Customer Focus
Richard Kang, Emerging Global Advisors
Richard Kang likes to talk about going "back to basics." He is Chief Investment Officer and Director of Research at Emerging Global Advisors (EGA), a year-old exchange-traded fund (ETF) company whose emphasis is on developing markets.
But for 15 years, he was a self-described "hedge fund guy." So it might seem strange for an individual whose profession once thrived on complex products and strategies to be talking about leading a charge to straightforward, uncomplicated products.
Why the change of heart and thinking? Well, maybe the past two years have something to do with it.
"We just went through an abyss," says the affable Richard, whose fervor for ETFs and indexes is contagious. And he still has a hedge fund guy's bluntness. "The market needs pure and simple tools to recover from what was essentially a 'nuclear winter.'"
Liquidity as key
Richard has strong opinions on why ETFs have been experiencing strong capital inflows, encroaching on other products' territory, and describes a range of contributing factors. But when comparing ETFs against hedge funds, he focuses on one specific advantage: ETFs offer liquidity that hedge funds do not.
"ETFs are one of the great investment innovations of our time," he argues. "Illiquidity in hedge funds was the great lesson of last year. The hedges put up their gates faster than anyone expected when markets started to drop, and prevented redemptions for certain periods. You might be a public pension fund that needed to withdraw money because you negotiated a new contract for your school district's teachers, but you couldn't get your money. It was a huge problem, and it wasn't something that institutions expected. It was a real shock."
Richard uses analogies to make points with a visitor. He shakes his head when relating the troubles institutions and individual retail investors faced.
"To use an old Wall Street expression, 'they took away the punchbowl,' ending the party. Some investors saw 100 percent, 200 percent unrealized returns on their statements, but by the time they got their money, it was more like zero percent. This wasn't the case for everyone, obviously, but it was a phenomenon. They were just praying that they could get their funds at some point."
ETFs, in contrast, are all about liquidity; they give investors the ability to sell if they need to.
Finding the right approach
Richard believes ETFs like those based on the Dow Jones Emerging Markets Sector Titans IndexesSM will be of interest to investors as they begin to test the waters after the recession. He says that his firm sought out Dow Jones due to its "great name," the methodology behind its "Titans" indexes and the wide acceptance of its sector indexes.
He also likes the Dow Jones Emerging Markets Sector Titans IndexesSM because they follow International Monetary Fund (IMF) guidelines for classifying countries into the "emerging" bracket. Most significantly, the indexes exclude Israel, South Korea and Taiwan (which are treated as developed nations). He believes this approach gives investors more accurate coverage of developing markets "rather than trying to chase returns."
A look ahead
What's ahead for the ETF industry, and for EGA? "I really see more niches being filled in the future," says Richard. "ETF firms realize that the easy stuff, the 'low-lying fruit,' is all gone. You have to find a space that no one else has touched, but clients could use or need.
"We strive to be first to market so that our clients have the best investment opportunities. And when you have companies like Dow Jones putting together these great indexes, we're going to make terrific ETFs to match."