WisdomTree Investments, Inc. (NASDAQ:WETF)
Q4 2015 Results Earnings Conference Call
February 05, 2016, 09:00 AM ET
Stuart Bell - Investor Relations
Jonathan Steinberg - President and Chief Executive Office
Amit Muni - Executive Vice President and Chief Financial Officer
Luciano Siracusano - Executive Vice President and Chief Investment Strategist
Craig Siegenthaler - Credit Suisse
Jason Weyeneth - Piper Jaffray
Surinder Thind - Jefferies
Adam Beatty - BofA Merrill Lynch
William Katz - Citi
Michael Cyprys - Morgan Stanley
Christopher Shutler - William Blair
Macrae Sykes - Gabelli and Company
Ann Dai - Keefe, Bruyette & Woods, Inc.
Mike Grondahl - Northland Capital Markets
Keith Housum - Northcoast Research
Good day, ladies and gentlemen and welcome to the WisdomTree Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]
As a reminder, this conference may be recorded. I would now like to turn the conference over to our host for today's call, Mr. Stuart Bell at WisdomTree Investor Relations. You may begin.
Thank you and 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 Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and they speak only as of the date when made.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not, or the times at or by which, these results will be achieved.
A number of 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 in the Risk Factors section of the company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Now it is my pleasure to turn the call over to WisdomTree’s CFO, Amit Muni.
Thank you, Stuart, and good morning, everyone. Despite the recent volatility, 2015 was a record breaking quarter year for WisdomTree. Our innovation led to the creation of a currency hedge category and ETFs, and our two leading products drove us to achieve record inflows in AUM.
The operating efficiency of our business model translated into our strong performance into record financial results with operating margins that rival the largest players in asset management. And with these strong cash flows we've returned over $100 million back to our shareholders through dividends and buybacks.
We took steps to make strategic investments as part of our long-term growth plans. We focused on expanding our sales efforts and hired 17 new salespeople including a new role overseeing global distribution. We continue to focus on innovative and differentiated products with the launch of 17 new ETFs.
We expanded our distribution relationships both in the U.S. and abroad and with the strength of U.S. accomplishments we made our first steps into Asia opening an office in Japan as well as continuing to grow our European business. We are setting up the foundation for us to take part in the worldwide growth of the ETF industry.
Now let's get into the results for the quarter beginning by first reviewing the U.S. ETF industry statistics. Turning to slide three, U.S. ETF industry flows increased significantly to $91 billion in the fourth quarter and the industry reached $232 billion inflows for the year. U.S. and unhedged international equities were the flow leaders this quarter followed by U.S. fixed income ETFs.
Turning to the next slide, our AUM increased 31% for the year to $51.6 billion due to the record inflows we took in during the year. AUM was down 3% sequentially due to outflows in the fourth quarter. Our two largest currency hedged ETFs made up about $2 billion of those outflows followed by emerging market equities which have been out of favor for some time. For the full year we reached a record $16.9 billion of inflows.
On the next slide we can go do a deeper dive on the currency hedge category. You can see on the chart international equity AUM UN rose to $357 billion at the end of the fourth quarter up 33% for the year. Currency hedged AUM has tripled for the year and now stands at 17% market share. Approximately 40% of all international flows went into a currency hedged product in 2015 and we believe this trend will continue over the long-term. Therefore we will continue to remain focused on this category. For example, we recently launched four dynamically currency hedged ETFs and we continue to innovate in this category.
The next two slides goes through our industry rankings. Turning to slide six on the left, in the U.S. ETF industry WisdomTree was ranked fourth in inflows for the year and we had the third best organic growth rate of the top 10 ETF sponsors as you can see on the next slide.
WisdomTree was also the fifth best asset gatherer compared to all ETF and mutual fund managers in the U.S. according to Morningstar. This translated into WisdomTree continuing to have the best organic growth rate versus the other publicly traded asset managers. In fact, over the past three years 10 of the 17 firms on this page have had negative organic growth rate over the last three years. The key take-away from this slide the flow momentum is continuing to grow for the ETF industry to the detriment of mutual funds.
On the next slide we show our fund performance according to the Morningstar peer groups. These comparisons take into account fees and transaction costs and reflect our equity, fixed income and alternative ETFs performed against active and passive mutual funds and other ETFs. This inception 66% of our ETFs outperform their peer group or 94% of the approximately $51 billion invested in our ETFs were in funds that beat their peers.
I'd like to update you on our European business on the next slide. Our European AUM continues to grow reaching $774 million at the end of the year. This quarter saw an increase in our WisdomTree use of ETFs with the launch of our currency hedge suite and flows into our boost ETPs have more than doubled from last year. We are pleased with the progress of this business to date.
Now let’s get into the financials on slide nine. Record net inflows for the year drove a 54% increase in our revenues from the fourth quarter of last year and net income increased 113% to $20.5 million over the same period. Earnings per share was $0.15 per quarter. Sequentially, revenues and net income were down due to lower average AUM from outflows. For the full year, revenues were up 63% and net income increased 31% to $80 million.
Turning to slide 12, as you can see from both charts the currency hedge category continues to make up the larger portion of our asset base and has contributed significantly to our revenue increase year-over-year. Our average revenue capture was 52 basis points in the quarter down sequentially due to outflows in our higher priced ETFs.
On the next slide we can review our key margin metrics. Gross margins for our U.S. listed ETF business was 85.6% in the fourth quarter. The increase year-over-year was due to higher average AUM. Gross margins were down sequentially due to higher fees for our third-party marketers.
In the chart on the right, you can see our U.S. business had a 52.1% pretax margin in the quarter and our overall margin was 46.7%. For the full year margins in the U.S. were nearly 50%.
Next we'll review expenses on slide 14. Third quarter total expenses were $41.2 million. Compensation costs decreased $3.6 million to properly reflect incentive compensation for our full year results and taken into account the elevated outflows in the fourth quarter. Marketing and sales spending was down $110,000. Professional fees increased $814,000 due to strategic consulting expenses and recruiting fees for our sales force. Third-party sharing expenses increased $693,000 due to threw-up annual fees for our third party marketer in Latin America.
The costs for our European business increased $198,000 due to higher fund expenses from ETF launches. We also recorded a $1.3 million higher charge to reflect the change in the fair value of the buyout obligation we have for our European business.
As I mentioned on our last call, we have updated our fair value approach to model the buyout based on our AUM projections at the end of the deal term. We will re-measure this obligation every quarter, but I expect it will be about $800,000 per quarter and threw-up annually absent a significant change in the $81 billion a year. On the right, you can see compensation as a percent of revenue for our U.S. business was 23% for the full year within the range we spoke about on our last call.
The next slide has changes for our full-year expenses for your reference. Turning to our balance sheet on slide 16, total assets grew to $293 million due to our strong cash flows. On the right, we generated $155 million of cash from our operating activities due to our record inflow levels this year. We spent $24 million to buy back stock and we returned $79 million to our shareholders through our dividends. We ended the year with $234 million of cash.
On the next slide we'll go through our taxes. While we record GAAP tax expense we don’t take cash taxes due to our tax losses. The tax rate for our U.S. business is approximately 39% and we did not yet get a deduction for the losses we are incurring in our European business which drives up our overall effective tax rate to approximately 42%.
At the end of the year, we have approximately $26 million of pretax earnings that can be sheltered from paying cash taxes. We will likely run through our current remaining tax shields in the first quarter. However, we continue to generate tax losses due to employees exercising options and investing in restricted stock. The detailed information is on the right hand side on slide 17.
I'd like to give you an update on our expense outlook for 2016. The trends driving the current environment and industry growth are firmly in place and we see a combination of new catalysts to further accelerate industry growth globally. First, ETFs are growing at the expense of mutual funds and penetrating existing channels and continuing to break into new market segments.
Second, while there has been investor demand giving growth we are also seeing positive external factors such as increased regulations which we believe are favorable and should accelerate growth in the ETF industry. Worldwide, markets are moving away from commissions to fee-based models with greater transparency around payment schemes.
And lastly, two decades into the ETF industry development, the ETF product continues to evolve into different strategies across asset classes. We see more investor demand for sophisticated outcome oriented strategies. Innovative product development is in our DNA and in this context WisdomTree, with one of the longest track records and smart data is well-positioned for this trend.
With that as a backdrop we believe it is important to continue to invest in our business to capture the long-term growth trends we see ahead. In order to best position for this growth, we are focusing our best efforts around three key initiatives. First, remain a leader in product innovation. We will continue to launch unique product strategies in different asset classes leveraging our self indexing capabilities to grow and to diversify our asset base. We intend to launch 12 to 15 new ETFs in 2016.
Second, we want to strengthen our positioning in our core channels. We will continue to invest in relationships we have today with our distribution partners and clients. We will use technology and data analytics to better target client segments. We will provide more value-added services to financial advisors to address their client's needs and increase our marketing and sales related activities.
And lastly, we want to best position ourselves for the next wave of ETF adoption as new investor segments in the U.S. and overseas continue to adopt ETF's. We will complete our sales expansion plan we started in 2015 to go deeper and broader within the channels where we currently compete as well as access new or emerging channels like the institutional space.
We will also continue to explore expansion into other non-U.S. markets to grow our global footprint. In total we intend to invest $12 million to $16 million in 2016 on these important initiatives. Of that amount $3 million is the carryover from our 2015 instituted expense.
On the next slide we can walk through our expense base change. Our U.S. expenses had - our U.S business had expenses of $148 million in 2015. We had one-time cost of $2.5 million during the year. Annualizing our AUM at the end of 2015 reduced expenses by $1.2 million. Resetting compensation to baseline levels given our outperformance in 2015, net with higher stock-based compensation and annualizing costs for new hires, further reduces expenses by $10.9 million.
We anticipate about $3.4 million in administrative and other overhead cost increases. We are targeting $12 million to $16 million for strategic investments so our baseline operating expense base in the U.S. will be $149 million to a $153 million. From there we will have savings or incur additional costs based on changes in our AUM. We anticipate our gross margins will be around 81% to 83% range given our current AUM levels and planned fund launches.
Incentive compensation will also change based on our inflow levels. Because of the increase in our headcount from the prior year and this year's growth initiatives we expect compensation for the U.S. business will be between 24% and 28% of revenue for the full year.
There may be some differences between the quarter and the annual target given timing, the level of flows as well as market movement as we have experienced in the past. We will update this guidance as the year progresses if needed. Again this is the expense base of the U.S. business. Our expected pretax loss for our European business before any charges for the buyout obligation will be $8 million to $11 million.
Before turning the call over to Jon let me give you an update on where we are so far this quarter. As of yesterday our AUM was $46 billion as a result of $4 billion of negative market movement and $1.8 billion of outflows. As you can see on the right, we all know January was a challenging month for the markets. The industry has had outflows and most of the players have also had outflows.
So in summary, we've demonstrated world-class results reflecting the operating efficiency of our business model. We run a disciplined business and as we have always demonstrated we will balance expense management with investments for growth.
Let me turn the call over to Jon.
Thank you, Amit. Good morning everybody. This was a weak quarter but a very strong year. As such, our strategy remains the same. Our discipline also remains the same. We are comfortably and carefully managing our business with an eye towards long-term growth.
We are mindful of the volatility in the markets in the second half of 2015 which have carried through year-to-date. We will manage our expenses appropriately just as we have done in years past should these conditions persist. But make no mistake; the environment for an ETF focused asset manager is only gaining momentum.
WisdomTree is uniquely positioned amongst the public asset managers to capitalize on these trends. As you can see on this slide from 2006 through 2011 the ETF industry averaged $126 billion of inflows and WisdomTree's market share on average was 2%. From 2012 to 2015, the industry saw a significant step-up in inflows averaging $210 billion-a-year and WisdomTree also saw a significant step-up in market share averaging 5% a year.
I think the ETF industry is poised for another step up in growth. Just consider what happened this year. In 2015 ETFs took in $232 billion while mutual funds bled $125 billion. In fact this was the largest year of active mutual fund outflows on record according to Morningstar. In many ways it is a zero-sum game. The growth of the ETF industry comes primarily at the expense of the traditional mutual fund.
Why am I so confident in this dynamic? Largely it is common sense. The ETF is the better structure. Transparency liquidity and tax efficiency and the continued growing awareness of these benefits are driving market share gains, but the deal well is proposed Fiduciary rule if enacted will further accelerate the trends.
Morningstar estimated more than 1 trillion of assets could flow into ETFs and passive products as a direct result of this higher Fiduciary standard. We are continuing to invest in our business because we are so confident that recent trends and funds flows will continue to move strongly in favor of ETFs and we expect that over the next five years the ETF industry could very possibly average $350 billion a year. What does that mean for WisdomTree?
Since the launch of our first ETFs 9.5 half years ago WisdomTree has taken 3.5% market share of the inflows. As just discussed over the last four years we have averaged just over 5%. As you know, we have historically targeted 3% to 5% of the industry inflows, but we are a stronger company today and with these investments will be a stronger company tomorrow.
Amit has walked you through this year’s strategic investment spend plan which builds upon prior year's investments. We are adding people, products and new distribution capabilities. This gives us the confidence to raise our target of inflows to 5% to 7% market share over the next 5 to 10 years. WisdomTree is positioning to take a greater share of a growing pie.
Before we open up the call to questions, I do want to remind investors that market share and flows in general are not linear. There will be moments of greater strength and weakness, but our history since inception is one of strong organic growth and we are confident that the long term trend is very much intact.
With that, let’s open it up to questions.
[Operator Instructions] And our first question comes from Craig Siegenthaler of Credit Suisse. Your line is now open Craig.
Thanks, good morning.
Good morning Craig.
So in the fourth quarter the two larger HEDJ products DXJ and HEDJ gave up some ground to the newer products at iShares and the X-Trackers. I’m just wondering, we know cap gain is partially behind us, but can you provide your updated thoughts on the short term trend and may be how your products are stacking up competitively versus iShares and X-Trackers?
Sure, Craig this is Luciano. HEDJ is by far the dominant vehicle for European HEDJ equities and DXJ is dominant in Japanese HEDJ equities. So as you've seen in other categories, typically the biggest ETF often takes in the lion's share of flows when the market is in favor and it typically seizes the greatest outflows when sentiment reverses. So, to put into context, I mean HEDJ took in $16 million since September of 2014. That was a period when European starts were in favor if you hedged out the Euro.
Now most recently European equity markets have sold off 10% to 15% since November. So it is not unusual to see HEDJ experiencing outflows. But I’m glad you asked the question because there has been some misinformation out there. So let me set the record straight with respect to three important points, taxes, trading and performance.
First on taxes, so due to the timing of HEDJ substantial inflows which occurred during the period when the Euro was losing value relative to the dollar, as well as the timing of HEDJ’s fiscal year WisdomTree ended up distributing larger capital gains than competing for funds from either iShares at Deutsche Bank. So, in the past few months we know there was some repositioning to avoid capital gains, but we believe this was a function of timing and not methodology.
So, for example, I mean WisdomTree didn’t pay any capital gains on the equity portion of HEDJ’s portfolios. We had larger capital gains to distribute because we had larger gains on the current see forwards. In other words the fund worked exactly as it was designed to. In any given year the size of those capital gain distributions can vary and next year could easily reverse itself.
With respect to trading, we have significant advantages when it comes to the cost of trading. Over the last three months HEDJ traded on average five times the dollar amount from its major competitors. Its AUM is more than four times as great as its nearest competitor and HEDJ is approximately 50% cheaper to trade versus its main competitors. Any notion that creation redemption fees are driving up the cost of trading HEDJ is simply not true.
Such fees are typically included in the pricing of the bid asset spreads and again we’re very competitive here because each day millions of shares of have HEDJ trade back and forth, which keeps the bid asset spread very tight. HEDJ typically trades a penny wide. So if you trade a penny wide at $50 the cost per trade is two basis points excluding commissions. That compares to four basis points for funds trading at penny wide at half of HEDJ price and that’s where the other funds typically trade at. So for many traders and investors, it’s the all-in cost of trading and owning the ETFs that matters.
Lastly, with respect to performance, this is an area where some of the greatest misperceptions seem to lie. Investors will look at Yahoo Finance or their own brokerage screens, may not see the full performance picture if they only see the price return of the fund. To compare performance you need to use the total return of the fund, which means adding back the dividends and the distributions. So HEDJ for example generated a total return of 6.7% at NAV in the fourth quarter of 2015, but the capital gains distributions and the dividends that were paid in that quarter totaled $4 per share or roughly 7% of the fund's NAV.
If you were looking at a screen that did not include those distributions, you could have mistakenly concluded that HEDJ lost money over the final three months of 2015 which it didn’t. To the contrary it literally put money in investors pockets. So the truth is when you look at the total return of HEDJ's underlying index it’s actually outperformed the MSCI EMU 100% HEDJ index by 62 basis points in the fourth quarter.
And since the inception of the WisdomTree Europe Hedged Equity Index July 2012 it has outperformed both of the cap-weighted indexes that the other European HEDJ ETFs track. Now we did underperform in calendar year 2015. That can occur when you have different country and sector rates relative to the data benchmarks, but those variations Craig can also turn in your favor.
Thus far this year in 2016 for example, the WisdomTree Index has already generated a 170 basis points of excess return relative to the MSCI EMU HEDJ index. So that trailing one year performance differential is closing. So to recap, HEDJ pays a large capital gain distribution in December as the DXJ, but those gains can vary year-to-year. HEDJ and DXJ remain among the most highly traded ETFs in the category and they both continue to exhibit competitive long-term performance stories.
So the outflows we experienced in Q4 have moderated in recent weeks and we should see recovery in European equity markets. Certainly if you have further weakness in the Euro and European equity markets do recover, we believe HEDJ could well benefit from that change in investor sentiments.
And Craig let me add just one final point to what Luciano just said. So one of the real structural advantages of the approach that WisdomTree has taken is really business model related and which is really a forever advantage. Self indexing, always being differentiated is really just the better long-term business model and that should carry through for years to come. We wouldn’t change the structure of our business versus any of the other ETF sponsors.
Got it, and just as my followup one of your HEDJ competitors uses a fund to fund structure in order to tap the liquidity be larger un-hedged base, why is this not a competitive advantage for this product versus your products?
Well we trade more than they do, we have higher volumes, we have higher dollar volumes and our bid asset spread as a percentage of the ETFs is actually cheaper, so I don’t know you explain to me why you think it’s an advantage.
So Craig it’s not necessarily the advantage of a disadvantage, but in this competitive situation where we have the largest funds in the category, it’s not an advantage.
Got it, thanks for taking my questions.
And our next question comes from Jason Weyeneth of Piper Jaffray. Your line is open.
Thanks. Can you guys talk a little bit about capital management and sort of the decision not to be more aggressive with buybacks particularly December? And then just sort of looking forward how you think about sort of buyback appetite as you take that into conjunction with the growth spending plans?
Sure, hey Jason, it’s Amit. There are several factors that we look at when we’re thinking about buyback, but obviously for competitive reasons, we’re not going to disclose what they all are, but you can imagine like in the recent periods we were approaching a blackout period. We were in the middle of an M&A transaction to acquire GreenHaven. So because of all of that we didn’t execute any buybacks during that period.
But when we think about capital management, remember we’re trying – we’re a growth company and we’re balancing the needs to make it the right investments in the business first, return excess cash back to our shareholders and add dry powder in case you know there maybe some other opportunities for us out there.
We’ve returned capital in the past and what we said in our last call is just because of what we did in the past don’t think that is the way it’s going to go in the future. We may change the way of the mix of our capital of how we distribute capital back to our shareholders based upon the time. We have $75 million left in our share buyback program and our goal is to have a very efficient capital management program and so that’s how we are continuing to think about it going forward.
Thanks. And on the gross margin guidance, I know we sort of think about how much of the lower guidance is driven by the recent pressure on assets versus the growth plans and the new product rollout?
Sure. So the bulk of it is the result of the current AUM. We are at $47 billion to date and that's what's driving the gross margins down. If you go back historically and look when we were averaging about this level of assets, you will see the gross margin was close to this or probably the guidance that we’re giving is probably up 1 to 1.5 points lower than that because of the additional funds that we've launched in 2015 and what we plan to do in 2016.
And our next question comes from Surinder Thind of Jefferies. Your line is open.
Hi good morning. I'd just like to touch base on the regulatory landscape here. So how important is kind of the, I mean assume that the deal proposal will be highly favorable and how important is that the kind of pulling forward demand or opening up some of these channels at this point versus if that rule was not going to be in place, is it a couple of years or?
I’m sorry, finished your question Surinder?
Are we looking at just a couple of years of pull forward demand or how should we think about that dynamic at this point?
So first regulation is a global phenomenon, so obviously we've had all ER [ph] in Europe and throughout other regions in Europe, there are other similar initiatives underway. Canada has an initiative underway right now. Now, you have the DOL rule which is expected to go into effect before the end of this year and if that happens if probably and FTC rule that would follow and would cover a much broader swath of the advisor market.
I think that these trends are inevitably going to accelerate the growth of the ETF industry, push more channels, make advisors move their allocation faster than they might have done on their own, though you can tell from historical flows advisors have been very strongly moving into the ETF industry in general.
So it really just feels like this is the icing on the cake that we really love a government regulation and there are a lot of government regulation. It is not just the DOL rule, but you also have things like the liquidity rule which they’re also challenging to asset managers is still very favorable to the ETF market because the things that they are focusing on liquidity and transparency again very favorable to the ETF structure. So I think that this is really a particularly U.S. market led DOL rule is a new phenomenon, this is really an accelerator to what has been taking place historically.
That’s helpful and then can you also touch base on just part of your new initiative spend which is your product launches at $2 million to $3 million. Is it fair to assume that that is roughly about 10 to 15 new products at this point?
Yes said it is about 10 to 15 new ETFs as per plan during the year and remember the cost for an ETF is roughly about $175,000 and so it is phased in throughout the year.
Let me just add product development as Amit said in his remarks it has obviously been historically important to WisdomTree, we have been very good at this. At the end of last year, we launched two liquid offs DYB which is a bearish fund and a long short fund and as you might know we filed for an S&P 500 PutWrite fund. So in the relatively near future you are going to see a really robust liquid all [ph] suite from WisdomTree and for investors to get more information on this you should go to wisdomtree.com.
We are also seeing some strength in domestic fixed income. We launched not too long ago and a yield enhanced Ag which has recently found its footing and seen significant growth. And we just file for so it's public, fixed income smart data. So, by the end of this year you will see a much stronger domestic fixed income in liquid all suite that will be a part of, our global equity suite which is both hedged and un-hedged and obviously we’ve made an acquisition in commodities and so, from a diversification standpoint these are very important initiates.
Thanks and then may be one quick question, any additional color on the Japan strategy at this point with the opening up of a new office in terms of just kind of because there is outlook there how you are thinking about that, the timing of things?
Yes, yes Surinder, so we’re still in the final legs of getting our license hopefully within the coming weeks and as soon as we get that we'll be in a better position to talk to more about the, the Japan’s strategy.
You know, working on regulation I would not be surprised from my trips to Japan, and this is just my speculation, that a version of the fiduciary will make it to Japan as well.
Okay, thank you guys, that's it from me.
And our next question comes from Adam Beatty. Your line is open.
Thank you and good morning. I wanted to come at the DOL fiduciary rule from kind of a different aspect. As I read the proposed rule, one of the aspects of it seems to be the idea that lower fees per se are a benefit to investors and given that WisdomTree has, one of the good things about WisdomTree is that you maintain fairly high fee rates north of 50 basis points. So to ex that aspect of the Fiduciary rule or there other parts of the rule that are favorable to ETFs and WisdomTree in particular? Thank you.
So, Adam, this is Jon. So the 50 basis points is just because of the mix of where the assets have come. So we really are a low fee firm. DXJs priced absolutely in line I mean exactly in line with EWJ the, so we were really not a high fee firm. What’s most important in DOL rule I think is if you are on a non-exclusive index, it really does not bode well to be the higher fee alternative. So again, I believe this rule means self indexing and an ETF focus is really the only viable long term business model in asset management.
Got it. Thank you and then turning to kind of the overseas market more generally, you’ve hired a Head of Global distribution. Could you give us a sense, I know AUM inflows can be volatile, can you give us a sense of maybe, a two to three-year outlook of how much growth you would expect?
I mean U.S. asset managers have had some excess both active and passive in taking some share in Europe. How much of a WisdomTree could be overseas domicile within a couple of years, what are your thoughts on that? Thank you.
It's really that’s a hard projection to make and what we've tried to do is manage the Street's expectations on the build out of these real true start up investments that we have been making. But as you saw in the U.S. there is a turning point where it really starts to accelerate, now one this is also a diversification effort for WisdomTree and so you are seeing flows in Europe even though we have actually had outflows in the U.S. And we're also seeing foreign buyers of the U.S. funds are coming out of Europe. So we are really starting to see the synergies, but we're going to have to give you greater guidance over time, but again the growth should accelerate in these markets as their markets mature and as their advisor community gets educated and as their new regulatory pushes also accelerates those transitions. So we’ll update you on what it could be, but what you should know is, we know we have the resources, we know it is a global phenomenon and we’re making the investments to be a global ETF sponsor.
Okay, I appreciate the color. Thanks for taking my questions.
And our next question comes from Bill Katz of Citi. Your line is open Bill.
Okay, good morning everyone. Thanks for taking the questions. So, on the expense guidance, thanks for framing out that way,, how much flexibility is there on the investment spend part of the business on the left hand side of the chart, if the markets and flows remain somewhat flat or choppy for the rest of the year?
Hi, Bill its Amit. So yes, there I mean we do have flexibility on our strategic spend. As we have in the past we can’t ramped up or ramped down if we see market conditions changing. We have discretionary items and such as headcount can be and slow down and the level of marketing spend that we wanted to kind of slow down.
So yeah, there is flexibility there if we need to but I would say as we've demonstrated in the past we have stream out of expense this when we need to be so, balancing that these are important investments that we need to make we think for the long run to help continued to accelerate our growth and importantly helps stabilizing and diversify our asset base.
Hey, Bill its john, and so let me also add, I mean Amit being a little bit humble, we’re going into this moment with really maybe 2015 you will know better than I did we have highest operating margins in the industry this year I think we might have. And I think one of the things that confuse many of the analysts is their coverage universe or public asset managers have historically for years have had no organic growth. So that's the only element they have in a negative market move environment is cost cutting. We have a very, very different dynamic and we’re the only pureplay public ETF sponsor and so I know it confuses a lot of the analyst, but our growth outlook is just dramatically different than the other publically traded asset managers.
Yes, thanks. My final question against that is, as you look at the counter balance between the spend, which I think if my math is right it's going to put you 16 margin pretty much on top of the rest of the industry are very close to it versus possibly linking up with a strategic player that might have a broader distribution footprint already. So I guess question is independent versus the build out where are you on the mind set from that perspective?
So I know that the analyst have often speculated that WisdomTree makes a very attractive acquisition and we understand the rationale from their perspective and its very flattering and I definitely agree that we have built this incredibly valuable franchise, but you also have to from our perspective two and the last three years we have been a top ten asset gatherer in America. We have achieved the highest margins in the industry and the outlook looks incredibly well, so we’re very committed to being an independent company, but we'll also do the right thing if the situation demands it. So that we'll focus so on building out the business and just growing our footprint.
Okay if I could just one last one, on your $350 billion per year number and I know you gave some very broad thoughts on it in your prepared commentary could you sort of dive down later and what products or geographies do you think over next year or two offer the greatest opportunity in particular?
So fist of all the, if you are talking geographies of U.S. listed funds and what regions will have strengthen meaning in Asia or Europe or America I’m not going to make those types of market calls. I think really there is we’re very excited about things that we have already put into place and some of the things that are coming to fruition. So like as an example, currency hedge is an important category for us.
I believe that if you look back, if we look back 5 or 10 years from now, international equities, the default will be either fully hedged or dynamically hedged and that the least favorable will be unhedged. Now in a movement where you - unless you have real conviction that you have dollar weakness that’s the only time that you would really want to make you default or grow into unhedged equities.
So we think that we’re really well positioned in that category and as Amit said we recently launched some dynamic currency hedge products and it still nascent for us and others, but we have a sort of an early lead. We’re very excited about having a broader and this is something that we’ve been building out over time, it’s starting with the zero and negative duration domestic equity ETFs but we are very excited about fixed income, domestic equities and we’re very excited about the small data points that are coming out and then the liquid alls [ph] we are committed to being a leader in liquid offs [ph] and we already have a very, very strong footprint in that category.
Okay, thanks guys. I appreciate the color.
And our next question comes from Michael Cyprys of Morgan Stanley. Your line is open.
Hey good morning, thanks for taking the question. Just curious we've seen some of the industry acquire online advisory, advisor platforms that is just another avenue for distribution, so just curious how you’re thinking about that as potential opportunity for WisdomTree and at this point do you feel you would have a full product suite for that type of robot advisor platform?
So this is Jon. So the robot advisor or robot advisor is very, very positive for the ETF industry. These model portfolios tend to be very ETF centric, so we’re very excited about them. They’re not large yet, but we think they will continue to develop. And in terms of having the built-out suite for them, we see opportunities to continue to launch products to better align with all of these new emerging channels, so we are very focused on it.
Okay. And then just shifting to regulation, you mentioned earlier that regulation is favorable for ETF, but could you touch upon some of the recent derivative regulation from the SEC and to what extent do you see that impacting ETF positively negatively for the industry and then also specifically for WisdomTree’s products and how that impacts your ability to use derivatives within your ETFs?
Thank you. Great question, so the derivative rule really is another push by the regulators in top of liquidity and top of fiduciary and we are obviously we are very supportive of the government’s push towards transparency and liquidity. That said, this rule the derivative rule tries to, puts limits on derivatives exposure and requirements concerning the collateralization of derivative exposure generally. So just in very simple terms if the rule was passed as it is, we can comply with it if it was passed as it is.
That is the simple answer. but this we definitely feel as others have commented that there may be some unintended consequences with this rule and we hope that they do make some adjustments, but if it as it is we can comply and our competitors would be in very similar positions meaning currency hedging would be on level playing field for all of the ETF sponsors. So, but anyway we are watching it very closely.
Would you have to make any tweaks to your products or their existing or some of the new suite of fixed income and liquidity products you have coming down the pie?
So obviously we have to wait to see what the final rule is and we can make tweaks if we have to, but again those tweaks will be in line with what others would have to do. It will be a level playing field for everybody.
Okay, thank you.
And our next question comes from Chris Shutler of William Blair. Your line is open.
Hey guys, good morning. I want to get more clarity on the comp guidance. I think in 2015 in the U.S. you had about $68 million of compensation expense, you say in Slide 19 to reset that by $11 million, so it takes you down to $57 million. So just to be clear, I want to make sure I understand this, would you expect that the comp in 2016 is roughly $57 million if AUM remained at year end levels and there were no flows, I just want to make sure that I understand how the flows and everything works into that $11 million decline in the base?
Yes that assumes a sort of average level of inflows on the take that takes that down to $10.9 million. Obviously if we have flows that incentive comp number will go up and we assume that we will have flows, I'm not telling you what that target is but it is built into that percent of revenue guidance that we gave. And as we've seen in the past if we don’t have flows we have a lot of flexibility in compensation. We have a paper performance model and we don’t have the flows then the compensation will be reflective of that.
Okay, thanks. And then just one more Jon, you said in the past I think you expect the vast majority of the flows for WisdomTree and the industry to come from products that are already in existence, I’m sure that is true for the industry but is that still your view for WisdomTree or how has your thinking evolved?
I think in general that is true, but that said we are an aggressive launcher of new products and you will have moments where new funds can really be a significant asset gatherer. So that point I made in the past was a generalization and I’m sure that in some of the new products that have been launched or will be launched in the near future, you will find some winners, significant winners as well.
All right, thanks a lot.
And our next question comes from Macrae Sykes of Gabelli. Your line is open.
Good morning, gentlemen.
There seems to be quite a bit of interest recently in the currency plays in China. I mean we've seen some notable hedge funds commenting about potential short positions and I know you have the CYB which is not the most optimal product for that, but just curious if you are thinking about sort of that space with more awareness there in terms of developing other products that could be used to perhaps take negative bets on the Yuan?
Hi Macrae, it is Jon. We won't comment on product development after it has been filed. So we are aware of lots of trends and opportunities but we hesitate to get specific prior to a filing, sorry.
Okay. Thank you very much.
And our next question comes from Robert Lee of KBW. Your line is open.
Hi good morning everyone, this is Ann Dai standing in for Rob. Just wanted to circle back on the $300 billion kind of projection and maybe the 5% to 7% market share that you've guys had highlighted. So when we think about that growth in market share, how much of that is really just assuming that currency hedge and some of the products that you are stronger and take disproportionate share within the ETF market and how much are you assuming comes from building those new relationships and growing the distribution channels?
I think that you're going to see currency hedging as a category continue to perform very well in the coming years as more and more advisors are cognizant of the currency risk in the un-hedged equity exposures. So I think that the category will see growth and we are a leader in that category so we'll participate there. And then we're going to see a lot of growth coming from some of the new suites of products that we see liquid off, smart data fixed income and then we'll also see continued growth from these expanded sales channels that we've referred to in our growth spends over the last year or so.
Okay great, thank you. And just generally when you think about launching a new product, can you take us through the time line of how long it takes from kind of the thought occurring to launching the product to the point where it really starts to get some traction and generate some sales for you guys?
So, you know, it is hard to generalize this, so first of all sometimes it can be very quick to launch a product is little as a 100 days from idea to putting it into the market. Sometimes it can be years before the product actually gets into the market. Sometimes we launch a fund and it is out of favor and we saw that in last few things like the zero and negative durations we launched at the end of 2012 thinking the rates might go higher and they haven’t.
So sometimes the digestive process for these funds to find footing can take more time, but then sometimes you just get lucky. So like DYB which we launched December 27, which is a bearish fund has been trading incredibly well in these volatile markets. So really it is very, very hard to generalize.
Okay, I appreciate it, thank you.
And our next question comes from Mike Grondahl of Northland Securities. Your line is open.
Yes, thanks guys for taking my two questions. First of all on the outflows, are you seeing anything you make are surprising in terms of the mix? And then maybe just secondly on your 12 to 15 new ETFs in 2016, any comments on the pace if you think that's more frontend loaded or backend loaded?
I'm sorry, repeat the second half of the question?
The second question was just your 12 to 15 new ETFs in 2016, just the pace of those rolling out, do you think they are more frontend loaded or backend loaded?
Hey Mike, it's Amit. Yes I think they are going to be a little bit more frontend loaded, but we'll have to see as the year progresses, but from a planning standpoint we're thinking a little bit more frontend loaded.
And in terms of the outflows nothing unusual as looks at the largest funds see in a downturn more outflows and usually see more inflows when the market sentiment changes favorably again.
Okay, thank you.
And our next question comes from Keith Housum of Northcoast Research. Your line is open, Keith.
Good morning gentlemen. The first quarter is for Amit, I'm just trying to understand the cadence of the top expense a little bit more. In the fourth quarter was there any inclusion of reversals of incentive compensation accruals?
Yes, so when we were accruing during the year we think about what a full year amount would look like. As a result we had outflows in the third quarter and we've reflected some of that in our third quarter call and then we had accelerated outflows in the fourth quarter. So it was a little bit of a sort of annual threw-up in that fourth quarter number.
Okay, that's helpful, thank you. And then Jon, just thinking about the industry and some of the conversations out there, can you speak to the competitive prices in terms of pricing the advisory fees? I mean you've seen pressure on the funds, the lower advisory fees and all, is that discussion been out there or is it nearly to save cost in the matter?
I mean you know the competitive dynamic is both a challenge and very exciting and a great benefit. I think we now have 74 to 75 sponsors. It is just becoming inevitable to everybody that this is where their energy should be, so it is really helping to grow the pie. In terms of the pricing dynamics, again the business model from day one really did anticipate this and that self indexing, differentiated product really is the only business model long-term in ETFs that we see that is sustainable.
And we've launched products with an eye towards the long term and so you'll see, I mean recently the fund launches have in some of the categories have been slightly lower than prior fund launches just taking into account the lower fees at the moment that the funds are being launched, but we're always looking at these. We're very comfortable with where we are. So I mean, it is a challenge, but it is also an opportunity and we are very well positioned for it.
All right, is that challenge new or has that challenge always been there, I mean based on the regulatory basis?
It has always been there. It has been there since 1993 and really we saw very early the business model again positioned us with yes again, this is the best business model in light of all of the regulatory and competitive pressures in asset management.
Great, thank you.
And I am showing no further questions at this time. I would now like to turn the call back over to WisdomTree for closing remarks.
Excellent. Thank you all for your time, and attention, and support, and we will speak to you next quarter.
Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day.
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