By Murray Coleman
WisdomTree Investments Inc. (WSDT.PK), the only pure-play public exchange-traded funds sponsor to provide quarterly earnings, reported late Wednesday a net loss of $5.6 million in the final three months of 2008.
Although still not profitable, last year's fourth-quarter results showed improvement. In the same period a year earlier, the ETF developer lost nearly $6 million.
For the full year, WisdomTree produced net losses of almost $28.9 million. In 2007, the firm had $25.1 million in net losses.
"We reduced our operating expenses from the first quarter to the fourth quarter [of 2008] by 40%," said WisdomTree Chief Executive Jonathan Steinberg in a conference call with investors and analysts before markets opened on Thursday.
The ETF provider noted that its 2008 fourth-quarter loss was flat with the previous three-month period. (See third-quarter earnings stories here.) The firm was also able to reduce its fourth-quarter expenses and operating losses significantly, both sequentially and compared with the same period a year ago.
"These are exciting times, times of opportunity," said Steinberg, noting that WisdomTree had produced positive inflows in 10 out of the 11 quarters that the company has been operating. He also pointed to continued strong inflows by ETFs as an industry and compared that with dramatic outflows in mutual funds.
Structural differences between traditional open-end funds and ETFs, Steinberg stressed, became apparent as market conditions turned dour in 2008.
"These are challenging times, but these are also important times of change in the asset management industry. The ETF industry as a whole took in approximately $178 billion in net inflows in 2008 in stark contrast to the net outflows of mutual funds," he said.
But with markets continuing to slide, WisdomTree might look in coming quarters at "additional avenues to raise capital," said Chief Financial Officer Amit Muni.
With no debt, he stressed that if such actions become necessary due to further erosion in stock prices, efforts to go outside the company for financing "would be at very modest levels."
WisdomTree has been the source of speculation that it's a buyout target of larger asset managers. Company officials have maintained they prefer to remain independent.
Based on cost reduction actions taken so far, the firm estimates it has lowered its cash break-even point to around $6.5 billion to $7 billion in assets under management. At the end of 2008, it had $3.2 billion in assets. That means to reach profitability, WisdomTree would need to increase its asset base by between $3.3 billion to $3.8 billion.
A Step Ahead
Although requiring more than twice what it currently has under management, such a break-even target still represents a step forward for management. In the third quarter, WisdomTree had put that break-even number at around $4.3 billion in additional assets needed to move into the black.
It's also worth noting that the firm's assets in the fourth quarter were down 22% from the previous quarter.
CFO Muni credited $925 million of WisdomTree's fourth-quarter bleeding in assets to market depreciation. At the same time, WisdomTree had net inflows of $29.5 million—despite a 22% drop in U.S. stock markets and 20% overseas, according to company officials.
For the full year, WisdomTree's assets declined 30.2% as market depreciation accounted for about $2.3 billion in losses. But it added that the firm still attracted $900 million in net inflows into its ETFs.
Total revenues for WisdomTree's fourth quarter decreased 31.7% to $4.2 million as compared with $6.2 million in the third quarter. In the final three-month period of 2007, the firm had revenues of $5.8 million. However, for the year, the firm had sales of $22.1 million, up from $18.2 million in 2007.
WisdomTree also reported that about 80% of the $2.9 billion invested in WisdomTree's 42 stock ETFs at the end of last year were in funds that had outperformed their benchmarks since inception. It said 25 of WisdomTree's 41 stock ETFs outperformed their comparable benchmarks in the fourth quarter.
The company's stock trades as a NASDAQ Pink Sheet. WisdomTree officials have said they're interested in pursuing a regular listing, but probably not until it meets the minimum $4-per-share requirement.
WisdomTree's average advisory fee earned during the fourth quarter was 0.51%, flat with its third quarter. The company reported that its domestic ETF assets increased while its international ETF assets went in the other direction. Since U.S. funds command lower fees, that change, although relatively small in the quarter, could be worth watching in coming quarters.