 Welcome everyone to the 34th edition of BogleHeads On Investing. Today our special guest is Jason Su. Jason is one of the smartest investors I've met. You guys published more than 40 peer-reviewed articles, won numerous awards, he co-created the Fundamental Indexing concept, and today focuses on inefficiencies in Chinese stocks. Hi everyone, my name is Rick Ferry and I'm the host of BogleHeads On Investing. This episode, as with all episodes, is brought to you by the John C Bogle Center for Financial Literacy, a 501C3 non-profit organization. Visit us at bogelcenter.net and your tax-deductible donations are greatly appreciated. Today we have a special guest, Jason Su. He graduated with a degree in physics from California Institute of Technology, was awarded his Master's of Science in Finance from Stanford University, and earned his PhD in Finance from UCLA, where he conducted research on the equity risk premium, business cycles, and portfolio asset allocations. Jason has authored more than 40 peer-reviewed articles, he is Associate Editor of the Journal of Investment Management, and serves on the editorial board of the Financial Analyst Journal, the Journal of Index Investing, the Journal of Investment Counseling, and the Journal of Investment Management. Professionally, Jason has been on the forefront of factor investing as one of the founders of research affiliates, and now has taken factor investing to a new level as he applies it to the Chinese stock market. So with no further ado, let me introduce Jason Su. Welcome to the Bogle Heads on Investing podcast, Jason. Glad to be here, Rick. Well, it's great that you joined us. I've always been super impressed with your background and all the things that you've done in the financial services industry and the investment management industry. Been a very successful person, although I have to say you kind of fly under the radar, and that you've done so much, and you've got so many awards, but you may have fortune, but you don't have the fame, which is a little bit odd in a way, given who you are and everything that you've done. And so maybe we'll elevate that a little bit here, at least among the Bogle Heads. So I've been a big fan of yours for years. And before we get started, tell us, going as far back as you feel comfortable, a little bit about your background. Well, going really far back, Rick, I came to this country really as an immigrant. No, you know, I arrived when I was 10. At the time I spoke, I think no English, but the country's been really, really good to me. I learned a tremendous amount. And eventually I found myself at Caltech, studying to be a physicist. You got into California Institute of Technology, and you decided you were going to be a physicist, and you excelled in that. You actually graduated summa cum laude in physics. What happened after that? I mean, you've made a pivot for sure. Yeah, the one thing that I experimented with while at Caltech was I did sort of a weekend gig at a economic laboratory where they had students play essentially market games. And then we were the subject of the experimentation. And I was really good at those games. Eventually they prevented me from participating. And that's when I got to learn about markets and about equilibrium, and also about market efficiency, and how competition leads to price efficiency, and how that generally leads to better outcome for everyone involved. What year was this when all this was going on? 1994, so I was a sophomore. And then you decided after you graduated to pursue a Master's of Science and Finance at Stanford University, you got some pretty good schools in your background. Yeah, I decided to learn about financial markets, really be an economist and understand how this stock market thing work, how the capital market work, how it's relevant to the real economy. And I guess to how society are shaped as a result of how these markets interact. And then from there, you went on to get your PhD and UCLA. That's right. And what was your PhD thesis? So I was studying the differences between American households and Asian households. And the thing that I was trying to understand is why do Asian households save too much and American households save too little? And as a result, what you see as Asian households participate in the stock market very directly and very meaningfully. And American households do not. The participation is very indirectly through their defined benefit pension plans or 401k. There's really very little individual wealth outside of retirement plan that's committed to the stock market. So that was the primary thing that I studied. Well, it's interesting, and we're going to get to this a little bit later on in the podcast. But it's interesting now that you've circled back to that with your new company in a way to try to capitalize on these individuals in the market as opposed to through institutions. I can see where you ended up going with all this is a little bit where you currently are right now. And without getting too far ahead, is that true? Yeah. I mean, I didn't know at the time that that was going to be of any practical usefulness really. I was very much set on pursuing a academic research career. It really was through a sequence of, I guess, happy coincidence that I ended up being a more of a practitioner than a academic scholar. It's like a bigger accident that 20, 25 years later, it ended up being quite useful given the business I'm in. But you did do a lot of academics. I mean, you were an adjunct professor and you were visiting professor at various colleges, both here and in Asia. And you did get that the feel for being an academic. Yes, I did put my PhD to good use. And you also wrote many papers. You wrote 40 peer-reviewed papers. And could you explain what the difference is between just writing something and having it published in a peer-reviewed paper? Yeah. So it is now fashionable in our industry for firms to do white papers. And white papers feel a little less marketing and salesy and perhaps more educational and neutral. But frankly, oftentimes, the quality is suspect. And then you can definitely see an angle where this is just a dressed up marketing document. When it's peer-reviewed journal article, to whether it's industry journals or academic journals, they're meant to be educational. You're supposed to do research. That answers an important question. And you're supposed to use methods that are robust, that it's replicable. And the conclusion you draw from it has to be logical. And there's at least one referee, if not two, and the journal editor will also sort of vet the paper to ensure that it is truly educational and useful and then not sort of a sales document in disguise. So it's a much higher bar that's required in terms of rigor and the time committed to doing a peer-reviewed article. And most articles are submitted to journals are actually rejected and even the ones that can get accepted go through two, three rounds of editing and re-editing. You are also very familiar with getting articles published. Not only have you written 40 peer-reviewed articles, but you're also a member of the editorial board for the Financial Analyst Journal. You're a trustee for the CFA Institute Research Foundation. You're an associate editor for the Journal of Index Investing and associate editor for the Journal of Investment Management. You could tell the difference, I think, if anybody could between something that's a marketing piece and something that is a actual academic paper. Yep, part of that is the PhD training and part of that is also being on both sides of the table, writing something as a scholar and of course being a gatekeeper to ensure that only scholarly pieces sort of come through. And I've been doing that for about 20 years. Yeah. You also have been in the field. You've got a distinguished career, not only in academics, but also you have a distinguished career in the investment management field first as the co-founder of research affiliates. And co-founded that with Robert. Could you give me a little history because I know Rob and I've known him for many years and he's an interesting character. But I'd like to know how that all came about. Yeah. Again, as I mentioned, a very lucky coincidence. So I was at the UCLA really finishing up. That was my last year in a PhD program and Rob had just sold and exited out of his last company, First Quadrant and decided to volunteer at UCLA Anderson School. Of course, the dean was very excited having someone who's so well-known at some point in the future. It could be a very meaningful donor to this school. And so we were put together to co-teach a class together because obviously I've been a lecturer at UCLA by that time for a number of years and Rob obviously, someone with great war stories. So the dean thought that would be a great pairing. And so that's how we got to know each other. And Rob is someone, I guess at that time, still very young. Had a lot of ambition and had a lot more left in his tank. And he quickly decided, well, he said, hey, I'm going to start something and Jason, would you be interested in joining in the startup? And that's how we got started. Literally two guys in a garage because we didn't have office back then and then a Bloomberg. A living room in a Bloomberg. That's why I actually got started myself in the advisory business. So I understand where you're coming from on that. But that's interesting. And tell us originally about the focus of research affiliates. What is it that you were trying to do with that company? And then what did it evolve into? Like many startups that eventually succeed, what the original founders set out to do is often not what ended up being successful. So I think when Rob and I first got started, a number of ideas we tried. Like we initially wanted to offer software actually. And it was way ahead of the time. It was a smart software to help wealth management platforms to manage rap accounts. It would be very intelligent in terms of tax loss harvesting, crossing off-setting trades. That great idea probably ahead of the time at the time when technology was a lot more expensive, a lot more unwieldy. So that didn't fly. But I still think it was a great idea. And later on, others have currently done a much better job with that idea. We then set out to do liability defecement strategy. Again, a clever strategy that played off of the way the yield curve worked. And we thought there's going to be great demand. But I think liability defecement back in the early 2000 was still a little too early for most pension funds. So again, a decent idea. Even got a seed investor to try out the program, but didn't actually go anywhere. Was almost a side hustle, which was supervising a asset allocation mutual fund, kind of a little pilot experiment for PIMCO. And that ended up taking off and became a runaway success. And like I think what most of you know us for, eventually we used the income from that product to develop fundamental indexing, which is what today, you know, research affiliates like Rob and I are probably best known for and likely will be best remembered for. I recall all of this because I was in the industry at the time and watching this happen. And to me, DFA, Dimensional Fund Advisors, had a real head start on this factor investing, fundamental indexing strategy. But you did it in an exchange traded fund form mostly and you captured that market fairly quickly. Back in the early 2000s, ETF was a very new concept. A lot of people didn't know what it was, right? This mutual fund at the time was the vehicle of choice. All the big ETF players you know of today didn't exist back then and probably back then they didn't want to do ETF. They thought it was a stupid thing to do. So very early on, after we wrote the paper on fundamental indexing, we were contacted by Bruce Bond and Ben Fulton. They started Power Shares and they said they are looking for innovative indexes on top of which they can create ETFs on. And they knew it wouldn't make sense for them to do an S&P and compete with a spider. So they really wanted something that was very differentiated. And they saw our research paper that was published in the Financial Analyst Journal and said, this is it, this is it. And so, you know, we met one knowing afternoon in New York, agreed to a deal, found FTSE, had FTSE basically convert our fundamental index methodology into an index. Just to clarify, FTSE is who? Yeah, FTSE is one of the largest index calculators in the world owned by the London Stock Exchange. And they took your methodology and created an index out of it? That's right. It was one of the things that I looked at and I personally said, well, this is an index, this is active management. And that was really a debate, you know, back then. I know that ship has sailed because the SEC said, yes, it's an index. But back then I recall the mud slinging that went on between you or your company and Standard & Poor's. As to what is an index. But I think that the SEC allowed all this to be called indexing and there it was. Much different than what the slang became and the slang became smart beta, which at first you embraced, but then later on didn't seem like you were embracing it so much. Yeah, so Rick, I got to tell you the backstory to that. So we didn't come up with the moniker smart beta. We called our strategy fundamental indexing and we really were trying to play off of cap weighted indexing. We think about cap weighted indexing is market capitalization, which is determined by price times shares outstanding. So really there's a lot of price indexing in that construct. And we wanted to play off of price based indexing. Again, something that's not priced but still related to value. So we think of your company fundamental. So we said, okay, now fundamental indexing would be this play on word and it would contrast against say cap weighted or price based indexing. And that's really how we came up with the name. And like you say, most people didn't think what we created was an index because everyone had by that time come to, except that the index should be cap weighted because that's how S&P is built. And there's the paper by Bill Sharp and others that talked about the merit of cap weighting as a index as a portfolio construct. And so we were really streaming upstream against that established school of thought. And as we were talking to investment consultants, financial advisors, most of you said like you got an active strategy. It's not an index. So you really shouldn't be in the ETF space because the ETF is really meant to track passive indices for people who believe in market efficiency. And so we actually had a lot of struggle in the early get go. And I think I was part of the struggle. I was sitting in the audience raising my hand yelling at you. That's right. I do remember that. Well, anyway, it took a lot. I fundamental indexing, I talked with Rob or not about this. I think it's an everlasting term, but the smart beta isn't because it kind of dirties the water and muddies the water in my opinion. Okay. This thing takes off then. I mean, you start rolling like a steamroller with fundamental indexing due to great returns from value stocks after the tech rec in the early 2000s. I mean, you're on the radar and things are growing. Can you just take us through that part of the growth of the company? Absolutely. So from the initial get go where people didn't even like the word indexing to it being embraced by, I think it was first by at the time, powers Watson later on Mercer and they coined the category name smart beta. And like you say, it just grew like wildfire. Once consultants validated the concept with a category name. And we were the first off the board. Yeah. We just had momentum behind us being the first mover being the claim to the original IP. We, yeah, we had a lot of active oriented pension funds who say, hey, we heard about the merit of a lower cost, more transparent index strategy, but we're not ready to go full on passive into the S&P 500. So going into a fundamental index is kind of like halfway move going from full active to full passive. And then that was a good compromise for, I think a lot of pension funds and their investment consultants. And similarly, I think we had a lot of people who already bought into the concept of indexing and love and understood the ETF chassis who said, well, you know, here is a index product that could actually have some credible success in delivering outperformance slightly more consistently and slightly more scientifically. And so we kind of were attracting flows from both sides of the argument, right? Attracting flows from active investors and attracting flows from some passive investors. And then that really, like you say, it's sort of steamroll through the industry and then put research affiliate on the map. You know, I remember this whole period of time and I remember discussions with you and discussions. I know I had discussion with Rob about this. I was, look, you're sort of barking up the wrong tree. This is initially, this is right at the beginning once you came out with fundamental indexing. I remember saying, you know, don't go after the cap weighted indexers. Don't go after them. I mean, that's not your market. Your market is active management because what you've done here is you've lowered the cost of active management and you've made it more consistent than what it was in the past because you have a set of rules. And that's the enduring part of what you're doing. So in my view, it was exactly what you said about a lot of these pension funds. Look, we're not ready to go from active to cap weighted indexing but what we're ready to do at least partially is to go from active to fundamental indexing and at least lower our cost and make things more consistent. When that shift happened, you know, that kind of the mental shift of marketing, if you will, happened, I think that really helped to propel the whole industry that you started. Yeah, Rick, you're absolutely right. I think you're a prediction and then your advice at the time turned out to be, I think, key. I think ultimately we attract a lot more assets from the active camp who really haven't had that much success with active management. But I think it's going fully to pure passive took some meandering, I think, before they could fully get on board and going to fundamental indexing was kind of a safe, middle way compromise. And like I said, it really cut the cost of doing it. And it was consistent. I mean, when you're following a strategy like you're following and you have to follow a systematic methodology, you don't get manager whims don't get in the way. I mean, if you believe in the methodology and you look at the data and you say, well, it worked in the past and this is why it worked in the past. And so we know that since it's a quote unquote index, that this is the methodology that's going to be used in the future. So we can rely on that rather than relying on the manager to one day be a value manager and the next day they're not so much a value manager because that's just not where the momentum is at the time, that there was a lot of value to that. And I have to believe that that's continuing to be that way. Although it was a struggle, right? I mean, after the financial crisis occurred, value investing, fundamental indexing, although a lot of assets were going that direction, those factors didn't perform well. I want to get into here a little bit that they're not always going to perform well and that there is a 25 year, I don't want to say cycle or something, a wave to these things and that people who are in it need to be patient. Yeah, Rick, I mean, I think what we saw in 25 years, probably going out 30 years, there are really two things happening in the background that's made it difficult to be a value investor and given value is a big underpinning of the fundamental index methodology, it's been tough for value investors in fundamental index the last 30 years. And part of what's driving that is market has become more efficient. If you think of value as an anomaly, meaning you can buy good quality asset cheap, that's not supposed to happen. Like good quality assets are supposed to be expensive and it's generally the risky stuff that's supposed to be cheaper. So you're generally supposed to see value stocks as more expensive, not cheaper if they're truly high quality, right? So a lot of value premium you could say was an anomaly for the reason that it existed. But as the market gets more efficient, it's supposed to go away. So I think part of the diminishing value premium is related to the US market becoming ever more institutional, ever more efficient and any anomalies that's been documented historically. It's arbed out or just less relevant. But you also have, I think, the last few years if you're looking at reddit, you're looking at Robinhood trading, you're looking at prices for cryptocurrency and GameStop stocks. You also recognize that US market has the last few years became probably more inefficient. I think retail trading is down from 3% to closer to 30% now. And we're exciting, sexy growth has done much better because that's where the retail flows and retail trading have been concentrating on. So you've got two things, right? One is market becoming more efficiently priced which makes value work less well. And then more recently, market has gone to a bit of a tech bubble which has a further punished value and we combine those two together. It's been tough to be a value investor. But has that been true internationally? And let's kind of work outside the US now and look internationally at developed markets and then secondly, emerging markets. Is it becoming more efficient? Yeah, so generally I would say when you want to get a sense of efficiency, probably the best indicator to look at is the fraction of the trading volume that's accounted for by retail trading. Because I guess market efficiency is about price discovery. So it's about well-informed analytical, rational, experienced investors making trade. And when you're talking about individuals, that's not what drives efficiency. So if you look at developed markets, by and large, they're very institutionalized because they have giant pension funds and very developed mutual fund in wealth management industry. So most of the money's been delegated out and ultimately the people who manage these assets are experienced. So it's basically super smart experience. Traders and PMs competing against each other. So markets tend to be more efficient. That's by and large not what you see in emerging markets. Many of them have underdeveloped wealth management markets. Their mutual fund industry is in their nascent stage. A lot of the trading are still just done by individual investors who are gambling in the stock market. And so as a result, efficiency is generally poor. And the funny thing is in the Asian emerging markets, I would say the efficiencies are particularly poor. Part of what you might say might be culture for gambling. A lot of the Asian investing is more gambling than really retirement planning or retirement saving. And also what you see is Asian households, like my dissertation found out, they save way too much and some of that money end up going to the stock market unproductively. So back to research affiliates, are you still associated with research affiliates? I'm associated with research affiliate as an advisor. So I exited or I spun out of research affiliates in 2016 to launch Rayleigh and Global Advisors to focus on basically China. We are now a specialty China manager, working with large institutions as well as financial advisors to help them get access to all things China. That's my new focus now and it's because that's where I think as a researcher as a portfolio manager, we could still create alpha consistently and reliably net of fees. Research affiliates was a research shop. You actually didn't manage investment portfolios there. You were doing research and you were creating the methodologies for choosing stocks and waiting stocks. Is that what your company Reliant is also? Research affiliates had a very small book of business that was running assets directly, but it was so small as to be not known by most people who've done business with us. Rayleigh and Global Advisors, we now are more like a traditional quantitative active manager. We both developed the IP, the strategy, and while we do license them out to other larger asset managers who wanted our research and our strategies, we also have a thriving practice in terms of creating our own funds. We got funds in China, in the US, and we run segregated accounts for institutional clients. So we got a different business model now versus research affiliates. So let's get into all of the research that you did on factor investing that was pretty much centered on US investors and the US markets with fundamental indexing initially. I know you expanded that globally, but you primarily started it in the US markets and a lot of the work that you did, a lot of your papers and so forth were on the US markets. You take these tools that you created, this research, you bring them to China, and now your first thing you do is take those and did you attempt to apply them to the Chinese market? And if so, what happened? Yep. So the first thing I did was to apply everything as is. So I've taken all of the anomaly factors that we documented in academia based on US data and say, well, do they work in China? And surprisingly or not surprisingly, they work in China and they work quite well. And when I thought about it, I go, oh, of course, right? A lot of the anomaly factors for the US, they sort of lived in the past and are sort of less effective or almost non-effective the last 10, 15 years because markets become so efficient, but they certainly work when the US market was less efficient. Now, if you're applying those same intuition to China, it being a much more inefficient market, these anomalies ought to be larger. And since these anomalies are often related to retail individuals and their behavioral biases, mental accounting, loss of immersion, preference for high volatility, a sort of lottery substitute. So you see all of that in China and space. So what used to work in the US that maybe doesn't work anymore are alive and well in China. I listened to your podcast with Jeff Patak and Christine Benz on Morningstar Longview and you were talking about a 9% performance gap between Chinese fund returns and investors in those funds and just put some background in the US. That gap has been closing significantly over the last 10 or 15 years in the gap between mutual fund returns and market returns and client investor returns has really narrowed down, in fact, balanced funds if you're actually getting an alpha now by being in a balanced fund. But this is not the case in China. Can you elaborate on that? Yeah, the two things that are super surprising when you look at Chinese fund data. First of all, if you just track the average mutual fund in China on a net of cost basis, they outperform by about 4% per annum. So this is adjusting for survivor should buy is obviously taking costs into account. So this is really net performance. And of course, that's not what you see in the US, right? In the US net of cost, the average mutual fund underperforms. So that's the first surprising thing. Now again, if you think about it, just tells you US market very efficient therefore even well trained portfolio managers can't consistently beat the market. In China, it's very inefficient. So someone who's a trained money manager, he's basically extracting alpha from essentially retail gamblers. That's the first surprising thing. The next surprising thing is the mutual fund industry in China is very underdeveloped, meaning most people don't trust mutual fund managers enough to buy mutual funds. They somehow trust their own skill more or prefer to gamble. And so as a result, they speculating the stock market to obviously great detriment of their own wealth. So that's another thing we see in China is despite the outperformance, mutual fund industry is in its very nascent stage. It's actually not grown very fast at all. I was reading a research paper that you put out. China's got talent, fund manager skill and alpha and Chinese stocks. And you track the growth of the mutual fund industry. And back in 1999, there was a whopping 22 mutual funds for all of China. But by the end of 2020, you wrote there was almost 8,000 mutual funds. So most of them were developed in the last call it seven years. How do you think this is going to affect the efficiencies of the market efficiency in China? So usually I would be on the side of competition will bring about greater efficiency. As I study more time with the data, what I have discovered when I look at this proliferation of mutual funds are really two things. One is most mutual funds in China are very concentrated. So unlike the US, where most mutual funds are benchmark huggers, where you're looking at closet indexers and therefore net of cost. It's very hard for them to be the index. In China, most of the mutual funds are quite concentrated. They would have enormously large bets on a sector, sometimes on a single stock. And you kind of think about why does that happen? That goes against diversification. It goes against sensible portfolio management. The reason it happens is Chinese fund investors are very short term oriented, meaning they look at mutual fund performance leaks table on a weekly basis. And they would buy a fund. And if they see another fund that had the better performance the next time they pick up a newspaper, they would be trading out of their last fund to get into this new hot fund. And as a result, if you're a mutual fund company and you want to not lose asset or at least keep the asset within your family of funds, you've got to constantly launch a new fund that's sort of flavor of the theme of the day and that's very concentrated. So when the theme is right, you have insane performances. And so that's largely what describes the funds industry in China. So this funds proliferation hasn't brought about better price discovery or better competition. It's really just everyone is creating more and more extreme portfolios trying to benefit from the volatility effect so they can randomly become the best performer and gather a lot of assets. You know, it does remind me of the mutual fund industry in the United States say in the 70s and 80s. There was a lot of that going on. I think that Fidelity would create a fund based on whatever, didn't matter what it was. We're going to create it and we're going to launch it because people want it. And even though the owners of that company would never put a dime of their own money in it, it didn't matter. They were in the mutual fund business and if this is what people want, then we're going to give it to them. Now that's not so much anymore in the United States. I think it's become too expensive to do that and it's thinned out as far as the amount of money that's available. So it's almost become almost prohibitively expensive to do that. You still see some of that perhaps in the ETF industry, but just not as much as they used to be. But it seems like in China this is what is going on. Yes, it is the mainstream practice. And so the fund proliferation really hasn't created a competition to lower fees or a competition for sort of better practices and portfolio management that leads to them that are price discovery, which then would lead to a more efficient market. So we're many, many innings away from getting to that outcome. Now the market in China, if you want to use an INDC, I'm just looking at the China MSCI Stock Price Index. There is a beta there, although if you look back from 1995 through 2001, this market collapsed about, well, it looks like 95%. And then it came roaring back from 2002 up to 2007 by I don't know how many multiples. And then it collapsed again during the financial crisis and now it's been crawling back up again. Can you tell us a little bit about beta? In fact, people who say, well, I get what you're saying about the inefficiencies in the market and that if I used an active manager that I might do better, but I wouldn't know one active manager from another, of course, without getting into your firm yet, of course. But what if you just bought beta? I mean, would that work in China? So if you just bought beta, it would have worked out okay the last 15 years. Prior to that, not so much. Now the question as well is that just me cherry picking the last 15 years. Well, no, because prior to the last 15 years, beta is poorly constructed in the following sense. It was mostly state-owned enterprises. They weren't a lot of companies. And so when you kind of bought that beta, you actually really had just a very concentrated exposure to a few large state-owned entities. And then that I don't think is what you want to buy when you're betting on the growth of China, the transformation from being an export-oriented economy into a more consumption-based economy where you're hoping a very educated, hungry young workforce will drive productivity gains. The 15 years prior to the last 15 years, you just couldn't buy things like that. So it's really the last 15 years that you're starting to breath where the listed market is more than just state-owned enterprises. Actually a lot of interesting smaller cap stocks that were purely privately controlled became listed and were driving value and driving earnings growth. So I think the last 15 years is more representative. Still, the last 15 years, of course, you still had the global financial crisis. You had the European debt crisis that had some spillover. It's like China. You had China's own crisis of the 2015 with the credit crisis. But even through those ups and downs, the beta did deliver about a 11% return, compounded geometric return, which is not bad. So yes, the beta itself, even if you go purely passive, is decent. It is a lot more volatile than say the S&P 500. I found some of your research that you did on state-owned enterprises to be interesting because you divide them up into big mega country-wide state-owned enterprises. And then more local enterprises that are localized. And the research found that these localized state-owned enterprises were far less likely to produce profits. Could you dig into that a little bit for us? Yeah, I think most of us, when we think about state-owned enterprises, we tend to have this very negative view. We don't think of them as actually companies that you just don't see as very efficient, nor do they really care about, say, stakeholder value. And that is not entirely true, but it's true enough. So in the dataset, when we look at just the city-level, town-level, state-owned enterprises, when you look at all the operating efficiencies, they're just not very efficient. They have poor margins. They have a lot of debt. If you look at all the metrics for management efficiency and quality, just not very high-quality teams, and you're not surprised because they're really controlled and dominated by local bureaucrats and then subject to all the issues that occurs when a local political power boss has his sway with everything in town. But when you look at the big Beijing-connected central state-owned enterprises, they tend to be well-oiled machines. The very best of the managers are in leadership positions. And their efficiency ratios are very, very high. And they actually tend to have decent performances over time. You also did research on, and I found this to be fascinating, by the way, the China companies that list in the U.S. market, we are here in the U.S., at least I've always been under the belief that, well, these things have to be, go through a certain level of scrutiny, and that the accounting has to be right before they can be listed on the U.S. exchanges. There's a certain level of confidence that I would have in a Chinese company that lists in the U.S. versus just listing in the local markets in Asia. So I would be more inclined as a U.S. investor to trust those companies more, but your research actually shows the opposite. Yep. I mean, I had the same intuition as you did, Rick. I thought, look, if you are willing to expose yourself to New York, to the financial money center and compete out here as a stock, you got to be pretty good when it comes to dotting your eyes and crossing your teeth and having good governance. As I did more research, I realized it was actually the opposite. So the listing requirement and the level of scrutiny that you have to go through as a firm before you get listed in China is extraordinary. And it's because the regulator at the stock exchanges who is in charge of approving your listing has personal liability. If you list and it was discovered, you made up numbers or for whatever reason you blow up later, that regulator has a lot of personal liability and his career is ruined and he might be going to jail. So they take forever to approve anything. And essentially, they actually have this very cynical view about the underwriter and the investment thing that's helping you go IPO, expecting all of you to be in cohoot to be fraud investors. So they actually have a separate underwriting process. Now, in the US, it's not like that, right? In the US, our regulatory environment and our listing requirements is such that, look, consenting adults making trades, right? If you're willing to buy shares in a Chinese company that doesn't want to subject itself to independent auditing. Hey, it's in the disclosure, it's buyers beware, so you can't blame anyone if you invest in these companies. So as a result, our listing requirements are actually very low and most Chinese companies who cannot qualify for listing in mainland China or Hong Kong have chosen to list in the US. Sorry to interrupt you, but could you say that one more time? So the listing requirement for the US is substantially lower than the requirements for mainland China and Hong Kong. So as a result, a lot of companies who fail listing requirements in mainland China and Hong Kong actually choose to list in the US. That's just fascinating. I would have never known that. Here I am, a US investor thinking, oh, all these big companies that come over here to list, they must be the cream of the crop to come over here to the United States and list on the New York Stock Exchange or something like that. But I would have never guessed that it's much more difficult to list as a Chinese company to list in China than it is to list in the United States. It's absolutely true. It's very strange, but it is true. All right, so you set up the shop over there and you first started out with factor investing. And that was in 2016. But I imagine you learned a lot very quickly and things are shifting for you. Oh yeah, absolutely. So the first thing I learned was while many of these behavioral factors that we research and discover in the US can't work and do work well in China, it is still a different market, certainly with a lot more retail participation. And also with accounting rules are different than the US and then also a market structure that's quite different. It's still got a lot of state-owned enterprises. And the result, you have to localize the research. You got to take all these institutional features that's uniquely China and adapt your research. And so what we found is we found a lot of China-specific factors. So again, they're behavioral in nature, but they exist in China only because either the data is available in China and not available in the US. So they're just more ways to characterize that behavioral bias or they're just sort of features of the Chinese market that allow for retail individuals to express more of their biases. So what we found is you've got to really have boots on the ground, know that market, learn the psychology. And if you do that, you'll discover a lot more factors. Jason, a lot of investors are worried about the ESG factors, which are environmental, social, and governance. In other words, look, a lot of these are state-owned companies. They're not going to report human infractions. They're not going to report environmental infractions. And people don't want to invest in China because a lot of things are covered up. What is changing in China to make more disclosure and can we trust it? Well, today, if you want to apply ESG to Chinese stocks, if you hold them to Western standard, requiring them to be at the same level, clearly you're going to eliminate so many of the stocks as to make the portfolio very concentrated and perhaps one that is unlikely to produce return. But if you want to apply a rule, which is more about the slope, meaning the speed at which they're improving, you'll find many companies to be great ESG citizens. That's because they're starting at a low base and the increase global pressure and increased self-awareness in terms of why ESG matters has actually encouraged a lot of them to make changes. Part of that is because society becomes more wealthy. Frankly, there's very little difference between a Chinese parent and an American parent. They all want better water, better air, better food safety, better work environment for their children. And they're going to demand that as consumers and they're going to demand that as regulators. So we're definitely seeing improvement, even though the level today is clearly not international standard. And the one thing that is additionally interesting is governance is certainly the one dimension of ESG that is highly correlated with return in China. And it may be less so outside of China, but in China it's very correlated. I think it's true for all the emerging markets. I think people who are more short-term oriented in the way they value stocks tend to not care about governance, but in the long run it matters. So it's an underappreciated factor in China. And if you focus on firms with great governance, you often end up having great return. So even without requiring that, most portfolio managers in China and ourselves certainly included in that are very governance-focused. And that's critical in terms of driving portfolio value. Without getting too into politics at all, has been some real changes in things like tariffs and that has affected some exports from China to the U.S. that is until the coronavirus hit. And then we all started spending our government checks on Amazon and exports went up from China after that. But there's a shift that seems out of China now towards places like Vietnam. Are you thinking of expanding your search for companies outside of China to someplace like Vietnam? Well, we're definitely looking for other alpha reservoirs now the thing with Vietnam is it certainly is even more inefficient than China because it's just say even younger stock market. But it doesn't have a lot of depth and it doesn't have a lot of stocks. And then of course for a proper portfolio, you've got to have some breath. And of course as a reservoir to really be able to extract alpha, the reservoir has to be large enough. So for small markets with very little liquidity and have not enough wealthy household that enter the market to supply alpha, it's even though there's inefficiency, it's actually not likely for managers to do very much with them. You're going to be severely capacity constrained. So in a way, if you think about big alpha reservoirs that are available in the EMBasket really, it's China and maybe a distant second would be India. And that has got the population. And they have a trading mentality in many ways. Yep, as the market becomes more wealthy, as sort of the per capita GDP starts to catch up, for the Western world like China has, you'll see more of the household wealth enter the stock market. And that's when sort of retail trading as a fraction of the market and overall market liquidity will go up. And then therefore making the opportunity more meaningful for someone who wants to sort of be actively on the other side of those retail trades. Well, just really been interesting. Let's get to your company. And if our listeners want to learn about your company and what they might be able to follow you, where should they look? So while we've been running a lot of different Chinese equity strategy onshore in China, the success of that business has convinced us to export that. So we've launched our very first active ETF in the US. So to find out more about that strategy, you can go to funds.ralien.com to learn about what it does, whether it makes sense for you. We're obviously looking to build out a whole family of different Chinese equities exposure and fixed income exposure and other alternative exposures. And our belief is most investors are underexposed to China. So the correlation isn't definitely going to come in as a major benefit in terms of making your portfolio more diversified. And insofar that you want to have exposure to a different currency. Now Chinese assets will give you exposure to another major currency that might be emerging and rivaling China. So you don't have to go to cryptocurrency to hedge against your dollar exposure. You can look at the Remding Bee base assets. And of course you want to buy more growth and it's differentiated growth. Like the China is on a different part of the growth curve versus the US. This is a market where you can buy that growth and buy it cheaper. But of course to find out more about our research, go to our website, ralien.com. And if you're interested in the strategy, go to funds.ralien.com. That'd be great. I had to ask you one question because you borrowed up the cryptocurrency. China's central bank is rolling out a digital one making it the first central bank to issue a central bank digital currency. What do you think about this? Well, I think it's super smart, right? Because as we're looking at cryptocurrency, we've often found two things, right? One is the technology, the blockchain technology, which is just a superior technology in terms of settling payment, tracking the flow of funds. Safer and it's just more technological advance, right? The existing settlement process we have came from 60 years ago. So China is pursuing that. It's pursuing the blockchain technology. The rest of the cryptocurrency is a combination of the blockchain technology, which is wonderful, with a currency that you're not sure is actually a currency because it's not backed by anyone, not backed by anything. It's not really legal tender. So I think this actually helps investors in terms of really understanding what the blockchain technology can do for central banks if they want to digitize their currency and improve the existing financial infrastructure. And then it helps us then understand, okay, if you take out the digital aspect and just have this new fiat currency issued by a non-central bank collective, like, is there really value in that? So I think what China has done is genius in terms of adopting a technology. Many central banks are likely to do the same thing. And as that happens, I think you'll find existing cryptocurrencies to sort of be left behind. Well, I don't want to upset too many of our listeners by getting into cryptocurrency discussions on cryptocurrency. We were just recently banned on the mobileheads.org website. But it's been a fascinating discussion, Jason. You've done so well in your career. And we just greatly appreciate you being our guest today on the Bogleheads On Investing. Thanks, Rick. I'm so glad to be here. This concludes Bogleheads On Investing. I'm your host, Rick Ferry. Join us each month as we have a new guest. In the meantime, visit Bogleheads.org, Boglecenter.net, the Bogleheads Wiki, view our new Bogleheads Live Speaker Series, get involved in your local Bogleheads chapter or a virtual community, and tell others about it. Thanks for listening.