was up 10 percentage points more than that.

Speaker 1:

So the question becomes we know that conditions were really good for equity investors, but how, in an active way, could we achieve that outperformance? It comes down to the factor tilts that we take within the portfolio. So these are multi-factor strategies. I mentioned that we've got a really big library of trading signals that we use. I alluded to some of the dimensions that we're looking at familiar things like valuation, but also very nuanced measures of quality, looking at companies' fundamentals, looking at companies' governance, the signaling that's being done by the management team, the quality of companies, managers, and then looking at all sorts of measures of technical strength, market sentiment and so forth. So when you put all that together, you get these bottom up stock picks, but in any given time, certain factor exposures are going to be doing better or worse.

Speaker 1:

So what's been working in the US within our strategies? Well, sentiment, not surprisingly when you kind of think about what's been going on in the US market. You've had, of course, the political dimension with Trump's reelection in November, the Fed policy. That's really been the focus of investors throughout the year and there's also been huge enthusiasm around AI and I think we talked a bit about that last time I was on with you, michael. But just thinking about AI across markets it's not just the US but Japan, certain emerging markets that's really that kind of investor enthusiasm animal spirits has been driving results and that's why you see playing on stocks with really strong sentiment. That's worked really well.

Speaker 2:

Growth is also, but I feel like, let's, let's, let's. How does that actually calculate? Like what goes into that as a factor sentiment?

Speaker 1:

So we're looking at, certainly, measures of technical strength. So there are so many different ways to measure things like momentum and reversal. Typically, when we think about sentiment, we're thinking about momentum where good performance continues. Now, I think where it gets a little bit more nuanced is what type of sentiment are you trying to capture? So there's sort of trend following where you don't really care whether it's underreaction or overreaction, and there you might buy something that's overvalued, just thinking that you know someone else is going to come along and pay a higher price for it.

Speaker 1:

We have measures that are specifically geared at capturing underreaction to information. So if it's underreaction to positive news, then that's a stock we'd want to buy and ride the trend as it cruises to fully incorporating that positive information. But you've also got stocks that have some sort of negative information of that the market doesn't catch on, the market doesn't react enough, and so those are stocks that we'd want to try to avoid in our portfolio. And then, as I said, there are measures of sentiment related to specific forecasts. So analyst sentiment that's a big one, and I think there's a lot of forward-looking information that you can extract.

Speaker 1:

Now we also know that sell-side analysts are biased. They tend to issue many more buy ratings and sell ratings, and so a big part of that is you're trying to de-bias and kind of extract the useful information from analyst forecasts. And then sentiment as to what are other investors doing. You know what are those sort of sophisticated hedge funds, mutual funds, prop traders? What are they buying and selling versus retail investors, where we would generally try to fade whatever they're doing. So that's, that's how we try to capture sentiment. As you can see, you know, when sentiment is driving the market, there's a lot of alpha to be earned in that dimension.

Speaker 2:

I think that's well, artilio. Now I am curious. I guess you've got the different factors set through growth value. Given these factors, I'm sure one could have made an argument that that just means go all in on tech right this year.

Speaker 1:

Let's talk about sort of how the mix of sectors plays into this. So we generally the way our portfolios are managed, and this again goes back to just viewing ourselves as primarily having an edge at bottom-up stock selection and kind of relative value type investments. We tend to be pretty close to benchmark weights when it comes to sectors or countries for that matter, and so most of our alpha is going to come from stock selection. It doesn't mean that we won't have overweights and underweights.

Speaker 1:

In general, we've seen a lot of positive signals among tech stocks in the US. It's not just sentiment. We've seen clear examples of high quality growth within US tech. We've had an overweight on NVIDIA and again, it's not just sentiment, it's also looking at NVIDIA's fundamentals. But you'll see representation from all sorts of other sectors. So energy has been another sector where, if you made the right calls within energy, there were opportunities there. Same with even boring sectors like consumer staples materials. If you pick the right stocks you'll find some surprising bargains that just don't capture as much media attention, but part of the story of that huge positive return for developed market stocks in 2024.

Speaker 2:

It's a great year on Rady. Let's talk about some of the other funds.

Speaker 1:

Yes. So, moving on to emerging markets, so we break emerging markets into China and EMX China Within emerging markets. So performance was positive. It wasn't quite as positive ex -China because China's actually had a good year this year and it certainly wasn't as positive as developed markets.

Speaker 1:

I think the big reason we've already kind of talked about it is that even though there's been a lot of good news on the global demand, global growth front, and that's been very much priced in US stocks, emerging markets have been in just a really kind of gloomy type of sentiment environment. And so within EM, we actually saw that our active strategies were pretty strong across most factors, that our active strategies were pretty strong across most factors. And I think it's not surprising that quality was the strongest factor, because what we've seen in EM is a lot of uncertainty about Fed monetary policy, about the election. You know, even before Trump was reelected there was a strong expectation that it would be a close race, if not a slight advantage to Trump. And so EM was already, before Trump's reelection, starting to price in some of the negative potential impact of tariffs and Trump's impact on Fed policy. And so within EM, it's really been about picking out the winners and losers in different themes. You know the winners and losers in terms of nearshoring, friend-shoring. So you look at markets like India, mexico that are really hit by that theme. Within AI, there was a lot of advantage to active stock picking in terms of stocks in Korea, in Taiwan. These are markets where the vast majority of stocks are tech stocks and so there was a lot of alpha there. If you pick the right ones, it kind of avoided those flashy growth stocks that ended up sort of disappointing on fundamentals, and so that's how we generated some alpha.

Speaker 1:

Within EMX China, we can move to China. So I think China is for a lot of investors. It's been. You know, we've heard the term uninvestable tossed around when it comes to China. For me that's almost a contrarian buy signal when I hear that, and I think China is just sort of characteristic deep value play.

Speaker 1:

At this point everything hinges on policy, and not just policy, but I think, fiscal policy. And so when you got those announcements at the very end of September that the government was going to start coming in with support on the fiscal side, what we saw was a huge rally in Chinese stocks, and that's why, at the end of November, if you looked at the onshore CSI 300 index. That's kind of like the S&P 500 for Chinese stocks. It was up about 15%. Now it was hard to earn alpha in China as a fundamental factor investor because a lot of the sort of upside and gains when the market shot back at the end of September, beginning of October, it was policy driven.

Speaker 1:

So it was this expectation that a big policy bazooka would benefit all stocks and in particular it was going to benefit stocks that had been really beaten down. So value was the one factor that showed unequivocally good performance in 2024. But a lot of the stocks that rebounded, so those kind of value stocks, were on the junk side of value and so it was harder to kind of benefit, I think, from that rising tide in China. As an active investor, I do think in 2025, as the details of some of these policies emerge and I believe they will that's when I think fundamentally anchored, systematic investors are going to see much more opportunity, because then we're going to start to see those winners and losers distinguish themselves in terms of price action.

Speaker 2:

So that's EM in a nutshell between those two ETFs and then, if we yeah, I was going to say I'm glad you mentioned the tech point just going to YouTube comments or question, because this does impact emerging market performance because of USB much more tech than not this point being mentioned by DeBillo tech tends to perform less or underperform when interest rates are higher. Any speculation on future growth? So I mean to the extent that the Fed may be made a mistake in terms of cutting rates and rates are either going to stay where they are or even, you know, rise again and that impacts tech that actually may, oddly enough, be, on a relative basis, really beneficial for emerging markets.

Speaker 1:

Yeah, you know. So that's absolutely true. You see that in the past data Now, as I said, us stocks and in particular US tech stocks, they're pricing in a lot of good news at this point. You know they're pricing in the Fed fairly aggressively, taking us down to sort of that long term neutral rate in continued growth along this AI revolution theme, and so that's why I think we've seen so much more volatility where you've got US tech companies that are beating on the top line, on the bottom line and the stock is still declining because expectations are just so high right now beyond the explicit analyst forecast.

Speaker 1:

As you say, michael, going to EM, whether it's stocks in China that might have a bit of an overhang from China policy, or stocks in the rest of EM, emx, china there's just much more opportunity there in my view, because a lot of these stocks are being discounted really heavily for some of these EM specific risk factors.

Speaker 1:

You know we didn't talk about Korea in particular, but South Korea is a market that I really like because that market trades at like 10 times forward earnings and most of that is because corporate governance in South Korea is pretty bad. You've got these chaebol conglomerates that sometimes take advantage of minority shareholders. But if you're an active investor and if you've got a specialization in international markets and EM, then you can pick out the companies that have better governance but are still being discounted as a result of those anxieties, and those companies eventually, when their earnings and their cash flows show so much growth, the price is going to rise and people are sort of going to, you know, let go of some of those fears, and so I think that's a great opportunity to kind of diversify away from expensive US tech.

Speaker 2:

And the fourth fund.

Speaker 1:

Yeah, the fourth fund is a bit different from the other three. So the other three we refer to those as quantum mental ETFs, but you can think of those as really systematic strategies that are trying to using machine learning, using quantitative methods, trying to synthesize what a local fundamental researcher would do. The fourth fund, rayj. This is our Japan fund. We launched this in April of this year. We wanted to launch a Japan fund for a while, but it's just a market that, like a lot of emerging markets where we have really deep expertise, we think you need to have kind of a local lens into that market. So we were looking for a local partner to launch this with us. We found one in Sumitomo, mitsui DS Asset Management. So this is the biggest active funhouse in Japan and the way this fund is built, raliant provides quantitative scoring. So we use the same models, the same factors we've been talking about to score stocks across Japan's market. But then the portfolio is ultimately constructed by a team of local portfolio managers who are doing deep dive fundamental research on Japanese stocks and because it's got a much stronger fundamental overlay, it can be a higher conviction, smaller portfolio. So this is versus the other ETFs which have you know, on the order of 100 to 200 holdings, the Japan ETF has 30 stocks roughly and it's really meant to capture, you know, underappreciated Japanese growth opportunities. So it's a bit different. So in that fund we're not showing factor exposures, we're just showing the industry contribution to performance and Japan's market. I mean, you know, if you, if you've been following Japan, we think of Japan now is sort of the phoenix rising, you know. Know they've been in a kind of an economic stagnation for decades and in the last couple of years we've started to see growth return. We've seen corporate reforms. The market has rallied like crazy In 2024, if you look at returns, through November, adjusted for exchange rates, japan's market was flat. Through November, adjusted for exchange rates, japan's market was flat. This active strategy was able to add as of today it's actually added about 11% alpha on top of the topics index and where that's coming from it's really similar factors.

Speaker 1:

I think quality is really important, in particular quality, sustainable growth. But from an industry standpoint, a big part of it has been that AI supply chain theme, where there are a lot of electronics manufacturers in Japan that people wouldn't really associate with AI, but they're an important part of the data center, build out chip manufacturing and so forth consumer discretionary in Japan. So as Japan sees growth rekindled as consumer sentiment improves, what we're seeing is that Japanese companies selling to Japanese consumers are doing much better. And if you pick the right ones, if you pick companies that have a strong footprint within Japan but also strong and growing international sales, where there's been a really weak yen, that's helped them out, there were some really good opportunities there. And then what hasn't worked in Japan is just really boring areas of the market where we're just not seeing much enthusiasm on the part of domestic investors. So that kind of rounds out the lineup. As I said, we've got funds just spanning the global equity space.

Speaker 2:

Is there sort of a firm-wide viewer outlook on next year? Obviously, there's a lot of unknown dynamics under Trump presidency. But yeah, you think about your fund suite and what could potentially really have a nice run. I mean, what factors could be beneficial or not beneficial?

Speaker 1:

So I in. In our view, we're in a pretty good situation from a macro perspective. I think a lot of the concern over the Fed taking longer to cut rates is it's really predicated on the US job market being very strong, us growth being very strong and the Fed just has a little more flexibility, so inflations look stickier. So the Fed now has the luxury of being a bit more patient. We think that a soft landing at this point is the base case, and so that's really good news. The American consumer has been surprisingly resilient, I think, given how much inflation we've observed over the last couple of years and how much budgets have been stretched. But a strong job market helps along those lines, and so I think from a macro perspective it's very positive and we don't have a lot of concern about corporate earnings.

Speaker 1:

I think where there's some concern is clearly just the uncertainty around Trump's policies, but not so enthused about the potential of trade conflict.

Speaker 1:

You know, maybe some of the geopolitical risks, because we still have a war going on between Russia and Ukraine, tensions in the Middle East, for sure, and then there's China, but I think, in our view, there's more chance of upside surprises next year on many of these fronts.

Speaker 1:

You know, I think there is a very real prospect that with a Trump presidency, we may actually see a potential resolution in Russia, ukraine, I think, china, which, as I said, people have kind of counted them out.

Speaker 1:

I do believe that they will kind of, you know, continue trying and incrementally putting in fiscal measures that eventually will help China's market to get out of this slump that it's in. So I have, I have a good feeling about some of these areas where I'm sure there's risk, but maybe the concerns are overdone. But I guess the last point I make is that, when it comes to valuations, I think certainly the US market is priced to perfection. That's one of the reasons we've seen stocks sliding now, when you get just a little bit of potentially negative news. International markets not so much, and so if I were going to make any moves tactically in terms of asset allocation, it would be to diversify from US stocks, developed market stocks, into emerging market X, china and for those who want to make a contrarian deep value play, you can also allocate a little bit more to China, because I think there's opportunity there.

Speaker 2:

We've seen all those charts that look at the percentage, know, the percentage of global market cap that the US makes up and it's, you know, at an all-time high. And for emerging markets then, of course, it's, you know, closer to the prior all-time low. As you talk to advisors and investors, let's face it, a lot of them have been burned by the emerging market trade for some time. What do you say to those investors, those advisors, who would counter by saying listen, if it's cheap, it's cheap for a reason.

Speaker 1:

Valuations are not enough to time the asset class, and when it our view, it's not so much about making a bold timing call it's sort of tweaking an asset allocation to diversify and understanding that US performance over the last 10 years is not reflective of what performances looked like over longer periods of time, where we've seen cycles where the US outperformed like it did.

Speaker 1:

We've seen cycles where emerging markets outperform US stocks by hundreds of percentage points, and so the question then becomes where's the greatest opportunity for an active investor? I think when it comes to market timing, a lot of folks are imagining if they take money out of US stocks, they're going to put it into a passive EM tracker, and I think there's a lot of risk there because you are buying stocks. If you buy broad EM, you're buying stocks that are cheap for a reason. I think the opportunity with active management in EM is that you can take advantage of the valuation differential. You can truly buy growth at a reasonable price in emerging markets and you don't have to buy those sorts of value traps or growth traps that I think have in many cases created some of that negative and risk sort of connotation of emerging markets. So it's more diversification argument and an active argument for advisors who want to seek some alpha in parts of the world that might not be as efficient as US stocks.

Speaker 2:

And certainly underinvested for a long time because they perform so poorly. So you would think that there's a lot of room for allocations to get off the floor. Exactly, and typically those types of allocations that you see are one the 5% range, 10%, I mean, what would be an emerging market weighting that you'd say maybe that's a little bit too high.

Speaker 1:

Yeah, that you'd say maybe it's a little bit too high. Yeah, so I think if you look at Acqui, for example an all-country world index you could, depending on your tactical view, you could have 5% to 15% in EM, and I think that would be very reasonable. You know, again, it's more about diversification, it's about seeking some alpha in less efficient markets, but we're certainly not advocating that an investor go overboard and sort of massively overweight emerging markets. The reason that we run a developed markets fund is that we think investors should spread their bets across global equities. And so, again, less about making some bold timing prediction and more about just making sure that you've got all your bases covered, because the US is subject to its own risks and I think you want to take advantage of opportunities around the world.

Speaker 2:

Are we starting to see the productivity enhancements of AI come through outside the US, into emerging markets? I mean, I would think the AI end of things ends up being really interesting from a longer term perspective. No different than how the Internet made in this labor arbitrage right between US workers and workers in India and China, so on and so forth.

Speaker 1:

Yeah. So I think we're still in a phase where AI has so much potential and we all see it every day. You know we see examples of AI. Some of them are pretty frivolous and you know we're looking at AI generated video and things like that. But you know, in my own work I've seen how AI can help, can help me and the team to write code faster, for example, when we're building our quant models. Those are real productivity gains.

Speaker 1:

But I think we're still in a period where there's a lot of spending on AI for uncertain future benefits, you know, with the expectation it's going to be incredibly transformative, and companies are investing a lot.

Speaker 1:

So it's the firms, I think, right now that are supplying you know, the picks and shovels, so to speak, that are that are really doing the best from an investor's perspective. But I think, in my mind, one of the most interesting areas here is really in China, where the US policy of containment is forcing China to home grow industries that have so much potential. And so, if you look at China, if you look at the AI sector, if you look at companies that make components that go into data centers, if China is shut out of the global market for some of these things. If they can't import from South Korea and Taiwan all the things they need to be competitive in AI there are going to be opportunities to buy companies in China. We're seeing those today that have state support of create this homegrown AI ecosystem within China. I think that's an area that a lot of investors probably overlook because they view China as just too risky.

Speaker 2:

Phil, for those that are thinking about emerging markets and they are thinking about choosing you on the active side versus a more passive emerging market exposure vehicle. Other than the obvious around the machine learning and the thoughtfulness that goes into it, make a broader case. You mentioned before on the inefficiency component, but make a broader case for why, if you're going to be active, you really should be active when it comes to international marketing.

Speaker 1:

Yeah. So ultimately I think the active, passive argument it does come down to inefficiency. Now I think we can get more specific. So what are we trying to do? What are our models really all about? As I said, when we create inputs to the models and that in AI, machine learning, if you look at pretty much any domain, the real secret it's not the models. There are so many models out there that you can choose from A lot of those. They've been published in academic papers, but what you won't find is that list of features that you're using to make predictions.

Speaker 1:

So it turns out that's the most important part is creating the trading signals that are going to go into the model. That's something that we've spent so much time, invested so much to build that library of proprietary trading signals. That's critically important. What are those signals trying to do? I kind of touched on it when I talked about sentiment. We're not trying to generate simple momentum where you might ride a winner past the point that it's hit its intrinsic value. You're buying in on an overvalued stock. We're trying to build sentiment signals that are going to put us in stocks that have underreacted to good news. That's critically important.

Speaker 1:

On the quality side, the focus for us is quality growth. We're trying to find stocks that have superior earnings growth, and so, for us, in emerging markets, where everyone expects that those markets are growing fast, not all companies in those markets get to enjoy that type of growth, and so, for us, it's all about, within emerging markets where we know there are huge growth opportunities, finding the companies that are actually going to show earnings growth that translates into returns for investors, and exploiting the mispricings where you've got lots of retail traders chasing the wrong types of growth stocks. And so I think that's a huge advantage of a systematic approach where we've got a really disciplined model that's doing that in a scientific, rigorous way, giving broad exposure to EM, but doing it in a high conviction ETF. That's going to give you the chance for outperformance if we pick the right stocks. So that's, in a nutshell, why someone would invest with us, as opposed to buying a passive tracker where their hope is just that EM beta is good over the next five, 10 years.

Speaker 2:

Phil. For those who want to learn more about Reliant's funds. Where should they go?

Speaker 1:

So they can go to our website, fundsreliantcom, and they'll find fact sheets. They'll find other marketing materials that describe the methodology in more detail and, of course, they can always reach out to our team. Our email is on the website and we're always happy to take calls and answer questions one-on-one.

Speaker 2:

Appreciate those that watch this sponsored conversation by Ireliant. I'll see you all on the next episode. Cheers.

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Michael A. Gayed, CFA

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