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By Paul Justice, CFA | 06-15-2011 03:32 PM

Look for Dividends in Emerging Markets

Seeking out dividend payers can help investors tap emerging-markets growth while providing a downside risk cushion, according to WisdomTree CEO Jonathan Steinberg.

Paul Justice: Hi there, I'm Paul Justice for Morningstar, director of exchange-traded fund research. Today, I'm joined by Jonathan Steinberg, the CEO of WisdomTree Investments. Today, we're going to talk a little bit about the surging interest in emerging-markets funds and some of the success WisdomTree's strategies have had in this space. So thank you for joining me today.

Jonathan Steinberg: Thank you. Thanks for having me.

Justice: So currently, we have several of your emerging-markets funds on our docket that have earned a Morningstar Rating for ETFs of 5, in that they have some superior performance versus the categories in different ways that they're gaining access to emerging markets. One of those is actually one of the top in its category. If you could talk a little bit about your fund, DEM is the ticker, can you give us a little highlight on strategy there and really what was the genesis of that fund?

Steinberg: So, DEM is emerging-markets equity income, and it uses our dividend-weighted approach. So when you weight internationally by dividends, you end up with very different country weights, and it gives you sort of a relative-value bias versus some of the momentum strategies, which is really what marks the cap-weighted approaches. So we can end up with very different investing experiences.

Our fund is about 3.5 years old. From a performance standpoint, it's maybe 700 basis points or 800 basis points of annualized outperformance over the MSCI index. Mostly that comes from the different country weights, and the very high yields protects on the downside. So, in fact, in the emerging markets, dividends have been growing in general at a much faster rate than anywhere else on the planet, and so not only are you getting high yields but the dividends themselves are growing. So it has a very, very complementary compounding effect to your overall returns. So it's just been something that's worked very well, and it's just another way to get growth of dividends and to just diversify your overall emerging-markets experience.

Justice: So you're getting exposure to emerging markets, but yet you're still complementing the yield side of your portfolio, two things that have shown very strong investor interest here during the last few years. So I think that's a pretty logical approach.

Steinberg: The other thing about dividends paid is it cuts through all of the different accounting standards, and in the emerging and frontier markets, that can be a very big issue. So it standardizes the way you weight your portfolios because a dividend paid in Brazil is a dividend paid in Indonesia is a dividend paid everywhere in the world. So that's also something that smoothes out the experience.

Justice: Yeah, and I think that oftentimes investors could find if you looked at the filings for those individual companies, some of the information may be incomplete when you get into the emerging-markets landscape. Even if you had it on a timely basis, it might be difficult to decipher. You know what a dividend is; you know when it comes in. There's no tricking the market around that.

Steinberg: Exactly. So, in a sense, it's very pristine. So that's one of the reasons that really attracted us to our dividend weighting in general, and when we were launching the firm five years ago, we definitely wanted to make a big push on the international side of the business, and so we really relied heavily on dividends. We thought that would make our job easier given these very standardized, clean portfolios that we could replicate using the same methodology really everywhere around the world.

Justice: What shocks me the most about some of these emerging-markets funds is especially the success that index funds have had versus their active counterparts here during the last five years. Many of the top funds in the category, be it MSCI-based market-cap funds or WisdomTree funds have done really well. So it kind of dispels that myth that you really need an active manager for these diverse markets in order to pick stocks out.

Steinberg: I think that's true, though what differentiates WisdomTree is: One, we are using an affiliated index, so we've created our own index, and two, we are definitely not beta. So beta is really defined by being cap-weighted, and we are, I would say, fundamentally weighted or rules-based-active. And so we're trying to beat the market on an afterfee basis.

Justice: Sure. So you've kind of blended the two?

Steinberg: Yes. I think. Hopefully, it's viewed as the best of both: Having clean, transparent, and broad portfolios, but still aspiring to beat the market.

Justice: Great. Well, thank you for your insights on emerging-markets equities. We look forward to having you back.

Steinberg: Thank you.


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