Asset TV Interview: A Quality Dividend Approach

Jonathan Forsgren:

Hello and welcome to the program. Joining me today to discuss the state of the equity market is Jeff Weniger, head of equity strategy at WisdomTree Investments. Jeff, thank you for joining us.

Jeff Weniger:

Thanks, Jonathan. I appreciate it.

Jonathan Forsgren:

Jeff, you're head of equity strategy. What is your outlook in the equity market with everything going on in 2023?

Jeff Weniger:

Well, you said everything going on, and there certainly are several issues in the here and now. Hill the regional bank crisis go on? The positive news for the stock market is that tends to be more of a small and mid-cap phenomenon. So it doesn't affect most people's allocations, which are large caps, but it is a concern and it's a headwind. We are entering a phase where liquidity and credit are tightening, in tandem you could say. It's a little bit of a known quantity. It doesn't really surprise anyone to infer that. We get this Fed senior loan. Officer survey has been tightening since what? The fourth quarter of '21. And we've just seen the Fed do its 500 basis points in what? 12 or 13, 14 months, something like that.

Jonathan Forsgren:

Bit of a spring. Yeah.

Jeff Weniger:

Yeah. And so it's one of these markets where you have to start thinking about how much does this market want to chop around? We've had this run here since October 12th, and then it flattened out in the last few months. And maybe it just wants to be a choppy market. After a 12-year bull market, maybe that's just where we want to be. And so the outlook is for something like that, elevated volatility concern with respect to mitigating downside pressures in these broad equity exposures.

Jonathan Forsgren:

And how much does this current environment mimic or remind you of 2008? Are there concerns? You mentioned the bank crisis. Is there anything like that that we could see dominoes fall beyond the banking crisis?

Jeff Weniger:

Well, '08's a little bit of a special situation because you would've been putting the likes of Citi and Wells Fargo and B of A up against the wall. This one is for now regional banks, plus a little hat tip to Credit Suisse from a few months ago. The large mega banks are more highly regulated than they were back then. This go around, you could argue that the stock market got more elevated in terms of valuation. That bull market that ended with the global financial crisis was a hated bull market. Whereas this one ended where with some pockets of the market at valuations that started to represent dot com, namely inside growth mandates, speculative growth, unprofitable growth, stuff trading at 30, 40, 50 times earnings. So that's probably the difference between this cycle and that one. A lot of our philosophy is tying into trying to avoid some of that stuff that really melted up. We're probably not going to be seeing an '09 to '21 experience here in the 2020s.

Jonathan Forsgren:

Well, that's great to hear. So what equity factors are you seeing as opportunistic right now?

Jeff Weniger:

Well, at WisdomTree, we've been doing for a living really dividend mandates and quality mandates. Now, quality can oftentimes be a synonym for growth investing, but quality will come at a price. And I think that's why we do the dividend exposure. I think we need to have this mentality snap out, that this gravy train of just running stocks higher for a decade, is probably over. And what are you actually going to do? Are you going to just own beta in what could end up being a sideways type market for many years? Or a market that ultimately ends up shunning hyper growth? Or you’re going to start thinking about some of these factors of just finding good quality run companies at reasonable valuations?

Jonathan Forsgren:

Do you expect interest rates to go back to zero at any point? That’s what it took.

Jeff Weniger:

Rates at zero. There’s scenarios that would have that happen. I don’t know that that would be a base case. Street consensus has Fed ... At this point, probably in recent memory, it was three cuts. Now, they’re looking at two cuts, ostensibly because the regional banks might be clearing themselves up. But who knows? That’s microdata. The scenario that would have them doing a Bernanke or a Greenspan on interest rates back down there would be if something like the housing market were to crumble. Housing market’s a risk. It’s in a state of a freeze at this point. That would be a panicky scenario. It’s almost one of those things is would the stock market like a total reversal of 500 basis points? What is happening happening systemically? But I think the stock market might like gentle 25 basis point increments, so long as it’s telegraphed.

Jonathan Forsgren:

I do hits from the exchange, and they’re all saying, “We can handle bad news, we can handle good news. We just don’t like surprises.” So you touched on WisdomTree’s, quality approach. Can you tell us about how you identify quality and what makes this strategy particularly attractive to investors right now?

Jeff Weniger:

Yeah. Well, the original US quality dividend growth mandates are on a 10^th birthday right now. And there’s a few things that we do in them that I think are pretty creative in terms of index design. You have an ETF, you wrap it around your index structure. You can run return on equity as a concept on a broad basket of stocks, but that won’t check your leverage, because I could take a mediocre company, return on assets as mediocre, and I could just plunk a lot of leverage onto that thing, and I can make your return on equity look beautiful, which is wonderful in an economic expansion. But let me know what happens when-

Jonathan Forsgren:

When the interest rates come up.

Jeff Weniger:

Yeah, so we run those screens. We return on equity in tandem with return on assets. But when you do that, you’ll oftentimes end up with a very growthy portfolio. Catch a value cycle, and you’re in trouble. And so what you do is you run the dividend weighted concepts, which we’ve been doing at the Tree of Wisdom, WisdomTree for 17 years. Run those two together. And so you have this growthy portfolio. Run the dividends on it, smash those together, and you end up with a balanced fund.

Jonathan Forsgren:

How does WisdomTree’s fund DGRW fit into today’s environment, and what makes it particularly appealing to investors at this moment?

Jeff Weniger:

Well, okay, think about it like this. What was working for all these years? A ton of companies at the top of the S&P paying no dividends, and you can name all … Basically just put a map, a laser on Silicon Valley. That's what had been past tense working. And now we're in this period of time where we're exiting the good times. As we're just talking about, J Powell has decided that that is going to be the case. And for the last decade, dividends were generally not were the first thing you're looking at. you're looking at electric vehicles, you're looking at to the social media, that type of thing.

Now are the 2020s something like a decade of dividends? We've had a bunch of those decades in the past. The time that it wasn’t really working was the 1990s. That was not a decade of dividends because we had a dot com bubble. And then basically this last decade. Despite not owning most of those Silicon Valley companies, what happens when the market reaches a state of sobriety? Some of those names are 50, 60 times earnings. When those start to get shunned and you're running quality screens and you have dividend mandates, and there's newfound capital shifting directionally towards those, does that make something like a 2023 to 2033 setup look pretty good for something like DGRW? That would be the thesis.

Jonathan Forsgren:

Okay. So you've just talked about the benefits of a quality strategy. What are some of possible downsides to a quality strategy?

Jeff Weniger:

Well, you get a speculative mania. A speculative mania whereby the companies that are outperforming are the companies that pay no dividends and are being priced based on prospects of distant earnings.

Jonathan Forsgren:

How do you address that, those challenges?

Jeff Weniger:

Well, you'll catch those from time to time. I imagine that if DGRW was alive in '98, '99, 2000, that we probably would've struggled because at the time, I'm just wracking my brain here, we would've not owned. Let's just think about it. eBay loosened. AOL. Think about AOL. How long did that dominate? Well, we wouldn't have owned those in the late 1990s when you get these types of 1929, 1999 type environments. That would be an area where DGRW would struggle. But I don't know how routine those are. I think that those are pretty anomalous eras. This is pretty standard stuff. You're running high profitability screens. You have to have earnings exceeding your dividends. There's another incremental layer of profitability over this. Paying dividends, which is the entire foundation of WisdomTree's 1957 to present Jeremy Siegel studies. In any given week, month, or year, this stuff could come up, fall out of a favor. But I think over 5, 10, 20, 30 year horizons, I'd be challenged to argue against the concept like this.

Jonathan Forsgren:

So Jeff, do you have a favorable outlook for quality investing over the next two to five years?

Jeff Weniger:

Well, okay, so let's think about it from this perspective. Two to five years or 30 years. Okay. Well, we're unwinding several bubbles, that we have to make historic comparisons. Was the NFT phenomenon, the meme stock phenomenon, a lot of the things that we started to see at the apex of the cycle, was that enough to get us to the point where the market wants to shun the winners of the prior bull market? These old market maxims, they're a hundred years old. The winners of the prior bull market are never the winners of the subsequent bull market. From moderate bull market transition to other moderate bull market, maybe they can continue working. But what if it's a really, really smack you in the face bull market, which is what we had from 09' to '21. You go back to these prior bull markets like in the 1920s where RCA, the radio is radio. And then get into the 1930s, and radio's the worst corporation you can invest in.

That type of thing. Or like we were just talking about with AOL. As we transition into this, "Did a bull market begin on October 12th? I don't know. We'll figure it out", can we be led by the same Silicon Valley giants into perpetuity? I think there's people who believe that. Maybe they're right. But if a bull market did end on January 3rd of '22 and that we had enough societal changes from the shock of COVID and from the grizzly bear of 2022, does that snap leadership, like the way leadership was snapped around the turn of the century when those AOLs died and it's time for energy to come on, that type of thing? I believe that. And so if you're on a two to five year horizon, as you said, Jonathan, it would seem to me that these types of screens would be working. This is why DGRW had the downside capture back in '22. It had a pretty good year because it wasn't owning a lot of that stuff that just got taken out and beaten up.

Jonathan Forsgren:

Well, funny you should mention, RCA. This building was actually built for RCA by the time it was done. They didn't have the money or they went bankrupt, I believe. And it's called the GE building because RCA got into financial trouble and GE took it over.

Jeff Weniger:

Yeah. GE, well, there's another. Okay, take it from that perspective. At the turn of the century ... You see, what we think about in the 1990s, Microsoft and Cisco and you know the names, General Electric was a fantastic name at the turn of the century, and it reached its pinnacle of dominance at that point. And sometimes, you get a new cycle on your hands, and it was time for GE to spend functionally a quarter-century in the wilderness ever since then. So that's pretty cool little story. RCA and GE.

Jonathan Forsgren:

And then for investors who are watching this and want to add quality toward their portfolios, what would you advise them? And can you point them to anywhere that they can access resources?

Jeff Weniger:

Oh, you're asking the WisdomTree guy about it. Well, we have a blog that we've been writing daily for I guess it's 15 years. And I would say that a critical proportion of that blog is on this quality factor and tying it in with the dividends. There's the wisdomtree.com/quality. There's that too. That would be the obvious one. But we do a ton of media. We're talking about this. We write white papers. We at this point ... See, when you launch an ETF business in '06, you start to develop a database. And you have a 17-year database, and you can pick through all of this stuff and figure out what's driving in the bowels of a portfolio. Well, how are these factors interacting? And you could write War and Peace using the research on the WisdomTree website for what our analysts have done with this stuff. It's a classic smart beta operation with, at this point, 17 years worth of literature.

Jonathan Forsgren:

Well, Jeff, thank you very much for joining us and sharing your insights today.

Jeff Weniger:

Thanks, Jonathan. Appreciate it.

Jonathan Forsgren:

And to our viewers, thanks for watching. For Asset TV, I'm Jonathan Forsgren. We'll see you next time.

Jeff Weniger:
Before investing, carefully consider a fund's investment objectives, risks, charges, and expenses, containing the prospectus available at wisdomtree.com/investments. Read carefully.