One of our most popular blog posts in 2015 focused on characterizing the types of companies that Warren Buffett and Berkshire Hathaway might see as interesting acquisitions targets. There was one criterion in particular that we found interesting:
“Businesses earning good returns on equity (ROE) while employing little or no debt.”1
In essence, this single line encapsulates the core focus of WisdomTree’s dividend growth strategies, which apply a focus on quality companies around the world.
Exemplifying a “Quality Tilt”
When we say “quality” at WisdomTree, what we mean is a focus on the combination of:
• Three-year average return on equity (ROE) and
• Three-year average return on assest (ROA)
Focusing on both penalizes firms that may have high return on equity through the use of leverage or, in other words, debt.
Impact of Focusing on Quality: 3-Year Average Return on Equity (as of 5/31/2015 WisdomTree Index Screening)
For definitions of indexes in the chart, visit our glossary.
Sector Manifestation of This Tilt
As a result of the global financial crisis of 2008–09, the word “leverage” found its way from the discussion of balance sheet statistics into more mainstream dialogue. As a result, the term became closely connected with Financials. Logically, an approach that focused on low leverage would necessarily have to under-weight Financials.
As of the May 31, 2015 Index Screening, the WisdomTree International Hedged Dividend Growth Index had an approximately 20% under-weight to Financials as measured against the MSCI EAFE Index. As bets against a benchmark go, we think the strength of this contrast duly emphasizes the commitment of WisdomTree’s dividend growth Index methodology to focus on quality companies.
Quality Stocks with a Currency Hedge to Reduce Risk
The WisdomTree Index that includes this quality tilt also employs a currency hedge on top of the equities to just target the local market return of these foreign equities. WisdomTree believes that currency hedging is becoming increasingly important as a strategic baseline for global allocations due to its risk reduction properties, as we discussed in this blog post. At a time when many investors are looking overseas for their additional portfolio allocations, the WisdomTree International Hedged Dividend Growth Index represents a marriage of two core ideas: a focus on quality companies positioned for growth, and the risk reduction properties of currency-hedged foreign allocations.
1Warren Buffett, “Letter to Shareholders 2015,” Berkshire Hathaway.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.