Should Canadian investors shift to value in U.S. equities?

Ruth Saldanha: With markets having recovered somewhat from the volatility of the last quarter of 2018, are we looking at a shift in terms of what investors are looking for? Asset Allocation Director at WisdomTree Jeff Weniger is here to tell us why he believes that in the U.S. markets there is a shift to value investing from growth.

Jeff, thank you so much for being here today.

Jeff Weniger: Thanks, Ruth. Glad to be here.

Saldanha: With markets rising why do you believe that there's a shift to value investing?

Weniger: Yeah, and it's been ever so slight, right? In the latter part of 2018, value down in the Stated appeared to be really taking over. You saw the FAANGs, which represented the leadership, Facebook, Apples, Amazons of the world, taking leadership for years on end and then kind of rolling over starting last summer. And then, when we really hit that fourth quarter, the boondoggle, well, I guess, you could say with capital markets, value was down but by a smaller order of magnitude than growth. So, it's been an interesting development.

Now, we snapped back up and a lot of the leadership is taking back some of the losses that were witnessed back then, and growth has picked up some alpha relative to value. But nonetheless, I think that the fact that we had two decent-sized market ructions in 2018 was enough to perhaps be the catalyst for changing some of the multiyear trends. Concepts like U.S. equities outperforming or U.S. growth stocks outperforming. You need something that's psychological that hits all of us all at once and that might have been it.

Saldanha: Going ahead based on this thesis what segments do you think will do well?

Weniger: The sectors within the U.S.?

Saldanha: Yes.

Weniger: Well, usually, within the confines of value it will oftentimes be value indexes will be more financials and growth indexes will be more tech. And so, that's so much that we are favoring financials, it's that tech is so ripe right now. I mean, it's been essentially tech leadership for the better part of the decade, notwithstanding what we saw in 2018. So, the points where a lot of valuations depending on which metrics you look at have become very stretched. So, you are starting to find populated in value indexes concepts like consumer staples. Nobody is really talking about them because they are not hot go-go type companies. But oftentimes, those are the areas that will behave a little bit better, especially if you end up having some sort of recession possibility or even just an economic slowdown where a lot of the stuff that was leading the market in the past ceases to be the leadership and it's new growth from groups like utilities, staples, some of the more boring areas of the market.

Saldanha: How should Canadian investors in U.S. equities play this theme right now?

Weniger: Well, there's two sides of it. There's, of course, the currency question should you be long U.S. dollars, or should you hedge back to CAD. We've said philosophically at WisdomTree that your default position should be hedge back to your base currency and then ask yourself why from a research perspective you should be making short that currency. So, that's what happens when you buy the S&P 500 without hedging back. And so, we would say default back to either what we do which is a variable hedge where our ETF metrics will do the metrics themselves or be fully hedged to start with. That's part of the equation.

Then the other part of the equation is, is to ask yourself how unique is it to go value. I mean, you look at some of our ETFs that have gathered the assets they've been the ones that haven't been value, right, because some of those people chase performance. I mean, we have an ETF that's HID and HIDB, those are the deep value ETFs that we have at WisdomTree and we haven't gotten much traction with them because, well, the performance hasn't been very good because value has been out of favor. If we get a multiyear snapback like we did from 2000 to 2007 in U.S. equities where performance was measured in thousands of percentage points and gaps between value and growth, which has long since been forgotten because we are talking about a generation ago, then not only do you want to be in value concepts but potentially deep value and that would be where the next surprise would be.

Saldanha: Finally, what are some U.S. equity names that you like right now?

Weniger: I'd say that it's more along the lines of where the risks are. So, we oftentimes will say half of money management is not so much what you do own but what you don't own, right? Avoiding potential pitfalls. So, down in the States, for example, you take Elizabeth Warren is running for President. Now, you never know this far out who is going to be the President. But the main platform that I think can appeal to both the left and the right – you saw that she wrote the blog recently – she wants to break up the big tech names, Facebook, Google, and Amazon in particular. And by the way, the man in the White House also is challenging those very companies. I mean, you've seen Trump challenging Jeff Bezos of Amazon in the past. There's a target on some of these companies that have been just mounting up for so many years at this point. You need to really ask yourself where is the next political change happening in the United States and can I get out in front of it. I think Canadians ask themselves these questions on fossil fuels a lot, but we don't oftentimes think about it in terms of the next potential enemies of the state and I think silicon valley might be that area.

Saldanha: Thank you so much for joining us with your perspectives, Jeff.

Weniger: Thanks, Ruth.

Saldanha: For Morningstar, I'm Ruth Saldanha.