| NEW YORK, March 28
NEW YORK, March 28 WisdomTree Investments Inc
has paid a price for being so dependent on its flagship
Japan fund - as that market reversed fortune this year, shares
of the asset manager fell nearly 30 percent and Citi analysts
downgraded its stock.
But the company and many of its followers are undeterred,
saying it can use its unique position in the white-hot
exchange-traded fund space to recover from that hit and continue
As the only publicly traded asset manager focused
exclusively on ETFs, WisdomTree continues to attract
institutional buyers and analysts who see the company as a
potential takeover target, as well as having growth prospects of
At about $12.88 per share, the fund company is still selling
at more than twice its price at the beginning of 2012, even
after this year's sell-off.
But to resume last year's climb, it will have to persuade
investors that it can build size in a broader offering of its
funds and reduce its dependence on its Japan Hedged Equity Fund
, known to investors as DXJ.
WisdomTree's share price nearly tripled last year on the
back of the outsized success of DXJ. That fund gained nearly 40
percent in 2013, as Japanese stocks went on a tear, the yen fell
against the dollar and investors piled in.
"They essentially had lightening in a bottle last year,
where they had a fund that was well positioned at the right
time," said Jason Weyeneth, a New York-based senior asset
management analyst with Sterne Agee. "Certainly we'd like to see
the shares of some other funds grow and see their overall assets
diversify a bit."
GROWING BEYOND DXJ
DXJ now accounts for roughly one-third of WisdomTree's total
assets under management. It ended 2013 with more than $12
billion in assets, up from just over $1 billion a year earlier.
Since then, its net asset value has fallen 10.3 percent and the
fund has given back nearly $1.4 billion in assets, costing the
company some $6.6 million in revenue.
That pullback was a concern for Citi analysts, who last week
placed a sell rating on WisdomTree, saying among other things
that DXJ's growth "may not be fully repeatable."
Other analysts are upbeat about the New York-based company
and WisdomTree sees its exponential growth as a positive: "You
cannot be a big fund company without big funds," the company
said. (See a chart of the fund's growth and effect on the
company at link.reuters.com/muh97v)
The company also has roughly a quarter of its assets tied to
emerging markets and has been hurt as those markets sold off in
2014. Its second-largest fund, the Emerging Markets Equity
Income Fund, is down 6.4 percent year to date.
AN ATTRACTIVE BUY
As long as WisdomTree can diversify its assets and attract
more investors globally, analysts say, the ETF manager can ride
the long-term growth wave of the ETF industry, which has grown
from its first U.S. launches in 1993 to $2.4 trillion in global
assets and is expected to expand exponentially over the coming
WisdomTree is currently the eighth-largest ETF manager
globally with some $33 billion in assets. The company has found
its niche by focusing exclusively on ETFs, unlike peers such as
BlackRock Inc, which says ETFs make up about 21 percent of its
total assets under management, and Invesco Ltd, which counts
ETFs as about 13 percent of its total assets under management.
WisdomTree also counts among its backers a handful of Wall
Street's more well-known individuals. Michael Steinhardt, a
legendary investor and hedge fund pioneer, is the company's
board chairman and largest shareholder, while Chief Executive
Jonathan Steinberg is the husband of business news anchor Maria
Bartiromo and son of longtime dealmaker Saul Steinberg.
Their colorful personalities, combined with WisdomTree's
unique platform, may make it attractive to larger firms looking
to add ETFs to their business.
"It's a digestible acquisition for a lot of asset managers,"
said Matt Hougan, president of San Francisco-based research and
analytics firm ETF.com, noting that WisdomTree's platform "would
instantly give them the footprint."
COMING OFF HIGH VALUATIONS
Surinder Thind, a San Francisco-based analyst at Jefferies
who covers the company, said that WisdomTree's shares have long
traded at a high valuation because of its growth prospects.
It was averaging along the lines of 20 percent organic asset
growth each year, Thind said. Now that the company is seeing its
inflows turn slightly negative - in part because of a pullback
in Japan and emerging markets - some investors may be getting
Even after recent declines, the company trades at a forward
price to earnings ratio of 22.7, still well above the average
16.2 valuation of larger competitors such as BlackRock and
Invesco, according to Thomson Reuters data.
"When you have that terrific equity price and your business
slows down a little bit, it's not surprising that the stock
price comes down as dramatically as it has," said New York-based
equity analyst Macrae Sykes of Gabelli & Co.
He said the sell-off in emerging markets has created
"intermediate headwinds" for the company, but he sees the impact
as short term.
SOME BUYING ON DECLINE
Craig Hodges, head portfolio manager of the $1.1 billion
Hodges Small Cap Fund, has been adding to his position in
WisdomTree as the company's shares have slipped.
He said he expects rising U.S. interest rates to prompt
investors to take money out of bond funds and put them into
stocks. "ETFs are going to get a very large portion of the flow
back into equities," Hodges said, and WisdomTree offers a "pure
play" on the growth of the ETF industry as traditional mutual
funds have struggled to attract new investor dollars, he said.
Analysts tracked by Reuters have a median target price of
$17 for WisdomTree, an approximately 35 percent increase from
its current trading price of $12.58. Of the 11 analysts who
cover the company, six rate it a buy or equivalent, while only
Citi rates it a sell.
MORE DIVERSIFICATION EYED
WisdomTree is also known for its family of dividend ETFs,
which have been strong performers and provide a smaller
counterweight to its other funds. Its largest dividend ETF, the
WisdomTree LargeCap Dividend Fund, added some $537.9
million in assets in 2013 and gained 24 percent last year.
Still, WisdomTree will need to continue to build out its ETF
franchise to attract assets from more than a few key channels,
analysts have said.
That way, a retreat in one region, such as the recent
pullback in Japan markets, will not have such a large impact on
the asset manager.
To that end, the company said in January it would be
spending $20 million to take a majority stake in UK-based
exchange-traded products provider Boost, a sign that the company
is eyeing the European market for growth.
Europe, with roughly $9 trillion in invested assets, is the
world's second-largest retail mutual fund market after the
United States. ETFs make up only about 5 percent of invested
assets in Europe, compared with a 13 percent in the United
Hougan said, "a sustainable business is going to come when
they have five or 10 funds that (each) get $100 million every
(Reporting by Ashley Lau and David Randall; Editing by Linda
Stern and Steve Orlofsky)