WisdomTree Income Drops On Proxy Costs
July 27, 2012
(A previous version of this story misstated the effects of WisdomTree's litigation with Research Affiliates. Its litigation costs are covered by insurance, and company officials said its deductible on that coverage counted against previous quarterly results. We regret the inaccuracy.)
WisdomTree, the only pure ETF company whose shares trade publicly, posted an 85 percent drop in second-quarter earnings—a figure that included costs related to shareholder proxies. But its litigation with Research Affiliates over fundamental indexes was not a factor, and the company emphasized that its dividend-focused funds were resonating with investors.
The company said net income dropped to $100,000 from $700,000 in the same year-earlier period. Assets under management rose 16 percent from a year earlier to just over $15 billion, the New York-based company said in a press release on Friday. However, its assets dropped 4 percent from the end of the first quarter due to $1 billion in market declines that offset inflows.
The net figure reflects costs related to its suit with Research Affliates, which sued WisdomTree for patent infringement. WisdomTree said legal costs have totaled $1.6 million, but $1.5 million of that is qualified for insurance coverage. It has a $300,000 deductible that counted against previous quarterly results. It listed second-quarter litigation fees at $821,000, but said insurance reimbursement was a bit more than $1 million.
The bigger expense that helped pulled its resutlts down--nearly $3.2 million--was related to ongoing previously disclosed shareholder proxies. The costs of three different shareholder votes, which relate to various changes to all the company's 48 existing ETFs, are reflected in the second-quarter results.
Apart from a press release Rob Arnott’s Research Affliliates circulated when it filed the lawsuit last autumn, neither side has commented on the proceedings.
Still, the suit is topical to the extent that WisdomTree said today it believes its version of fundamentally weighted index funds is behind the outperformance of some of WisdomTree ETFs. Arnott's firm claims that WisdomTree's version borrows from the RAFI methodology Research Affiliates pioneered.
"WisdomTree gathered $338 million predominantly in our dividend based strategies in a difficult market environment where, at an industry level, net inflows were almost entirely concentrated in domestic fixed income,” the company’s chief executive Jonathan Steinberg said in the press release.
One of those successful funds, the WisdomTree Emerging Markets Equity Income Fund (NYSEArca: DEM), has $3.73 billion and attracted more than $500 million in fresh assets during the second quarter, according to data compiled by IndexUniverse.
On an operating basis, without those fees that dragged its net income lower, WisdomTree said it earned $3.1 million compared with $800,000 in the 2011 second quarter. Total revenues rose 22 percent to $20.39 billion.
“While this market cycle was challenging for our product set, our ability to buck the trend in equities demonstrates our strategies are differentiated and desirable,” Steinberg said.
More to the point, Steinberg noted that the company’s fundamentally weighted ETFs that screen stocks for variables like dividends are building track records of strong performance. He said 24 of its 34 equity ETFs outperformed their capitalization weighted or competitive benchmarks from their inceptions through the end of the second quarter.
“I believe this powerful performance story will be an important driver of future growth,” Steinberg said.
About a year ago, WisdomTree changed its stock’s listing to the Nasdaq from the over-the-counter “Pink Sheets,” a shift the company said reflected its growth and represented a new chapter in its history. Its shares trade on Nasdaq under the symbol “WETF.”
WisdomTree’s shares opened about 2 percent higher and were changing hands at $6.57 a share early in the trading session. That move was more than the broad U.S. market. The S&P 500, for example, was up 0.46 percent at 1.366.24.