Jason Hsu’s Fundamentals Avoid ‘Sex and Sizzle’ of Value Investing

Jason Hsu, a quantitative expert by trade, likes when companies and leaders have proven, successful track records. He utilized that same thinking when forming his own business.

In the early 2000s, Hsu served as a visiting professor alongside industry veteran Rob Arnott, a well-known name in the investment world who had previously worked at Salomon Brothers, The Boston Company, and First Quadrant, LP. However, Arnott “got bored of teaching after two classes,” Hsu said, and in 2002, the pair formed investment strategies firm Research Affiliates, renowned for its focus on fundamental investing. “It was just two guys in a living room with the Bloomberg terminal,” Hsu told Advisor Upside.

Today, Hsu is the founder and CIO of Rayliant, a firm that applies his fundamental- and value-investing principles to markets all around the world. “It’s a basic idea,” Hsu told Advisor Upside at a New York cafe where he showed up sporting one of his signature graphic T-shirts, this one emblazoned with a Batman logo. “You want to buy companies that have already demonstrated a proven track record of success and value, as opposed to buying an amazing person with a great PowerPoint. It isn’t just about investing in something that’s cheap and exciting. ”

AU: What should advisors know about fundamental and value investing?

JH: You’re going to miss out on some early-days growth, which is often built on ideas rather than actual cash flow and business, but you also skip out on a lot of the sex and sizzle. You don’t get into things that blow up badly. I know advisors whose clients have sold big tech firms they were starting founders in, and those folks never invest in growth companies again because they just know they got lucky. 

How is the current tension in global trade impacting investment strategies?

The funny thing about President Trump picking a fight with basically every single country in the emerging markets basket is that those countries and China are now winning sympathy from investors. This could be a real catalyst, and investors are recognizing how advanced EM nations are. Many are not poor. From an engineering and manufacturing perspective, they’re significantly ahead of the US. If you want to invest in advanced technologies or STEM engineering growth, that’s EM because that’s just not what we do in the US anymore. We’re focused more on service, design, and branding. That new awareness is valuable for EM in terms of attracting international and US flows. 

For the last 20 years, advisors were almost never allocating to Asian or emerging markets. People were buying into the S&P 500, which produced great returns. Those all are very comfortable, low-cost products advisors don’t even need to explain to clients. There was no need for diversification because buying only in the US worked perfectly well. However, between 2000 and 2010, emerging markets, particularly led by Asia, outperformed the US by 9% per annum. But of course, that was a long time ago. People have forgotten that markets go in longer cycles. When they swing right, you could have massive opportunities in other markets. 

What’s something no one is talking about?

Japan. For 30 years it looked sleepy and just couldn’t get anything right. The government tried just about everything under the sun in macro textbooks, and nothing worked. But all of a sudden, the stock market, interest rates, and inflation are moving, and no one understands why, but it’s actually quite simple. Why did it take so long for Japanese households to start spending again? Because 30 years ago, it had the world’s largest real estate bubble, when everyone purchased their homes and apartments at crazy peaks and were stuck with 30-year mortgages haunting them. Every dollar from their paychecks went toward servicing debt. But now, those mortgages are paid off, they have disposable income, and the government can move out of this zero interest environment. Consumption is roaring back from a death spiral into a virtuous cycle. 

It’s definitely something advisors should look into for investing strategies. When we think about developed markets, I’m an underweight to Europe and a big overweight to Japan. People are thinking Europe can come back, but with it being so fragmented yet bound together by the European Union, it’s going to take a long time to get any kind of policy working.