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Insights, The Bridge

Papers, Pivot, and a Pitch

Jason Hsu, PhD

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This following article was first published to
Jason Hsu’s LinkedIn newsletter, The Bridge.
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Warning: Self-congratulatory and self-promotional message below =)


In addition to sharing a self-congratulatory announcement about my recent appointment to the Advisory Council for CFA Institute’s Financial Analysts Journal, I am pleased to also announce my forthcoming paper on the case for separating China from emerging markets was accepted for publication in the Journal of Beta Investment Strategies. I hope you are shocked to hear me advocate for EM ex-China, considering my extensive research on generating alpha in China and my tenacious support for the long-term investment thesis for China beta. Continue reading to unravel this seemingly inconsistent pivot!


The ideas in the paper were initially shared in September 2023 in my Bridge article, “Kicking the Elephant Out of the Room: The Case for EM ex-China.” I am grateful for the excellent comments, suggestions, and questions from many of you, which significantly contributed to turning this into a compelling paper—thank you! The paper, titled the same as my original post on the Bridge, will be published this summer. If you are interested in being informed when it comes out, let me know.


Before sharing some of the key points from the forthcoming paper, let’s revisit why I believe now is an opportune time to invest in EM. There seems to be consensus building on that conclusion, and it happens to be one I share:

  1. Attractive Valuations: EM equities offer significant valuation discounts (around 30% to 40% compared to developed markets and US equities, respectively).1
  2. Earnings Growth: Earnings per share (EPS) growth is forecasted to be higher than in Developed Markets. We believe emerging Asia will be a key contributor to this growth–primarily firms focused on technology.2
  3. Positive Outlook for EM Debt/Currency: Amid a backdrop of ongoing monetary cycle easing, EM debt is viewed positively, especially since fixed-income markets historically tend to generate equity-like returns during the period between the end of central bank rate hikes and the completion of rate cuts.
  4. Opportunities for Alpha3 Generation: Dispersion in monetary and fiscal policies across EM provides potential opportunities for alpha generation, especially in an election-heavy year.
  5. Resilience and Recovery: EM equities (especially those excluding China) have historically shown resilience in the face of global challenges, benefiting from reforms, domestic consumption, and healthy balance sheets. In 2024, South Korea and Taiwan are expected to drive earnings growth in EM due to an improving technology cycle.
  6. Fundamental Factors Driving Long-Term Returns: Despite geopolitical tensions, positive fundamental factors—a recovery in earnings, monetary easing, and healthy corporate and household balance sheets—are expected to continue to drive long-term returns in EM.

If you find these points compelling and are considering an EM allocation, let me offer three criteria to consider in selecting an EM manager:

  1. Go Active: In my opinion, there is too much inefficiency across EM to capture these markets effectively with an index. Don’t leave alpha on the table with passive. There are good companies in every country, but it really takes a bottom-up approach4 to find them and avoid stocks that are either too expensive (tech in India anyone?) or structurally impaired (many state-owned enterprises, or SOEs).
  2. Emphasis on Quant: This may surprise you, but I am a believer that a quantitative process can offer significant advantages when applied to EM investing. One reason is because the large number of markets and their idiosyncratic nature results in fundamental managers often covering the biggest or most popular names in each country. I find this limitation means they often miss some of the smaller, more dynamic companies that drive innovation and growth in emerging economies.
  3. Break Out China: Finally, we come to my paper! Why should you find an EM ex-China manager? Well, let me digress for a moment to reshare key arguments from my paper.
    • China’s Dominance in EM Indexes: China’s large size in EM indexes can disproportionately influence the performance of the overall portfolio, suggesting the need for separate management.
    • Complexity of China’s Market Composition: The diversity and complexity of China’s market, including onshore and offshore listings, necessitate specialized management strategies that differ from other EM countries.
    • Unique Risk Profile: China’s unique risk factors, such as political and regulatory risks distinct from other EM countries, warrant a different risk management approach.
      Diversification Benefits: Separating China from EM portfolios can improve diversification benefits, as China’s market dynamics and correlation patterns differ significantly from other EM countries.
    • Investor Preferences and Strategic Views: Investor sentiments, strategic views, and tactical approaches toward China can vary greatly, justifying its separation for more tailored portfolio construction.

I hope this article has provided a helpful overview of our investment thesis and approach in EM. If you would like to leave prior to my marketing message—go now!


What I’ve described above mirrors the approach we adopt in EM investing with our EM ETF, RAYE. While I don’t directly market our funds often, I’m excited about RAYE. If you’re exploring EM as an asset class, I encourage you to consider our approach.


We are active managers and apply an active process. Although much of my early career was developing smart beta strategies,5 when looking at the research and opportunity for generating alpha from inefficient markets like Asia and EM, the decision to go active was abundantly clear.


We use a quantitative process to uncover great stocks within EM—companies that are high quality and trade at reasonable prices. We use this process to trade against the behavioral mistakes made by retail traders in these highly retail-driven and inefficient markets. We then apply a fundamental portfolio review to make sure that the quantitative process is building a portfolio consistent with our investment thesis. We call this blended process quantamental.


Furthermore, we exclude China from this process to allow investors the flexibility to allocate to China separately based on their own investment views and the preferences of their clients.
And how has RAYE performed? I invite you to see for yourself! You can find detailed information on our fund page – scroll down to watch the video of my colleague Dr. Phil Wool share more about our process and portfolio including historical performance.


Alternatively, please reach out to me or anyone on the Rayliant team. We would be happy to provide additional research and discuss whether this approach aligns well with your portfolio needs.



  1. Source: Based on forward price-to-earnings ratios for MSCI EM (emerging), MSCI World (developed), and S&P 500 (US) stocks as of January 31, 2024.
  2. Source: FactSet as of December 31, 2023.
  3. The term “alpha” refers to the measurement of an investment’s performance in excess of fair compensation for risk, controlling for, e.g., size, valuation, and beta.
  4. Bottom-up investing is an investment approach that focuses on analyzing individual stocks and de-emphasizes the significance of macroeconomic and market cycles.
  5. Smart beta strategies screen and weigh securities based on factors other than market capitalization.

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Important Information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.


Important Information Regarding RAYE

Please visit for more information regarding the Rayliant Quantamental Emerging Market Equity ETF (RAYE). Carefully consider the Funds’ investment objectives, risks, and charges and expenses before investing. This and other information can be found in the Funds’ full or summary prospectus, which may be obtained by visiting Please read the prospectus carefully before investing.


Risk of Investing Investing involves risk, including the risk of total loss of principal. Please consider the following risks before investing in the ETF.


Smaller Companies Investments in smaller companies typically exhibit higher volatility.


Quantitative Investments Investments that are managed according to a quantitative model can perform differently from the market as a whole.


International and Emerging Markets International markets involve political, social, economic and currency risks. These risks are heightened in emerging markets, which also include the risk of increased volatility and lower trading volume.


Active Management Risk The Fund may trade securities actively, which could increase its transaction costs (thereby lowering its performance) and could increase the amount of taxes you owe by generating short-term gains, which may be taxed at a higher rate. The Adviser’s judgments about the attractiveness, value, or potential appreciation of the Fund’s investments may prove to be incorrect.


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