WisdomTree Investments' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 2.14 | About: WisdomTree Investments, (WETF)

WisdomTree Investments, Inc. (NASDAQ:WETF)

Q1 2014 Earnings Conference Call

May 02, 2014 9:00 AM ET

Executives

Stuart Bell – Director-Investor Relations

Amit Muni – Chief Financial Officer & Executive VP-Finance

Jonathan L. Steinberg – President, Chief Executive Officer & Director

Analysts

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Surinder Thind – Jefferies LLC

Mike J. Grondahl – Piper Jaffray & Co.

William R. Katz – Citigroup Global Markets Inc.

Stephen Jones – Goldman Sachs & Co.

Macrae Sykes – Gabelli & Co.

Adam Beatty – Bank of America Merrill Lynch.

Chris C. Shutler – William Blair & Co. LLC

Doug Sipkin – Susquehanna Financial Group

John Dunn – Sidoti & Co.

Operator

Good day, ladies and gentlemen, and welcome to the WisdomTree First Quarter Earnings Call. At this time all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I’d now like to turn the conference over to WisdomTree Investor Relations, Mr. Stuart Bell. Sir, you may begin.

Stuart Bell

Thank you. Good morning. Before we begin, I would like to reference our legal disclaimer available in 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 included, but not limited to, the risks set forth in this presentation and in the Risk Factors section of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Now, it is my pleasure to turn the call over to WisdomTree’s CFO, Amit Muni.

Amit Muni

Thank you, Stu. Good morning, everyone, and good afternoon to those listening to us from London today. On today’s call, I will review our operating and financial results for the first quarter, update you on our plans in Europe, discuss our tax situation, and lastly, update you on our results so far in the second quarter. Jon will then make some closing comments before opening it up for Q&A.

So let’s begin on Slide 3 by first understanding industry’s backdrop in the first quarter. As we can see on the chart on the left, industry inflows were $14.6 billion in the first quarter, which declined significantly from the first and fourth quarters of last year.

In the middle column, you can see there was positive investor demand for international equities and fixed income EPS. However, there was significant negative sentiment for emerging market equities. In the far right column, you can see Japan equities were down 7.5% and EMs transient about 2% against dollar.

As the next slide reflects our operating results mirrored this industry trend, we had net outflows of $500 million in the first quarter. To the right you can see, this was due to $1.5 billion of outflows we experienced in our emerging market ETFs covering equities fixed income and one large outflow of nearly $500 million in our Brazilian currency ETF earlier in the quarter.

We had slight outflows in DXJ. However, relative to the size of DXJ, we were very modest. On the positive side, we experienced $1.4 billion of inflows primarily in our European themed EPS.

Turning to the next slide, you can see the strength we demonstrated in the European category. We were the third best asset gatherer in the European category, representing 15% market share. Our Europe’s SmallCap fund, DFE is the industry’s first and only SmallCap EPS in this asset class. In our Europe Hedged Equity Fund, HEDJ, took in $419 million basically offsetting DXJ outflows. Part of our diversification efforts are to create innovative products that can gather flows in different market cycles as we demonstrated this quarter. On the right, you can see the flow rankings for the US ETF industry.

As the next slide reflects the outflows we experienced cause us to have negative organic growth, when you compare us against the publicly traded asset managers and the US ETF industry participants. We are disappointed with this statistic. However, our largest exposures were in markets out of favor. We nevertheless believe in the long-term opportunities for these asset classes, and we look to build upon our leadership within these categories, as well as continue on our diversification efforts.

On slide 7, we show how our ETF have performed relative to their peer groups as characterized by Morningstar. Each comparison has taken into account fees and transaction costs and reflects our equity, fixed income and alternative ETFs performed against actively managed mutual funds, index funds and ETFs.

In evaluating the performance of these funds, you can see in the far right column that since their respective recessions, 58% of these ETFs outperformed their peer group. Put another way, 85% of the roughly $33 billion invested in these ETFs were in these peer-beating funds.

Now to provide you an update on our international expansion initiatives on Slide 8. We closed our acquisition of Boost on April 17 and renamed the Company WisdomTree Europe. We are excited about this transaction as our new team in London will lead our efforts to launch WisdomTree ETFs in Europe, sometime in the fourth quarter along with continuing to grow the suite of short and leveraged products under the Boost brand.

We contributed $20 million of working capital for the business and believe that is enough for it to get the profitability in four years. We expect the business will incur losses of $4 million to $6 million in 2014 and $6 million to $9 million in 2015.

On our financials going forward, we will consolidate 100% of the WisdomTree Europe’s results and record 25% minority interest to reflect the piece we do not own. We will also be recognizing the charge each quarter to reflect the buy-out commitment we have for the remaining 25% at the end of four years.

That charge is calculated as the AUM in Europe multiplied by our global AUM multiple times 25%. On the right, you can see the assets into the Boost products have grown to nearly $100 million today. Now, let’s turn to the numbers. Despite the challenging market, we generated solid financial results.

Turning to Slide 10, revenues increased 46% from the first quarter of last year and were essentially flat with the fourth quarter. Pre-tax income more than doubled to $16.5 million compared to the first quarter of last year, and was also flat with the fourth quarter.

Turning to Slide 11, you can see how the negativity towards emerging markets decreased our percentage of concentration and revenues in that category. However, we continue to see strength and growth in our hedged equity category. Despite the mix change, our average revenue capture remains at 51 basis points.

On the next slide you can review our key margin metrics. Our gross margin increased to 78.6% in the first quarter as compared to the fourth quarter, due to the lower third-party sharing expenses. Our pre-tax operating margin increased slightly to 38.4% in the first quarter.

On the next slide, I’ll review our expenses compared to the fourth quarter. Fourth quarter total expenses were $26.7 million. We incurred expenses of 800,000 related to our acquisition of Boost and a one-time transition fees in the Bank of New York of 475,000 related to moving our back office fund accounting and administration services to State Street.

We also ended the double rent expense for our previous office space, which lease expired in January. Compensation costs decreased as higher stock-based compensation, due to equity grants as part of 2013 year-end compensation was offset by lower accrued incentive compensation due to our level of outflows in the first quarter.

The net outflows we experienced, as well as lower average AUMs in certain categories like emerging markets decreased fund-related costs. Marketing and sales-related spending decreased by $114,000, and other administrative and overhead costs decreased by $156,000 leading to a slight decrease in expenses of $26.4 million.

As the next slide reflects, we continue to carefully mange our cost base, yet make the right investments in the business as our expenses continue to decline as a percent of revenues. The savings from switching our fund accounting services will kick in beginning in the second quarter and we expect our gross margins for the U.S. products to be between 80% and 83% for the remainder of the year.

As we stated earlier, we intend to spend $6 million to $9 million on strategic growth initiatives, and we are still on track to make these important investments to support our growth. And lastly, we still do expect our compensation costs to be between 20% and 23% of revenues for the full year.

On the next slide, we can also review our balance sheet. We had total assets of $116 million at the end of the quarter, which is primarily comprised of $105 million of cash and $12 million in investments. You can see, our balance sheet continues to remains rock solid.

Now I would like to update you on our tax situation on the next slide. As you can see from our results this quarter, we released a valuation allowance on our deferred tax asset as we passed the more-likely-than-not threshold that we will be able to recognize the benefit of our net operating losses.

We recorded a deferred tax asset of $13.7 million on our balance sheet with a corresponding one-time tax benefit on our income statement. As a result of releasing the valuation allowance, we will be recording GAAP tax expenses going forward at a rate of approximately 45%, however, we will not be paying actual cash taxes because of our NOLs.

As you can see on the chart on the left, we ended the quarter with a pre-tax NOL of $146 million, meaning we will save the next $66 million in cash taxes. Said another way, we will not be paying cash taxes on the next $146 million of pre-tax earnings.

As I discussed on our last call, we still continue to generate tax losses due to our employees exercising options and investing in restricted stock. As the chart in the middle reflects, assuming yesterday’s closing stock price, we potentially have another $19 million in losses we can recognize over time, bringing our total tax savings to be potentially $107 million. Again, even though we will be recording GAAP tax expense going forward, we will not be paying cash taxes for sometime.

Now to give you an update on our current flows. As you can see on Slide 16, we are facing similar trends as the first quarter. The US ETF industry has taken in about $19 billion. So far we’ve experience $368 million in net outflows, primarily in DXJ and our emerging market equity and fixed income ETFs. Though just like the first quarter, our European equity ETFs continue to gather inflows. Our AUM is down about 1.5%.

So in summary, despite the challenging environment, we demonstrated solid financial results and improved margins, reflecting the strength of our business model.

Now, let me turn it over to Jono.

Jonathan Steinberg

Thank you, Amit. To summarize, this was a quarter of strong financial results. Even against the backdrop of a challenging market environment for our largest exposures in emerging markets in Japan, we reported another quarter of strong revenue and earnings, demonstrating the scale and strength of our business today. The efficiency of our business model is evident this quarter as we reported a 38% pre-tax margin with an average asset base just $34 billion.

In fact, WisdomTree has never been in a stronger financial position. With $115 million in cash plus our growing cash flow, $63 million last year – our business is extremely well-capitalized and well-positioned for the future. I’m confident, we can continue to profitably grow our business while reinvesting aggressively for future growth.

We have invested in our products, we have invested in our people, and we are laser focused on what I know to be the most promising and exciting market within financial services ETFs. While Q1 was a quarter of only modest inflows for the U.S. ETF industry, the longer-term growth opportunity is simply tremendous. As an industry, I believe ETFs have an opportunity to capture the majority of long-term assets from traditional product structures over time.

Education is the key. The ETFs growth story may not always be linear, but it is vast. In fact, new distribution channels and new investments innovation such as smart beta, in which WisdomTree is a pioneer, are further expanding the total addressable market every day. Internationally, the story is equally bright as the ETF structure spreads to new markets.

Earlier this month, WisdomTree completed our acquisition of Boost, and fully funded our European expansion plan. The Boost product families has already more than doubled to roughly $100 million in assets since we first announced this transaction on our fourth quarter earnings call. And we are excited to build out a family of WisdomTree use in ETFs later this year.

Together with the initiatives that we have already pursued across Latin America and Japan, we’re increasing our global foot print and positioning the company for global growth. But in reality, we are already a global company. This slide shows WisdomTree is already the 8th largest ETF sponsor. I reaffirm our longer-term goal of reaching $100 billion in assets in the U.S. market. As that happens, we will move up this chart to become the 5th largest sponsor globally. I’m confident that we have the products, the team and the resources, as well as the focus to achieve our ambitious goals.

With that, I want to thank you. Thank you for your support and interest in WisdomTree. And I will open up the call for questions now.

Question-and-Answer Session

Operator

(Operator Instruction) Our first question comes from the line of Jason Weyeneth of Sterne, Agee. Your line is open. Please go ahead.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Thanks. The first question is on the Hedged Equity products, I guess, how do you think investors are using the product? Do think it’s more of a way to remove currency risk or to take an active currency bit in addition to the underlying exposures. I’m asking in the context of the DXJ market share which is obviously grown from about 12% to close to 40% today, I’m just trying to gauge defendable that market share position might be in the extent of a continued pullback in Japan demands?

Luciano Siracusano

Hi, thank you for the question, this is Luciano. So I would say, in the case of DXJ, it reflects the investors view on the direction of the yen, if they believe the yen will lose value or depreciate from here. They typically want to hedge the yen out, particularly since Japan is a unique market, where the equity market is actually negatively correlated with the currency movement.

So if Prime Minister and the Bank of Japan are effective in their policy, and people believe the yen will reconfirm here. We would expect there to be continued demand for DXJ, which hedges out that impact. With respect to Europe hedged – hedges out the euro, there it’s a different story. I think people are using it to reduce volatility of the European exposure and they may continue to use it if they think there is more aggressive monitoring policy coming from the UCB that would actually target the euro to try to stop its depreciation.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Thanks. And then just another one on WisdomTree Europe, (indiscernible) developing products specifically for Europe and if so can you talk about how you manage that without diluting the U.S. product development efforts?

Luciano Siracusano

Sure. We’re continuing to look at equity markets around the world. We’re actually going to be launching a European dividend growth fund next week, which will attempt to give exposure to European and UK companies that are growing dividends on the continent. So that would be a third major European exposure for WisdomTree. And we think that will complement our existing product line.

Jonathan Steinberg

Yes, but Jason, as far as WisdomTree Europe, we intend to launch the WisdomTree use of fund sometime in the fourth quarter. It’s going to be a controlled buildout. This is not about replicating the entire WisdomTree products in Europe. We’ll give a little bit more detail on the types of products that we’re thinking about as we get closer to launch.

Amit Muni

But the key Jason is that, after we launch some of the use of funds that will have two structures, the usage structure and the [40X] (ph). And the usage structure really is a preferred structure to many investors outside of the U.S.

Jason L. Weyeneth – Sterne, Agee & Leach, Inc.

Great, thanks.

Operator

Thank you. Our next question comes from the line of Surinder Thind of Jefferies. Your line is open. Please go ahead.

Surinder Thind – Jefferies LLC

All right. Good morning, guys. I will just kind of start off with the question around the taxes. How much leeway did you guys actually have in determining when to recognize the DTA and stuff?

Jonathan Steinberg

Thanks, Surinder. So there is a lot of judgment that goes into one, you sort of released the valuation allowance. And so we’ve kind of been on the cusp of that, but I would say, one, we’ve passed now three years of profitability, but there is one main event that really pushed us over that threshold. And that was really if you look our results this quarter, even in a period of where we had no growth, we still had a very solid financial results, diversification efforts are proving to work. We saw outflows in funds where we had a lot of exposure to inflows and other products.

When you look at the combination of that together from an accounting standpoint, it really push us over the edge, we believe more likely than not they are going to be – we’re going to sustain profitability and be able to use those NOLs. And so that’s why we have to release the valuation allowance this quarter.

Surinder Thind – Jefferies LLC

Thanks. And then, maybe touching just based on Japan and the overall strategy there, with the release or the introduction of a series of new sector ETFs there, it seems like you guys are looking at potentially a much bigger longer-term opportunity but is there also chance that some of those products may be taking market share from DXJ itself?

Jonathan Steinberg

Well, we want to have a large footprint in Japan, DXJ is a security that’s known well in Japan and we’ve notified the Japanese regulators are certain of our Japanese funds so this broker-dealers in Japan that have an interest not just in DXJ, but also in the sectors. We believe that has Japan develops and more money is going through it people may want to make more granular bets. This but obviously a lot of interest in DXJ, this sector is just give them another way to tilt or work with their tactical bets within the Japan market.

Surinder Thind – Jefferies LLC

Excellent. In terms of traction in seeing take-up of some of the DXJ or what kind of the ramp are you guys expecting in terms of the local population there with the FSA approvals and stuff ultimately once that’s all done the products are gaining traction there?

Jonathan Steinberg

Well, as far as to speculate. We don’t directly control that we’re just making it available get make sure that people are aware of it that’s just the function of demand generally in Japan. And one of the drivers hopefully going forward will be more equity participation by Japanese investor in there certain reforms in tax incentives in place now to encourage that. A lot of the activity in 2013 came from investors outside of Japan.

So we would expect creating funds, hedge funds who are interested in Japanese equity story, once they become await that these sectors under the years may start to use them. There weren’t any other Japanese sector funds in the market and you seen how successful sector funds have been in the United States. So we think it’s a good chance to give people the choice and new tools to manage their exposure to Japan.

Surinder Thind – Jefferies LLC

Okay, thanks, very helpful. That’s it on my part.

Operator

Thank you our next question comes from the line of Mike Grondahl of Piper Jaffray. Your line is open, please go ahead.

Mike J. Grondahl – Piper Jaffray & Co.

Hi good morning guys. Can you help us think about your marketing strategy and marketing dollars around new funds maybe versus in favor or high demand fund? How do you kind of allocate that marketing spend?

Jonathan Steinberg

Hi, Mike its Jono. We are flexible, we have a growing inventory of television ads that we can market the some of the exiting funds, if we think they are in favor or sometimes we have television ads for new funds. The television ads really do create ticker awareness and then we support the awareness with lot of research on our website that really helps the sales team to sell that fund and to help create the reason and how you might put the funds into your portfolio. Sometimes they were being aggressive in trying to create the awareness with something is really working.

So recently you’ve seen some India ads on television in the first quarter, India has some outflows the market started training better in the second quarter as they were approaching their election and so we seen some inflows actually in India in the second quarter. We’ve also just try to make the most of the investor interest in the European exposures hedging DFE which have been put in on television quite a bit.

Mike J. Grondahl – Piper Jaffray & Co.

Okay. In your distribution channel, are you seeing anything new different in terms of just where you’re emphasizing things?

Jonathan Steinberg

It is a new channel, what we’ve seen in the first quarter of this year has been a lot of interest as John I’ll said in Europe some of the larger inflows have gone into the European team ETFs. So we have made hedged in DFE a major priority in terms of our education program and advisors across the country. So, that’s a unified approach we’ve used across the channels and we think it’s had a lot of success. And I’ll just add to that so has just currency hedged generally as a theme. Currency hedged is now represents the largest portion of WisdomTree’s equity assets and there we feel we are mind share leader in educating advisors about had a hedged our currencies other equity.

Mike J. Grondahl – Piper Jaffray & Co.

Okay. And then maybe just one for Amit here. Amit, how are you thinking about pretax margin kind of in this $30 billion to $40 billion range for AUM?

Amit Muni

You are right, so. We have given three sorts of margin targets right. On the shorter term, we’re expecting a 40% operating margin and $35 billion of average AUM and that guidance hasn’t changed and the longer-term margin guidance that we gave was expecting a 30% operating margin and about $55 billion to $60 billion of average assets and US assets that are current revenue capture. We’re still on track that’s our goal for the US business operating and goes margins.

Mike J. Grondahl – Piper Jaffray & Co.

Okay, great. Thank you, guys.

Operator

Thank you. Our next question comes from line Bill Katz of Citi. Your line is open, please go ahead.

William R. Katz – Citigroup Global Markets Inc. Inc.

Hi, thank you very much for taking the questions. Just starting with the margin, so that the gross margin Amit you provide the first it’s little bit higher than when you were previously, how does it get affected, if you will to the effect affected, if you will to the effect non-US business wants to grow. And then since your overall margins are constant. Are you looking to the sort of re-invest the incremental gross margin relative to last quarter guidance?

Amit Muni

There is couple of things happening on the gross margin. Let me first focus on the U.S. parts of the business. We’re switching our backlog services to State Street. And so we’re expecting to see an improvement in that gross margins and then so the guidance that we’re giving is, we’re expecting like gross margins be between 80% and 83% for rest of this year.

On the non-US part of the business, we are expecting that’s the boost related leverage in interest products are very high margin, are very low cost actually operate those funds. We gave guidance and what we think the overall cost is of running that business in 2014. I am not going to get into the details of all those European products right now we get that more as we get further on in the year.

William R. Katz – Citigroup Global Markets Inc. Inc.

So, we should assume just Matt that the overall margin targeted company being unchanged that the gross margin improvement would not necessarily filter down at earnings at this point?

Jonathan Steinberg

Well, again, we would expect some of it, but the guide remind you build that, we’re growth company we still want to make the right investments in the business, we are going to spend $6 million to $9 million on the strategic growth investments right now. We’re kind of trending towards the lower to middle end of that range, but the goal is to continue to make those right investments in the business, not about really the short-term to get to those margins as fast as possible. So making the right investments in the business will support the revenue growth.

William R. Katz – Citigroup Global Markets Inc. Inc.

That’s very helpful. And then you’ve done a very good job collectively expanding your products at any distribution channels. Can you just talk a little bit about the traction you’re seeing in, maybe in the Latin American distribution area, that seems to be an area we are focusing, what percentage of flows or growth sales maybe coming from that and maybe still early days, and so I’m curious what the – some of the early signs over there?

Luciano Siracusano

Hi, this is Luciano again. So we get very good data in Latin America, because the ETFs assets there can be tracked pretty precisely. So at this point you have about roughly $650 million in assets across the region, about 75% of that is concentrated today in Chile. That number in Chile had been higher, but there had been some selling in the second half of the year there.

We’ve listed or cross listed and cleared some of our ETFs with pension regulators in Mexico and Peru. So, now the conference team in Mexico and Peru and even Columbia have more opportunity to sell including ETFs. And we hope that Bill, start to track assets, so pension systems increased adoption of U.S. traded ETFs.

William R. Katz – Citigroup Global Markets Inc. Inc.

Okay. I just have two more, thank you for taking those questions. Just Amit on the 40% tax rate, it’s obviously relative not given you New York City headquarters if you will. Is there any opportunity maybe just mix as Boost growth, but any opportunity to potentially reduce that tax rate, any opportunity maybe leakage if you will?

Amit Muni

I mean, we’re going to look at ways to see if it’s possible, we can reduce that effective tax rate. As we mentioned, we are in New York state, we are New York city, we believe this is the right place for us to be. This has got a town pool, we believe really is for our industry. But we will look for incremental ways to see we can possibly reduce that tax rate going forward.

William R. Katz – Citigroup Global Markets Inc. Inc.

And last one Jono for you was just, you’ve highlighted in the past that you when considering on sales call, the flows will flip more and decisively to the ETFs. And if you look at the equal number, certainly nice snapback in overall Q1, but I see I – it continues to be pretty stable itself when you look at sort of the active business. What are the things going to be the catalyst to really move that market share more deeply in the pass of on a go-forward basis?

Jonathan Steinberg

I think it’s one would be education, so I think that really is more investors become aware of really the tax benefits of the ETFs structure, you’ll see more success there as the business model of its financial advisors continues to move to the fee-based model. We will continue to take market share there. And then as we continues as an industry to innovate with things like smart data and all these unique innovative exposures that we and the industry are launching, we should continue to able to take, grow market share from next standpoint as well. So I think it’s inevitable, but it’s – I think it’s inevitable really.

William R. Katz – Citigroup Global Markets Inc. Inc.

Okay. Thank you for taking my questions.

Jonathan Steinberg

Thanks, Bill.

Operator

Thank you. Our next question comes from Marc Irizarry of Goldman Sachs. Your line is open. Please go ahead.

Stephen Jones – Goldman Sachs & Co.

Hi, thanks. This is Stephen Jones standing in for Marc today. Firstly, I just want to start, there has been more product launches year-to-date, more marketing and pressure around this smart beta team. I was hoping you guys could maybe speak to the competitive dynamics there, maybe in your conversions with advisers WisdomTree is differentiating? And if you’re seeing maybe their early signs of any fee pressure in the space?

Luciano Siracusano

Hi, Stephen, this is Luciano. So, last year about a third of the inflows into the industry came into so called smart way to products, products that were weighted by something other than market capitalization.

So, we are seeing a great deal of interest in it and I think now advisors and advisory firms, investment committees they’re making evaluations between different smart data approaches and their we are competing against equal weighted strategies to some extent low volatility strategies and other fundamental related strategies. So I think from the way WisdomTree is positioning ourselves is one we have a track record that seven or eight years now – a very impressive performance relative to traditional cap weighted index.

Number two, our indexes have tremendous investment capacity inside of that because their design to scale for the size of the company that doesn’t necessarily apply you can see weighted indexes and put some limits on how widely adopted they could become. And number three, our indexes have done a very good job of getting the line share of the markets upside capture over the last five years.

That’s not necessarily true of low volatility strategies they tend to only get traction of the markets upside. And at the end of the day, what really matters to investors is what was a return you got and how much risk of did you take to get it? That’s where we are trying to focus people retention on because that’s what we think WisdomTree is the greatest competitive advantage.

Stephen Jones – Goldman Sachs & Co.

Thank you, that’s very helpful.

Jonathan Steinberg

With respect a few pressure, the smart beta products are priced at some of them are priced cheaper and some of them more expensive. So at the end of the day its really the delivery of the funds return after fee, after transaction cost and their again, we think we have a competitive advantage.

Stephen Jones – Goldman Sachs & Co.

Great, thanks. And sort of on the fixed income side of the products that how is the build out going there. And maybe you could speak to sort of that current rate environments and what it’s going take to get more traction, more broadly with our fixed income ETFs industry?

Jonathan Steinberg

Well, with respects to WisdomTree what it would take it would take interest rates to starts rising both the United States and Japan. Any kind of rise in the market rate or any kind of Federal Reserve interest rate hike, would impact the bullish for our products that because they are designed to work in that market environment. We had good success with emerging market debt ETFs for the first few years after they were launched, but the center mid changed in year over the last 18 months that starting to subside now and we’re starting to see potentially a back into some EM equity classes.

So we think our EM debt fund, which doesn’t have currency risk on the currency side should start to appeal to advisors going forward and hopefully it will be growing interest to get in the local debt EM space, which has been sold off of the last year.

Stephen Jones – Goldman Sachs & Co.

Great, thank you for taking my questions.

Operator

Thank you. Our next question comes from the line of Macrae Sykes of Gabelli and Company. Your line is open please go ahead.

Macrae Sykes – Gabelli & Co.

Good morning gentlemen. I would ask two questions and maybe you could answer them together. First is on Europe and how do you see the distribution unfolding? Are you talking mainly institutions, retails and combination of both, I mean, secondarily what are this some of the difference in ETFs adoption in Europe versus US. Other some nuances and what your thoughts on more competitive? Thanks

Luciano Siracusano

Hi, this is Luciano again. So, with respect to the roll out of product and distribution strategy in Europe, we are going to discuss that more as you get closer to it and so I want to comment on specifically today except to say that in Europe it’s a very fragmented market there are ETF assets in the UK there are ETF assets in Germany and also in Switzerland.

So you need to know who are the ETF users and then you need to figure out a way to talk to them and get them interested and what was and through does even figure out how to work it into their practice. And the good news in Europe is that they are starting to move to more of the fee-based model, we are advising to being discourage during in certain cases prohibited on from doing business the way they used in terms of sales loads and so forth. So we think the overall climate is becoming more conducive for low fee-product and that’s one of the reasons on we’re going in to Europe now.

Macrae Sykes – Gabelli & Co.

Thank you.

Operator

Thank you. Our next question comes from the line of Adam Beatty of Bank of America Merrill Lynch. Your line is open, please go ahead.

Adam Beatty – Bank of America Merrill Lynch.

Thank you, and good morning. First a couple of questions about WisdomTree Europe and the cost around that you took some expenses in the quarter just for integration and what have you, apart from the operating loss of boost and WisdomTree Europe will there be any sort of additional investment expenses. And then the second part of that question is in terms of the, kind of charge off of the acquisition cost obviously there is a future point in time, where the AUM in the multiple and what have you will be fixed. Will there be sort of periodic trips in charging off that cost? Thanks.

Amit Muni

Hi, Adam. So we think, so there is beyond this, so we put in $20 million working capital into the business within the WisdomTree Europe. And we think that’s enough capital of the business needs to get the break even at the end of full year. So, there’s not going to be any investments are beyond that, that’s the plan today. And then we expect that’s burn it up $4 to $6 million in the first year by 2014 and $6 million to $9 million next year. As we continue to ramp up the business, as we continue to non-small funds we expect that loss so it’s quite a little bit in the third year and then gets a break even in the fourth year.

So, this is the control build up that we’re doing over that full years. So at the end of the full year, we have a commitment to buy out the remaining 25%. So what you’re going to see in our second quarter results is that will take a charge of what we believe the future payout will be based on the assets at the time at June 30. And then every quarter we are just going to basically true that up over the next four years you’ll see that charge start to grow as the assets continue to grow into that business.

Adam Beatty – Bank of America Merrill Lynch.

Okay. That’s helpful, thanks, Amit. Maybe a follow-up on some of the earlier discussion around DXJ, could you give us any color on, how you see – you talk about the use of the product. How do you see the investor composition is that primarily institutional, primarily retail what kind of intelligent do you have around that?

Amit Muni

Well. DXJ represents about a third of our AUM, so its been adopted across all the major channels, I would say that it does have a lot of international interest it’s a global security. And so when we take look at the outflows in the first quarter, the largest outflows we can identify were facility that typical and institutional. And so their may have been some international redemption of DXJ in the first quarter, and again its very widely held across the major channels.

Adam Beatty – Bank of America Merrill Lynch.

Okay. That’s helpful, thanks. Then one last one, thanks for taking my questions. Just around the in visor channel may be in the context of, some of the comments around Europe, but also here in the U.S. in terms of advisors billing more on UN as opposed to training commissions and what have you, what in – and do you feel we’re in, I guess mainly in the U.S. in terms of ETF penetration and the attractiveness of world fee product in that context? Thanks.

Amit Muni

I’d say the U.S. is obviously ahead of Europe and we’ve seen tremendous adoption in the U.S. is started in the RIA channel, I think over the last 10 years we’ve seen more adoption in the warehouse channel as advisors move to fee-based advisory platform. I think that’s good for the advisor, I think, its goods for the plan, I also think it’s good for the overall firm. I wouldn’t put a feeling on it. All I would say is that it’s continuing to gain traction and it still I think relatively early both in the ETF adoption cycle and in terms of practice management I think that would be going forward I think you’ll see more advisory assets falling in then commission based assets in the future.

Luciano Siracusano

Adam, its Luciano. The only other thing I would add to that is they definitely feels that there is a lethargic nature flows overall and people already investing with enthusiasm. I think that’s one of the things that are holding back to growth of ETFs in general of that, we still have a dozen industry broke $200 billion of inflows in the year yet. So still they’re should be a lot of upside to the angle flows that we have seen going forward, when at some point has some enthusiasm to investing coming back.

Jonathan Steinberg

Got it, I appreciate the detail that’s all I had today. Thanks very much.

Unidentified Company Representative

Thanks, Alex.

Operator

Thank you. Our next question comes from the line of Christ Shutler of William Blair. Your line is open please go ahead.

Chris C. Shutler – William Blair & Co. LLC

Hi, guys good morning. You highlighted emerging markets is one of the drivers in Q1 of the outflows couple of quick questions there, to the extent you can tell what channel though the outflows concentrated in. And then secondly to what extent at least in the near term do you think investors are gravitating more towards active manager per EM?

Luciano Siracusano

Well, this is Luciano. With respect to your question we still one redemption in our Brazilian currency fund that was a large RA firm, which accounted for almost all of the currency. EM equity as you mentioned has been out of favor so we did see redemption is there pretty much across the board in terms of the channels. With respect to active there are periods when some active managers do a little bit better than the indexes, but over a longer period of time, I think the data is pretty overwhelming that, due to the capacitive approach is better. And certainly we compare our emerging market strategies to active managers and we do very well over longer term timeframe.

So, I think everything is really was changed in terms of the strategic case where passive been exposure. I do think people are more open for different type of exposure they making from the traditional captulated benchmarks.

Amit Muni

We have started to see just in EM, as I mentioned earlier India has started to have some inflows this quarter, emerging markets small caps had inflows. So Maybe we’re seeing abounding of the negative sentiment.

Chris C. Shutler – William Blair & Co. LLC

Yes, it seems to be disputing. And then on the capital allocation just want to get your current thoughts and particularly any incremental thoughts around buy-back?

Jonathan Steinberg

So Chris, the businesses is very well, we are generating a bit amount of cash but, as I said we are growth company and our goal is to invest that money back into the business strategically to help support that growth whether its continue to organic growth or whatever is determinate, we funded our acquisition of boost. And so there is a lots of opportunity for us to use that cash. To the extent, if we have, if we believe we have excess cash beyond our investment needs for the business, we will consider returning that to investors.

Chris C. Shutler – William Blair & Co. LLC

And remind me, give an outstanding authorization?

Jonathan Steinberg

The only buyback that we do today, we buyback the amount of when employees best in their restricted stock, we buyback the tax portion of that, that’s only buyback that would be say.

Chris C. Shutler – William Blair & Co. LLC

Okay, thank a lot.

Jonathan Steinberg

Thanks.

Operator

Thank you. Our next question comes from the line of Douglas Sipkin of Susquehanna. Your line is open please go ahead.

Doug Sipkin – Susquehanna Financial Group

Yes. Thank you. Good morning. I just wanted to spend a little bit more time on Europe, it sounds like it’s a nice opportunity for you guys in a couple of years. So obviously a big source of ETF growth in U.S has been now the emergence of these ETF money managers like when haven and things like that. Where are we in Europe and maybe seeing the development of money manger’s like that I know it’s probably early days there that you guys eluded to the migration to the fee-based is still way behind where we are, but I’m just curious if you’re seeing the emergence of sort of new development of an ETF money manager universe in Europe?

Luciano Siracusano

Hi, this is Luciano. I think what we see it in Europe is on the mutual fund side and in the institutional asset management side. So there we are seeing folks use EFTs within broader allocations either in a mutual fund, mutual structure an institutional account. I don’t think they are at the point yet of having enough within a RIA channel develop to have what we would consider RIA money managers I think that’s a driver in the future.

But as they move to fee-based approaches and that would be natural evolution as that advisors start to get digression over the several $100 million about the fee-based approach the nature next step is to create a model that they can use implementing ETFs and then try to raise money within ETF model I mean that’s been very successful in the U.S. it’s a major drivers of assets in America and we had a lot of success working with those RIA firms finding a place in those model.

Doug Sipkin – Susquehanna Financial Group

Great. So if I sort of think about the opportunity in Europe it sounds like it’s probably going to come more from traditional guys just embracing ETFs more than they have in the past in terms of slow generation over the next couple of years because it’s still probably early days for those RIA models?

Jonathan Steinberg

I think that’s a fair assessment, I mean the Europe is the second largest ETF market in the world, but it is still many, many years behind the U.S. and its build out. And, particularly on the business model and advisors it is still early days, but they had been important legislation that is encouraging sort of this fee-based movement.

Doug Sipkin – Susquehanna Financial Group

Gotcha, okay. And then just some financial questions so obviously you guys pass the threshold and will be recording a GAAP tax rate, but still not paying taxes for sometime obviously still getting a bit benefit from the shield. I’m just wondering to reflect this I mean is there a certain AUM level were maybe dividend come into play, I know we’re not there yet. It sounds like I think that guys have said you would probably more incline to pay a dividend then play buybacks, I mean there is certain AUM level down the road where maybe that comes a little bit more into play and again that would be maybe better shows of the tax advantages you still have?

Jonathan Steinberg

Yes, Doug if I wouldn’t say it is tied really to AUM it’s really tied to our investment needs. We are growth company, we want to make the right investment to the business that support our growth on that where our key focus is we spent, we believe, we have excess cash beyond those investments need. We would considerably showing that back to investors we check primarily we favor dividend as we are going to do that but the key is not that AUM level that it’s very dissolving factor is as we believe we have excess cash beyond our investment need opportunities.

Doug Sipkin – Susquehanna Financial Group

Gotcha, okay that’s helpful. And then just finally with the guidance around boost those numbers net or did you actually be able to get tax benefit from those early development loses?

Jonathan Steinberg

Those are our pretax numbers there and the business are getting the biggest generate losses right and so – those you’ll see some benefit on that’s kind of effective tax rates from that, but they are small and big scheme of things anyway.

Doug Sipkin – Susquehanna Financial Group

Gotcha, great. Thank you.

Operator

Thank you. Our next question comes from the line of John Dunn with Sidoti. Your line is open, please go ahead.

John Dunn – Sidoti & Co.

Good morning. I had a follow-up on the competitive landscape. Could you give us an update on and you talked about a smart beta building, but specifically on the nontransparent ETFs and some of the large ETF guys ramping up in your signature, some of your signature product?

Luciano Siracusano

So with respect to nontransparent, I think you will need to attract a new ETF buyer from who was in the market today. The market in the U.S. that has been buying ETF’s likes the full functionality, which includes the full transparency. So personally I’m not that optimistic about nontransparent active, but that’s what making horse race.

John Dunn – Sidoti & Co.

Gotcha. And then, maybe just give a flavor of the sales discussions for some of your newer vintage products, particularly the once that are designd to address rising rate?

Amit Muni

Sure. So we’ve been speaking to RAs and institutional investors, as well as some advisors who are all on platform that can use these strategies. In fact, we’re going to have some advisors in about two weeks from across the country, as well as advisory firms. And this would be one of the discussions we will be going through with them, how to use an effective interest rate hedge portfolios to manage interest rates risks in the future going forward. What we have heard from clients is, when we launched this in the beginning of the year, the 10-year bond was about 3%, it got down to below 2.7%.

So this is not a concern that’s front and center for them today, but it is something that they feel they are going to manage and deal within the coming year, next two or three years. So we feel the suite of products we launched as well as the floating rate treasury product will be well suited for clients to use once we see the federal reserve raising interest rates and market rates going up. But that might be 12 months, 18 months out. So I would say, we’re very early on the education cycle, but we are getting the word out to these products exist and they are developing a decent track record in the interim.

John Dunn – Sidoti & Co.

Got it. Thank you very much.

Operator

Thank you. Our next question is a follow-up from the line of Bill Katz of Citi. Your line is open. Please go ahead.

William R. Katz –– Citigroup Global Markets

Okay. Thanks for taking these extra questions. I’m not sure these are related questions, but I’ll ask them together. Could you give us an update on what you are seeing in terms of opportunity set into the retirement business, particularly into United States? Then more broadly what are you seeing if adding in terms of any pricing pressure for the industry a large?

Amit Muni

Well, with respect to 401(k) retirement, I mean there have been some advances forward there. We think that overall, we think record keepers across the country are going to come under some competitive pressure to have an ETF enabled offering both to get more investment choice in the system, as well as to get overall fees down.

So we would hope that over the coming years, more opportunities open up on the record-keeping side. We’re also working with the RAAs who sell into these platforms to get WisdomTree ETFs inside of their models. So as those money managers get wired in effect to get inside this 401(k) distribution plans, that would be a potential driver for WisdomTree.

Jonathan Steinberg

Well, Bill, in terms of fee pressures, the industry has always even from 20 years ago when the Spider was launched at 9 basis points. There’s really been no change recently it just is. And we continue to choose our fund launches with an eye towards being differentiated which has really been, I think very constructive from a fee perspective. But we haven’t seen any major changes this quarter or last quarter or any of the quarters of last year.

William R. Katz –– Citigroup Global Markets

Okay. Thanks again for taking my questions today.

Operator

Thank you. And with no further questions in the queue, I’d like to turn the conference back over to Mr. Jonathan Steinberg for any closing remarks.

Jonathan Steinberg

I just want to thank you for your interest today, and I will speak to you on next quarter. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.

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