Abe Election Is Steinhardt Win as WisdomTree ETF Triples

Shinzo Abe’s election as prime minister of Japan is creating a windfall for Michael Steinhardt, the former hedge-fund manager turned exchange-traded fund executive.

WisdomTree Investments Inc., the firm where Steinhardt is both chairman and the largest shareholder, has seen assets in its Japan Hedged Equity Fund triple to $3.67 billion since the start of 2013 as Abe’s pledge to revive the economy sent investors searching for a way to benefit from the country’s stock-market rally while avoiding the currency’s decline. The fund took in more money than all but one U.S. ETF this year, helping to drive a 48 percent rally in WisdomTree’s stock.

“When the stars align, funds like this can take off,” Ugo Egbunike, an ETF specialist at IndexUniverse LLC, said in a telephone interview.

Assets swelled as money managers including Jeffrey Gundlach of DoubleLine Capital LP said Japanese stocks are set to rise as the country takes steps to weaken its currency, which helps exporters such as Toyota Motor Corp. by boosting the value of overseas sales. Japanese stocks have rallied 18 percent and the yen has slumped 12 percent against the dollar since Nov. 30, shortly before Abe won election in December pledging to take an aggressive approach to ending deflation and reviving the economy.

Short-Term Trades

The rapid growth of the fund highlights investors’ embrace of ETFs as vehicles for short-term trades in a way traditional mutual funds, with their higher fees and trading restrictions, haven’t been used. Investors poured a record $188 billion into U.S. ETFs in 2012, according to San Francisco-based IndexUniverse. ETFs, which hold $1.4 trillion in assets, generally track indexes and trade throughout the day like stocks.

WisdomTree gained 1.5 percent to close at $9.06 in New York time.

WisdomTree created its Japan fund when it entered the ETF business in 2006. It changed the fund in 2010 to neutralize the impact of currency swings, after research director Jeremy Schwartz noticed that the Japanese currency and stock market often moved in opposite directions.

“We thought one day the yen would weaken and stocks, especially the big exporters, would benefit,” Schwartz said this week in a telephone interview. WisdomTree tweaked the product again in November by putting more emphasis on global companies rather than those that rely heavily on the domestic economy. Like most of WisdomTree’s products, the Japan ETF focuses on dividend-paying stocks.

Gundlach’s Conviction

Gundlach, whose $38.7 billion DoubleLine Total Return Fund beat 96 percent of peers over the past year, said in a Dec. 18 interview with Bloomberg Television that his “most high-conviction investment idea” was that the yen would weaken while Japan’s stock market would improve.

Gundlach said currency “debasement” was the only policy tool left in Japan, where the economy is expected to grow 0.9 percent this year, the average prediction of 59 economists in a Bloomberg survey. The Japanese economy unexpectedly shrank an annualized 0.4 percent in the fourth quarter as falling exports and a business investment slump outweighed improved consumption, a report showed yesterday.

George Soros made almost $1 billion since November from bets that the yen would tumble, and is also wagering on an increase in Japanese stocks, a person close to the billionaire’s $24 billion family office said this week.

Soros’s Bet

Soros, known for netting $1 billion in 1992 by betting against the British pound, has 10 percent of the money managed internally by his $24 billion Soros Fund Management LLC in Japanese stocks, said the person close to his firm, asking not to be named because the information is private.

WisdomTree’s ETF gained 20 percent since Nov. 30, compared with 6.3 percent for the $5.6 billion iShares MSCI Japan Index Fund, which tracks Japanese stocks without hedging the currency.

Investors have noticed the difference. Since the end of November, the WisdomTree ETF received $2.76 billion in deposits and the iShares fund, run by BlackRock Inc., got $1.23 billion, according to IndexUniverse. In 2013, another BlackRock fund, the $52.2 billion IShares MSCI Emerging Markets Index, attracted $3.43 billion, the most among U.S. ETFs, and WisdomTree’s Japan fund pulled in $2.26 billion.

ETF ‘Migration’

WisdomTree Investments, based in New York, was founded in 1985 by the current chief executive officer, Jonathan Steinberg. In 2004 the company signed up Jeremy Siegel, professor of finance at the University of Pennsylvania’s Wharton School, as senior investment strategy adviser, and raised money from investors including Steinhardt, whose hedge fund Steinhardt Management Co. produced returns averaging 24 percent a year for 28 years until it was wound down in 1995.

Steinhardt owns 15 percent of WisdomTree, according to data compiled by Bloomberg. WisdomTree is the second-best performer this year in the Nasdaq Financial-100 Index, behind real estate research firm Zillow Inc.

“We are seeing a migration to ETFs,” Macrae Sykes, an analyst from Gabelli & Co., said in an interview last week. Sykes raised his recommendation on the stock to buy from hold in November.

WisdomTree offers 47 of the funds across a range of asset classes. The firm managed $18.3 billion at year-end, about 3 percent of the ETF assets run by the largest U.S. provider, BlackRock, which is also based in New York. WisdomTree attracted $4.7 billion from investors in 2012, the company reported earlier this month.

Popular Trade

Because the money flowing into WisdomTree’s Japan fund is the result of a popular trade, it could disappear if sentiment changes, said Patricia Oey, an analyst at Chicago-based Morningstar Inc.

“If the yen strengthened, money could come out pretty quickly,” she said in a telephone interview.

WisdomTree lost 37 percent of its market value between the end of August 2011 and early October that year, when one institutional investor pulled money, contributing to a 5.9 percent decline in the firm’s assets.

WisdomTree’s Schwartz isn’t worried about redemptions yet.

“The Japanese market moved in one direction for a long time,” he said. “This new trend could last a considerable period.”

(Updates shares with closing prices in second, sixth paragraphs.)
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