Jason Hsu

Kind of your background and how you got into the position where you are today? Yeah, absolutely.

Well, I actually started out as an academic in the university, but thought, hey, all these things that we're teaching, do they actually work? And so I actually built a very successful institutional business around, quantitative research that we've developed in academia. And, since then, I've taken the institutional business and also created retail vehicles. So now all of our strategies are available in active ETFs.

So I always like to ask before we get into the business, what kind of hobbies you like to get into when you're outside of work and you're not, behind the desk?

I guess, my hobby is watching basketball games. I actually played in high school and play a little bit in college. I went to Caltech, so it's not hard to play collegiate basketball at Caltech. And basically, if you had legs, you could play. But I love basketball. Grew up on, the Lakers versus the Celtics, right? The days of Magic Johnson and Larry Bird. So that's my

Passion. No, that's great. That's what we were just talking before we got on the show, basketball and hockey. Well, did basketball playoffs start yet? Or is it just hockey right now?

No, it's game two already. Okay. It happens fast. So I'm in Pittsburgh. We don't have a basketball

Team, but at least we have the rest of the sports. So I guess I'll... Yeah, we have the Penguins. So let's talk about Raliant, right? We know you have a handful of ETFs. We're going to talk about a few of those today. But can you talk about some of the other things you do and how you're helping clients kind of holistically other than just in the ETF space? Well, absolutely. So as I mentioned,

We are primarily institutional. So we run money for the governments of Japan, Taiwan, Canada. We run pension funds as well as sovereign wealth funds. So that's kind of our primary client segment up until recently. And so in the wealth space and kind of the retail financial advisor space, we now offer model portfolios containing ETFs or direct stocks in the model portfolios. And of course, we also manufacture the tools, which are some of the ETFs that aren't as available in terms of the universe of ETFs. So you'll see that we are coming to markets with sort of this year, active ETFs in emerging markets, emerging X China, China, and now Japan.

Yeah. So you started the business, if I read correctly, in 2016. You guys have a significant amount of AUA. I'm assuming a lot of that's driven by your institutional work. You have a lot of different channels. Can you talk about really what made you start the business? I know you came from academia and eventually how you kind of scaled it to where you got it today.

Yeah. So we actually spun out of a larger organization. So when I first spun out of academia and launched my funds management business, my first startup is Research Affiliates. So I co-founded that firm with Rob Arnott, built out this franchise, the RAFI, a fundamental index franchise. And then had my second spin out in 2016, basically spun out of Research Affiliates and kind of taken over what was Research Affiliates Asia. And kind of from that platform started offering institutional services, primarily in this year markets, like emerging markets, like emerging Asia and single country, I would say Asian economies. And then, I think broadening that out since then.

Yeah. So I saw the word quantamental a lot on the website. I'm a big fan of this type of investing. We have a lot of financial advisors that listen to the show. So can you talk about what that means to your firm in particular and how you're implementing it?

Sure. So I would say, even though I am quantitative in my DNA, it doesn't mean black box, right? I have tremendous amount of respect for stock pickers, for people who are qualitative, fundamental, but really deep dive stock pickers. And in fact, a lot of what we're trying to do using the quantitative methods is, well, can we model what a really experienced stock picker actually do day in, day out basis? Just do it systematically, take out the human emotions and human biases. And of course, with machines, you can broadly apply the same methodology to, a universe of 10,000, 20,000 global stocks. So that's kind of how I think about the right way to do quantitative analysis is to really use systematic computer science methodology to, as much as possible, replicate what a human portfolio manager

Historically. So we have some data to guide us. Yeah. And so you kind of answered my next question, which is how much human interaction goes in it. we run a systematic and quantitative portfolio. We don't put a lot of human overlay on it other than some guardrails for it. So it sounds like to me, and please correct me if I'm wrong, if you're kind of having humans almost fact check the model in a way that you kind of know what's coming on the horizon and whether or not a certain investment or a certain amount of risk may or may not be necessary.

I think guardrail is the perfect word for it. Because what you don't want is you don't want the human to come in and say, oh, I disagree with the machine. I have some other insights I want to implement, right? Because, the thesis is we believe in the human insight and the human framework. And we have done as much as we can using models to replicate that. So I think the human's role in this case is say, look, if the human insights live there, let's make sure the output matches that insight that you don't have unexplainable trades or large concentrated positions that you can't really map back to that intuition.

Yeah. So let's talk about, you have four ETFs that I've seen come to market. We want to talk about RayJ, which is R-A-Y-J, which is your Japan equity ETF. So if you could, can you please just explain the strategy at a very high level and what it's trying to accomplish?

Sure. And then, obviously RayJ is, Raylian Japan. Sounds like Raymond James. It's actually in collaboration with one of the largest financial institutions in Japan. So it's in collaboration with the Sumitomo group. Of course, they're the largest insurance banking investment management conglomerate in Japan. So partnering with them is really what I think the ideal combination of taking the quantitative science and the fundamental, because they're a big stock picker shop. They obviously have been in business for as long as I think that Japanese stock market's been available. And so we are working with their portfolio managers to take what we think is a more interesting segment of Japan that people don't talk about. It's really the small mid-cap segment.

Yeah. So I definitely want to talk about kind of that screening process. I see the fund is fairly concentrated. So I looked at the fact sheet, at least the last fact sheet shows about 30 names in the portfolio. Can you talk about that screening process? I know you touched on it there a little bit, but maybe how you're getting to that, to those 30 names. And then afterwards, we'll talk about kind of how you make weighting decisions around those names.

Yeah. So the screens that we apply broadly fall into, I would say, three distinct categories. And within each category, they're sort of, separate dimensions. So the three distinct categories is we clearly focus on the fundamental. So we care a lot about, so healthy, high quality fundamental, growth oriented fundamental. There's another category that's really about what the corporate insiders are doing and what you can infer from that. So let's think of it as the governance structure. Think of it as are the insiders buying. Think of it, has there been evidence of insider manipulating, managing earnings aggressively? So those could all be sort of negative and positive signals that come into it. That comes from analyzing insiders. And then the final piece is really understanding the market sentiment. And, the Japanese market is actually still

Right. No, I definitely want to talk about more about market sentiment and how you're analyzing that. But as far as, now, in my opinion, if you kind of just look at international historically compared to U.S. equities, you'd have to be excited about the growth projections and, almost a reversion to the mean in terms of valuation in those sectors. You guys have the same belief?

Absolutely. So and then this is why we actually like emerging markets a lot. And in this case, I almost would say, Japan has for a very long time behaved like emerging market, right? It's always fairly cheap, right? You want the growth story, but it seems to be much more cyclical than structurally growing. But if you now look at, I would say, from a cyclical perspective, it's probably the cyclical trough. It's been cheap for a long time. If you look at kind of the growth trajectory, there are a lot of catalysts to believe in a structural recovery in Japan. And so this is why we really like Japan right now and are bringing a product to market, right? It's cheap. It's at cyclical bottom. But the growth catalyst seems so obvious with the really ultra

Market. Yeah, no, I would agree. So it's exciting time for, to have this particular product in the market. Let's go back to sentiment because I'm interested, right? How are you, how are you observing sentiment? Are you looking at flows? Are you using in some, I've talked to some managers that are using AI models to read sentiment on social, there's many different ways. So primarily, how are you trying to uncover where that retail and or institutional sentiment is?

Yeah, so I think sentiment is one area where the quantitative approach has an enormous advantage, because you could use AI to process text. And from there, just score whether, media and headlines tends to be more growth oriented, more positive sentiment. Also, you could use that to look at tick by tick data and understand whether you're seeing sort of, retail order flows that tends to be sentiment chasing, tends to react and amplify positive sentiments. And so we're using, data and the machine learning methodology to access sentiment measures across all channels where there's data available.

Yeah. So with that, let's talk about weighting decisions, right? It is a fairly concentrated portfolio. It's not run equal weight. So when you're running and looking at certain weighting decisions, is that primarily driven by that market sentiment? Or are there other things that you're looking at to kind of derive, the amount of risk you're willing to take in any single one of those names?

I would say the primary weighting decisions are driven actually by the, of the three buckets I talked about, it's primarily driven by the fundamental bucket that has the largest weight, let's say that actually has two third of the weight because you want to anchor the portfolio in something you can believe in that you want to hold for the next five years, the next 10 years, right? We will never get into a company that has poor fundamentals just because the sentiment is positive because that's a bit of a Ponzi scheme, right? You might trade perfectly and get out before things blow up. But that's, I think that's not how our investors want to invest. It's certainly not how we want to invest. So for us, it's about, we want to buy companies that have the right fundamental

Got it. So how often are you rebalancing the underlying or is the fund purely active and you can kind of rebalance it at any time? how often are you, or is there a, a monthly, quarterly, weekly rebalance schedule? And on top of that, how often are you kind of rerunning the fundamentals and looking at the screen to add or delete any names that might be in the portfolio?

The fund is truly active. So there's not a sort of deterministic, like, oh, every month or every quarter we do something. As information comes through, we'll be making, rebalancing and making trades. And of course, a lot of the quantitative signals tend to be more, on the cycle, right? Monthly cycle for some of the data, quarterly cycle for a lot of the sort of fundamental earnings related data. So there is a updating cycle that produces a new set of screens and scores. But then remember, that goes to the active managers in Japan who use that as part of decision criteria to put together a portfolio. And they have sort of ongoing monitoring of news, reviewing with the actual company in terms of manager visits that then all result in the final

So when all the last question on kind of the underlying holdings and waiting, do you have any guardrails on sector exposure? Or can you really go anywhere in terms of, the names that you want to put in here? Like, do you have any guardrails around you need so much exposure to financials or information technology? Or, or can you really just take this, take this anywhere and find the best ideas?

We have some guardrail, but those guardrail are very loose, because we do believe in, look, the underlying benchmark has the sector weights. Now, do they make any sense? Is there a reason why finances has to be, 20 plus percent for Japan simply because they have these big old financial dinosaurs, right? So for us, we want to take active deviations against what's in the cap weighted benchmark. I've, I've always been a big believer in, in, in that, especially in the market where you can't, say, well, the index, the passive index is perfectly efficient. So we do take quite a bit of deviation in the active Japan product, which is why it's, it's more concentrated, reflecting the fact that it is also a more inefficient market,

Yeah. So as a, as a model portfolio builder yourself, or as somebody that you're talking to, an advisor group that might have their own model portfolios, where would you put R-A-Y-J as a allocation? Kind of what bucket would you put it in? How would you weight it? just kind of best practices to use the fund.

Yeah. So definitely this goes into your kind of international developed bucket. And we've been telling a lot of clients, like, within your EFA bucket, right? Your international XUS bucket. Frankly, when you look at what's available there and the thesis, you're probably not too excited, right? Is it the UK, which is still probably struggling with the Brexit. And then I think, the pound, the inflation, the inability to raise rate, like we did in the US to fight off inflation. Eurozone isn't, I think, any better versus the UK. So in some ways, if you're looking at international XUS, I actually like Japan more than anything else, right? It's cheaper.

Got it. Makes sense to me. So as a new fund, or I should say as a new issue that you guys have out there, I always like to ask how you think about marketing the fund, right? It's one thing to come up with the idea, put it, do all the work and, and produce good results for your clients and those who use it. But how are you guys thinking about marketing and getting RAYJ out there and people starting to implement it in their portfolios?

First of all, I'm going to go on every single podcast interview wearing a Hello Kitty t-shirt. Look, everyone knows Hello Kitty, right? We probably know Hello Kitty as much as we know, Toyota Prius. But how do you access Toyota Prius? You buy Toyota, right? It's one of the largest cap name, but how would you access Hello Kitty? You probably don't know the company. I always see the, brand and licensing, right? And it's a fast growing, very interesting, mid cap company in Japan. So no, we're out there talking to all the advisors. We are at different conferences, making sure people understand kind of our brand energy, what we're bringing to market, right? It tends to be some initial, interesting growth markets that people

Yeah. Well, Jason, I really appreciate your time. This was a lot of fun. Before I let you go, where can people learn more about this fund? Where can they learn more about your firm and get some of that information that you were talking about? Absolutely. So first of all, please do find me

On LinkedIn. That is the primary social media platform that I use and my firm use. So go on LinkedIn, find me, and then add me as your connection, and then add my newsletter, The Bridge. And the idea is to bridge these less familiar markets with the US advisor. So you have a steady source of both op-ed and research pieces coming from my firm. And then go to funds.raylion.com to get the perspectives for

Our different ETFs. Well, again, thank you so much. I hope to see you on the conference trail. Um, and I really appreciate your time and doing this. Thanks, Brad.