Asset TV Interview: Raise the Quality of Your Growth

Gillian Kemmerer:

Welcome to Asset TV, I'm Gillian Kemmerer. Today we're joined by WisdomTree Global CIO Jeremy Schwartz, who will be discussing his firm's approach to quality growth investing and how clients should be thinking about allocating in this category. Jeremy, thanks so much for joining us today. And technological advancement has been a dominant force in the markets this year, so I think it makes sense to start there. How does innovation, particularly in the tech sector, impact the WisdomTree quality growth strategy?

Jeremy Schwartz:

Well, thanks for having me here. This definitely has been the year of AI. I mean, you hear all this excitement about ChatGPT, and what's happening, and who's benefiting from all this advances in AI. And you see a lot of these large-cap tech stocks, whether it's a Microsoft, an Amazon, a Meta, the big stocks with all the data. What drives AI is the data. And these companies are benefiting disproportionately to the small-cap stocks or more unprofitable speculative stocks. And interestingly, the way we look at quality and growth, we have basically all these magnificent seven stocks that you hear so much about as our seven largest holdings in our quality growth strategy. So I think we're benefiting now, but over the long term we expect to continue to benefit from all these advances in technology.

Gillian Kemmerer:

Well thinking about hanging off of that, can you tell us a little bit about WisdomTree's approach to developing funds in this category right now since you're seeing so much success?

Jeremy Schwartz:

Yeah, so WisdomTree has been a champion of quality investing for the last decade, and really one of our flagship funds today is our Quality Dividend Growth Fund. We believe - what does quality mean? It's your high return on investment, high returns on capital type businesses. We use return on equity as one of those premier measures. I called it your Buffett style of investing. And when we first launched this quality dividend growth we owned Apple before Warren Buffett owned Apple, and so it's sort of symbolic of the types of companies he invested and buys in.

We've got about $15 billion now in this sort of quality family, but this is our first expression on the true growth side. We were doing quality selection from a dividend universe. This is quality, but with other growth characteristics. And so you're looking for fast sales growth, fast earnings growth, but high returns in capital versus what you hear a lot about the unprofitable tech companies as driving some of the markets in the last few years after the pandemic. This is identifying truly profitable companies that are growing their earnings and sales faster than the typical company.

Gillian Kemmerer:

And what are some of the challenges that you see associated with the fund, and what are the steps you're taking to mitigate them?

Jeremy Schwartz:

Well, I think the biggest risk now is can these companies deliver on these higher elevated expectations? So when I look at the growth profile of our basket, the S&P 500 is around 11% sales growth for the last five years, our basket is six points higher, 17%. So they're clearly delivering higher growth than the typical company. Can they keep on delivering that higher growth? So we rebalance our basket twice a year. These fundamentals don't change day to day that much, so you don't need to rebalance all the time, but sort of long-term can they deliver profits? Can they deliver their growth profitably, which is why we use those return on capital measures like return on equity, but finding the fast growers to sustainably grow is what we're trying to do, and that's certainly the highest risk, but clearly these companies are delivering right now.

Gillian Kemmerer:

We've touched on this a bit but let's drill a little deeper. What are the opportunities associated with the fund, and where are you seeing the best value in quality growth investing right now?

Jeremy Schwartz:

Well, I touched on the magnificent seven, I think that is what's leading the market, and these are companies growing their earnings much faster than the regular stocks, so I think that is really where the opportunities are today.

But as things evolve, by refreshing the portfolio, coming back to those return on capital and earnings growth, we'll refresh the portfolio as it evolves. But today, magnificent seven are roughly 50% of our basket, and so a hundred stock portfolio, so it's a bit more concentrated than your typical stock basket, but we think there are good opportunities in those big tech stocks today.

Gillian Kemmerer:

What is the most important takeaway for clients who are considering an allocation to this category, and how should they be thinking more broadly about quality growth investing in 2023 and moving forward?

Jeremy Schwartz:

When you look at the market this year there's been a huge dispersion across standard growth indexes. And what you find is what's under the hood really matters. What goes into the index construction. We talked about the process focusing on high returning capital businesses and marrying quality with growth. Some of the other index providers started including momentum as part of their growth screen. And for a while what was leading the markets was the same tech stocks that people were associating with growth. But what's interesting at the re-balances last year, what was leading the markets higher was energy. What happened this year was energy's earnings collapsed, it wasn't as high as it was last year, and so it showed strong earnings growth last year, good momentum last year, but not the same this year.

And so I think you're seeing huge diversion between some of the traditional growth indexes and our quality growth with QGRW, and so I think you just got to be cautious of how your index providers create their indexes, and theirs, its big differential, and we think the combination of quality and growth together is really a great combination, and so I think that's just the key points that we would leave you with.

Gillian Kemmerer:

Wonderful Jeremy, thank you so much for taking the time to chat with us and sharing more about the fund with our viewers today.

Jeremy Schwartz:

Thank you so much for having me.

Gillian Kemmerer:

Thank you so much for tuning in. Once again, I'm Gillian Kemmerer alongside Jeremy Schwartz, Global CIO for WisdomTree.

Jeremy Schwartz:

Before investing carefully consider a fund's investment objective, risks, charges, and expenses contained in the prospectus available at wisdomtree.com/investments. Read it carefully.