Q1 2023: What Were the BEST (and WORST) WisdomTree Strategies?
With breathtaking speed, the first quarter of 2023 has passed, and we are left to consider the kinds of investment strategies that did (and did not) work well over the period. If we consider the path of our experience:
- 2022 was all about the tightening of central bank policy, which sought to combat inflation that was much higher than the stated goal of many central banks—something close to 2%. Therefore, we saw the transition from the at or near zero interest rate world to a world where the cost of capital was significantly higher.
- In equities, if the environment is characterized by a significantly higher cost of capital, that means that more growth-oriented companies with potential earnings pushed far into the future will have to see their valuations contract, and similarly, investors should favor companies that are distributing cash, usually dividends, presently. Simply put, we’d expect “value” to outperform “growth.”
- If the U.S. Federal Reserve is positioning itself more aggressively in its tightening policy, a consequence could be a stronger U.S. dollar, which could make returns in unhedged international investments as well as commodities face a headwind.
So, as 2023 began, we knew all of that, and we likely would have been talking more about value- than growth-oriented equities and wondering how much more the U.S. dollar could run. In the back of our minds, we have also been thinking about China’s emergence from COVID-19 lockdown conditions, seeing how that pent-up consumption would reverberate across the global economy.
Q1 2023: The Five BEST-Performing WisdomTree Strategies
The first quarter of 2023 was, in a word, surprising. While we recognize that, even if value is in the midst of a multi-year run of outperforming growth, it was remarkable to see WisdomTree’s five top-performing strategies for the period dominated by growth. In fact, four out of the five were amongst WisdomTree’s “megatrend” strategies.
- WTAI: During the first quarter of 2023, the WisdomTree Artificial Intelligence and Innovation Fund was WisdomTree’s top performer. AI itself was particularly “hot” over this period, as this was the first full quarter after the launch of ChatGPT from OpenAI, an application with a potent mix of both novelty and potential productivity that pushed itself into the mainstream and got people of all types talking more about the potential of AI. We agree that AI is an exciting topic, but we also note that generative AI—the broader concept underlying ChatGPT—is something that should play out over years. There is always a risk that markets get too excited about things like this over shorter-term horizons.
- QGRW: The recently launched WisdomTree U.S. Quality Growth Fund found itself in the second position for the first quarter of 2023. Even if a lot of the forces that were present in 2022 have not dissipated, the market has seen certain Financials under greater pressure, while the higher-quality technology companies have been seeking to better contain costs—in many cases with layoffs—and also have large cash hoards to help buffer uncertainties.
- WCBR: The WisdomTree Cybersecurity Fund was the third best-performing WisdomTree Fund during the first quarter of 2023. In 2022, the cybersecurity story was dominated by Russia’s action against Ukraine, with the world knowing and watching out for Russia’s offensive cyber capabilities. It was also recognized that, even if a recession were to be imminent, it would be tough to cut expenses on the cybersecurity side of a given business. Still, the performance of purely focused cybersecurity companies in 2022 was not great, so it’s possible that part of the rally during the first quarter of 2023 was a recovery after particularly poor returns. Additionally, cybersecurity does touch artificial intelligence in that AI provides certain tools that could be particularly useful in the space. As we noted, AI-oriented companies performed well over this period.
- WCLD: The WisdomTree Cloud Computing Fund was the fourth-best performer during the first quarter of 2023. Cloud computing is a closely related topic to both AI and cybersecurity, as, in many cases, both AI and cybersecurity companies provide their Software as a Service (SaaS), which is a core business model in the cloud computing paradigm. If generative AI really takes off in the coming years, it is likely that many will access these technologies through the cloud. That’s because these models can be very large and use massive amounts of data, and cloud computing is a clear way to make this much more efficient for a lot more varied users to take advantage of.
- PLAT: Rounding out the top five, we see the WisdomTree Growth Leaders Fund. The typical company within this approach is defined as a “platform” business, meaning that customers can come to it—usually a website or application of some sort—and take advantage of economies of scale with many buyers and sellers of a given service right there, ready to extract value from that ecosystem. Frequently, we see people discussing generative AI in the context of different platform businesses, in that data tends to be the blood flowing through the veins, and a better understanding and predictive capability coming from that data allows for better servicing of clients and a reinforcing flywheel over time.
Figure 1: WisdomTree’s Five Top-Performing Strategies (Performance Measured at NAV in Total Return Terms, from 12/31/22 to 3/31/23
Q1 2023: The Five WORST-Performing WisdomTree Strategies
Over time, we have learned to never solely look at the best-performing strategies over a given period because, in many cases, it makes sense to be more interested in the underperformers, poised for a possible upswing if the environment changes. No strategy that we have seen outperforms forever. Amongst the worst-performing WisdomTree strategies to start 2023, we saw:
- IXSE (and EPI): Both the WisdomTree India ex-State-Owned Enterprises Fund and the WisdomTree India Earnings Fund have in common their geographic focus on India. When people consider what will drive global economic growth going forward, population growth and productivity tend to be at the core, and India has some of the best forward-looking demographics of any country today. That being said, it is still an emerging market, and it can be highly volatile. The news swirling around the Adani Group was just one recent example of how narratives can take hold and pressure this market even if the longer-term story, we believe, remains intact.
- DHS: The WisdomTree U.S. High Dividend Fund is the quintessential strategy that focuses on those companies that are paying dividends at present, but if the market is favoring technology-oriented companies, it does create a headwind here. Similarly, if Financials are under pressure, this can also create a headwind here, as many Financials tend to be higher-yielding. If people believe that value-oriented strategies are still in a run of longer-term outperformance, we believe that this strategy should capture predominantly mid-cap and large-cap value-oriented dividend payers in the United States.1
- GCC: The WisdomTree Enhanced Commodity Strategy Fund is a broadly focused basket of different commodities. While we continue to believe in the potential for commodity exposures to hedge against rising inflation, there can be periods where commodity prices moderate, and what we see here is based only on three months.
- WDNA: The WisdomTree BioRevolution Fund rounds out the five bottom-performing Funds for the first quarter of 2023. We saw the top five dominated by the more “software-oriented” megatrend strategies, and we see this “biotech-oriented” strategy included amongst the worst performers. It is possible that the 2020s and 2030s will be defined by innovations within health care, agriculture and materials science brought on by a better understanding of biology and DNA. However, it’s true that certain stocks in this strategy are even pre-revenue, so in a higher interest rate environment, we may see valuations taking a hit.
Figure 2: WisdomTree’s Five Bottom-Performing Strategies (Performance Measured at NAV in Total Return Terms from 12/31/22 to 3/31/23
Bottom Line: Top- and Bottom-Performing Strategies Give Us Useful Information
WisdomTree has a suite of tools directly available on its website that allow investors to monitor performance over different time frames. While we focus on Q1 2023 in this blog post, other investors, we recognize, may want to change the size of that window from three months to something longer (or sometimes shorter). To that end, investors can click here to see the performance-at-a-glance tool and test their theses on what might be performing the best or worst in WisdomTree’s range over different periods.
1 Dividends are not guaranteed and can be lowered or eliminated by the issuing company.
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he was based out of WisdomTree’s London office and was responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. In November 2021, Christopher was promoted to Global Head of Research, now responsible for numerous communications on investment strategy globally, particularly in the thematic equity space. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst Designation.