Market Commentary: Long-term view on KWEB | Delisting of a VIE

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, Philipp Muedder, Head of Financial Planning, and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

1. Why we reoptimise your portfolios [0:26]
2. How KWEB fits into your long-term investments [2:24]
3. Are VIE schemes risky for my investments? [7:14]

FULL TRANSCRIPT

Philipp | 00:01 

Welcome everyone to another market commentary from StashAway. With me, my whole team on the investment side, we have our CIO, Freddy Lim. Hey Freddy, how are you?

Freddy | 00:12

Hi everyone! It's been a while - it's good to be back to this show.

Philipp | 00:15

Yes, good to see you again - it's been a while as well. And of course, we also have our Deputy CIO, Stephanie. How are you, Stephanie?

Stephanie | 00:23

I'm great, I hope everyone is having a great week.

Philipp | 00:26

Yes. So far, so good on my side for sure. But obviously, we wanted to share some news with our listeners, and our audience on YouTube, or wherever you consume this market commentary these days - and Freddy, there will be some changes being made to our portfolios - what we call a re-optimisation, right? Do you want to walk the listeners through that just at a high level with a little bit more detail?

Freddy | 00:55

Well, as you know, every once in a while, due to huge economic changes or even valuation distortions in the markets, our algorithm will make adjustments to the allocations in your portfolio. Regardless of the risk levels you have, each of you will be impacted in various different ways. But the current re-optimisation is designed to enhance and further broaden the inflation protection we bring to your portfolio. And as you know, due to our past significant investment in Gold since December 2017 and our investment in TIP - the inflation-protected security - we have already, a lot of inflation protection for portfolios in the past. But the thing is that the world's becoming a little more mirrored, a garden variety of styles now - we decided to enhance and broaden the types of inflation protection through investments in [02:00] commodity-exporting countries - equities such as Australian equities. We also sort of broadened - we have some portfolios with investments in XLE, which is the Energy Select ETF that focuses on the energy sector. So we're trying to broaden and drill down further to the nuts and bolts of inflation to ring-fence it.

Philipp | 02:24

Great, thank you for that overview, Freddy. And of course, if you ever want to learn more about this, feel free to put additional questions below the video or send us an email to support@stashaway.com and we'll happily pick those up over the next few weeks - Freddy and also our support team is more than happy to reach out and answer any of them that you might have. With that being said, though, Freddy, we did get quite a lot of questions surrounding our China Tech Innovation ETF holding, the ticker is actually KWEB, right? So I wanted to know either from Stephanie or from yourself, get a little bit of a feel of where you stand. So some of the questions are obviously surrounding it not performing as well as, let's say, US equities over the last few months, right? What are the reasons why that is happening, right? And where do you see how this ETF actually fits in in the long term as well, right? We can look at short term versus long term, but then maybe you can put that a little bit more in perspective for the listeners, because we do get that question quite a bit lately.

Freddy | 03:35

Well, first, in the short term, we know that China's technology has been impacted by a wave of antitrust measures against them. But from our perspective, I mean, this is a well-known fact - a hundred people in the room would all have known this already - so the market has sort of priced it in and that [04:00] sort of our stance there. However, we are long-term investors on our platform. We need to start looking at the potentials that it brings beyond the immediate. And if you look at the cycle, whether it is China's 5-year plans or 10-year plans, it all revolves around technological revolutions. The trade war is just going to make it worse because it's now no longer the US versus China, it's China versus the West. And the confidence that the Chinese have in terms of the reliability of my trading partners in terms of giving me parts and chips - as a certain part of the supply chain that feeds into my technological products - those things are now in doubt. And the Chinese are embarking on a massive campaign to build 5G networks, to build chip-making capabilities themselves. So we felt that in terms of the long-term potential for China is immense because of this structural investment they are making to just reduce their dependencies on other partners. So that is one of the very, very big stories for years to come. Do not let a few months of underperformance overwhelm your long-term decisions. Ultimately, it's about having the right amount of it such that your overall portfolio caters to your specific risk level, right? Not every portfolio will have a lot of KWEB. It's a function of your risk level - if you're antsy or if you're nervous, review your risk level.

Philipp | 05:43

Absolutely, anything to add there from your side, Stephanie?

Stephanie | 05:48

Yeah, I guess. As Freddy has said, the KWEB corresponds to different types of risk levels. And within our portfolios, different portfolios [06:00] would have a different level of exposure to KWEB. And it's also important to look at history as well. What kind of volatility would KWEB have as an index, right? So if we look at the year-to-date performance, KWEB is down 20%. But bear in mind that it went up 20% at the beginning of the year and then it went down 40% from its peak. And if we look at historical episodes, the same thing happened in the second half of 2018 when China was tightening policy, KWEB also had a 40% drawdown. Also in 2015, KWEB had a 30+% drawdown in a span of 3 months. So this does not deviate from the historical volatility of an instrument like KWEB. And I think it's like Freddy said, it's important to keep a long-term perspective. And then also, there are companies right now that are trading at a cheaper valuation than they were a few months ago. So as a long-term investor, this is actually a good opportunity to get exposure.

Philipp | 07:14

Great and thanks, both of you for those details, as I said, lots of questions on that. One follow-up question to that, Freddy, that someone commented below the video from last time is that he recently read that we don't actually buy Chinese shares within the ETF and that there is some kind of VIE scheme behind it. So he's asking how does StashAway view such risks and what protection can investors expect if the VIE becomes void? Is there anything that you want to share on that part?

Freddy | 07:49

The risk is not just the VIE scheme being voided by China, but I think that's a bit hasty to assume anyway, because what the Chinese government can do is to say, [08:00] well, you can't use it anymore, come home. So other than worrying about delisting by the US, which takes a couple of years of processes, there's also the risk that the Chinese government might say, hey, I want you to come back - that's the risk. It's not like the stock's going to go poof and disappear just like that. No, it's just going to be listed back in Hong Kong or a domestic Chinese exchange, right? So then the bigger question around these VIE schemes - the delisting risks - is whether KWEB, as a fund manager, could manage stocks onshore. Currently, out of the 53 names that KWEB owns, 40 names are of American depository receipts, the ADRs, and the ADRs are issued on the back of the VIE scheme. So that's what the question is about. Now, if that goes away, what it means is that KWEB, the fund manager, simply has to move away from ADRs instead and owning stocks on the Hong Kong Stock Exchange or the Shenzhen Stock Exchange. It's not like the stock's just going to disappear and go to zero. It's a very misleading question in the first place, in my opinion. If Stephanie has anything to chime in, feel free.

Stephanie | 09:20

Yeah, if you look at the composition of KWEB right now, there's 30+% of exposure actually for stocks listed in Hong Kong. And as Freddy said, if there's any changes to regulations etc - we've seen these - a lot of companies are delisted in the States and being listed in Hong Kong or even Shanghai, and those can be changes that the ETF makes.

Philipp | 09:49

Exactly, so thank you for the question, Leehiung Chong and thank you for the answer, to the both of you. For everyone else, we have a lot of webinars coming up. So listen closely if you [10:00] want to attend some of those, we start on the 28th July, 7pm Singapore, Malaysia, Hong Kong time and 3pm for the Middle East region. It's going to be an Ask Me Anything on the Re-optimisation of Your Portfolio. So, Freddy at the high level, has touched it today already. He will go with the investment team on a lot more details on 28th July - so please join us for this. If you have any questions on that, feel free to ask them during the session. I think this will be super interesting and there will be tons of people there. So if you want to also submit your question maybe beforehand to our support channel, please do that so we can prioritise them as well. Then we also have on 27th July, so one day before, at 7pm, Singapore, Malaysia, Hong Kong time, 3pm Middle Eastern Time, we have a super interesting talk between StashAway and Diane Yeung on Coaching: Decluttering Your Money Beliefs. And if you want, we also have a podcast recorded with Diane. So if you want to listen to that before and then maybe it gets even more questions going, feel free to listen to that and then attend our webinar as well. On top of this, we have on 28th July, another event at 6pm, that's going to be called Personal Finance Basics. So if you want to learn more about the personal finance basics, you can join that for our Malaysian audience at 6pm. On the 4th August, 6pm in Malaysia, we also have our Investing Basics. So that's kind of the follow up to the Personal Finance Basics that I just mentioned before. And in Hong Kong, we have on the 30th July, an event at 1.30pm. It's called StashAway Hong Kong - Ask Me Anything - which will be in Cantonese. So if you want to listen to this in Cantonese, please feel free to join that session as well. And last but not least, I told you there's many of them today. We also have an event [12:00] on the 4th August at 6pm Middles Eastern Time. So for that audience, it's called StashAway Money Chat: How to Spend and Save the Smart Way, with a super nice guest, it's Saeid Hejazi - he's the CEO and co-founder of Wally. So please feel free to join that as well. All of those links to sign up will be in the show notes below, on our website, on our Eventbrite pages, on our Insta, and social channels. So please feel free to sign up wherever you follow us. That was a lot of webinars, so we hope to see as many of you as possible at all of them or even if you just attend one or two, please do, they're always super educational and we always get great feedback on them. With that being said, thank you again so much for joining us again this week. Also, thank you to my guests, Freddy and Stephanie, it was super insightful. I will see everyone later and have a great week ahead!