WisdomTree Investments, Inc. (NASDAQ:WETF)
Q2 2016 Earnings Conference Call
July 29, 2016, 9:00 AM ET
Stuart Bell - Investor Relations
Jonathan Steinberg - President and Chief Executive Officer
Amit Muni - Executive Vice President and Chief Financial Officer
Luciano Siracusano - Executive Vice President and Chief Investment Strategist
Craig Siegenthaler - Credit Suisse
Chris Shutler - William Blair
Michael Cyprys - Morgan Stanley
William Katz - Citigroup
Mac Sykes - Gabelli and Company
Adam Beatty - BofA Merrill Lynch
Mike Grondahl - Northland Capital Markets
Robert Lee - KBW
Keith Housum - Northcoast Research
Good day, ladies and gentlemen and welcome to the WisdomTree Second 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 call is being recorded. I would now like to introduce your host for today's conference, Mr. Stuart Bell at WisdomTree. You may begin.
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 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, 2015.
Now, it’s my pleasure to turn the call over to WisdomTree’s CFO, Amit Muni.
Thank you, Stuart, and good morning, everyone. This was another challenging quarter due to market volatility and the continued negative sentiment towards our two largest ETF exposure. However, we are seeing a number of encouraging signs, particularly with our US equity product suite, which has now reached their ten year anniversary.
Despite the short-term volatility, we remain focused on executing our strategic growth plans that positions us for long-term growth for the ETF industry.
Now let’s get into the results of the quarter beginning by first reviewing the US ETF industry specifics. US ETF industry flows remain muted at $31.9 billion this quarter. On the right, you can see industry flows was driven with fixed income, US and developed world equities and gold ETFs.
Hedged international equities experienced industry outflows again this quarter. These industry trends were a significant driver of our results from an operational and financial standpoint which we can begin to review starting with the next slide.
Setting the backdrop, Japan equity markets declined 7% and the dollar weakened nearly 9% versus the yen in the quarter. European markets also declined nearly 5%. Our AUM inflows follows these market trends, as was already disclosed; our US AUM declined 16% to $37.5 billion due to $4.9 billion of net outflows and $1.3 billion from negative market movements.
The majority of our outflows came from our two largest ETFs, Hedge and DXJ. However, our US equity ETFs took in $500 million this quarter, which is encouraging on a number of fronts as we take a deeper dive into these flows on the next Slide.
As you can see on the left on Slide 5, we generated 4% market share in this very competitive category more than our historical average with a particular strong market share in mid and small caps, our leading funds in these categories were DLN, DHS, DON and DES, all funds that have now hit their 10 year anniversary.
As you can see in the chart on the right, flows have accelerated in July and we have net inflows of nearly $1 billion into our US equity ETF so far this year. In fact, since these ETFs hit their 10 year anniversary, average daily flows have accelerated to $19 million per day, much higher than their historical average. We believe this is a combination of market sentiment to US equities and the real-time performance track record of these smart data strategies.
We have aligned our distribution, research and marketing teams to capitalize on the momentum we have and position these funds for accelerated growth.
As you can see on the next slide, the majority of our original ETFs have received either four or five Morningstar ratings, not only are we proud of these ratings, but they are also very helpful as advisors transition away from mutual funds to ETFs.
Growing our existing product set is an important part of our strategic growth initiatives we laid out at the beginning of the year.
Turning to Slide 7. The objectives of these initiatives are increase our target market share of inflows to 5% to 7%, diversify our asset base and stabilize our flows and lastly, best position us for long-term growth of the ETF industry.
On the product front, we continue to focus on staying ahead of the competition through innovation and diversifying our product set. This quarter, we launched two US listed ETFs with investment strategies focused on dividends and dividend growth in the broad emerging markets in developed world as investors continue to search for yields in this low interest rate environment.
We are strengthening our position with our core client segments by significantly increasing our marketing and sales-related spending to support our brands, our products and our clients. We are also growing our distribution reach and diversifying our client base.
This month, we launched six ETFs in Canada to capitalize on the growth in their ETF market through the recent regulatory changes and have already raised nearly $7 million - $70 million in initial fees. We also recently announced a global product partnership with ICBC Credit Suisse along ETFs globally based on the S&P China 500 index.
And lastly, we continue to broaden our distribution capabilities with a particular focus on the institutional channel where we are complemented our new head of the channels with expertise in consultant relations and the retirement space.
So far this year, we have added ten people to our distribution team in the US bringing the total to 65. Of the $12 million to $16 million we earmarked for strategic investments this year, we have spent approximately $5.5 million and we have received the vast majority of our plans in the first half of the year.
We expanded our distribution teams. We launched 13 new ETFs so far this year and we’ve expanded into Canada. Therefore, given the current market conditions, we are slowing down or eliminating some of the spends in the second half of the year with a goal of coming in at the low end of the range.
The next slide reflects our industry ranking. Our largest exposures were impacted the hardest by market sentiment which has negatively affected our industry rankings. While we are not pleased with this rankings, we think it represents more short-term market conditions, not the long-term growth prospects of our business.
On the next slide, we show you our fund performance according to their Morningstar peer groups. These comparisons take into account fees and transaction costs and reflects how our equities, fixed income and alternative ETFs performed against active and passive mutual funds and other ETFs.
Since inception, 57% of our ETFs have outperformed their peer group or 74% of the approximately $37 billion invested in our ETFs were in funds that beat their peers.
On the next slide, we can review our results in Europe. Our European AUM continues to grow and it’s now surpassed $1 billion with the largest growth coming from our WisdomTree branded use of products. These ETFs are also available now in Sweden and France and we continue expanding both the WisdomTree and Group’s product line-up.
In May, we announced we had accelerated the buy out for the minority shareholders in our European business. In connection with this, we took a $6 million charge this quarter to reflect the purchase and other [Audio Gap] $6 million this quarter.
Net income declined to $3.7 million on a GAAP basis or $9.6 million excluding the buy out charge. We earned $0.03 a share on a GAAP basis and $0.07 excluding the buy out charge.
Turning to Slide 13, as you can see from both charts, we have seen a pick up in our US equity AUM as a percentage of our overall AUM and revenues. Our average revenue capture was 62 basis points in the quarter, but has ticked down to 51 basis points today due to a change in mix.
On the next slide, we can review our key margin metrics. Gross margin for our US listed ETF business was 81.5% this quarter, down due to lower average AUMs. At our AUM levels today, gross margins are expected to be around 80%. In the chart on the right, consolidated pretax margin was 19.9%. Excluding the buyout charge, margins were 30.6% this quarter.
Our US pretax margin was 35.6%. The decline from prior periods was due to lower revenue from outflows and negative market movements not increased expenses which you can review on the next slide.
First quarter total expenses were $39.2 million. Compensation costs decreased due to lower incentive compensation accruals given the net outflows for the first half of the year. Third-party sharing cost declined due to lower average AUMs.
Professional fees decreased due to lower corporate consulting and one-time advisory fees related to our acquisition of GreenHaven.
Marketing and sales spending increased due to spending as part of our strategic initiatives. Operating cost for our European business increased due to additional fund launches and higher marketing and sales to support our new products. Expenses before the buyout charge were $38.8 million, down slightly from the first quarter.
On the right, you can see compensation of the percent of revenue for our US business was 23% for the first half, below our annual target of 24% to 28% reflecting our current level of operating performance. Based on our results to-date, I would expect to come in at the low-end of the range of our guidance for the full year.
Let’s review our balance sheet on the next slide. We ended the quarter with total assets of $248 million and cash and investments of $194 million. On the right, you can see this quarter, we generated $22 million of cash from operations and returned $11 million back to shareholders through dividend to end the quarter with $175 million of cash.
Let me point out this quarter while our earnings were below our dividends, when you add back stock-based compensation, which was $3.8 million, our cash earnings were actually higher than the dividend.
Let me take this opportunity to remind you how we think about capital management and supporting our dividend. Our capital management strategy is formulated to account for long periods and different market cycles. We can adjust one component of our capital management to support our dividend that’s needed for a short period because we have that long-term view and strong cash balance.
So, we have the ability to adjust our buybacks and use some of our $175 million of cash to support our dividend that we have to. The tailwinds and trends for our continued to remain strong, what we are dealing with currently is short-term sentiment challenges for our two largest exposures. Our business fundamentals remains firmly in tact for the long-term.
On the next slide, let’s go through our taxes. As we have been discussing over the last several calls, our remaining NOLs is now $3 million, which means we will complete our historical shields in the third quarter and begin to pay cash taxes.
However, we continue to generate tax losses due to improved exercise and options, investing in restricted stock. The detail information for that is on the right-hand side of this slide.
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 is almost $40 billion. On the right, you can see the flows by category. We have seen a recent turn in DXJ and continued strength in US equities. However, they have been offset by outflows and hedge.
So in summary, despite the challenging quarter, we see encouraging signs in other parts of our product suite and we will continue to balance expense management with investments for growth.
Now let me turn the call over to Jonathan.
Thanks, Amit and good morning everyone. Today I will be brief. As you know, the second was a tough quarter with significant outflows. Extreme negative sentiment towards Japanese and European equities led to outflows in DXJ and Hedge which more than offset our $500 million in US equity inflows.
But the financial results in the second quarter do demonstrate the inherit durability of the business model and underlying strength of the franchise. As Amit discussed, we maintained high margins relative to our peers and our balance sheet remains very strong.
This has allowed us to continue to pursue growth opportunities like our recent entry into Canada and our exciting product partnership with ICBC Credit Suisse who is the second largest asset manager in China.
Today, together, we will launch the S&P China 500 fund exclusively around the world. This index includes A share and S&P hopes this index can become the new benchmark for China. This partnership combines WisdomTree’s ETF expertise and distribution in the US and Europe with our peers or partners expertise and distribution in Asia.
This global partnership would not have been possible without the continuous global investments that we have made over the last few years. Earlier this year, we launched the first dynamically hedged currency ETF in the United States and have emerged as the early leader in this category.
We took that methodology and launched the first dynamically hedged currency ETF in Canada. These are kinds of synergies that we are achieving and which are necessary to be successful in the ETF industry around the world. These are just a few of the examples of our expanded capability.
Our investments in people, in new geographies, new products and new technologies are transforming WisdomTree into a much more competitive and dynamic organization.
I would encourage investors not to be blinded by short-term negative sentiments, but to look to the long-term trends that are transforming the global asset management industry. There are very few firms has well positioned as WisdomTree.
Now, let’s open up the call for questions.
Thank you. [Operator Instructions] And our first question comes from the line of Craig Siegenthaler with Credit Suisse. Your line is now open.
Thanks. Good morning everyone.
Good morning Craig.
Just to start with fixed income ETFs, it’s been a very hot segment for some of your peers and we can see you guys have been pretty active on the product innovation front with five net new ETFs over the last 12 months. But, you really haven’t seen any significant demand just yet either in the smart data products or even AGGY which is putting up some very good relative numbers. Why do you think inflows has been slow to develop in these segments? Because actually I think flows have been a little bit negative here?
Thanks, Craig. So, the hardest thing to do is to launch a new ETF start with $2 million in seat and establish traction, particularly when you are going into crowded spaces. So if you look at the slow leaders in ETF this year, the AG has really been one of them.
So to find us put hold within that very crowded space isn’t easy. Now that said, AGGY just hit its one year anniversary have got to a $100 million in assets and this is sort of how you build normally a successful ETF. Sometimes it happens very quickly out on the gate, but this is the more normal path towards eventual success and it should help us to sell the more recently launched, more beta fixed income or faster fixed income funds that we launched more recently over time. So, it’s a process. It’s not easy, but we are very pleased with the product positioning that we have.
And just a follow-up, I had a few questions on the S&P 500 China index and I was curious on the competitive landscape. So, what other ETFs exists that raise capital from outside of China and invest in China and I am talking Mainland China. And will this fund also raise capital from investors inside of China to invest in China? And then a lot of products that go into China actually have restrictions or capacity constrains. Will this ETF potentially have any of those?
Thanks for the question. So, it’s an exciting partnership. In fact, yesterday, the fund was launched in the use it format in Langdon which first of all from a sort of a synergy standpoint gives the European team a lot of energy and something truly proprietary and exciting to expand our conversations in that market. ICBC Credit Suisse has the ability to sell in Greater Asia, Hong Kong and potentially Mainland China as well.
To your question of how many firms and funds have actually, what they’ve done, these are very early days in bringing products to China and really there – we think it’s all upsize. We’ll also be launching the 40 act version of this later this year. So, we are very optimistic. It’s a very broad based index with tremendous capacity when we have a very strong partner.
Thanks for taking my questions.
Thank you. Our next question comes from the line of Chris Shutler with William Blair. Your line is now open.
Hey guys, good morning.
Good morning, Chris.
I guess, bigger picture guys and I just want to get your thoughts on ETF performance and obviously you think it matters, but why? And many of your customers are advisors, so, I guess in what cases do they care and don’t they care? And the reason I ask, I would think that, most ETF investors are buying their products based much more on the sort of strategy expense ratio and liquidity. Thanks.
So, if you took that stand, then there would be no value to the active mutual fund industry. Do you think we have different customers? We have the exact same customers. We are just getting the ones that are moving, that are forward-looking. performance always matters in asset management. And now, it is true though that this is an educational process.
So indexing and ETFs historically have been data. You haven’t really had differentiated performance really in any broad measure before WisdomTree. These ten year records are stunning. In fact, of the US equity funds that have achieved the ten year track record, five of them, of the five that have the ten year track record, over the last five years, they’ve beaten 95% of their index based and active manage peer set according to Morningstar and three of them actually beat 99%.
So, these are kind of numbers that really just attract demand. And it is particularly in a heart of the market like US equities which is very crowded. You really do need something like this. Other than price, I mean, those are the only two ways. You have to be first, you have to be cheapest, or you need something differentiated that really adds value.
So we think that this is the WisdomTree brand and the WisdomTree performance is really an asset that is developed, developing and over the next 24 months or so, you are going to see a lot more ten year anniversaries emerge.
Okay, got it. And then, I want to go back to the ICBC Credit Suisse relationship. How did that relationship developed? And is there a potential to distribute some of your existing ETFs through ICBC in Asia?
It’s an early relationship. So we - really the relationship is focused on this first products and we’ll see how the partnership evolves.
Okay, got it. Thank you.
Thank you. Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is now open.
Hi, good morning. Thanks for taking the question. Just wanted to dive in a little bit more on the US equity inflows like you guys getting more attraction there $500 million inflows have you seen that in some time in that category there. Can you talk a little bit about what’s driving the success there? And any change in terms of marketing or distribution strategy or client education that you’ve done recently that perhaps led to that?
Hi, Michael, this is Luciano. So what’s driving it really is the – as Jonathan mentioned, it’s the cumulative performance of the funds that have rose and brought up to allocation model. So we are seeing them into DON, the mid-cap dividend fund, DES, the small-cap dividend fund. DHS which is the high-cap high dividend in the large-cap space as well as DLN which of course competes directly with the S&P 500 in the Russell 1000 value.
So in terms of what we are doing, I mean, we have a coordinated campaign to educate advisors both about the history, the performance, the methodologies, the yields, the growth of income on the funds and we’ve done that through all of our medium. I mean, we’ve written about it. We’ve researched. We’ve written about it in blogs. We’ve done webinars.
We’ve done conferences. The ads are on TV. We’ve also had specific email campaigns around these particular funds and the strategies and the 10 year number is an important number. It shows what the products can do over a full market cycle and one of the things we pointed out last ten years, growth speaks value in America. Financials underperform the market in America.
And yet these funds who are able to beat in many cases, not just the cap-weighted Poor, but the value cut of cap-weighted as well in an environment where growth beats value. So I think people have a much greater appreciation of what these funds can do. How to use them in a portfolio and the fact that the mid-cap and the small-cap can generate income in this environment above the S&P 500, above the 10 year treasury, just gives them another dimension that I think can play a role in client portfolio.
Let me just add one thing to what Luciano said, what’s very exciting is, the funds that we’ve just been talking about, they are not just a series of one-off funds, but they are a unified methodology that is an alternative to Vanguard’s approach. And it really takes time to validate something that can deliver a better after fee return than Vanguard. So, it’s exciting that it’s multi-funds using the same approach that are achieving these results and in fact, we’ve been focusing on the US. But this approach is global for WisdomTree. So we have ten year records on the developed world and over the next 24 months you’ll see on records in the emerging markets using these same methodologies. So, again very exciting.
Interesting you mentioned Vanguard where they have direct-to-consumer approach. How are you thinking about longer-term in terms of your go to market strategy? Today, it seems like you are focused a lot on the financial advisors. But what are your thoughts around a more direct-to-consumer approach? You have a great website, you have a brand that’s out there with the advertising campaign that you have, people are aware of it. What are your thoughts there, just more broadly about direct-to-consumer and then also digital strategy too?
So our historic approach has been targeting the financial intermediary and the institutional investor, our sales team focuses on those markets. We offer self-directed retail fees or ads whether it’s on television or online or in print and certainly have access toward an incredible array of information and tools on our website. And we are building a database of retail at wisdomtree.com.
But it is definitely a secondary market for us that is growing slowly and incrementally. Now, the truth is, the vast, vast majority of all money flows through the financial intermediary and I think that will be true for some very significant period of time. I know that there is a belief and a hope that maybe sort of the robot digital distribution could lend itself to reaching sort of the millennial, the newer investor.
I am sure it will, but in the scheme of things they are not investor rich and so, that’s a long, long game. Vanguard builds their consumer business over like a 40 year business. So, we are very much aware of the opportunities in digital and have been making part of our strategic spend for the last few years have been in enhancing the website and the interface and predictive analytics and are getting our models out into investors’ hands. But it’s a process and it builds over time cumulatively. Thank you.
Thank you. Our next question comes from the line of William Katz with Citigroup. Your line is now open.
Okay, thanks very much. I appreciate guys for taking my questions and I got a number of them this morning. Just to sort of circle back and start with the equity inflows, do you have a sense of what the market share is quarter-to-date by chances? If I look around some of your peers like a federated they’ve got $2 million of similar type of flows in their mutual funds. Just trying to see how strong the category has been versus your opportunity to take share.
Well, if you are asking us to comment on the quarter-to-date numbers in July, we don’t, they are not part of the presentation, but we do monitor the industry and I think you would have checked today, we’ve done about $500 million into US equity. The ETF industry has done in the neighborhood of $20 billion to $25 billion.
So you can work out that percentage, but that percentage is higher than our historical market share and the category. But we are seeing an uptick in terms of the traction that we are getting.
Okay, it’s very helpful. And then when you sit back a little bit, as good as your results are on the equity side, you are still on average below your target range and in terms of the annual growth for the industry is well below what you anticipated at least so far. What strategies would you might have to potentially look to take on market share? Or is it less about market share and this is more of a unit diversified growth at this point? I am trying to understand maybe priorities over the near-term?
Hi, Bill, this is Jonathan. I think that, first of all, diversified strategies and market share go hand-in-hand. So, we are committed to diversifying for sure and we were able to put down some very important categories that like our – even though one of the earlier questions was about the domestic fixed income, though our flows have been small, we are laying the seed for differentiated performance and future penetration in those channels or in those seeds.
The same thing in liquid dynamic currency hedging by not taking an eye off of many of the core strategies like we spoken about US equities, we are even starting to see a little bit of flow in EM, DEM has had recent inflows which we haven’t seen recently because of the negative sentiments to emerging markets. But really both of them – market share and diversification are very, very important to us and we are trying to achieve both knowing that we have some challenges with the largest exposures that are very much at a favor in the short-term.
Okay, it’s helpful. And then, on the – the hedge on few guys coming down and your comp guidance and gross margin guidance, on the non-comp side showing what kind of flexibility you might have if AUM continue to be sort of range down, just give us some macro dynamics?
Sure, so, remember earlier this year, we thought we wanted to spend $12 million to $16 million on our strategic investments. We’ve made a lot of those investments already and so, we are going to be slowing down the spending in the second half of the year.
But I think, when you look at the spending in the second half, the big pieces of it will be from the US and I think how we are targeting is that, exclude comp, exclude fund-related cost. The second half of the year will probably be pretty flat as what you saw in the first half of the year. You may get a little bit of seasonality between Q3 and Q4, but we are trying to basically hold of non-AUM, non-comp expenses in the US roughly flat with the first half.
Okay, and then my final question, thanks for being for patient with today. On the share count, which came out a little bit, or I guess there is no buyback, how do we think about the quarterly runrate? Is it flat again the rest of the year or is there output migration? And then if we assume that you are still bouncing around the level of dividend what kind of share count increase will we next year?
So, for next year, a lot of that will depend upon incentive comp, this year remember, buybacks are two components. Wanted to eliminate share count when we issue stock in a big – along that will be what our year end bonuses will be.
Second will be discretionary. I touched in my remarks about our ability and importance for us to support the dividend, we can ramp down buybacks if we need to support the dividend, we can use our existing cash to support the dividend. So, I think the share count number that you see at the end of this quarter roughly should be flat with the end of the year, absence any some major movements in AUM and then we’ll see what the next year holds out to.
Okay, thanks for taking all the questions this morning.
Thank you. Our next question comes from the line of Mac Sykes with Gabelli. Your line is now open.
Good morning gentlemen. Just to expand on the robot advising question, some of the success, I know it’s been small, but some of the success has come around more simplified branded strategies if I could call that in terms of some of the ETFs was more the – I want to say more gimmicky, but is there an opportunity to focus innovation on sort of this aspect? I know it’s initial at this point, but more of a differentiated approach to the millennial.
I don’t really break my worldview into millennial. I am always looking for investors. And however they want to be reached, we want to reach them through that medium, but I don’t do advice by age. And yes, it’s not so different than let’s say just indexing in general. It used to be – it started very, very vanilla, Vanguard like.
You saw in the earliest days of robot they look very similar to – like a Vanguard portfolio. But as there has been a proliferation of robot advisors, they also need differentiation just like the asset managers need differentiation. And so, yes, we expect it will be lots of opportunities for the WisdomTree – WisdomTree or the WisdomTree for the world to participate in this phenomenon.
Okay, and then, going back up to sort of 30,000 fee for a second, in a world of more solutions-based investing, how are you thinking about becoming a more holistic platform or perhaps a niche provider of specific products at this point? And is this actually an important aspect for ETF providers going forward?
So, I mean, when you talk about solutions, WisdomTree is participating in so many of the biggest themes in investing. So income, that’s one of the most important themes for every advisor, every investor and it’s really one of the hallmarks of WisdomTree. Currency hedging, smart data factors, liquid alts for Japan and we are – so we are in many, many very important stories and a dominant or major fourth within those themes.
And we really are offering solutions, just as an example, last night, we hosted a conference call with our Head of Japan office, Jesper Koll and Professor Jeremy Siegel and hundreds and hundreds and hundreds of advisors are talking about what was going to happen overnight with the Bank of Japan and with the fed.
And so, and then we supported with product and research. So really, we are creating those solutions, it also ties into the models that we are producing and probably our best most popular model would be the income model. So, it’s really something we are very focused on. It’s part of the capabilities that we are trying to develop with our strategic investments.
And just one last question. Is there any capacity constraints in terms of the – this new joint venture on the China aspect? I mean, is this something you could ramp up pretty significantly on an institutional basis?
It has tremendous capacity. It’s a huge exposure and China has actually been as a theme very much out of favor. Where you are starting to see some flow in the emerging market and maybe we actually get lucky from a timing perspective, not versus like that AGGY question. Sometimes you can’t get lucky on a timing, but it’s a very broad based index. The most inclusive I would say, covering China today.
Thank you very much.
Thank you. Our next question comes from the line of Adam Beatty with Bank of America Merrill Lynch. Your line is now open.
Thank you and good morning. A question about global distribution. Given, the fairly vigorous activity over the last couple of years and some of Amit’s comments about initiatives kind of – some of the spending there easing, not that there won’t be further growth and maybe some incremental investment, but in terms of planting the flag in different regions and countries across the world, are you at a point where you are kind of done for maybe in the next 12 months or so? Or if not, what are the next targets got to the EC bank?
So right now, we are in the US market, the world’s largest ETF market, we – a few years ago, made the investments in boost giving us that toehold and now we have a $1 billion in Europe and very excited which is the second largest market. Canada, we just launched, which is either the third or the fourth largest depending on whether you include Bank of Japan money. So, Japan would be either the third or the fourth money market, whether you include Bank of Japan they will be the third largest market without it would be the fourth largest market.
So we are right now in the world’s largest markets. And then interestingly, about seven years ago, we started our relationship with the Compass Group for Latin America. So, we made that investment seven years ago, we’ve been working with them. They come to our sales meetings. We travel extensively throughout Latin America with them.
And now, that they’ve been with us for seven years and seeing the ten year track record, we are starting to see serious, meaningful flow out of that channel. So, I do think that there is – it’s a finite world and there is tremendous disparity between what markets will are receptive to ETFs and to the sort of fee-based business model. And so I think we have much the critical math of the global footprint in place today.
Got it. Thanks Jon. I appreciate the details.
And then a question about, currency hedged international equity in the financial intermediary market that we’ve been talking about, how far along assuming there is a possibility of currency hedge basically it’s the planting non-currency hedge international. How far long are you in terms of educating financial intermediaries, FAs and what have you and how much more remains to be done in that area to really establish currency hedged international as a core portfolio holding? Thanks.
It’s a great question and it’s a little bit nuanced. So, I think we and others have done a tremendous amount in the last few years to highlight the benefits and in what market cycle currency hedging can be constructive to investors. It won’t be a straight-line.
But the facts are the facts and your question sort of reminds me of some of the questions people might have asked about ETFs broadly, 10 and 12 years ago, you’ve seen some – when we launched ten years ago, ETF had $400 billion in assets and you would have said, well, that’s sort of a nice number. You know, it’s small, what have we gone as an industry.
And again, a lot of this is cumulative. You are really having to break and change patterns, but, because of the momentum that we have as an industry, plus the accelerant that comes from all this new global regulation, we are very, very optimistic that the – you will see acceleration into ETFs and that on merit, just like the performance question earlier, if these strategies that we firmly believe from a research standpoint, currency hedging has a significant place in a diversified portfolio.
We think that we are going to – we have much more growth from here, particularly as we take money from unhedged active mutual funds, which really has close to $1 trillion in that.
Great. That’s good color. Thanks again for taking my questions.
Thank you. Our next question comes from the line of Mike Grondahl with Northland Securities. Your line is now open.
Yes, thank you guys. First question is, do you have plans to ramp up marketing spend or advertising now that you have hit that ten year anniversary for a bunch of the US funds? I don’t know that I heard clearly if there is sort of a new plan there or an enhanced plan.
So, for those that have spent time with me, particularly have very strong views on the value of marketing. And obviously we’ve been marketing particularly you’ve seen us on television from the very first day that we’ve launched the firm and right now, you are seeing us on television creating ticker awareness around the US equity funds that ticker awareness.
Now that doesn’t actually sell the fund. That just creates awareness. It’s then all of the things that Jonathan was talking about from a research standpoint, the hand-to-hand comment in the field, the webinars, the research, the conference calls, all of the things that we are doing, the models, so we are not changing upping the spend.
We are – I mean, we are incremental year-over-year increasing the spend, but we are not doing something around sort of the brand with a ten year anniversary specifically from a – sort of above the folds or visual on television. We are still keeping that to be sort of ticker awareness type ads.
It’s a little bit sorrow, but we are really bringing a lot of attention to it through all of the medium. It’s just taking a percentage of the existing ad spend instead of adding to the ad spend.
Got it. And then, just secondly quickly, the slower investment spend in the second half, is that primarily because you’ve kind of front-loaded the spend or because you are pushing a few things to next year?
Mike it’s Jonathan, a lot of it is because we did the important investments in the first half of the year, right, we expanded our distribution team. We’ve gotten to the channels that we wanted to get into. We launched in Canada.
We got a number of products, important products out into the market and so now we feel with there is important things behind us. We can take – we can slowdown the spending in the second half of the year being cognizant in the market conditions.
Got it. Okay. Thanks guys.
Thank you. Our next question comes from the line of Robert Lee with KBW. Your line is open.
Thanks. Good morning guys. Thanks for taking my question. Most of my questions have been asked. So I am just curious, your latest thoughts or insight into some of the SEC proposals that have been out there around derivative use in the 40 act products.
I guess, liquidity also and – obviously, it wouldn’t impact a lot of your ETFs, but your thoughts on – your current understanding on where that stands and your thoughts about how that may or may not impact some of your existing strategies or how do you incorporate that into how you are thinking about developing new strategies?
Sure, this is Jon. First we would have like to have made your Fintech index. So we want to talk to you about that. But in terms of new regulation, liquidity and derivatives, so, as you correctly stated, it’s not an ETF regulation, it’s much broader than that. Now much of what they are trying to do is about transparency and liquidity and so it actually plays to the ETF structure.
So in many ways, responding to the regulation will be easier, we think for us than for many others. In terms of – I think that there is a industry optimism, I would say that, the rules themselves are emerging a little more common sense and product-friendly than initially proposed.
So that I think a positive. I think – if you think about it from the DOL rules, so the DOL rule is focused on the distributor, the advisor, and it was tremendously disruptive, very, very constructive for ETFs, what disruptive and I would say that, even though there is optimism that the rules on liquidity in derivatives are moving in the right direction.
Those rules are actually targeting the asset management firm. And again, I think it’s going to be incredibly disruptive for many and I think this is another accelerant of ETF adoption as many of the largest traditional firms are dealing with trying to being more ETF like, more transparent and liquid, we can just go about doing our business.
So, I think it’s a really very, very positive though, so not – and our strategies will be compliant even with the bad or the original executions that were proposed. So we feel fine with it. But we do think that this is going to cause more change, more change in general helping to transform at global asset management.
Great, and then, maybe just one quick follow-up question. You guys have been – one of the interesting things about your model and my view is that, you have a lot of products and you don’t have to put up the seed capital as a traditional manager that have to do when they launch a product.
I mean, are you seeing any change in market participants’ willingness to provide even the minimal level of capital for new products? Is that do you think – any change at all in your future thinking your potential need to provide even modest levels of CD over there?
First, the industry from a seed standpoint has changed tremendously over the 23 or 24 years that we’ve been in the business. I mean, there were times – I mean, when we launched, we launched with $350 million in seed or something. So, yes, things are getting tighter.
You now have 75 sponsors in 1900 ETFs. There is a limit to how much capital is out there. What’s good for WisdomTree is, we launched high conviction fund launches. We have a very strong relationship with the market-making community. We have been successful in developing and maintaining those relationships.
But it is something to keep an eye on, I mean, like I said, it is a nice advantage that we have as an industry, but if it has to be, so far no change other than you are launching with less money which is what we’ve been doing for the last few years. So, but we are sort of one of the known entities and with our strong cash flow and balance sheet, we had to put up these we would, but let’s hope it doesn’t go that way.
Great, thanks for taking my questions. I appreciate it.
Thank you. Our next question comes from the line of Keith Housum with Northcoast Research. Your line is now open.
Good morning. Actually, my question here is going to piggyback up the last question. The China ETF – the S&P 500 with China ETF seems that it be a more of a higher profile ETF launch for you guys. Is there an opportunity to launch that with some more seed money and does that make a difference in terms of making that initial impression into the market.
I think it launched with $8 million in seeds and more seed is better, don’t get me wrong and you could launch with $8 million better than $2 million, $50 million, better than $8 million.
In fact, we got very strong seed commitments for our Canadian launches. We launched nine strategies with $90 million in Canadian, $70 million US. So, already we are close to a top-10 player in Canada. So, anyway, that goes – that’s how it is. In terms of, one of the things that I said to investors which is more nuanced, the only way you want to do beta is if you could be first, right, if you could have offered of the S&P 500 in 1993, it would have been a good business idea to take it.
So here we are being nuanced. We are trying to play what maybe the new beta flag and we are doing it with a period of exclusivity with S&P and trying to launch it globally and big. So, it is high profile. It does have some seeds. It is constructive. All of this is just sort of being a very dynamic competitive organized ETF sponsor.
Great. And then follow-up to that is, you are launching in Canada, is your expectation that your growth just to the asset file that you guys have been experienced in Europe or what about the initial impression from investors so far up in Canada?
So, we’ve actually only been in the Canadian market for – I think less than two weeks. So it’s very new. We got a very strong introduction. One of the differences versus Europe is that, it’s because of the geography of Canada to the US and Toronto to New York, we get to use much of the infrastructure that is in place in the US.
So we are just becoming a more efficient organization. But, we also then use the very coordinated product strategy where we thought that the Canadians are actually currency-sensitive and no one had done dynamic currency hedging and we thought we could really open up a new category would be first with it. So, we are very pleased with the initial first few weeks of our launch.
Great. Thank you.
Thank you. And we have a follow-up question from the line of William Katz with Citigroup. Your line is now open.
Okay, thanks again. It’s actually two follow-ups if I may. First one is on Brexit, perhaps not much of an impact, but, could you talk a little bit about how boost may not be affected operationally and then maybe what kind of market drop might arise as a result?
Sure, Bill. So, we actually think we are pretty well placed in our European business. Still it’s early days, but our funds are listed in Dublin. So we are in the EU. Our sales people are in the UK. But remember, we have an outsourced business model and so those regulatory licenses are held by a third-party.
We can move those licenses to a provider in the EU. So it would eliminate any issues that would happen from a distribution standpoint. So our people should be able to travel between the UK and the EU to sell the products. So, it’s still the early days. The industry is watching, but unlike from the larger front, we think we are pretty well positioned and can be very flexible.
Okay, thank you. And then just a last one is, just looking at the most recent entities of your newer products, from a year-by-year basis, nothing very scientific I think for a year, I’ve noticed that the lot of new traction of a lower fee rate than the average fee rate as a company, how much of that is based on product mix versus competition? The reason I am asking this, sort of something Jon talk about 75 sponsors and 1900 products, just trying to think about the competitive pricing dynamic in very large sense.
So, I mean, what I’ve said to you and others on individual meetings, if you were to launch the 99 funds that we have today from scratch, they would be coming out at lower price points because they are coming into crowded markets.
So, yes, there are sometimes where in what a market that we were very early in, ten years ago, eight years ago, seven years ago, launching follow-on strategies in those themes today they are coming in at lower price points, something that we are very, very comfortable with and it is what it takes to be competitive again. That’s the benefit of having started ten years ago.
That is why we try to do so much so quickly and are so hesitant to render the strategic growth spend just to show you a higher margin in the short-term.
Okay, thanks. That’s all my questions today.
Thank you. This concludes today’s Q&A session. I would now like to turn the call back over to Jonathan Steinberg for any closing remarks.
No closing remarks. Just thank you all for your support and interest and we will speak to you next quarter.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
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