managed accounts, sub-advised funds, and other sponsored investment funds. Waddell & Reed is engaged in providing investment management, investment product underwriting and distribution services. Among them, WisdomTree is the only one that focuses exclusively on ETFs. Based on Reuters data, Wisdom Tree, valued at 29.1 times forward P/E, trades at a premium to the rest of the asset managers which trade at a range of 17-23 times forward P/E. This is largely due to WisdomTree’s organic growth outpacing that of its competitors and asset management peers. Based on data from Strategic Insights, a mutual fund industry research company, WisdomTree Investments, Inc. (NASDAQ:WETF) led a group of traditional publicly traded asset managers (excluding money market funds) with a growth rate of 39% in 2012 based on net flows for the period over BoP AUM.
Company-Specific Risks
The WisdomTree ETFs have a limited historical track record with only 22 out of 47 ETFs having a track record exceeding five years, and approximately 68% of its ETF AUM was concentrated in ten of its WisdomTree ETFs as at Dec. 31, 2011. A limited track record and a lack of diversification are critical risk factors for both investments and investment managers.
In December 2011, Research Affiliates, LLC filed a suit against WisdomTree in the United States District Court for the Central District of California, alleging that the fundamentally weighted investment methodology infringed three of plaintiff’s patents. In November 2012, Research Affiliates announced that it will withdraw its patent infringement lawsuit and acknowledged that WisdomTree’s fundamentally-weighted indexes and strategies were developed by WisdomTree independently of Research
Affiliates. There is no guarantee that WisdomTree will not be subject to claims of infringement of third-party intellectual property rights in the future. This is important as WisdomTree’s fundamentally-weighted indexes and strategies are important differentiating factors.
Conclusion
WisdomTree’s premium valuations over peers embed huge growth expectations from the market, and it is ‘easier’ for WisdomTree to disappoint than exceed such market expectations. The lifting of the moratorium for approval of applications for exemptive relief for ETFs that make significant use of derivatives and/or any underperformance of equity ETFs based on its own fundamentally weighted index methodology relative to competitive benchmarks are two of the biggest risks that investors need to pay attention to.
The article Should You Buy WisdomTree’s Shares Or Its ETFs? originally appeared on Fool.com and is written by Mark Lin.
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