The results of the G-20 Summit meeting between the United States and China were closely watched, especially by purveyors of international and emerging markets, which have been racked by the tit-for-tat tariff battles between the two economic superpowers. Nonetheless, one firm, Julex Capital Management, has been able to deftly navigate through these challenging times for international developed markets when others would simply avoid the risk and avoid them altogether.
Founded in 2012, Julex Capital dedicates itself to creating innovative solutions in tactical asset allocation, downside risk management and quantitative investing. Julex is able to accomplish this by leveraging the talents of industry veterans who bring to the table strong academic and industry experiences in various walks of the financial industry.
Julex Capital’s core competency lies in developing a variety of tactical/risk-managed total return strategies that deliver consistent returns with low volatility and drawdowns in all market landscapes, whether bull or bear. Furthermore, Julex Capital provides quantitative equity strategy solutions that are aimed at delivering returns with concentrated portfolios.
Henry Ma, Ph.D., is the founder of Julex Capital, and he was able to speak with ETF Trends on how his firm implements its tactical strategies, particularly in the areas of international developed markets and emerging markets.
International equities have been challenged this year by trade wars—how has Julex Capital been able to limit the drawdowns in global equity markets using your Dynamic Developed Market Strategy?
The international equity markets have faced significant headwinds this year: trade war, uncertainty on the Brexit agreement, the Italian debt problem and political instability. As of November 30, 2018, the MSCI EAFE index lost 9.39% and the MSCI EM Index tumbled 12.24% for the year. However, our Dynamic Developed Market strategy has avoided the majority of the losses by tactically maneuvering among country ETFs and fixed income ETFs.
The investment universe of the strategy includes 12 country ETFs representing developed market economies: Australia (EWA), Sweden (EWD), Germany (EWG), Hong Kong (EWH), Italy (EWI), Japan (EWJ), Switzerland (EWL), Netherlands (EWN), Spain (EWP), France (EWQ), Singapore (EWS) and UK (EWU).
The strategy follows a tactical trend-based investment process. The unique feature of the strategy is identifying market trends through a multi-resolution analysis, which is a popular tool commonly used by engineers and physicists. Normally, we invest in the country ETFs exhibiting positive trends and avoid the ETFs with negative trends.
Throughout the year, the strategy had an average of over 50% in fixed income ETFs. Especially during the market turmoil in October, the strategy had over 80% in Fixed income ETFs and cash. As of November 30, the Dynamic Developed Market strategy outperformed MSCI EAFE Index by 9.00%.
How does the flexibility of the Dynamic Developed Market Strategy account for political factors, such as leadership/regime changes?
Our investment process is rule-based. The model is run monthly. However, we do have the flexibility of taking risk off the table if there is a “Black Swan” political/geopolitical event(s) that may have a large impact on the market. For example, we did reduce risk exposures after the failed coup in Turkey.
Talk about the Dynamic Developed Market strategy and why it specifically only caters to fixed-income ETFs or cash equivalents?
We use US Treasuries ETFs and cash equivalents as the real “safe haven” investments during the “risk off” environment for two reasons: (1) They are the best way to preserve capital during market downturns. Foreign bonds have the risks of sovereign default and/or currency fluctuations. (2) They can potentially generate positive returns in the flight-to-quality environment.
How has Julex Capital been able to use a rotational asset methodology to limit the volatility in both the Emerging and Developed Market strategies?
Julex Capital manages the volatility of the strategies through two different mechanisms: (1) We use a volatility-weighted portfolio construction. Normally, the less volatile ETFs get more weight and vice versa. This tends to reduce the volatility of the whole portfolio compared to a equally-weighted portfolio. (2) Volatility cap of 20%. We monitor the volatility of the portfolio on a daily basis. Once the volatility exceeds 20%, we will reduce portfolio exposures immediately.
Given what you’ve been seeing and hearing, do you feel emerging markets will experience a resurgence in 2019 given the weakness in U.S. equities as of late?
Emerging markets face both tailwinds and headwinds. The trade war between China and the US, the two largest economies, is likely to slow global economic growth. The IMF recently revised China’s GDP growth from 6.6% to 6.2% for 2019 and noted that global growth could suffer as much as a 1% drop if the trade war continues.
Emerging market economies tend to suffer more from protectionist trade policies because they are more dependent on exports, foreign investments and technologies. However, the EM equities have some tailwinds. The EM equity valuations are a lot cheaper than US equities. The MSCI EM Index EFT (EEM) has a current PE of 12 while S&P 500 Index ETF (SPY) has a much higher current PE of 24. In general, the EM economies grow faster than the developed economies.
Emerging market economies tend to suffer more from protectionist trade policies because they are more dependent on exports, foreign investments and technologies. However, the EM equities have some tailwinds. The EM equity valuations are a lot cheaper than US equities. The MSCI EM Index EFT (EEM) has a current PE of 12 while S&P 500 Index ETF (SPY) has a much higher current PE of 24. In general, the EM economies grow faster than the developed economies.
The World Bank projected the EM countries and developed countries to grow 4.7% and 2.0%, respectively in 2019. If there is any progress in resolving the trade tensions between US and China, we should expect the EM equities to outperform next year. If not, we expect more volatility and less upside in global equity markets in EM, DM and the US.
Julex Capital is a participant in the ETF Strategist Channel.