Malkiel: Ignore China At Your Own Peril

September 18, 2013 How would you prepare investors in terms of expectations as to the time it might take for the government to effectively transition from that high-export model to an economy where there’s much more a more sizable consumption component?

Malkiel: It’s happening as we speak. Consumption is growing faster than GDP. And exports have not given China the kick that they did in the past. And while I’m not sure you can completely trust any of the figures you see, they certainly are reporting growth rates that are in the 7’s as opposed to the 9’s.

China’s the only country in the world where growth goes down from 9.5 percent to 7 percent or even 6.5 percent and everyone throws up their hands and says, “Oh my god, China is crashing!” We should have growth rate like that in the United States! You’re saying one needs to look at what’s going on now?

Malkiel: Yes. I just think there’s far too much pessimism.

Now, the other reason that I’m optimistic—you asked what investors ought to do—is that valuations matter. And China is about as cheap in terms of valuations as I’ve seen it in the years I’ve been following it, in that we’re talking about Chinese equities that are around 10 times earnings. So, expected returns are now quite sizable and investors should take notice?

Malkiel: I think so. Let’s talk about Wealthfront, one of your latest projects. It would appear from the cursory look I’ve had at the numbers that things are going well there.

Malkiel: Things are going extremely well there. I just actually saw the figures—they have $350 million under management. Give me a sense of the rate of growth. The last time we spoke about this in any detail, I believe the AUM was probably about $100 million; this was less than a year ago. When did this launch; about a year ago, maybe?

Malkiel: The other company I’m associated with is Rebalance IRA, which is also doing well.

And I’m just very excited about this, because I think investing is very uncertain; there are a lot of things we don’t know about. But the only thing about investing I’m absolutely certain about is—and I think that all of us who work in the investment area, who write about it, ought to be very modest about what we know and don’t know—the lower the fee I pay to the purveyor of the investment service, the more there’s going to be for me.

The beauty of Wealthfront is, we’re talking about an overall wrap fee of 25 basis points for managing a portfolio, and within that portfolio, it’s all done with index funds, and the lowest-cost index funds we can find. This may be one of the first times in the history of the advisory business where the fee pressure is extended to the actual advisors as well as to the products.

Malkiel: Exactly. And I think this is just in its infancy. I anticipate that just as indexing created a revolution in terms of portfolio management, that this is the beginning of a revolution in terms of investment advisory fees.



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