WETF - WisdomTree Investments

[Picasso]

Been eyeing this stock for a while and decided to go long today.  Especially after I saw Janus purchase one of their smaller competitors.

 

For those unfamiliar with WisdomTree, they have a bunch of ETF's that are not weighted on market caps but rather different metrics such as yield or earnings, etc.  They are actually trying to beat the market in their ETF's versus competitors which are typically trying to match the index such as the S&P.

 

ETF's currently make up 12% of the mutual fund business which totals about $12.5 trillion.  These guys "manage" about $36 billion.  By manage I mean they create the index for the funds they market and outsource the management to Mellon and Western.  So they do not take any of the execution risk and simply focus their efforts on creating funds and marketing them.  It's very capital light as a result and they have high gross margins of over 80%.

 

The two largest funds are DXJ and DEM.  $13.4 billion between the two out of their $36 billion in total AUM.

 

On a trailing 12m basis, they produced $63 million of free cash flow.  On the $1.2 billion dollar market cap this is a 5% FCF yield.  They plan to reinvest the $100+ million of so of cash back into the business.  Probably not a bad thing since their ROIC from 2013 was over 50%.

 

So my bet is they come up with other interesting funds in a market which will continue to grow (ETF's).  There seems to be a lot of good qualities in the business and as far as I am aware it is the only pure play ETF stock.  In the meantime I think it is reasonable to assume I can earn at least 5% in a debt-free capital light business that has shown the ability to grow in recent years.  It is not clear what the catalyst will be in the short-term but I think they can get a bigger chunk of that $12 trillion and growing pile of cash which is not producing much, if any, alpha.

 

Edit: Took out the "dollars" after $36 billion.  I hate it when I do that.

[oddballstocks]

Asset managers are valued as a percentage of AUM, any idea where WisdomTree stands on that today?  I believe about 6% of AUM is fair value, I know for a while they were trading at 3%, not sure about now.

[oddballstocks]

Looks like still 3% of AUM...so maybe some room here for a double?

[Picasso]

Well I think it varies on the type of asset management business.  The average fee on AUM for WETF is about 52 basis points.  I think it is a lot higher for other asset managers but would need to look at BLK to check their fees.

 

But it also ignores the fact this business is a lot less capital intensive than other asset managers because they are really trying to market versus hiring lots of employees and doing who knows what else that fund companies do.  I think they still have less than 90 employees.

 

Their costs are pretty fixed as well so there should be some scale advantages if they can keep growing.  Hard for me to peg the upside.

[writser]

Interesting idea. I have a little experience in the industry. Let me point out the bear case. I'd say that the ETF-business is pretty much 'winner takes all'. Bigger funds can afford lower management fees, pay more for promotion, are more liquid in times of need and simply better known by investors. GLD, SPY and VWO are far larger than their competitors and I would consider them to have a kind of moat. Of all the Wisdomtree funds I would only consider DXJ to have some sort of scale advantage.

 

Secondly, especially in equity ETF's there is an ongoing race 'to the bottom' with funds charging less and less management fees. SPY is now at 9 basis points. I think this trend will continue as ETF issuers try to gain market share in a growing market (let's call that the Amazon approach).

 

I agree that Wisdomtree has some interesting niche funds but they are a small fish in this business when compared to (especially) Vanguard, iShares and State Street. Not to mention there are a lot of other small fish out there. I personally have some doubts about the sustainability of a lot of these small ETF's and their issuers. Is it really a good value proposition for investors to buy a 'WisdomTree Japan (currency) Hedged Tech, Media and Telecom Fund' with a 0.5% fee p.a.? Frankly I think you should be banned from this forum if you buy crap like that. The same holds for 90% of their funds.

 

So, what you are betting on is that they can a) carve out a niche market in the ETF business, b) the big players won't enter their niche market (so they can never grow too profitable) and c) that they can charge fees above market rates for their funds. They're trying to achieve this in a market that is highly competitive with fees trending downwards. And all other small players are trying to do the same thing. I'm not sure what distinguishes Wisdomtree from the competition and that's why I'd say that in terms of % of AUM I think they should trade at a low valuation when compared to other asset managers.

 

To get back to the Amazon comparison, would you bet on any of their small competitors succeeding? However, so far Wisdomtree seems to be buckling the trend and is doing decent.

 

Please note that this is just the qualitative view. Haven't looked at the numbers in great detail but it doesn't look extremely cheap at first glance.

[Picasso]

Interesting idea. I have a little experience in the industry. Let me point out the bear case. I'd say that the ETF-business is pretty much 'winner takes all'. Bigger funds can afford lower management fees, pay more for promotion, are more liquid in times of need and simply better known by investors. GLD, SPY and VWO are far larger than their competitors and I would consider them to have a kind of moat. Also, especially in equity ETF's there is an ongoing race 'to the bottom' with funds charging less and less management fees. SPY is now at 9 basis points. I think this trend will continue as ETF issuers try to gain market share in a growing market (let's call that the Amazon approach).

 

I agree that Wisdomtree has some interesting niche funds but they are a small fish in this business when compared to (especially) Vanguard, iShares and State Street. Not to mention there are a lot of other small fish out there. I personally have some doubts about the sustainability of a lot of these small ETF's and their issuers. Is it really a good value proposition for investors to buy a 'WisdomTree Japan (currency) Hedged Tech, Media and Telecom Fund' with a 0.5% fee p.a.? Frankly I think you should be banned from this forum if you buy crap like that. The same holds for 90% of their funds.

 

So, what you are betting on is that they can a) carve out a niche market in the ETF business, b) the big players won't enter their niche market (so they can never grow too profitable) and c) that they can charge fees above market rates for their funds. They're trying to achieve this in a market that is highly competitive with fees trending downwards. And all other small players are trying to do the same thing. I'm not sure what distinguishes Wisdomtree from the competition and that's why I'd say that in terms of % of AUM I think they should trade at a low valuation when compared to other asset managers.

 

However, so far they seem to be buckling the trend and are doing decent.

 

It seems like they are having an easy time carving out their niche.  As far as fees go, paying 48 basis points to have a hedged Japan index seems like good value to me.  How many investors want to invest in Japan but worry about the currency risk?  Now add on the number of investors who know how to properly hedge out the currency risk and the 50 basis points sounds pretty good.  The fees on a standard index are being driven down to zero but I think it will be more of a value add on the types of indices these guys can create.

 

I believe Murray Stahl at FRMO is doing a similar thing where they are coming up with an index and using their name to create a sort of "IP' revenue stream. 

 

It is also hard for big players to enter their niche, in my opinion.  Spdr or iShares will not be caught dead doing half of these products because it flies in the face of their motto which is investors can't beat the market so just index.

 

The thing I do worry about is the stickiness of the asset base.  ETF investors by nature want in/out and intraday liquidity so you will get more redemptions than a typical mutual fund.

[Tim Eriksen]

Asset managers are valued as a percentage of AUM, any idea where WisdomTree stands on that today?  I believe about 6% of AUM is fair value, I know for a while they were trading at 3%, not sure about now.

 

Having spent a lot of time on asset managers, and making most of mine and my clients money in stocks like DHIL, HNNA, and TETAA, I would say 6% is way to high of valuation metric for equity asset managers, and particularly too high for WETF (since their fees are closer to bond managers ).

 

I don't think you should value them at 6% when they only charge 51 basis points on average.  That is 12x revenue (600 bps/51 bps).  Since after tax profits for WETF are about 25% of revenue that would be 48x earnings (600 bps / (51*0.25) bps.  That is way to rich unless you believe in an incredibly high growth rate.  I have followed WETF for 8 years and nearly all the time considered way overpriced.  Still do, but not by much since they don't pay taxes right now.  It is currently at about 15x cash earnings.  The problem is they will use up their NOLs in 18 months, putting the valuation at 25x earnings /cash flow.   

[cobafdek]

Anyone know if Jeremy Siegel is still affiliated with WisdomTree, as investment advisor, major owner, or both?

 

For my money, I'd sooner trust the methodology at PowerShares/RAFI (Rob Arnott), when it comes to fundamental indexing.

 

Don't know how this consideration influences the valuation of WETF.  I do recall Munger calling Siegel "daft."

[writser]

It seems like they are having an easy time carving out their niche.  As far as fees go, paying 48 basis points to have a hedged Japan index seems like good value to me.  How many investors want to invest in Japan but worry about the currency risk?  Now add on the number of investors who know how to properly hedge out the currency risk and the 50 basis points sounds pretty good.  The fees on a standard index are being driven down to zero but I think it will be more of a value add on the types of indices these guys can create.

 

I see your point but I am sceptical about the 'value added' by a lot of their indices. Sure, for Joe Trader these are good propositions if he wants to invest (speculate) in very specific themes because he has no other way to do so. But for institutional investors I'm not so sure these products offer good value for money. They can replicate similar strategies in a cheaper way.

 

It is also hard for big players to enter their niche, in my opinion.  Spdr or iShares will not be caught dead doing half of these products because it flies in the face of their motto which is investors can't beat the market so just index.

 

It's a grey area. Wisdomtree is also 'just indexing'. They just track some more obscure indices. But if these indices turn out to be popular others will copy them. DXJ is by far the biggest Wisdomtree hit because it turned out (in hindsight) to be a nice play to bet on Abenomics because of the currency hedge. Thus, all the hot money went in and DXJ grew twentyfold in two years. Blackrock recently issued a currency-hedged Japan ETF too . So I disagree with you. If the niche gets too profitable others will notice. Not to mention that a lot of the money in DXJ is, as you pointed out, 'fast money' that can leave in the blink of an eye.

[Picasso]

While some people may view their funds as perhaps a gimmick, I would say some of these add a lot of value especially during periods of currency volatility.

 

I mean look at HEDJ versus VGK for European large cap.  HEDJ removes the currency risk and is down 2.7% YTD versus 8.8% for VGK.  Fees are 12 basis points on VGK but I would argue that people looking to buy European stocks would probably want to pull out the currency risk.  It was worth it to pay a bit more, which compared to the fees in the mutual fund world is not a big deal.

 

I agree that Siegel is a joke.  But people who invest in ETF's don't really know Siegel is a joke.  In fact it is probably worth having him as a spokesperson for the types of people who do ETF's.

[Picasso]

It seems like they are having an easy time carving out their niche.  As far as fees go, paying 48 basis points to have a hedged Japan index seems like good value to me.  How many investors want to invest in Japan but worry about the currency risk?  Now add on the number of investors who know how to properly hedge out the currency risk and the 50 basis points sounds pretty good.  The fees on a standard index are being driven down to zero but I think it will be more of a value add on the types of indices these guys can create.

 

I see your point but I am sceptical about the 'value added' by a lot of their indices. Sure, for Joe Trader these are good propositions if he wants to invest (speculate) in very specific themes because he has no other way to do so. But for institutional investors I'm not so sure these products offer good value for money. They can replicate similar strategies in a cheaper way.

 

It is also hard for big players to enter their niche, in my opinion.  Spdr or iShares will not be caught dead doing half of these products because it flies in the face of their motto which is investors can't beat the market so just index.

 

It's a grey area. Wisdomtree is also 'just indexing'. They just track some more obscure indices. But if these indices turn out to be popular others will copy them. DXJ is by far the biggest Wisdomtree hit because it turned out (in hindsight) to be a nice play to bet on Abenomics because of the currency hedge. Thus, all the hot money went in and DXJ grew twentyfold in two years. Blackrock recently issued a currency-hedged Japan ETF too . So I disagree with you. If the niche gets too profitable others will notice. Not to mention that a lot of the money in DXJ is, as you pointed out, 'fast money' that can leave in the blink of an eye.

 

You would think the Blackrock hedged Japan fund has a smaller fee than DXJ, but it is also at 48 basis points.  There is $50 million of AUM versus $10 billion at DXJ.  There is a risk for the smaller funds to be unwound if they get under a certain size which can make it hard for copy cat funds to survive.  For this reason a lot of investors will not get involved with the smaller funds even under someone like Blackrock.  I will be curious to see if Blackrock starts lowering the fees on that fund to win over business.  Sometimes a fund like IAU will get enough critical mass to be able to pull business from something like a GLD.

 

Management mentioned they are not looking to copy other funds but come out with interesting new ones. 

 

Part of the reason why I started to like WETF was the amount of money still in DXJ after  2013.  In May of 2013 when the Abenomics trade was hot, they had around 210 million shares outstanding.  Today after the Japanese market has cooled off in a major way, they are still at 207 million.  The peak was 250 million at the end of 2013.

[Picasso]

Asset managers are valued as a percentage of AUM, any idea where WisdomTree stands on that today?  I believe about 6% of AUM is fair value, I know for a while they were trading at 3%, not sure about now.

 

Having spent a lot of time on asset managers, and making most of mine and my clients money in stocks like DHIL, HNNA, and TETAA, I would say 6% is way to high of valuation metric for equity asset managers, and particularly too high for WETF (since their fees are closer to bond managers ).

 

I don't think you should value them at 6% when they only charge 51 basis points on average.  That is 12x revenue (600 bps/51 bps).  Since after tax profits for WETF are about 25% of revenue that would be 48x earnings (600 bps / (51*0.25) bps.  That is way to rich unless you believe in an incredibly high growth rate.  I have followed WETF for 8 years and nearly all the time considered way overpriced.  Still do, but not by much since they don't pay taxes right now.  It is currently at about 15x cash earnings.  The problem is they will use up their NOLs in 18 months, putting the valuation at 25x earnings /cash flow. 

 

What would you consider the closest comp to WETF in terms of a publicly traded equity?

[writser]

While some people may view their funds as perhaps a gimmick, I would say some of these add a lot of value especially during periods of currency volatility.

 

I mean look at HEDJ versus VGK for European large cap.  HEDJ removes the currency risk and is down 2.7% YTD versus 8.8% for VGK.  Fees are 12 basis points on VGK but I would argue that people looking to buy European stocks would probably want to pull out the currency risk.  It was worth it to pay a bit more, which compared to the fees in the mutual fund world is not a big deal.

That's easy to say in hindsight. Currencies can move both ways. Institutional investors can hedge currency risk for far less than what they're paying for in HEDJ.

 

I agree that Siegel is a joke.  But people who invest in ETF's don't really know Siegel is a joke.  In fact it is probably worth having him as a spokesperson for the types of people who do ETF's.

I think you're being too naive about the 'types of people who do ETF's'. From the $12 trillion in ETF's how much would be invested by retail clients? And what about the $36 billion managed by Wisdomtree ? It would be very interesting to dig up some numbers on that.

 

Part of the reason why I started to like WETF was the amount of money still in DXJ after  2013.  In May of 2013 when the Abenomics trade was hot, they had around 210 million shares outstanding.  Today after the Japanese market has cooled off in a major way, they are still at 207 million.  The peak was 250 million at the end of 2013.

I agree with you that DXJ is doing great and has some scale advantages now. However, I'm not sure how viable the strategy is of churning out new funds and hoping they will do just as well as DXJ.

[Picasso]

Well there is only about $1.9 trillion in ETF's.  The rest of the $12.5 trillion are in mutual funds.

 

I realize currencies can move both ways, but there should be a lot of demand for that kind of product.  The rate differential between the US and the rest of the world is pretty wide and most investors expect the Fed to be on the exit of QE while others are just ramping up.  Who knows if it will actually happen but that is supportive of the dollar and may be something investors will want to hedge out.

 

Do you know the actual costs for an institutional investor to hedge?  Between the total expense fees on the fund I would be surprised if they saw any savings.

 

Edit: Looking at the top holdings for DXJ, it is mostly private wealth.  Morgan Stanley, Goldman, UBS, Wells, etc.  Either advisors or retail clients not so much institutional.  Looks like most of the non-private wealth has been net sellers.

[writser]

Do you know the actual costs for an institutional investor to hedge?  Between the total expense fees on the fund I would be surprised if they saw any savings.

You can easily hedge with currency futures or forwards. I can buy VGK and hedge currency in my personal account cheaper than Wisdomtree offers to do for me in HEDJ. Anyway, I am getting a bit sidetracked. As a value investor who doesn't really believe in macro forecasting I think a lot of these products are not adding value but that doesn't mean there is no demand for them.

 

Good post by Tim Eriksen on actually valuing this company, as opposed to my bla bla :) .

[Tim Eriksen]

Didn't see this coming at all.  I didn't own it as I thought it overpriced.  Earnings of $.08 were worse than I expected ($.09) and the stock jumps 20%.  Go figure.

[Picasso]

Not a bad 40% return in three weeks.  I'll probably start selling some of my position soon.

[leeway]

DXJ up 6.5% today (Japan increased QE, and GPIF confirmed to raise pension funds' stock allocation) prob helped WETF today

[Picasso]

In case anyone is still following this, it's up around 80% in a few months.  I finished selling out of my shares even though it seems like there are some good tailwinds with the dollar strength. 

 

If I were a brave man, I would hold on and see what this turns into.  But I am not....

[Tim Eriksen]

In case anyone is still following this, it's up around 80% in a few months.  I finished selling out of my shares even though it seems like there are some good tailwinds with the dollar strength. 

 

If I were a brave man, I would hold on and see what this turns into.  But I am not....

 

Congratulations.  You had great timing on the buy.  Time will tell about the selling decision, but with that kind of gain in such a short time, and the current valuation, it makes sense to sell.

[DooDiligence]

In case anyone is still following this, it's up around 80% in a few months.  I finished selling out of my shares even though it seems like there are some good tailwinds with the dollar strength. 

 

If I were a brave man, I would hold on and see what this turns into.  But I am not....

 

Looks like you had awesome timing here (I'm not trying to promote timing; just sayin')

 

I own T Rowe (love their target date AUM) & am looking for an inverse corollary.

 

My thought is that outflows from T Rowe funds might get sucked up by ETF's.

 

You & others here have put up some great discussion & I wonder if you got back into WETF & what your thoughts are as to it possibly dimming the risk of owning T Rowe.

 

I agree on the comments re: Siegel (I couldn't make it past the 1st few chapters of Stocks for the Long Run) & WETF's website has him front & center giving weekly editorials behind a "registered professionals only" dealio (FWIW...)

 

I'd be owning for at least 3 years & very possibly longer (not a quick in/out kinda guy.)

[Picasso]

DD,

 

I could see what would drive AUM growth at the end of 2014 (dollar was on the verge of ripping so if you wanted overseas exposure, you'd massively underperform by owning in foreign currency, hedged ETF's were probably something there would be a lot of demand for).  I'm also surprised by what happened with the Japanese stock market/yen.  Their market should be trading a lot higher from policy but instead both the markets and currencies are doing the exact opposite.  So I can't imagine managers will look at that and either want to invest in Japan or look to buy a hedged ETF.  Also, fast forward to today and I don't see what will drive AUM in the same way (dollar only seems like it will go up if asset prices drop which isn't great for an asset manager).  There's an extra element of macro to WETF, not sure it makes sense to long at this point given everything... Lot of variables here, screw up one and you'll probably lose money.  Also add in fee compression that some others referenced.  BLK seems happy to make $50 million of fees off $100 billion.  Writser and others were probably right that there's limited value add.

[DooDiligence]

Thanks Picasso!

 

I'll keep looking.

 

Maybe my inverse should be something less obvious (if flows go out from TROW funds they'll go into luxury consumer goods!!!)

 

Richemont or Louis Vuitton (I'm not really serious; just groping around...)

 

 

[CorpRaider]

Reported Guggenheim deal seems like a pretty good comp (Although I believe WETF has a bigger brand and they also do mostly their own proprietary indexes, so they aren't splitting with S&P, etc...).  Gugg is going for ~3.5% of AUM.