Dynamic Premia Partners Sets out its ETF and Smart Beta Stalls for Asia

Hubbis met with Rebecca Chua, Managing Partner at the Hong Kong-based ETF strategies provider Premia Partners (Premia), and with Aleksey Mironenko, the firm’s Partner & Chief Distribution Officer. Both are clearly energised by the immense opportunities on offer in the Asian market to expand interest and activity in ETFs amongst retail, institutional and wealth management investors. After just 14 months in operation, Premia is already at the cutting edge of driving innovation in Asian ETFs, aiming to introduce global best practices for Asia and to boost ETF trading in the region dramatically.

Premia Partners launched its first product just 14 months ago but is already set to burst into the top 10 of ETF providers in Hong Kong by assets. The firm’s ideology is to offer investors a vision of ‘smart investing’, aiming to create a reliable, curated ecosystem that is conducive to ETF investing, optimised with the best technologies, tools, and platform. This all adds up to the bold yet straightforward goal to reshape the landscape for ETFs in Asia.

ETF creator and smart beta proponent Premia Partners (Premia) is on a fast-track to growth and prominence. In a mere 14 months of product operations from its headquarters in Hong Kong, the firm has built a 20-person team, overseen by four partners, to focus in a dedicated fashion on delivering Asian beta. In addition to Asian beta, Premia partners with WisdomTree, a leading global ETF manager, to offer smart global beta solutions to Asian investors across equities, fixed income, commodities and even foreign exchange.

“We have seen tremendous growth both in the ETF universe and also in the smart beta world, but Asia lags well behind in both these areas,” reports Aleksey Mironenko, Partner & Chief Distribution Officer at Premia Partners (Premia). “It is certainly not enough to simply try to replicate here in Asia what works elsewhere; we need to do far more than that.”

Rebecca Chua, the firm’s Managing Partner says the ‘beauty’ of Asia right now is it is effectively ‘greenfield’, unlike the US and Europe, which are dominated by a handful of global incumbents. “This,” she added, “gives us a great opportunity to build something that allows investors in this part of the world to invest in the kind of low-cost, efficiently-built best practice ETFs they’re used to globally, as well as offer them improved thought leadership on the topic of ETF implementation. It is an exciting prospect.”

Mironenko explains that Premia’s concept of smart beta comprises factor investing and thematic investing, using a systematic approach that steers away from the pure market capitalisation weighted indexing methodologies.

“The benefit,” he explains, “is that in Asia’s emerging markets where you have a lot of market volatility and risk on/risk off scenarios, we avoid the broad-brush market capitalisation weighted approach that tends to buy-high-sell-low given its rebalancing mechanism.  Instead, based on research, we concentrate on key factors and themes that not only improve the outcome in terms of returns but importantly solve some of the challenges our clients have expressed to us about investing in the region. A great strength is our access to thought leaders around the world including our advisors former Yale Professor Zhiwu Chen, and Dr Jason Hsu, who is also the Co-Founder and Vice Chairman of Research Affiliates.  They are leaders in the quantitative finance and smart beta/ factor investing space and have been helping us greatly in the research and understanding of the China A-share market. Moreover, our emerging ASEAN Titan ETF and the Asia Innovative Tech ETF both offer investors targeted thematic strategies to access growth opportunities in the region, without broad brush exposure to less-desired parts of the region’s equity markets.”

Growing investor sophistication and demands

Premia is very comfortable in its choice of Hong Kong as its headquarters. “We believe that the ETF market will see tremendous growth and far greater demand from the investment management community here, as well as elsewhere in Asia,” Chua reports. “We see that people at first tend to put their financial wealth with the banks, but over time the increasing number of investment firms and also technology firms that have become involved in wealth management and investment management is allowing a lot more people to gain exposure to most cost-efficient, transparent investment solutions.”

In turn, this all means that they gradually understand that in addition to putting their money under the pillow or in a bank deposit they can also invest in the capital markets. “As individuals become more financially literate,” she notes, “this trend will surely accelerate.”

Chua adds that intergeneration wealth transfer is migrating wealth to people who are often of higher education and more financially literate. “The result is that they will generally ask more about what they are buying, they will ask more about how much they are paying and they definitely want to be more involved,” she notes. “They are also somewhat self-directed in their portfolios, even if they do rely on private bankers and wealth managers to help with the majority of their private, personal wealth. So that kind of trend we see increasing and we see the key elements are in place that tell us that the ETF growth in Asia would mirror a lot what we see in the US and in Europe.”

Premia does not limit its exposures to mainstream indices but works with index providers to adapt to the nuances of the region in response to client demands. “Thus far,” Mironenko notes, “a significant portion of our clients are sovereigns, insurers, active managers and family offices who like the benchmarks we have put in place and who are far from satisfied with traditional market-cap approaches for Asia. The indices are designed to offer a specific exposure and/or outperform the market.”

Costs are important, as is transparency. “Every product we have is charged at 0.5%, and with no other costs added,” he explains. “Moreover, there are no performance or other fees. This means that the four strategies we currently promote cost the investors 0.5% per annum and investors can be assured there are no hidden costs. Fees are certainly an area of concern, especially in weaker markets. Moreover, we can say that, not just in Asia but globally, it is harder and harder for active managers to prove that they are able to generate a good enough performance to support the high fees that they are charging, further boosting the appeals of low-cost passive strategies.”

China: a natural starting point

“There is a very considerable opportunity for generating alpha in an inefficient market such as China,” Chua reports. “For example, our two key China strategies focus on this massive economy where there is strong growth in GDP per capita from a fairly low base. There, we offer two investment options – a broad economy strategy that represents mainstream Chinese stocks across all sectors, and a new economy only strategy, that targets China’s transition from old industry laggards to new economy winners.  Within both strategies, the index we use employs smart beta to select stocks likely to outperform over the long-run. Since launching the ETFs in October 2017, we’ve seen them outperform comparable indices such as CSI 300, MSCI China A and ChiNext.”

Mironenko argues that there are also several traditional investment reasons for investors to focus on mainland China equities.

“Cheap valuations are compelling as the PE ratio has fallen by nearly 30% in the past year to less than 10 times,” he reports, “while the US market is trading at around 14 times. We believe that the returns for our broad China A strategy will be between 5% and 10% over the medium-term, based on a highly conservative set of assumptions. Large inflows continue, and foreign investors will be adding A-shares in increasingly large volumes, at the same time as domestic government policies are pushing retail investors away from unregulated trust products to traditional equity and bond markets.”

Additionally, he believes that China’s growth potential remains intact. “It is the world’s second largest economy and will weather the storms of any trade wars, so not investing in China will mean investors miss out on many great opportunities,” he claims. “The diversification benefits are also worth considering, as mainland equities are quite uncorrelated to the rest of the world.”

Chua added that China has dramatically further to advance. “It might be the world’s second largest economy, but GDP per capita remains less than USD9,000 and the implication of that is that many structural changes are still taking place. The current situation is different from 10 years ago when GDP per capita was around USD3,000. When per capita numbers rise to USD10,000, or USD20,000 or even further, China will move closer to a developed market and because of that the composition and the winners and losers would be quite different from what we see today.”

Mironenko further explains that this environment and outlook means that Premia’s systematic approach allows a clear focus on the factors and qualities of companies that are more aligned with the growth trajectory and the structural changes of the economy. “This means we can give investors a much higher probability to generate consistent alpha.”

Broadening his perspective to an ever-wider angle, Mironenko comments that the global institutional investment industry is gradually heading towards a China allocation more aligned with China’s contribution to global GDP.

“That,” he says, “means going from their current low single-digit exposure to double-digit or even up to 20% to 25% in the next 10 or so years. That is simply a huge transition and represents a truly massive amount of capital going into the Chinese market. There is a lot of room for alpha generation by taking a more disciplined approach during this evolution.”

A team for the future

To conclude the discussion, Chua also highlights the vital roles Premia’s two other partners play. David Lai and Laura Lui are the co-CIOs and together with Mironenko and Chua form the four leaders of the firm.

“We believe we have a really strong team that can take the business forward quickly,” she comments. “We have a lot of experience amongst us and we can move straight ahead with the implementation of our ideas and that allows us to move ahead at pace and rapidly fill the gaps that we see in the market. After just 14 months, we are already now number 11 by assets in Hong Kong out of 23 ETF providers. We aim to keep that momentum and to hopefully crack the top five ranking by the end of 2019.”