Young Jae Lee, Pictet
Why Your Emerging Markets ETF Isn't Actually Diversifying You
Young Jae Lee has spent his whole career inside one firm, which is rare in this business. He joined Pictet in 2010 and spent his first seven years as an analyst covering emerging market technology, the exact corner of the market he now argues most US investors are badly overexposed to. Pictet itself is worth a beat. It was founded in Geneva in 1805 and is still owned by its managing partners 220 years later, which shapes how the firm thinks about time horizons in a way quarterly-driven shops rarely do.
The core argument is uncomfortable if you own a standard emerging markets fund. The MSCI EM benchmark is more than 70% Korea, Taiwan, and China, and its five largest holdings are TSMC, Samsung, SK Hynix, Tencent, and Alibaba. Line that up against the top of the S&P 500 and you are holding the same technology-heavy concentration twice. Young Jae's point is blunt. Buying passive EM alongside a US portfolio doesn't diversify you, it doubles down on the bet you already have.
RISE, the fund he runs, was built to break that overlap on purpose. It only invests in emerging market countries where the working-age population is growing, which mechanically excludes Korea, Taiwan, and China and pushes the portfolio toward India, Brazil, Indonesia, Mexico, and South Africa. The thesis leans on the Solow Growth Model, the old idea that labor and capital drive long-run output. Young Jae frames demographics in these countries as structurally the same force that AI is in developed markets, the thing that actually compounds over decades rather than quarters.
The construction is a split. Roughly 60 percent is a quantitative screen he calls an invisible analyst, sorting the universe on the factors that travel well in EM. The other 40 percent is a fundamental conviction sleeve where the team leans into names they actually know. His case for doing it this way is that active management earns its keep more in emerging markets than in developed ones, where information is thinner and the index is a blunter instrument.
The number that stuck with me is this one. Historically, more than half of the total return from the MSCI EM benchmark has come from dividend yield, not price growth. That reframes the reflex to treat EM as a pure growth trade. If most of the payoff has come from what companies pay out rather than how fast they expand, then value discipline in EM is not a style box, it is where the returns have actually lived.
Whether or not you buy the demographic screen, the overlap problem is real and easy to check in your own book. If your emerging markets sleeve and your US sleeve are both top-heavy in the same handful of chip and internet names, you own less diversification than the label promises. Worth knowing before the next drawdown tells you the hard way.
Full Transcript
3,411 wordsMachine transcribed from Brad Roth's conversation with Young Jae Lee, Pictet, with speakers identified automatically. Timestamps link to that moment on YouTube. Lightly cleaned, otherwise unedited.
Welcome to Behind the Ticker, the podcast where we go beyond the symbol and into the strategy. I'm Brad Roth, founder and chief investment officer at Thor Funds. And in each episode, I sit down with ETF managers, CIOs, and industry leaders to break down how these funds are actually built, how they behave in real markets, and how advisors use them in real portfolios. Most people just see a ticker symbol, but we know much more goes on behind the ticker.
Hi, everyone. My name is Yang Jie Li. I'm a senior investment manager at PICTASA Management. I'm currently running the Rise ETF and Global Growing Market Fund, which is a mother fund of the Rise ETF, and also Global Emerging Market High Dividend Fund at PICTASA Management. I joined PICTASA in 2010, right after finishing my business school. Before that, I worked at SellSide as a tech analyst in Korea. And before that, I started my career at Samsung Electronics. I was doing corporate finance in their CEO's office. Very nice to see you today.
Yeah, thanks for joining us, Yang Jie. And thanks for that bit about your background. I always like to ask, though, people as well, when they talk about themselves here in the beginning, what do you like to do for fun? I know you're calling me from London. You have any hobbies?
Every Saturday, I'm playing golf. That's my hobby.
Read the full transcript (43 more sections)Collapse transcript
Well, I'm playing today, so it should be fun. Oh, easy. Okay. Finally.
Indeed. Okay.
So let's talk about PICTASA. The firm was founded, in 1805. You've remained a partnership of owner-managers for over 220 years, over $300 billion in assets. For listeners in the States who maybe aren't familiar with your firm by name, can you give us a high level on what the firm is and what makes it different?
Right. So PICTASA Group is, as you said, started from a very long time ago. It's a private firm. And PICTASA asset management is an asset management arm with full service from equity, fixed income, and all different asset classes. The best thing for PICTASA is its long-term view. It's a privately held, so there's less of disruption from others or outside. So we're very much encouraged to take a very, very long-term view. I think that's one of the best thing that we have and we try to maintain all the times. And that probably set apart from others for PICTASA.
And yes, maybe a...
I was actually looking. You were one of the first European asset managers back in the late 1980s to actually enter the emerging market space. This is what we're going to talk about today. What is that advantage, that EM knowledge, given that you guys have been in this business for over 40 years over maybe some of the newer entrants?
Because we've been through those 40 years, meaning we had a lot of experience there. And the emerging market, as compared to the developed market or US, is still much more volatile asset class. So we're actually looking at emerging market with differently sometimes, also with much longer longevity. Again, like we're very much encouraged to take a long-term view. And also we have many other local offices where we can cooperate. So it's kind of like centralized in London, but cooperate a lot with the other PMs and analysts sitting in Asia and other emerging market countries. That's one thing good. And we've been through many different cycles. So the way I look at emerging market could be a bit different from competitors out there. So yeah, I think we can
Talk about it later when it comes to our investment style and all that. But yes.
So you co-manage the EM High Dividend Fund and lead the Global Growing Markets Fund, which is a European strategy that RISE, which we're going to talk about here in a second, was built on. Can you talk about that strategy's evolution and how you actually ended up running it?
Right. So I actually started my career at PICTA as a tech analyst. So I think for the seven, eight years, I was doing emerging market tech. And then later I was doing a head of research for emerging market. And then I became a journalist PM from 2020, from the beginning of 2020. I could start looking at different sectors when I was doing a head of research. And then after becoming a journalist PM, I had to spend a lot of time out of tech, out of typical tech countries. Yeah. So one thing interesting for high dividend strategy, this is a value strategy, and this is in line with your earlier question. So a lot of emerging market fund or product out there, when I look at it,
It's quite a lot biased towards growth strategy, I would say, because emerging market, given the low base, tend to grow faster than developed market and all that. So many people more focusing on growth when they're looking at emerging market. But very interesting thing is that if you look at the MSCI emerging market benchmark performance, more than half of the emerging market total return is actually coming from dividend yield. It's not multiple expansion. It's not earnings growth. It's actually a dividend yield. That's more than half of the total return. So different from people's perception, value strategy is really working well within emerging market. And the other thing I found by running these funds is for emerging market, given the volatility, for me, upside capture is important,
But downside protection is more important. There's a lot of black swan events, especially in these days. So a lot of wars, COVID and all that. So normally, like, following market or chasing market or upmarket capture is, I would say, is less important. So when it's going up, some people try to have too much risk to outperform the market. And then there is a one event happened and they lost much more than the benchmark. So for me, for emerging market, given the volatility or volatile nature than the developed market, I think downside protection, risk management is actually very, very important. Interesting. I never, you just taught me
Something there. I had no idea half the EM return came from dividend yield. So that's a nice little tidbit I can leave with. So let's get into RISE, R-I-S-E, BICTA, emerging markets, rising economy, ETF. You guys launched this just recently, April 23rd of this year. It's actively managed. At a high level, what is this fund and what is it doing differently from traditional EM funds? Got it. So the RISE ETF is an emerging market
ETF, but it only invests in countries where working population is growing. That basically means we're excluding Korea, Taiwan, and China from our investment universe. If I give you some idea, Korea, China, Taiwan together accounts for more than 70% of the emerging market benchmark today. So this is very different and very unique. And one of the key reasons why we set up this fund is, or this ETF, is within today's emerging market ETF, doesn't provide a real emerging market exposure. So for example, like some of these countries are actually not emerging market anymore. For example, like Korea is classified as developed market by Fiji already. And MSCI may do the similar thing within the next few years. So we don't think Taiwan's similar. So we don't really think it's not exactly a real emerging
Market exposure anymore. Number two is, I think when I look at, if I think of US investors, the number one reason for them to look at emerging market is for diversification benefits with different exposure. But if you look at today's benchmark, I think top five names for MSCI EM account for, I think over 30% of the total benchmark versus S&P 500 is 27, 28. And if you look at those five names, it's interesting. So for top five name for MSCI EM is TSMC, Samsung Electronics, SK Hynix, Tencent and Alibaba.
And if I look at the same thing for S&P 500, it's Nvidia, Apple, Microsoft, Amazon, and Alphabet. So it's basically the same exposure. For both benchmark, technology sector is around 40% or over 40%. So by buying emerging market ETF for US investors today, you're not diversifying. You're actually amplifying your risk because you're buying the same thing. So that's the beginning of our thought process for the rise.
So let's talk about, I just want to dive into this a little bit deeper. So one of the questions you've already answered, which is the exclusion of, the big countries, and you've given me that answer, but you've included India, Brazil, South Africa, and some other company and some other countries. So these are expanding working age populations, strong GDP growth. Like was the demographic thesis of the heart of this strategy? Is that like the heart of what kind of starts the investment framework?
Yes. I'll explain you how we think. So the reason why we're focusing on demographics or working population growth is because working population growth drives higher GDP growth. So if you look at, there's a theory called soil economic growth model. So this model tried to explain the GDP growth. So according to soil economic growth model, GDP growth can be explained by three factors. Those are number one, labor or working population growth. Number two, capital accumulation. And number three is technology development. And among those three factors, working population growth has the highest explanation power for EM countries' GDP growth. On the other hand, technology development has the highest explanation power for developed market countries. So for example, like US, population, working population is not really growing. Capital accumulation is happening, but US base is so big, so delta is small. On the other
Hand, US is leading the technology development, and that is the biggest part of the GDP growth for US. So in a big picture perspective, focusing on working population growth when investing in EM makes a lot of sense. At the same time, focusing on technology development makes a lot of sense when you're investing in developed market. So to me, population growth in emerging market is something as structured as AI in developed market or in US.
So you touched on this before earlier, demographics is one of those, it's a very powerful long term force in economics, but this is something that's going to play out over decades, rather than, quarters or even years. So how do you build a portfolio around something that slow moving?
Hmm. As you correctly pointed out, in a short term, it may capture in a very efficient manner, also given the volatility within the emerging market and so on and so forth. But in the end, what we believe is higher GDP growth falls into company's top line. And then that in the end falls into company's bottom line. And that goes to the higher share price. And then if we look at it, when we do the regressions over the long period, it actually gives a very, very powerful return difference. So like, that's, that's the beginning. And second thing, in terms of the portfolio construction, as I said, our investment universe exclude those population declining countries within the EM. And then we're basically using two approaches.
Like, if I touch upon our investment philosophy, I talked about the value for emerging market earlier. So our investment philosophy is very simple. We like cheap stocks with positive changes. So when I say cheap, it's cheap valuation. In terms of any valuation methodology, it could be PE, it could be PB, price to cash flow, whatever, and, or dividend yield. When I say positive change, it means earnings upgrade, return structure enhancement type of thing. So we're taking two approaches. One is a quantitative approach and two is a fundamental overlay.
So because one thing is a fundamental overlay. So because one thing is this approach actually makes a lot of sense for this fund. So 60% of our portfolio names are coming from our fund screen. And 40% of our portfolio weighting is coming from our fundamental stock picks. And these 60% screen is actually a very, very simple screen, which I can even replicate on Excel sheet. So as I said, this one, just try to capture our investment philosophy. So cheap stocks with positive changes. So we use a few valuation matrix or to find cheap stocks and expensive stock. And also, as I mentioned, return structure, earnings upgrade to find out the positive change stock.
So what we do is we use those cheap stock matrix and positive change matrix. And then we put it onto the quadrant. And then if we dump the stock universe into that quadrant, there's a cheaper half and more expensive half. And there's positive half and there's less positive half. And at the first quadrant, we'll have a cheaper with more positive stocks, right? We don't change the factor weightings. It's that simple. It's we just want to find that is in line with our investment philosophy. And then to have those names. And then we just do the market cap weighted. We just keep the market cap weighted weightings. And then that goes for the 6% of our portfolio.
And as you can imagine, a lot of these small emerging market or frontier market countries, English research is not available. And I can't understand, basically. And there are still a lot of good companies out there, right? For QuantScreen, it does a great job for those, especially for those like very small emerging market. We're not talking about big countries like China or Korea, Taiwan, all the bird's-barket banks are running their research center, their type of, right? So this QuantScreen works as an invisible analyst to me. So that's like 60%. That picks the stocks that's in line with our investment philosophy.
And the other 40% is actually only 20 stocks, but with higher weighting. These are the fully research-finished, research-supported, owned by other emerging market funds within our team. So we know the company inside out. Given the higher conviction, we have a higher betting, bet size and all that. So we generally have about 100 stocks within our portfolio. 20 stocks has 40% weighting, and 80 stocks has 60% weighting. So it's a bit better diversification or a smaller bet size. That's how we manage the risk without missing an opportunity.
Interesting. So as far as sector composition is concerned, you had talked earlier about how most EM funds are tech-heavy like the U.S. domestic indexes are as well. So RISE is much heavier in financials, industrials, materials, and consumer goods, and a little bit lighter in that tech sector. Very lighter. Can you talk us through what the portfolio actually looks like at that sector? We don't have to go all the way into the holdings level, but can you talk about sector exposures at this moment?
Yes. Sorry. Yes, financials are generally the biggest sector with about 40% type of weightings. Actually, I'm seeing it right now in front of the Bloomberg. It's becoming very slow. Sorry.
Okay. I don't need exact numbers, but like 40% financials.
Generally, the biggest sector, that's correct. And then material, as is also another big sector, consumers. So typical thing, because the thing is we're basically one of the big themes that we have when we are betting on population growth, we're thinking of like urbanization, like non-banking to banking, credit growth, consumer. It's much more domestic-driven countries by excluding all those wealthy part of the emerging market or more developed part of the emerging market. So it's consumer staples.
So it's like very basic things. So now I have the numbers. Yes. Financial today, 40%. Material, 15%. Other sectors generally hovering around 10%. But technology is only... At the moment, we have 5% in our portfolio. But yes, roughly around. So much smaller. But as I said, for a normal MSCI emerging market benchmark, over 40% within technology. But within our portfolio, it's about 5%. So huge difference.
So while we're on this, most U.S. investors are getting their EM exposure in passive funds like VWO, EM. Rise is actively managed, doesn't track an index. I think I know the answer to this, but I want to hear it from you. What's the case for active management in emerging markets specifically? Why is it so important to be active inside of EM?
Because of all these risks that I mentioned. Because the emerging market is still much more volatile than the developed market. And all these countries, something we can never thought about, it could happen. And that's the reason why we need to monitor and manage the portfolio in an active manner. That's probably the biggest thing. And again, I think everyone in DC, not only U.S. investor, everyone runs a tech habit portfolio. And three words that I'm reading and hearing the most in these days is, well, concentration, divergent, K-shaped.
It's all coming from AI. Because AI versus non-AI goes different direction. Everyone concentrated in AI and all that. I think what everyone needs at this point is a diversification and risk management. And that's one of the reasons why people start looking at emerging market. Even the institutional investors start looking at emerging market. Valuation gap is still big. Currency is more expensive side on U.S. versus emerging market currencies. Also, GDP growth gap, emerging market is recovering.
So gap is actually getting bigger. Despite U.S. is doing very good. So a lot of big pictures is improving for emerging market. But actually, if you're buying an emerging market fund to diversify today, as I said earlier, you don't get any benefit in reality. You're actually, it's the same to add your S&P 500 ETF. So that effort is, in some sense, much less meaningful.
Yeah, and that's what I was going to kind of ask the next question. I think we've kind of answered it, but it's important. We have a lot of advisors that listen to this show. If you're looking at the Rise ETF and you already have a diversified model portfolio, it almost listening to you, if you look at a typical model portfolio in the U.S., there's very little exposure to EM as, historically, if you're looking at just a static passive model portfolio. But the more I'm listening to you, the diversification benefits to get away from tech and even diversify into non-U.S. seems like this should warrant a little bit more exposure than maybe a traditional EM fund.
Yes, exactly. Exactly.
So I was seeing, you guys are starting, back to the firm, you guys have been building a steady U.S. lineup. You've got, I believe, this is your sixth U.S. ETF. What's the broader vision over there in the U.S. market? Are we going to continue to see the firm, release products over here domestically in the U.S.?
I believe so. U.S. is apparently the world's biggest market. We're European asset manager. I think we're one of the biggest in Europe, but almost nonexistent so far in the U.S. And then now we're looking at this market. We see the huge opportunity. We understand we're a latecomer. But yeah, once we make a decision, I think we're going to keep introducing some of the product, some of our product, which is very successful in other part of the world. And then we see a good chance for success within the U.S. market, too.
So, Youngjae, I really appreciate you spending some time with me today. Before I can let you go, though, where can people learn more about the firm and where can people get information they need on the Rise ETF?
I see. I think the best and easiest place to find that information is a PICTAC webpage. There is an ETF section. And then you can find all of the ETF we launched in U.S., all the details. So, yeah.
Well, great. Again, thanks for hanging out with me for a little bit today. Thank you very much. It was great to meet you. Nice to meet you as well.
Have a great day. Have a great day.
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