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Cooper Abbott on ETFs & Emerging Markets

Matthews Asia has a strong reputation for investments in Asia and emerging markets, with a track record spanning over 30 years. The San Francisco-headquartered firm expanded its offerings in July with the debut of its first ETFs, a trio of transparent active ETF strategies focused on global emerging markets, Asia, and China.

The Matthews Emerging Markets Equity Active ETF (MEM ), the Matthews Asia Innovators Active ETF (MINV ), and the Matthews China Active ETF (MCH ) have portfolios that are similar to the firm’s established U.S. mutual funds and leverage the same portfolio management teams and investment process.

VettaFi writer Elle Caruso recently sat down with Cooper Abbott, CEO of Matthews Asia, to discuss the firm’s new ETFs and investment opportunities in emerging markets, Asia, and China.

Caruso: Cooper, you started in your role a few months ago. Can you explain why you decided to join the firm?

Abbott: I’ve followed Matthews for a long time and have been an investor for more than a decade. I’ve really appreciated the commentary and insights — this was a brand, a firm, an investment IP, that I really have enjoyed learning from for quite a while now. I think that Matthews offers asset classes that are dynamically important for people’s portfolios but largely underweighted in the U.S. and in Europe. And the current set-up is especially promising.

Over the intermediate longer term, it’s clear to me that investors will source an awful lot of alpha and growth, as well as portfolio diversification from emerging markets and from Asia, and so that value proposition is very compelling to me. The investment capabilities that Matthews has, with true global experts… it’s just great to be part of this team.

Caruso: Matthews launched its first ETFs in mid-July. Can you walk us through that lineup?

Abbott: These are our first. They probably won’t be our last. We listen to what clients want and look to respond to their needs.

The current lineup provides active core exposures to emerging markets and China, along with a future-oriented thematic offering in Asia innovation. These portfolios offer very different exposures than passive benchmarks and are designed to add alpha and diversification over time to client portfolios. And they are designed to help allocators and investors fine-tune their exposures… in a very efficient way.

I do want to emphasize that these ETFs are unique! Active exposure in an ETF vehicle for these markets is something of a new category… ETFs are a wrapper, and as these products show, the vehicles do not have to be passive.

These are very much active ETFs. You are getting real, fundamental research analysis in these strategies. Not simplistic, passive cap-weightings, but company-specific portfolios built from the bottom-up, based upon proprietary insights and deep experience.

There is also a strong sustainability approach that underpins everything that we do at Matthews and that element comes through in these strategies as well.

Caruso: All three of the firm’s ETFs utilize a fully transparent, active structure. Can you talk more about the advantages of active management?

Abbott: I think particularly in these marketplaces — in China, in emerging markets, in Asia — the benchmarks are not always representative of what’s going on in the economy. Benchmarks can also be very concentrated in a handful of names. They tend to lag where the growth is coming from. They can have sovereign issues. The indexes are not always efficient. They don’t factor in geopolitics… or state ownership. And they often reflect the biases of the index providers.

Our fundamental approach, I believe, is something that can work well in these inefficient markets and against imperfect benchmarks. And the current setup could be especially interesting.

Our research-based, active approach allows Matthews’ deep and experienced investment teams the opportunity to develop portfolios that seek to offer risk-adjusted performance. Our teams can look at rates of change and look at companies that are positioning with differentiated moats to outperform.

Emerging markets tend to be less transparent, more opaque, with less research going on. Against that backdrop, the experience that our teams have, their discipline around sustainability considerations, and execution of their ideas… Our portfolios look quite different than the benchmark weightings.

Caruso: How should MEM, MINV, and MCH be utilized in a portfolio? How can advisors enhance clients’ portfolios with these active ETFs?

Abbott: A key use case for active ETFs can be as standalone cores. They could also be paired in some pretty interesting ways with passive benchmark approaches to help diversify and add alpha to portfolios.

In general, there’s been such a focus for U.S.-based investors on the domestic markets, which have performed quite well, but there are a lot of overlooked opportunities offshore: international, Asia, emerging markets, and China all represent unique opportunity sets for returns, but also real diversification of portfolios.

I feel in developed markets, we’re very focused right now on generationally “new” phenomena like inflation and the active role of central banks. These phenomena are not news to emerging markets, so I think there is an experience that comes with that both for portfolio managers and the companies we are investing in. You can also look at what’s going on in China where rates are being cut, relative to rising rates in much of the developed world. That diversification becomes important from an investment standpoint, and from an efficient frontier standpoint as well.

Within emerging and Asian markets, there is both a cyclical and a secular argument in terms of the returns, in terms of where the market cap opportunity is — but also where the GDP is, where the population growth is coming from. These can be core aspects of a portfolio. I think, by and large, most investors are underweight emerging markets and China, and so there’s a differentiated opportunity here.

We’ve heard from financial advisors that there is also an opportunity around tax loss harvesting. If you were an investor in passive emerging markets, passive China, passive Asia, and are sitting on losses, then moving to an active approach, particularly with the dynamic markets we are experiencing, might be a tactical opportunity.

Caruso: Tax loss harvesting has been a big focus recently. That’s a great point that it could be an opportunity to move into active management.

Abbott: I think that that’s one of the reasons why Matthews wanted to be involved in this ETF space — to help support the needs of Advisors and clients. There is increasing client demand for these easy-to-access wrappers. The fact that you can trade and tactically adapt your positioning, and do so in a pretty tax-efficient way, are advantages to clients. The fact that you can access creative, fundamentally driven, active, complex strategies in these unique asset classes requires a lot of work on the investment and administrative side — but is very simple for the investor.

Matthews wants to offer a kit-of-parts for investors to creatively deploy to meet their investment challenges.

Caruso: For advisors and investors who are waiting for the optimal time to add exposure to these ETFs, how does the environment look now?

Abbott: A lot of it goes to how you plan to use these in your portfolio. If you have an intermediate- to longer-term perspective, I think you will do well by allocating to emerging markets, to Asia, and to China. There’s still a lot of pent-up growth as those economies start to come out of COVID. We may feel like we’re done with COVID in the U.S. and the developed world, but other places aren’t quite there yet.

There is also an interesting currency overlay that could benefit a U.S.-dollar investor.

When you look at some of the valuation opportunities — I was speaking with portfolio managers earlier this week — some of the names that they were talking about, some of the situations they’re investigating are compelling in terms of valuation, in terms of growth prospects, etc. You can get a view of that from a broad benchmark, but it can be far more pronounced through active, company-specific approaches.

Caruso: What are you hearing about investing in China?

Abbott: Well, I think whether you have a view around China that’s positive or negative, the truth is it’s going to be an increasingly important part of the global economy. There are ways to invest in China that can address some of the more serious concerns that a financial advisor or end investor might have, including exposures to state-owned enterprises, forced labor, and other issues. Active approaches are well suited to address these, and when combined with Matthews’ focus on sustainability and governance, our China portfolios can look quite different than the benchmark.

Caruso: What do you think is really important that our readers know about Matthews and the firm’s new ETFs?

Abbott: Well, I think for one, there will likely be more ETFs to come. Matthews has always been a leader in helping investors access the unique opportunities of emerging markets, Asia, and China via deep research, and these offerings tie into that historical, client-focused heritage.

Second, going active in these inefficient markets and against imperfect benchmarks offers opportunities. I have seen statistics that suggest that institutions, on average, use active approaches for emerging markets 90% of the time. These ETFs offer a very straightforward way for advisors to do that in a highly sophisticated manner.

More tactically, I feel that the current dynamism of looking beyond ‘obvious’ domestic allocations is very real; with some of the turmoil we’re seeing, now could be an opportune time to be looking at some of these interesting, but under-allocated places like emerging markets, like China, and Asia.

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