WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up

Takeaway: WETF assets-under-management finished '15 on a slippery slope and January '16 hasn't started much better.

RECENT OUTFLOWS

WisdomTree assets-under-management (AUM) finished last year in fluid fashion with -$3.0 billion flowing out of the asset manager in December alone. This was the worst month in the history of the firm and January 2016 hasn't started in any better fashion. In the first five business days of the New Year, WisdomTree has shed another $686 million, essentially on par with the -$3 billion monthly run rate exiting '15. We can't exactly chalk up year end loses to seasonality, as December 2014 put up a +$1.0 billion inflow for WETF. Monthly inflows are now a pittance of their highs of over $6.0 billion from March '15. Over 90% of the losses in both December and January occurred in the firm's international hedged equity products.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - chart 5 flow chart

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - WETF monthly breakout detail

 

The Tale of Two Products

 

We are chalking the exodus in the international hedged products to separate catalysts as firstly the firm's Japanese hedged product has fallen victim to a substantial rally in the Yen which has taken demand for the hedged FX fund off of the boil. We warned of a slack in demand should the U.S. dollar not continue to strengthen which has proven accurate over the very near term.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - DXJ chart 6

 

The firm's European product can't be painted with the same brush however as the Euro has maintained its price range against the U.S. currency.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - HEDJ chart 7 

 

It looks however that European woes are the result of new demand for the copy cat iShares hedged product (which is 5 basis points cheaper). The following chart shows how the HEDJ moved from a 91% share of the market’s three major hedged Euro products (WisdomTree’s HEDJ, BlackRock’s HEZU, and Deutsche’s DBEZ) at the beginning of December to 86% share through yesterday. This has increased the HEZU iShares Currency Hedged MSCI Europe share from 8% to 14% over the same period on net positive inflows respectively.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - EUR4

 

Additionally, DXJ’s share of the market’s three major hedged Japan products (WisdomTree’s DXJ, BlackRock’s HEWJ, and Deutsche’s DBJP) ceded another point of market share over the past month. The Deutsche and BlackRock products both gained incrementally in December finishing at just over 9% and 4% share respectively.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - JPY4

 

PRICING NOW IN QUESTION and Forward outlook

It looks like pricing is becoming a factor with the emergence of investor interest in the iShares hedged European product (or it was just a catch up trade to share that the Japanese product had already ceded to competitors). While the delta's of price decreases per basis point are quite small, we don't think Street estimates incorporate a lot, if any, pricing compression for WisdomTree. At a 1 basis point decline for HEDJ pricing on an annual basis, we calculate a -0.6% top line revenue impact, but with AUM in decline the impact could be worse. We calculate for every $1 billion in AUM lost for the hedged European fund that annual WisdomTree revenues decline by -3.2%. The impact on pricing and AUM are not as severe for the Japanese DXJ product.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - price analysis

 

The ongoing fundamental issue from our vantage point is Street consensus is way too high (which is increasing by the month with the development of net outflows). We calculate that 2017 consensus estimates of $0.97 per share (the out year numbers this growth stock is valued on) to be based on over $80 billion in AUM. With assets-under-management at $47 billion currently, this is a stretch at best. Even our $0.79 estimate for '17 based on $70 billion in AUM looks ambitious at this point. WisdomTree continues to trade at a substantial premium to the asset management group at over 20.0x next 12 month estimates versus the group at just over 13.0x '16 numbers which make estimate cuts problematic. The stock remains on our Best Ideas list as a Short.

 

WisdomTree (WETF) - Trending Not Mending - Competing Products Heating Up - PE chart 

 

WisdomTree (WETF) - More Questions Than Answers - We Remain Short 

WisdomTree (WETF) Black Book Presentation - Not So Smart Beta 

 

Please let us know of questions,

 

 

Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA

 

 

 


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more