WisdomTree Investments, Inc. (WETF) Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.26.13 | About: WisdomTree Investments, (WETF)

WisdomTree Investments, Inc. (NASDAQ:WETF)

Q2 2013 Earnings Call

July 26, 2013 9:00 am ET

Executives

Stuart Bell

Jonathan Laurence Steinberg - Founder, Chief Executive Officer, President and Executive Director

Amit Muni - Chief Financial Officer, Principal Accounting Officer and Executive Vice President of Finance

Luciano Siracusano - Chief Investment Strategist, Executive Vice President and Head of Sales

Analysts

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Steve Fullerton

Adam Q. Beatty - BofA Merrill Lynch, Research Division

Jason Weyeneth - Sterne Agee & Leach Inc., Research Division

Matthew Kelley - Morgan Stanley, Research Division

Macrae Sykes - Gabelli & Company, Inc.

John Joseph Dunn - Sidoti & Company, LLC

Todd Wachsman

Olly Ludwig

Dan Weiskopf

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to WisdomTree Second Quarter Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'll now like to turn the conference over to your host, WisdomTree. You may begin.

Stuart Bell

Good morning. Before we begin, I would like to reference our legal disclaimer available on today's presentation. This presentation may contain forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminologies such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this presentation. Such forward-looking statements are based on a number of assumptions which may prove to be incorrect. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved. A number of risks and other factors could cause actual results to differ materially from the results discussed in forward-looking statements including, but not limited to, the risks set forth in this presentation and the Risk Factors section of the company's annual report on Form 10-K for the fiscal year-ended December 31, 2012.

Now it's my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Jonathan Laurence Steinberg

Thank you. Good morning, everyone. Welcome to WisdomTree's Second Quarter Conference Call. Fellow shareholders, the second quarter was another excellent quarter. In many respects, it was our best quarter ever. Our average assets under management for the second quarter were up 88% year-over-year to over $28 billion, and up 29% sequentially. Year-to-date, our assets were up more than 70% to over $31 billion.

Second quarter inflows of $5 billion were incredibly strong, especially on a relative basis. Our market share of inflows was 29%, a new quarterly record. In fact, only Vanguard raised more money in ETFs than WisdomTree this quarter. We also reported record revenues of $37 million, up 83% year-over-year and up 27% sequentially. Also, we recorded record net income of $12.2 million, up 56% sequentially. And for the first half, we reported over $20 million in net income.

Our pretax profit margins expanded significantly to 33%, a 6 percentage point increase in just 1 quarter's time. Later on the call, Amit Muni, WisdomTree's CFO, will walk you through our financial statements.

Finally, the third quarter is off to another strong start with more than $1.1 billion of inflows quarter-to-date.

Now let's take a closer look at WisdomTree's inflows on the next slide. We have $5 billion of inflows, $4.2 billion from DXJ or Japan Hedged Equity ETF. As you can see, the momentum from the first quarter continued through the second. If you look on the right-hand side of the page, you can see how transformational the first half inflows have been. Remember, we started the year with just $18 billion in assets.

Let's look more closely at our inflows by category, excluding DXJ. This is an important slide. Excluding DXJ, WisdomTree raised another $772 million this quarter. We saw strength in domestic equities and continued strength in our international hedged equities but emerging market equities, emerging market bonds and emerging market currencies all saw declines or outflows. On the right, you can see the strong imbalanced inflows WisdomTree experienced in the first half. Remember, this excludes DXJ. We took in $2.7 billion in the first half this year versus $2.4 billion in the first half of last year. We have typically seen the majority of our inflows into emerging markets. But even as emerging markets are out of favor, we still saw growth. And again, this excludes DXJ. Overall, second quarter and first half results were very strong and very resilient.

Now let's look more closely at our Japan inflows. In the second quarter, at an industry level, Japan-focused ETFs took in $7.8 billion. WisdomTree share was 53% or $4.2 billion. In fact, DXJ's $8.1 billion of inflows for the first half led all ETFs in asset gathering, as you can see on the bottom left chart.

As we did last quarter, let's look at where's the money in DXJ coming from. In the bar chart on the right, we look at DXJ's estimated inflows in the first half by channel and compare that to our current AUM by channel for the total complex since the firm's inception. As you can see, and as was the case in Q1, the inflows for DXJ do not differ significantly from our historical patterns of channel representation, though, very positively, we do see that DXJ has experienced an increase from the international and institutional channels. For us, institutional is primarily mutual funds, foundations and endowments. With Sunday's election in Japan successfully behind them, the new administration firmly in control, the momentum for DXJ is continuing into the third quarter with more than $1.1 billion of inflows third quarter to date.

Now let's look at our market share inflows. On the left, you can see the last 5 quarters. As I said before, the second quarter was a record for the firm coming in at 29%. As you know, DXJ has been an important contributor to our market share growth. But even excluding Japan flows from us and the industry, our market share would have been 4% in Q1 and 8.6% in Q2, well within the targets we have given investors of 3% to 5% of industry inflows.

I do want to remind investors again that market share can be a very volatile metric and can move around dramatically from quarter-to-quarter. On the right side of the page, we look at our market share for the first half. As you can see, the market share gains for the first half are simply tremendous. Remember, WisdomTree only had 2% of the ETF industry's assets, so these inflow numbers mean we are taking market share.

Now let's look at the market share ranking of the ETF industry by sponsor. As stated earlier, WisdomTree had $5 billion of inflows in the quarter, 29% market share, second only to Vanguard. From a relative strength perspective, this is simply the best quarter we have ever experienced. For the 6 months, we have $10.9 billion of inflows and 15% market share, which ranked us third overall behind only Vanguard and iShares. WisdomTree continues to compete very effectively.

Let's put this quarter into an even broader context and compare our inflows in the second quarter and first half, but this time include all mutual fund families, as well as all ETF sponsors. It is only when we broaden the universe to include all mutual fund families that we can truly appreciate how extraordinary the quarter and year-to-date really was. In Q2, WisdomTree was the third best asset gatherer overall according to Morningstar. These are simply world-class results. For the first half, WisdomTree ranked sixth overall. Look at who follows us on this list. These results exceed everyone's expectations.

Now let's look on the next slide at WisdomTree's organic growth rates and compare it to the other leading publicly traded asset managers and leading ETF firms. No slide better illustrates our relative growth. WisdomTree remains the fastest-growing, publicly traded asset manager with 59% organic growth in the first half. It is very encouraging how much faster we are growing than the other public asset managers. We feel this is an important metric for our shareholders. And as the only pure play publicly traded ETF sponsor, WisdomTree remains uniquely well positioned for investors who want direct exposure to the ETF industry. On the right, we compare WisdomTree's organic growth in assets to that of the other leading ETF sponsors. Again, it's just an incredible quarter. This is how we take market share.

Now let's look at the performance of our equity funds on the next slide. This is the one area where we underperformed this quarter. You can see that the 1- and 3-year basis, a majority of our funds underperformed the no-fee benchmarks. But on a 5 year, and since inception basis, the majority of our funds have outperformed the comparable cap-weighted or competitive benchmarks. In the short term, the majority of our strategies lagged during this year's rising market environment. When you look at our performance in terms of percentage of AUM, DXJ brought our numbers down because it trailed its formal benchmark, though the hedged strategy has outperformed the unhedged to Japan exposures and it's one of the best absolute returns stories of the year. It obviously hasn't hurt invested interest in that fund.

It is now my pleasure to introduce Amit Muni, WisdomTree's CFO.

Amit Muni

Thank you, Jono, and good morning, everyone. This is another quarter of solid financial results. Revenues continue to climb, reaching another record level of $37 million in the second quarter, up 83% from the second quarter of last year, and up 27% sequentially. Expenses increased 45% from the second quarter of last year, and up 17% sequentially. This translated into continuing growth in net income which reached a record $12.2 million, or $0.09 per share for the second quarter. For the first half of this year, revenues are up 69%, and net income is up 4x to $20 million.

On the next slide, we'll go through key drivers for our revenue growth. Starting from the left, you can see our AUM increased due to $5 billion of net inflows, which is partly offset by decline of $1.1 billion due to negative market movement. We ended the quarter with $29 billion of AUM, which is up 15% for the quarter. However, our average AUM increased 29% due to starting off the quarter at higher AUM basis. You can see from the bar graph at the right, our average AUM mix is changing as a result of the strong inflows we are experiencing in DXJ, which is translating into attractive revenue growth as reflected on the next slide.

Our ETF revenues reached a record $37 million in the first quarter -- in the second quarter. You can see in red, we have nearly doubled our revenue in the international category due to the strong growth in DXJ. Our mix dynamics have changed our overall revenue capture to 52 basis points in the second quarter and it is 51 basis points today.

Our key margin metrics continued to climb higher, as you can see on the next slide. Our gross margin increased to 74% in the second quarter compared to 72% in the first quarter, primarily due to higher assets under management. Based on our current mix, we expect our gross margins to continue to be between 70% and 75% in the near term as we intend to launch more ETFs in the second half of the year. Gross margins for the first half were 73%.

Our pretax operating margin also continues to drive higher, increasing 6 percentage points to 33% in the second quarter and to 30% for the first half of the year. Even though we have experienced tremendous growth in revenues, we continue to exercise discipline, expense discipline, yet invest in our previously discussed strategic growth initiatives, which you can see on the next slide, which compares our expense base growth from the first quarter.

First, compensation-related expense increased by $2 million due to higher accrued incentive compensation as a result of record-setting inflow levels for the first half of the year. In addition, we added 7 new people in the quarter, of which 4 were on the client-facing side of the business. Higher AUM increased fund-related costs by $883,000. Fees that we pay to our third-party marketing agents increased $317,000, primarily due to assets raised in Latin America. We incurred a onetime cash of expense for $207,000, which relates to New York City commercial rent tax.

Administrative and other overhead type expenses increased by $174,000. We incurred lower payroll tax expense, which is seasonally higher in the first quarter due to bonus payments. And lastly, our overall marketing and sales related spending declined slightly.

Related to our marketing spend, in the past, this expense typically declined in the third quarter. As part of our growth initiatives plan, we are expecting our marketing spend in the third quarter to be in line with our first half spend. So we ended the quarter with a 17% increase in expenses to $25.1 million.

The operating leverage in our business model as our assets scale is reflected on the next slide. As you can see, our expenses continue to decline as a percentage of revenues contributing to our expanding margins. This is clearly reflected on the right-hand graph when comparing our first half results to last year and the full year of 2012. Our balance sheet and cash liquidity continues to improve, as you can see on the next slide.

We have total assets of $97 million at June 30, which is primarily comprised of $71 million of cash and cash equivalents; $11 million in investments and $12 million in revenue due to us from the WisdomTree Funds. We had 126 million common shares outstanding and 140 million shares in total when you include our options and restricted stocks.

And as a reminder, we have a $61 million post tax NOL carryforward. As we get closer to year end, we'll have a further update on how we're thinking about handing our NOLs.

Now to update you on 3 items. First, as we stated earlier this year, we plan on spending $5 million to $8 million on strategic growth initiatives, which include hiring more sales and other client-facing positions; additional spending on marketing and sales related initiatives; launching more funds; and lastly, investing in technology tools for our sales force. So far this year, we have spent $3.4 million on these initiatives. So you can see we are trending towards the higher end of the range, as we stated we would on our last call. We believe it's important to make these investments to help further our growth and long-term positioning.

Second, our current lease will expire in January of 2014, and we will be relocating to a new office in New York City. We are very close to signing a lease for the new space and as a result, we will be incurring additional occupancy expense for the new space of approximately $740,000 per quarter in 2013 while we continue to occupy our current office space. Then starting in 2014 and thereafter, we will incur an additional expense of $440,000 per quarter, which is net of the savings from vacating our current office space. As part of this move, we expect depreciation and amortization to increase by approximately $150,000 to $200,000 per quarter as we depreciate leasehold improvements for the new office space beginning next year.

And lastly, as you know, we earned revenue from licensing our indexes to third parties for various investment products. One of those licenses will end in July so other income will decline by approximately $100,000 per quarter, beginning in July.

Now to give you an update on our results so far in July. Net inflows continue to remain strong. So far this month, we generated $1.2 billion in net inflows and our AUM is $31.5 billion. DXJ inflows have been about $1.1 billion, with the balance and equities predominantly in our U.S. ETFs. Our average AUM is up about 7%. As the chart on the bottom reflects, the ETF industry is experiencing strong inflows in the equity category.

So to summarize, this is another record-breaking quarter as reflected in rising revenues, net income and expanding margins. The operating leverage in our business model will continue to emerge as our assets scale.

Thank you. Let me turn it back to Jono.

Jonathan Laurence Steinberg

Thank you, Amit. I will be brief. WisdomTree has never been stronger. 2013 has been a year of investment for the firm. We have added to our headcount, launched additional funds and expanded our marketing and communications, but we are investing in our business in a very disciplined way. Bottom line, we have never been as well positioned for the future as we are today. I want to thank you for your interest and support. This ends the planned portion of today's call. Now let's open this up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Marc Irizarry from Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

On some of the talk around the market dynamics in June for ETFs, I'm curious if you guys have a view on how DXJ and how your ETFs traded versus maybe the underlying markets, particularly in fixed income. And maybe just how much sort of misses out there versus reality with what we saw in terms of the way the ETFs performed in June?

Jonathan Laurence Steinberg

Thanks, Marc. So there has been, in the volatility in June, there was some reporting that there might be some pressure on the way the ETF structure was working. Unfortunately, it was really a lack of understanding about the ETF market structure. A lot of the stories really failed to understand the price discovery mechanism that the ETF plays, so there was a big story on how emerging market ETFs were trading at a discount. What that fails to recognize is that an emerging market ETF listed in the U.S. never trades at anything. It trades in the same direction as a NAV, but because of the difference in time zones, when the markets are open, there'll never be exactly aligned. So that failure of understanding really precipitated a flurry of stories that, unfortunately, we and the industry need to continue to educate the marketplace on. In fact, during those volatile days, the ETFs performed exactly as they should and provided a very important service to investors, providing them price discovery for you or how they expect the emerging markets to open and with in bonds as well. Sometimes within the bond market, some of the prices that are inputted into the NAV are just stale and the ETF -- the fixed income ETF is again providing investors price discovery to those markets, so we have to continue to educate the market, Marc.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Okay, helpful. And then just, can you give some more clarity on the investors who are using DXJ versus the -- versus maybe some of the other ETFs? Are you seeing some marginal changes in the past quarter or so or just recently in the types of investors who are using the product?

Luciano Siracusano

Marc, this is Luciano. We continue to see very broad adoption of DXJ similar to what we saw in the first quarter. What we saw in June, in particularly, the Japanese equity market, declined about 20%. The shares outstanding in DXJ only declined slightly. There was a -- in fact, there was continued buying, as you can see, for DXJ this quarter. So we haven't really seen the flows impacted by what happened in June and we continue to see very broad adoption and use of DXJ to all the major channels.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Okay. And then maybe, Amit, for you on the gross, the guidance on the gross is how should we think about the quarterly progression? Looks like you guys are having a lot of product that's come out, I guess, at the end of June, also in July. Maybe you can give us some perspective on how those gross has -- you think will track on a quarterly basis? And then,I don't know Jono, if you have a view on product launches in the back half of the year and maybe going forward? It seems like, again, there's a lot -- in the pipeline, a lot that has come out, maybe some perspective there.

Amit Muni

Yes, Marc, so you've seen again continued growth in that gross margin, 74% in the current quarter. So we still believe that 70% to 75% gross margin in near term is a good guidance. We do intend to launch more funds in the second half of the year. There is a cost related to that until those assets -- until those funds scale up. So I think that's sort of where you should be thinking from a guidance perspective in near term.

Jonathan Laurence Steinberg

And, Marc, it's just -- it's hard for us -- this is Jono. It's hard for us to know how quickly these new funds will scale. When we launch a new fund, it's really a commitment by the firm for future growth. So in year 1, you do it -- all that you can do to bring investor attention to the new funds. We've launched 5 funds year-to-date. 2 of them have gotten close to their breakevens but we'll -- and we will probably be launching another 3 or 4 funds in the back half of this year. And in fact, next week, we will launch an additional Dividend Growth Fund this time to the emerging markets. So we continue to invest in our franchises, dividends, emerging markets and currently hedged equities, so we'll be busy again in the back half of the year.

Operator

Our next question is from Mike Grondahl from Piper Jaffray.

Michael J. Grondahl - Piper Jaffray Companies, Research Division

Two questions, really. One, could you kind of just give us an update on how some of the recent launches have gone, maybe the ones in May and June? And then secondly, is DXJ priced right? I mean, would you ever consider increasing the 48 bps, is that possible?

Luciano Siracusano

Let me -- this is Luciano. Let me handle the first question with respect to the new product. So we launched the U.S. Dividend Growth Fund in May, ticker on that one is DGRW, and that's up to about $35 million in assets. You can see our assets disclosed each day on the website, so I think there's been very strong interest in that. That's really the -- one of the few other alternatives out there in the U.S. dividend growth space for investors. And I think it's a good example of how WisdomTree is building upon one of its core competencies, which is we create the underlying indexes, the underlying IPs for our ETFs. So we have the ability to look out what's out there and see if we can create something that we believe is better. And in the case of this dividend growth strategy, this is actually looking at historic return on equity, historic return on assets and then what are the earnings expectations for these companies. So we try to put together a portfolio that has a potential to raise dividends faster going forward. That's the goal of what we're trying to achieve. And so we think this is an excellent alternative for investors. This week, we've also launched a small cap complement to that, which is the SmallCap Dividend Growth Fund, and the ticker on that one is DGRS. That's just getting out of the gate, we launched it yesterday but it traded approximately 50,000 shares from the get-go. So we think there's going to be strong interest in the dividend growth theme, particularly if you get a rising rate environment going forward where investors are more interested in getting higher-quality companies.

Jonathan Laurence Steinberg

And, Mike, in terms of our -- is DXJ priced right and our ability to raise price, we have no intention of raising price in DXJ and certainly the success of the fund. It leads us to believe that it's appropriately priced.

Operator

Our next question is from Bill Katz from Citi.

Steve Fullerton

This is Steve Fullerton filling in for Bill. Quick question on the gross margins again. So you did 74% this quarter and there's 2 fund launches, and it sounds like you already had 1 fund launch and 1 to come. Would it be fair to think you guys can sustain a 74% gross margin in the second half of the year? Or for the 70% and 75% guidance, is it more the middle of that range?

Amit Muni

Well, based on the current assets that we see today, we still, probably, the short term, I think, we're at 74% now, a new fund cost us on average of about $200,000, $225,000 to operate when it first starts, so I think assuming that the current asset level mix sort of stays where you see it today, that should be sustainable. But again, I think 70% to 75% in the near term is what you should be thinking.

Steve Fullerton

Okay, great. And then just going back to the last quarter's $100 billion in AUM goal, do you guys have any guidance as to, like, a margin range that we could see at that or is it too far in the future, at the moment?

Jonathan Laurence Steinberg

We haven't updated margins beyond the $35 billion of AUM, which would be a 40% margin. Though Amit has indicated that we would continue to see improvement if we continue to scale, but we are not giving a number to it.

Operator

Our next question is from Adam Beatty from Bank of America.

Adam Q. Beatty - BofA Merrill Lynch, Research Division

If I could just ask for an update on some of the growth spending that you're doing and some of the initiatives that you've embarked upon. Looks like as you said, expenses are coming around the high end of the range, does that reflect any kind of change in scope approach or timing of the initiatives? And also, could you give us some flavor of the kind results that you're seeing so far and how it's helping the business?

Amit Muni

Sure. So we spent about $1.3 million in those growth initiatives in Q1, about $2.1 million in Q2. We knew the spend was a little bit light in the first quarter, that's why we indicated we did expect it to trend up closer to the mid to the higher end of that range. And that's our intention. We believe it's important for us to spend in those growth initiatives to help build our business. We've added to our sales force. The marketing and the sales related spending was roughly flat with what you saw in the first quarter. We are launching more funds, as we noted on the call. And there's going to be more coming in the back half of the year. And I think you can see the results. Look at the very, very strong net inflows. We are continuing to diversify our product suite and so we think it's important for us to make those investments. But again, I think one of the key things to understand is that even though we have seen a tremendous amount of revenue growth from DXJ, we are not changing our expense discipline. We said we're going to spend $5 million to $8 million, we're still spending $5 million to $8 million.

Adam Q. Beatty - BofA Merrill Lynch, Research Division

Okay, that's helpful. Quick follow-up, are there certain distribution channels that you're focusing on in the sales efforts and the sales spending?

Luciano Siracusano

This is Luciano. We're focusing on really beefing up across the board. We added support in the first half of the year to the wire house channel, to the capital markets desk. And here, in the third quarter, we'll look to continue to build up the internal sales force, as well as a few more external. So we continue to build it out incrementally. We're trying to get the whole country covered and we're trying to set us up for the growth initiatives we'd like to undertake in the future.

Adam Q. Beatty - BofA Merrill Lynch, Research Division

Just one more question. About emerging market flows, obviously, it's been a challenging market, challenging flows in that area, it seems looking at the quarter, and maybe even July and month to date, that the outflow is maybe not quite as serious as some of your competitors in those areas. I'm just wondering, wanted to get your take on the dynamics around that and how your products play into emerging market flows?

Luciano Siracusano

Yes, I think it's a great point. We're seeing year-to-date outflows from some of the major emerging market equity ETFs in the U.S., billions of dollars of outflows. Both DEM and DGS, our emerging markets small-cap have had net inflows for the year even though there's been some redemptions in DEM in the last few weeks. For the first half of the year, there's actually been inflows. And I think the reason for that is historically, DEM has actually performed very well frankly in some of the down markets. In the last 2 down cycles, it held up on a relative basis better than some of the cap weighted indexes. It also starts out as a higher dividend yield on the underlying index so some people who buy DEM are buying it for the dividend income and they can afford to hold it even in down markets because they are getting that quarterly dividend distribution. So I think we have a very compelling products that even in a tough emerging market environment, as the dollar strengthens, we put the focus on currency hedged equities and that environment, our currency hedged funds do very well, including some of the ones we've launched recently are starting to see interest because there's more awareness that there may be some further deterioration of foreign exchanges relative to the dollar.

Operator

Our next question is from Jason Weyeneth from Sterne Agee.

Jason Weyeneth - Sterne Agee & Leach Inc., Research Division

I was hoping you could provide a little bit more color around the Japan announcement from a couple of weeks ago regarding, I guess, listing some products over there and distributing outside the U.S. now?

Jonathan Laurence Steinberg

Certainly, thanks, Jason. So we have made available some of the -- our funds including DXJ for the Japanese market. One of the large local Japanese brokerage firms reached out to us so it was sort of like an inbound call that said to us if there was demand in that marketplace. As we indicated when we went through the DXJ flows, DXJ has really broken through on these, sort of the world scene, lots of non-U.S. investors have participated and contributed to our growth in assets. And so what's interesting is that local Japanese retail investors are also now buying DXJ, which we just think is a very encouraging sign. So it's just one more incremental step where we're really seeing strength in the business similar to lifting in Mexico, some of our ETFs, and the Compass relationship so we're just broadening our footprint in general.

Operator

Our next question is from Matt Kelley from Morgan Stanley.

Matthew Kelley - Morgan Stanley, Research Division

So I just wanted to step back a little bit on the expenses. You've obviously gotten a lot of questions on the margin and how you're spending for growth here, which is totally understandable. So coming through the back half of the year with a significant number of product launches this year, how are you guys thinking about at what point that sort of has to continue to accelerate but at a decelerating rate, I guess, so continue to increase, I should say, at a decelerating rate so we can kind of like understand versus your margin guidance. If the margin guidance 40% at $35 billion asset level is like -- is it a hard target? Or you could be -- or there could be quarterly volatility around that?

Amit Muni

Matt, so we have spoken about that we have that longer-term target. And assuming that our AUM continues to rise, we should continue to see continued incremental growth going towards that target. We don't want to get into the short-term play of margin guidance because we want the ability to invest in the business when the opportunities present themselves. And so I would just say, we have that target, we're not moving off that target and we're going to make those continued investments in our business. AUM will continue to rise. We're going to -- we've recognized that the expense discipline that we have -- and we're continuing towards that longer-term target.

Matthew Kelley - Morgan Stanley, Research Division

Understood. It makes sense. And, I guess, I'd just ask one other question on the performance of the funds. Jono, you gave us some pretty good color on that, but is that something that's -- obviously, guys, you have a unique product that diverses the industry, but is the performance something that's entering the conversation when you're meeting with the distribution channels at this point? Or is it kind of less about that and more about the differentiated products still?

Luciano Siracusano

This is Luciano again. I think it's been mostly about the differentiated product this year and we've really staked out some pretty unique terrain there with currency hedged ETFs. There really aren't a lot of options that people can use in that space. Certainly, ours have become, in many instances, the largest, the most heavily traded and the preferred vehicles. With respect to this performance slide on Page 10, I mean, that's not the most compelling chart we've ever showed you, but you should have some context around it. I mean, there are 5 funds we have since inception that are within their expense ratio of the underlying benchmark. So what the chart doesn't show you is that an ETF that's underperforming its index by 2 basis points over 5 or 6 years. So I would say, these things can change depending on the snapshot in time. What we have seen over the last 5 years is really very compelling performance on our U.S.-based funds. The ones that have 5-year record in the U.S. covering the broad market, large cap, mid cap, small cap, they've done very well against the underlying benchmark. And in some instances, they've outperformed by more than 400 basis points on an annualized basis. So I could certainly point to instances where the performance for the fundamentally weighted ETFs have never been as strong as they are right now. But this, I would say, this slide doesn't say, really, the whole story, there's a bit little more flavor to it.

Matthew Kelley - Morgan Stanley, Research Division

And then just one last follow-up from me because that's helpful color. I just wanted to follow up on that. When you're -- I know you guys have looked at net performance, net of fees over time, beating benchmarks, but when you're actually talk to the channels, are they more focused on net or is it actually gross?

Luciano Siracusano

Well, what matters to them, is net -- I mean, what matters to them is what they keep, but we are holding ourselves to the highest standard, which is we compare ourselves to an underlying index, which has no fees, allowing the mutual funds to compare themselves to an industry average of other mutual funds after the fees have been deducted. So I think people get that if they were to compare our ETFs to other ETFs out there or to other mutual funds, that the comparisons will be more favorable to WisdomTree. And what we're showing you is the underlying index on a no-fee level. Our funds after fee, after transaction costs compared to underlying indexes with no fees. Okay.

Operator

Our next question is from Macrae Sykes from Gabelli & Company.

Macrae Sykes - Gabelli & Company, Inc.

My question is more higher level. On BlackRock's call, management talked about ETF appeal from liquidity perspective, they did highlight that this quarter. And we saw a sharp outflows in June. So to some extent, your vehicles, liquidity made them a first choice of -- for quick reallocations. So I guess my question is should we believe that -- if there's greater risk during periods of stress to AUM given its unique liquidity aspect? And could this make the business more volatile than traditional mutual fund asset managers? Or is it really subject to the underlying client?

Jonathan Laurence Steinberg

So this is Jono, Mac, thanks for the question. I really think the -- what we have stressed to investors in the past and to give iShares the benefit of the doubt, it really depends upon how market sentiment aligns with your product set. So iShares is a very large domestic fixed income ETF suite and that was a point of great stress in June. So I don't think you can make anything to say more than that. The ETF does express liquidity sentiment change quickly, but so does mutual funds. The difference is we, as an industry, report in real time. And a lot of what you see on mutual fund has a significant lag, so I wouldn't read anything else into it.

Operator

Our next question is from John Dunn from Sidoti & Company.

John Joseph Dunn - Sidoti & Company, LLC

Guys, could you touch on how you think higher rates are going to play out for your international development and emerging market fund?

Luciano Siracusano

Hi, this is Luciano again. So if interest rates go higher, it might be going higher because of what's happening in the U.S. so you might end up with a stronger dollar as a result of that. And we think the stronger dollar environment is actually bullish for currency hedged portfolios. So we would say on that part of the international market. We would hope to gain additional share. We have seen some people come out of emerging market, equity emerging market bonds so a stronger dollar doesn't necessarily help there. Internationally, these flows come back to the United States, to take advantage of a stronger dollar environment in the U.S., we may see continued inflows into the U.S. equities. And we think that, of course, is bullish for WisdomTree, and we hope to benefit in that environment as well.

John Joseph Dunn - Sidoti & Company, LLC

Got you. And then you said -- the people you added, the 4 people you added on the sales side, was that in the wire house channel? And is that the most promising channel for you guys at this point?

Amit Muni

I would say that all the channels have promise. I mean, they all performed at the highest level in the first half that we never had at WisdomTree. We've continue to make investments where we felt they were necessary. In certain cases you need more people, you need more contact clients. In other cases, more can be done through phone, and through a more concentrated sales team. But we are thinking about and we are executing, adding personnel to all major channels. We've done that in the first half of the year and we have plans in the second half to continue to add bodies where we feel we need to do to grow quicker.

Operator

Our next question is from Todd Wachsman from Morgan Stanley.

Todd Wachsman

My question really is just in relation to the international expansion that you guys did both Japan and I believe you did another dual listing over in Mexico. Are you able to quantify how much is coming from that versus flows in the U.S.? And do you plan to do more, dual listing in the future, as you see fit?

Luciano Siracusano

Well, we certainly have had success with our third-party relationship with Compass in Chile. They've done a terrific job marketing the WisdomTree ETFs to the Chilean pension funds. The inflows from Chilean pension funds were very strong in the first half of the year. We've got some anecdotal feedback from our notification in Japan that certain of the Japanese brokers have had some success selling DXJ into that channel. And we're under the operating framework where wherever we're free and whatever jurisdiction is out there to either sell directly or through a third-party, our U.S. registered funds, we'll try to take advantage of that. One of the things that's happened in the last few months is that a broker-dealer exemption for distribution of U.S. registered funds into certain provinces in Canada has opened up. And that will allow our institutional team to have certain conversations with Canadian institutional investors, that hopefully will give us a little bit more traction in that institutional channel and we'll take advantage of that.

Todd Wachsman

And would you say like in the international world that the product distribution in terms of how much it is, broker-dealer versus independent versus retailer is similar to the mix in the U.S.?

Luciano Siracusano

No, I would say in every jurisdiction, a region is slightly different. I think the U.S. is far ahead of the rest of the world in terms of the number of financial intermediaries so we're in a position to sell funds to their clients. I just think the U.S. is probably 10 to 15 years ahead in terms of the discretionary fee-based model where advisors have discretion over assets and are using ETFs. I don't think you have that same level of development in Europe and certainly not yet in Asia. I think their distribution is more through institutions, the private wealth management, the banks are more important, so it's not apples-to-apples. I think it's really unique to every jurisdiction but to the extent we can reach institutional investors around the world today to buy U.S. ETFs, we're going to continue try to do so.

Operator

Our next question is from Olly Ludwig from Index Universe.

Olly Ludwig

I wanted to take a couple of things that you said in your presentation, Jono, and sort of integrate them and redirect them into a question. You said, as we all know, that, that WisdomTree is the only pure play ETF company and people could play the ETF world in that manner. And you also said the future has never looked brighter. And as we look at your stock price this year, I was wondering if you might provide a little bit of color to the extent that you can without getting yourself in trouble with the SEC. It's doubled this year. Some people may not know a darn thing about ETFs but know about WETF or somebody will tell them about it. How do you communicate everything we're talking about here through the lens of the stock price to someone who is thinking very seriously that they may want to buy this stock? And it's not just an idle question, I've been receiving phone calls in the traffic that I travel and from people who are -- who manage a lot of money. And they're looking at this and they are seeing this. And I'm wondering how do you manage expectations through the lens of your stock prices as you communicate your story to the public?

Jonathan Laurence Steinberg

We don't try to manage our expectations through the stock price. What we do is we have unusually good transparency of information. So we update people like yourselves and really all interested investors with better disclosure, I think, than any other publicly traded asset manager. We have performed well as a public company this year, but we've also performed extraordinarily well as an operating business. We showed, as you saw, the 6 best asset gatherer in all of America. And we obviously started with the smallest base of assets at the beginning of the year versus the other leading companies on that list. So and then we're obviously again showing tremendous discipline in the business. But I will say, being a public company does allow us to talk to a stock-oriented investor who might not be as interested in mutual funds. And this is another opportunity for us to educate a different suite of investors on the benefits of ETFs, which obviously we will continue to grow with the growth of the industry.

Olly Ludwig

So that -- it's industry growth and this whole DXJ thing is sort of icing on the cake, you're saying. So you wouldn't say you're going to double your stock again but you're, "steady as she goes" is kind of what you're telling me?

Jonathan Laurence Steinberg

What we have done this year really built off of the foundation that we laid in prior years. What we've done in the first 6 months and in the prior year should be laying the right foundation for growth going forward.

Operator

Our next question is from Dan Weiskopf from Asset Solution.

Dan Weiskopf

A couple of questions. First, congratulations on your board change. I think last quarter, I may have asked about that but you're making progress with it. My questions, like maybe there are 2 questions that I have. Can you walk us through how you made decision to recalibrate DXJ with that methodology? I mean, we all know that structure matters in the context of the ETF world, but I think it's an interesting story. And maybe for some of the people on this call, it's one of those key differentiation that you have versus the other manufacturers. The other question I have is a couple of quarters ago, maybe 4 quarters ago, there was a question about your policy on dividends for WETF. Should we assume that until the NOL is used up, you can't even move forward with regard to that policy, if you have a policy at all.

Jonathan Laurence Steinberg

I'll take the first part of that, the sort of the process with DXJ. So one of the things that does set WisdomTree apart from other index firms, ETF sponsors, we create our own indexes. Because of that, we have our own in-house research department, so we have a point of view. Our research department had an observation that there was an inverse correlation between the movement of the yen and the Japanese equity market. And it was -- and they brought it to our attention that they thought it would be very constructive and would differentiate the fund further and provide really a benefit to investors in certain markets if we hedged out the yen. And so we, a few years ago, we went to the trustees and we've change the investment objective. And it's obviously played out in this market extraordinarily favorably, so that really was using the research and the point of view that comes of having our own research department. Amit?

Amit Muni

Dan, it's Amit. As far as the dividend, our business is doing very well. The cash balance is growing. But we're a growth company and our focus is on investing that cash back into the business over the short term. There may be opportunities for us to do some M&A. There may be opportunities for us to do something possibly internationally, so our focus is on building that cash. But to the extent we cannot put it back into the business, I would say it's natural for us to do dividends. But over the short term, that's not on the horizon right now.

Operator

Thank you. We have no more questions in queue. Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Everyone, have a great day.

Jonathan Laurence Steinberg

Thank you, everybody.

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WisdomTree (WETF): Q2 EPS of $0.09 in-line. Revenue of $37.3M beats by $0.03M. (PR)