Jonathan Steinberg - President, Chief Executive Officer
Bruce Lavine - President
Amit Muni – CFO
Jeffery Goldberger – Investor Communications
Dan Weiskopf – UBS
Mosel Katzter- J. Alden and Associates
Steven Green - Ordnance Capital
Jeffrey Whithorn - Gilman Hill Asset Management
Wisdom Tree (WSDT.PK) Q2 2008 Earnings Call July 31, 2008 4:30 PM ET
At this time I would like to welcome everyone to the Wisdom Tree 2008 second quarter conference call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Jonathan Steinberg.
Welcome, everybody. Good afternoon. I want to thank you all for your interest in Wisdom Tree and your time this afternoon. We have a busy agenda so let's just start. We have a very straightforward agenda today. We will review our business. Because this is our first investor call, we will briefly review our history, we will discuss an industry overview. Bruce Lavine, our President, will discuss certain growth initiatives and Amit Muni, our CFO, will take you through our second quarter results, and then we will do a question-and-answer session.
We have been a publicly traded company for a while, but we have intentionally kept a low profile while we focused on building our business. We have now filled out our operating team with our General Counsel and our CFO. We have over two years of operating history.
We have publicly stated we have a goal to relist on NASDAQ. Our investors and customers have been asking us for more information on the company, so with this call we begin our formal investor relations program to provide the information that our stakeholders are looking for.
I think on this call probably many of you have invested in our ETFs. Our customers, for you we have created this company. Our philosophy for launching product is, is it better than what currently exists in the marketplace today? Do investors need this new fund? We have always put your interests first.
We currently have 41 equity ETFs with $4.3 billion in assets under management. All are fundamentally weighted. Everyone at Wisdom Tree believes that our approach should deliver better long-term returns with less volatility than traditional cap-weighted ETFs.
Cap-weighting, we believe, is structurally flawed. What does the S&P 500 or MSCI EAFA do? They tend to buy stocks high and continue to increase their weightings as those stocks rise in value and sell low and continue to decrease their weightings as those stocks fall. Intuitively, buying high and selling low cannot deliver the best returns. Because Wisdom Tree fundamentally weights our ETFs by dividends or by earnings and rebalances once a year, we tend to buy low and sell high.
Wisdom Tree also has current eight currency ETFs with over $500 million in assets under management. Ours are the only 1940 Act currency funds. Our innovation was in the structure that we offered currencies to investors. One of our greatest strengths as a company is our product development capability, which we will go through during this presentation. We also have a unique operating business model which we have not previously discussed in any great detail with investors, which I think will be particularly of interest to you on this call.
As I said, Bruce will cover certain growth initiatives and then I will walk you through some of the other aspects of the business like the management team and the advisory team.
Our history. Wisdom Tree emerged from a financial media company that started in 1988 and our goal was to become the new McGraw-Hill. As such we developed indexes. We became a public company in 1991. We started working on index construction in 1997 and between 2001 and 2003 we refined and perfected our fundamentally weighted approach. We sold our media operations in 2001 and 2002.
The transformation into Wisdom Tree began at the end of 2004 when Michael Steinhardt and RRE Ventures lead our first financing. We launched our first 20 ETFs in June of 2006. In December of 2006 AIG and Atlantic-Pacific lead a $56 million capital raise at $3 per share. Lastly, we launched our currency ETFs in May of 2008.
As the only publicly traded pure play ETF sponsor in the industry, this slide I think is of interest. In 1993 with the launch of SPDR, the industry was born. As you can see, the growth in assets and the number of funds has been dramatic. Today, ETFs are being used to invest not only in equities but fixed income, commodities, inverse strategies, leverage, currency and now Active ETF.
With Active, I think Wisdom Tree and the other ETF sponsors are truly poised to challenge the traditional mutual fund industry. ETFs are a better mousetrap; that point is not open for debate. They offer better liquidity, full transparency, they are more tax efficient and more convenient. The only debate is how important are those qualities? Some of you on the phone may have heard me say in the past that traditional mutual funds are like black-and-white TVs, that is how important I view those qualities. Seriously, how many black-and-white TVs are being sold around the world today? If you are on this call today, you are a pioneer. We are all pioneers. This is the very infancy of our industry.
This next page shows the list of our largest ETFs. All I wanted to point out on this page is I want you to notice how many of our top 15 ETFs, how many of them were recently launched. Also on the bottom of the page we summarize how our assets are distributed. 70% of our equity assets are in international ETFs and currencies already make up over 11% of our total assets under management.
Currency, this next slide goes through what I believe has been an extraordinarily successful launch for Wisdom Tree. Think about how difficult the markets have been over the last 2 1/2 months, but still Wisdom Tree has taken in over $500 million in new assets. Acceptance to this product set has been instantaneous.
How big an opportunity are currencies? Let me tell you how we thought about this market internally. The FX or foreign exchange market, which our ETFs will compete with, trade approximately $4 trillion a day worth of securities and the US money market industry is also a $4 trillion business. Why shouldn't investors also diversify their cash away from the US dollar? We think our opportunity in currencies is at least as big as it is in equities.
As I said earlier, these currency funds were the first 1940 Act currency funds as opposed to some of the other structures. Very importantly, this product set diversifies Wisdom Tree’s product offerings and revenue streams. I think this is particularly important for shareholders from a valuation standpoint. I believe that our valuation should be enhanced as we achieve greater balance between equities and currencies. Also currencies, which have a very low correlation to equities, should allow Wisdom Tree a reasonable chance to grow our assets under very adverse equity markets like we have seen and proven during the last two months.
These funds were launched in partnership with the Bank of New York and Dreyfus. The we structured this is that we share external costs. The bank contributes fund services, including portfolio management in custody and Wisdom Tree includes the legal infrastructure and its sales team expertise. These funds have met instantaneous acceptance in the marketplace. I think that means that there was true investor demand. Later we have other funds that we will be launching in this currency space that Bruce will be discussing a little bit later.
This next slide shows you what our industry has done since Wisdom Tree has launched in the second quarter of 2006. You can see that the industry has grown every quarter. The next column shows Wisdom Tree’s inflows see can see that Wisdom Tree has also grown every quarter since we launched.
In the first quarter of 2007, that was our best quarter, we took in almost $1.5 billion in 90 days and we actually took in 12% of the industry inflows. The second quarter was one of our best quarters taking in $745 million in inflows and we had a very strong market share number as well.
The next column will show you the market share, so since inception we have taken in 2.2% of the industry inflows. One point I want to make. Wisdom Tree is a young company and we are filling out our product set, so we have not competed in all of the different categories. So with currencies we have really broadened out our footprint and really in the last 12 months we have launched our complete emerging market product set.
The next column shows you market moves, what has happened in the markets. What it shows is the last nine months there has been immense selloff in the market as everyone knows. That really masks the growth that we've seen in inflows, so in the last three quarters we took in $1.2 billion and we lost over $900 million in market flows. So I think it really does mask the success that we've achieved in these difficult times.
On the bottom it shows you the inflows by category. As I said earlier, 70% of Wisdom Tree’s equity ETFs are in international securities and as you can see on the very bottom, that is the only category year-to-date that had outflows. What I really think this shows is how well we are executing. We are really swimming against the tide. We have been growing in that category.
This next set of slides or next set of graphs come to us from Index Universe and on the left it shows you the net creations by funds sponsor and you can see that Wisdom Tree had the fourth greatest inflows in the industry, year to date, with over $820 million in inflows.
On the next side of the column you see what funds that were launched this year took in the most assets and we are very proud to say we had two of the top three funds launched this year, in terms of market acceptance. Our Chinese Yuan, CYB and our India Earnings Fund, EPI. Again, what I think this shows is Wisdom Tree is executing at a very high level, that our product development and launch creates value with every launch that we put into the market.
This next slide shows you the leadership team that we have assembled. This may be the most significant and impressive accomplishment that we have been able to bring to bear. Michael Steinhardt is our Chairman and largest shareholder. The Wall Street Journal has referred to him as one of the world's greatest investors and you can see that the rest of the board, Win Neuger and Jim Robinson, Frank Salerno, and Jim Manley, it is a very sophisticated group of investors. I am sure you all recognize our senior advisers, Professor Jeremy Siegel and Arthur Levitt. It is a truly prestigious group and we are honored to work with them.
As importantly as that board and senior adviser team is, really the operating team is just as good. It is led by Bruce Lavine, our President and COO, Bruce is one of the founders of iShares. He helped write that business plan. He was at onetime the CFO of that division. He headed up at one point the product development and his recent job prior to joining Wisdom Tree was as head of iShares Europe. He is joined by another 60 professionals at Wisdom Tree, all from top companies and again it is because of this operating team that we have been able to execute, I believe, as well as we have.
This next slide shows you who owns Wisdom Tree’s common stock and what it shows you is that at every level of the organization, Wisdom Tree is aligned with its shareholders.
Finally, we are getting to the business model. We made a couple of big decisions early on. The first is proprietary indexes. That is an innovation that we pioneered and that no one else yet has copied. It has three advantages, in our opinion. One is it is very high margin. We do not pay third-party licensing fees. Also, we feel it increases our agility. It allows us to bring product to market quickly and in this industry, being first to market really makes a difference. Lastly, it allows us to offer a unified investing experience. We get to have quality control on the messaging.
The next big decision that we made was to go with a highly outsourced business model. We outsourced all labor intensive and system intensive services. Our lead partner is the Bank of New York and the assets that we have outsourced like trading, it is important for you to understand Wisdom Tree itself does not do any trading ourselves. That is done by our partner, the Bank of New York. Think about, we are such a young firm but we are buying securities in 45 markets around the world and some of them, including the Middle East, are very exotic. It would be extraordinarily difficult to be able to execute that without a massive capital investment.
We also limit transaction risk through the ETF structure. We have limited personnel risk and we also are not a people intensive business. The last is, we have minimal technology investment.
The net result of those two big decisions creates a highly scalable business model. So as an example, if you on the phone today fell in love with our currency funds and decided over the next week to allocate $5 billion to our ETFs, we wouldn't be adding any personnel to handle the inflows. It shows you how scalable the business can be.
With that, let me turn this over to our President Bruce Lavine.
Thanks, John. I wanted to take you through three growth initiatives at Wisdom Tree. There are many going on at Wisdom Tree today, but I wanted to highlight these three for you. To talk a little bit about our fund launches in the ETF space, to talk about our licensing business which we've made a couple of announcements about lately, and finally to touch on our 401(k) business, an initiative that we're very excited about.
First let's go to fund launches. There are three that I want to highlight for you; all of these have been filed with the SEC this year. We're in a quiet period on the last two of them, but I just want to talk about them at a high level.
John mentioned about our currency funds having better structure and we're really excited about these. We spent over two years with the SEC to get these to market. They are coming out as active funds. So oddly enough with all the discussion about active, Wisdom Tree ends up being the leader in active management in ETFs at this point.
But these are the first funds in the industry, so everything out there in currency land so far have been trusts or notes and we think this structure really makes us a better option in terms of being able to diversify credit risk, in terms of getting the best tax treatment possible, in terms of getting the highest yields possible in the underlying interest instruments and then we have brought them out at a low fee. We really think this is the right structure for the future. Others took shortcuts to come early and we think this ultimately is the best structure that is out there. We're going to continue to leverage this structure into other country funds.
The one fund I did want to highlight for you is our emerging markets currency fund. We have been out there talking about the individual country funds since we launched and there is very nice reception. But there are definitely investors that are not comfortable making the decision on which currency to buy and they are looking for a basket. So this will be a basket product of 10 emerging market currencies; China, Brazil, Korea, India, Eastern European, South African, there will be a number of different ones in there. They are equally weighted. It actually has quite a high yield of about 7% on the underlying instruments. That will give investors an opportunity to allocate for something that has a low correlation with equities and provides a nice diversification benefit inside a portfolio.
The next one I want to talk about is our domestic and international growth funds. Now just the idea that Wisdom Tree is talking about growth is something that might surprise a few people, because I think we are often associated with value funds. It is true that Wisdom Tree has a value tilt in the way we manage our products but we think of that as a tilt away from over-valuation and we are not specifically seeking out the value stocks by anybody else's definition, and that's important.
So our methodology and fundamental weighting can be applied to any set of stocks and we're going to apply it to growth stocks. We are going to pre-screen a set of growth stocks and we're going to apply Wisdom Tree value tilt and you are going to come out with something that feels like growth at a reasonable price. That is the GARP concept that Peter Lynch made famous.
If anything, fundamental weighting might be most important in this category because growth is a place where you tend to get the most story stocks and the highest valuations and often the greatest train wrecks. So we're very optimistic about this. It has had very nice results in the testing that we've done on it.
Finally, a product called DEFA Hedged. Most of you will know that DEFA is one of our flagship funds, our largest fund, it is a dividend index with Europe, Far East, Australasia. It is a very strong competitor with MSCI EAFA, it was one of our best performers in our back test. It has been live for two years now and is developing a really nice track record of out performance.
We're going to take that product and do a hedged version of it. So you're going to have the ability to have the equity exposure without having the currency exposure. So we get a lot of people who think the dollar's slide actually might be over and they don’t want to be on the other side of the outperformance we have seen in the last few years from the falling dollar. This will be an opportunity again to really separate your currency and your equity exposure and to think clearly about what risks you want to take and what risks you don't want to take.
Skipping on now to the second initiative, our licensing business. Wisdom Tree has intellectual property that we created that makes us different from most ETF sponsors. There is a part of Wisdom Tree that is, I suppose, in competition with the S&P 500 and MSCI and FTSE and others as an index provider. Our goal is to license and really maximize the value of this intellectual property where we can. We're not going to do it in a way that compromises Wisdom Tree in any way or commoditizes it, but we think there are opportunities and that is very consistent with the business model that Jona said, and the value of having proprietary indexes.
One way we started to do that, we've been working for a couple of years with the City of New York to try and introduce fundamental weighting to them as a concept. We're very pleased to announce on July 21 a mandate by the city. We got two of their plans to invest about $415 million in Wisdom Tree strategy. That is being transitioned into us right now. That is just really an incredible endorsement for Wisdom Tree, a very unusual position for a firm only two years old. We think it is going to be the start of something of fundamental weighting in the pension world.
Now to accelerate our growth in that area, we just announced yesterday a partnership with Mellon Capital out in San Francisco and we are really pleased to partner with them. Mellon Capital is a big player in this world already. They manage a couple hundred billion dollars in strategies for the Pension Endowment Foundation world. They manage various things including cap-weighted indexes, and Mellon is going to be the exclusive licensee to represent Wisdom Tree in this channel. So together we are going to market to this channel. It is really a very large opportunity. There is an immense amount of money around the world that is benchmarked against cap-weighted indexes. We see the fact that the NYCERS, or the city of New York, has done a mandate and actually CALPERS has dipped their toe in fundamental weighting as well. This is very much the start of what is to come in this marketplace.
Anyone who is a fiduciary in this space ,and who has looked at the research behind fundamental weighting, I think has reason to consider that maybe you don't want 100% of your indexed assets in the cap-weighted basket. I wouldn't expect this to be a quick effort, as we have this call quarter from now, I don't necessarily expect to have a new mandate to announce but over time we would expect to make some progress in that market.
Finally, away from the pension world, we did a deal with ING earlier this year, the big Dutch insurance company and they have licensed Wisdom Tree’s Global High Yield Equity Index as the basis of their variable annuity product. Again, a great partner for us. They have brought this market themselves. They are out there selling themselves through a channel that Wisdom Tree had no people in and doesn’t intend to staff up in. In a short time, less than six months, they have gathered $170 million in assets. The licensing business is a business that although lower fee than the ETF, it is a very high margin business because we are not dedicating a lot of cost to it.
Now, finally I want to turn to our retirement services business, our 401(k) business. Again, a very, very large opportunity. There are trillions of dollars in the 401(k) world currently in mutual funds. Wisdom Tree believes it is very early but very much on the right side of entering this space. We absolutely believe ETFs will penetrate 401(k) plans. There has been some discussion in the press as to whether or not that is actually going to happen. We think a lot of people are missing the point on that one completely. Wisdom Tree has solved the issues that are keeping today ETFs out of 401(k) plans, and those are largely the ability to trade without commission for the participants and so we are very excited about that.
I think one of the reasons there is confusion, is people loved ETFs so much for their tax efficiency and their intraday liquidity that they forget the other benefits of them. So when they get compared to index mutual funds, people forget that we are still fully transparent everyday. They are very precise vehicles for asset allocation. They are low fee; they are still very convenient.
Probably the biggest mistake that I think people make about comparing ETFs in a 401(k) plan with indexed mutual funds is they forget that there is massive innovation going on in the ETF world that is not going on in the indexed mutual fund world. So the indexed mutual fund world today is really made up of the S&P 500, MSCI EAFA, Russell 2000 and a few other benchmarks, but it is nothing near what you're seeing in the ETF world where you can have fixed income commodities, currencies as well as approaches like Wisdom Tree’s. We think it is only a matter of time before ETFs penetrate greater into 401(k)s.
Wisdom Tree has built a dedicated business unit with very seasoned professionals to go after this. We have partnered with very strong players in the industry. CLS is a firm from Omaha Nebraska that does asset allocation advice, Professional Capital Services. PCS is a firm in Philadelphia that is a record-keeping firm. Very importantly, we have built this new model in a way that makes it very easy for people to embrace ETFs in their 401(k) plans.
For example, what you really do is you switch the recordkeeping platform and then you can add ETFs to your choices. You can add them as a single ETF if you want, you can add them as bundled ETFs. And as the adviser you can make the asset allocation decision, or if you don't want a bear that fiduciary responsibility, you can use predetermined models by CLS. These are target date and target risk funds, so a lot of different flexible ways to use it.
Likewise, we are not asking people to switch out of all of their mutual funds day one. Despite what John has said about the benefits of ETFs, there are very good reasons why people might want mutual funds. Their comfort level with them is still high. So we will have mutual funds on the platform as well.
We think we've really built something that has open architecture that is a very strong offering. We are targeting this at the least-served part of the market, so those with planned of $5 million to $50 million. We can turnkey our solution as low as 65 basis points; some of the participants at that size are paying 200 to 250 basis points all in. We've gotten a very strong reception since we started discussing this. Today we have about 10 plans that have either converted over to Wisdom tree or have signed the paperwork or are in the process of converting. The asset levels are small today. It is only about $25 million. There is some seasonality to this business. We expect more movement in the first and fourth quarters.
We are very early to this opportunity. We are very happy to be early to this opportunity. We are in this as a long-term player and we think this is a very large opportunity.
With that I'll now turn it over to Amit Muni who is going to go through our financials.
Thank you, Bruce. Before I begin the discussion of our financial results I would like to provide you with some background to understand our financials. Wisdom Tree is a young entrepreneurial growth company. We are in an investment mode for our business and as a result are incurring losses that should be expected. However, these losses are beginning to reverse as our business gains traction.
As you can see from our presentation, we are executing at the highest levels in the industry. Our management, employees and board who are all major stakeholders in the company are committed to the same goals and are aligned with the interests of all of our shareholders. That is to grow this company to reach breakeven and then move on to profitability as soon as possible.
With that background, I would like to begin by first reviewing our overall financial performance. Our total revenues have been growing, increasing 15% to $6.2 million from $5.4 million in the first quarter, primarily due to higher average assets under management and higher average pricing.
Our total operating expenses, which exclude stock-based compensation and depreciation, decreased 8% to $11.1 million from $12.1 million, primarily due to lower levels of compensation-related expenses.
Our operating loss decreased 27% to $4.8 million from $6.6 million. Our operating expenses and operating loss are the key metrics we use to measure the financial health of our business and our operating loss is a good approximation of our cash burn.
Our net loss on a GAAP basis was $8 million, down 18% from $9.7 million in the first quarter. Let me emphasize that we are committed to decreasing our operating loss quarter after quarter until we reach breakeven.
Now let's review the key drivers to our business. Our revenues are primarily driven by our average assets under management, through our ETFs, the fees we charge on them and the mix between our ETFs. We earn approximately on average 33 basis points for our US ETFs; 55 to 58 basis points for our international ETFs; and 88 basis points for our India ETF. We earn 43 basis points for our currency ETFs, but under our agreement with Dreyfus, we split the revenue with them so we earn on average 22 basis points on a net basis. Remember that while we do split the revenues we also split the costs and don't bear any portfolio or fund administration costs.
Now let's review how these drivers affect our revenue. Our revenues continue to increase as we gather more assets. We earned $6.1 million of revenues from our ETFs in the second quarter and our international ETFs comprised 84% of those revenues. Our average fee earned for our equity ETFs at the end of the quarter was a blended 53 basis points. We have been growing quarter over quarter. Including currency on a net basis our overall blended fee was 50 basis points. On an annualized basis this translates to approximately $24 million in run rate revenue based on assets and ETF mix at the end of the quarter.
Now let's review our expenses. Our expenses have increased as we continue to grow and invest in our business. Certain of our costs are variable, in particular our fund management expenses. As we gather more assets, certain of these costs will increase since they are based on our average assets under management while others are based on the number of funds we have.
We also have discretionary costs such as our marketing and professional fees, which we can adjust. Looking at our expenses, we are balancing the importance of expense management in the current business environment and investing in growing our business.
Our total expenses on a GAAP basis was $14.6 million in the second quarter. Excluding non-cash charges for stock-based compensation and depreciation, our operating expenses were $11.1 million. This is down from $12.1 million in the first quarter. The decrease was primarily due to lower levels of compensation related expenses, in particular incentive compensation. Our fund management costs have increased as we gather more assets since I noted these costs are variable.
Our marketing costs have also been increasing as we grow our business. Our marketing and branding campaigns are tailored to reach a targeted audience to gain the most cost-effective benefits. The results we see from this program far outweigh the relatively conservative costs we incur as compared to the significant amount spent by some of our competitors.
Now before I continue, I would like to comment on our breakeven. Breakeven is a moving target as it is based on our expenses at the time, which as I mentioned has a variable component. Also the mix of our assets are important; that is where the majority of our assets are in higher priced or lower priced funds.
With that said, based on these factors at the end of the quarter, our annualized revenue run rate based on the assets we have today is approximately $24 million. Our annualized run rate operating expenses based on our second quarter is approximately $44 million. So there is a $20 million gap we have to close. Based on our current mix of assets and fees that gap translates into approximately $4.3 billion of additional assets we need to gather to reach cash breakeven.
Again, this is a snapshot in time based on the facts today's so I want to caution you that this is a moving target. However, let me stress again that management is committed to close this gap and lower our operating loss quarter after quarter going forward. We will do that primarily by growing our revenues through continued asset gathering and innovative product launches or conversely aggressively managing our expenses. Our strong capitalization will support us until we get to cash breakeven, so let’s review our balance sheet.
We have total assets of $40.7 million which is primarily comprised of $13.7 million of cash and cash equivalents and $21.8 million in US senior agency debt instruments for a total liquidity of $35.5 million. Wisdom Tree has no debt and has only issued straight common stock. We have no preferred or convertibles.
At the end of June, we had approximately 104.5 million shares outstanding. As I said, we are very well capitalized and believe we have more than enough liquidity based on our conservative growth projections to reach cash breakeven. We have the ability to raise more cash if needed but we are not pursuing that at this time.
With that let me turn it back to John.
Thank you Amit, thank you Bruce. A summary and then we will open this up to questions. Wisdom Tree is the only publicly traded pure play ETF sponsor. We have a highly scalable business model. We are proven innovators. We have a very experienced management team and advisory team. Our goal as a public company will be full transparency in its operations and its financials, and again we have no debt and a solid balance sheet. With that, let me open it up for questions.
Your first question comes from Dan Weiskopf – UBS.
Dan Weiskopf – UBS
I have to compliment you on your transparency. Going from what we are used to, to this, it is almost like coming out of the closet. Thanks.
My question is there are about $5 billion in currency ETPs available in the marketplace now. Can you speak to how Wisdom Tree’s product ETF is better than what is out there currently? You probably should outline a little bit further what you mean by 40 Act.
Thanks for your question, Dan. Bruce, why don’t you take that please?
The advantages of the currency fund, we think there are a number of them. First of all, the structure allows us to get into some currencies that have never been available. So we have introduced the Indian rupee, the Chinese Yuan, the Brazilian real, things that were difficult to do and we access those markets with forward contracts.
When we compare ourselves to a product that already exists in the marketplace, going head to head, so we have a product called EU, which is our euro fund, and there is a pretty active product out there already, FXE that Rydex has, which is their euro product. When we go head-to-head, the comparison is we will invest directly in the underlying instruments. In this case, the European denominated government paper, in that product you are in a J.P. Morgan overnight bank account. So you have 100% credit exposure to J.P. Morgan, they are a good credit but perhaps not as good as the European governments.
From a tax perspective, we have as a 1940 Act mutual fund, a registered investment company, we get long-term capital gains treatment. So if you had a 20% gain in the euro in our product from the currency itself, you get long-term cap gains from it. If you had it on the FXE, you would pay income rates.
Additionally, I said before that we came out under the SEC's active mandate. This really allows us to tap the potential and the expertise of Dreyfus. Dreyfus is essentially managing short-term cash instruments for us with a 30-day weighted average maturity. And as a result, we are going to get a higher yield than you would get in that J.P. Morgan bank account, probably about 35 basis points higher. On a fee perspective, I think we're slightly lower.
So all in all, we think our structure gives you better protection from the credit risk, the best taxation possible, the highest yields one can get and we have brought them at low fees. It is something that is going to play out over time where we are head to head, but it also allows us to enter these new markets where others cannot go.
Now, I haven't really talked about the note structure. I would just suggest, it is a similar kind of discussion there. You have 100% credit risk of the issuing institution and I would say those typically come out at even higher fees.
Dan Weiskopf – UBS
Can you talk about your distribution channel? You are breaking it up and most people in the ETP market seem to be just doing feet on the ground. You guys seem to be trying to get some leverage from different distribution channels. How have you tried to focus that? The 401(k) market is different than the retail market.
Certainly there is a theme running through everything that we do of trying to do things where we are good at them and leverage others where others can do them better. We have our own existing salesforce, 30 people doing sales and marketing and we're out there every day much like other ETF sponsors in various channels like the warehouses, talking to the brokers at Merrill Lynch and Morgan Stanley and others. We're talking to the registered investment advisers, we're talking to the hedge funds. We're talking to the pension community.
In the case of the currency products, we have a nice relationship with Dreyfu,s where we are lead sharing with each other. Certainly the relationship over time will grow. But we feel very good about our ability in two years to get the Wisdom Tree brand to a level where people have good feelings about it. We obviously, over time, would intend to add more distribution people but we have made really quite good inroads in two years.
Dan Weiskopf – UBS
Your balance sheet, why is it that you have three lines basically for cash and investments? One is below the line.
It is primarily just classification of our balance sheet. Some of it is long-term and some of it is short-term, so if it is long-term dated investments we will classify that as under the bottom of the line as you call it, in long term. And if its maturing in one year or less it will be in the short term.
Dan Weiskopf – UBS
And none of the capital is restricted?
No, absolutely not.
Dan Weiskopf – UBS
Our next question is coming from Steven Green with Ordnance Capital. Please go ahead.
Steven Green - Ordnance Capital
Congratulations guys on navigating a very tough environment especially in equities. That said, I know you guys sold stock two years ago at, I think, it was $3.00 a share. Have you been approached by other companies to buy portions of the company, or would the company be for sale. I know a lot of people, such as, I don’t know, Putnam and other people are looking for maybe an ETF strategy, would you be open to selling the company?
I take that. Thank you Steven for that question. There has been a lot of speculation about Wisdom Tree. I can understand that speculation, we do believe that Wisdom Tree would make an attractive acquisition target. It is a fact that there are very few ETF sponsors, so we are scarce commodity. There is also a growing belief that if you are traditional asset manager and you don’t have a vibrant ETF platform, you will eventually be left behind. As a CEO of a public company, I have an obligation to all shareholders to take these types of inquiries very seriously. And I do take these responsibilities very seriously. Also as I said earlier, management, the board, and all the employees of the company own substantial stock in the company so we are all fully aligned with you, the shareholders.
Let me end this with one last point, we do value our independence. We do believe we can achieve our goals as a stand-alone company. Wisdom Tree was built on a simple vision; serve investors with great products, marry a revolutionary idea, fundamentally weighted indexes to a revolutionary structure, the ETF.
Our ambitions from the very beginning was not to get to the 5 billion but to get to $50 billion and beyond. So our goal is to become a great asset management company. I hope that answers your question
Thanks a lot, it does. I have one question for Bruce. You spent a lot of time obviously building iShares, can you compare your experience of that with where Wisdom Tree is today and how you see Wisdom Tree scaling to, like Jona mentioned, to $50 billion and beyond. One add on question to that is, this should be a good time for Wisdom Tree in terms of building their international markets. With the decline of international markets and with the decline of some emerging markets, for people to switch from iShares products, such as (inaudible), to a Wisdom tree product.
Yes, Steven, a couple thoughts on that. I appreciate the question. First of all, timing is all different about when WisdomTree is operating and when iShares really started out. iShares was really alone and they were first, and no one else was really that engaged, apologies if there is anyone from Vanguard or State Street on the phone. They were in the game, but they are much more formidable competitors today than they were back then. So its not a new thing anymore.
Having said that, Wisdom Tree is executing extremely strongly with a small team, very speedy decision making, we have accomplished quite a lot in a very short amount of time. And one thing that is important about Wisdom Tree is that we have a very large potential business, which when we compare ourselves to some other guys in the industry, we think our footprint is larger.
And if you think about how this industry is beginning to play out, you do have competition going on among large players on cap weighted indexes. In some cases you have direct competition, the same exact fund being managed. You mentioned the emerging markets product. As you mentioned the emerging markets product. Vanguard's got MSCI emerging markets at 35 basis points and iShares has it at 75 basis points, because they're going to go head-to-head on that.
I believe Vanguard has started to take some assets away from iShares on that score. Wisdom Tree feels comfortable our approach is different, we feel its better and that is going to play out over time. Just on that point of the emerging market fund, we have a product called the Emerging Market High-Yield fund, the ticker is DEM, that we launched in July of last year. I think it really shows you Wisdom Tree how fundamentals work. We launched this product, it's the same country set as the MSCI Index. But we weight by the high-yielding dividend payers and we end up with a different weight by country and obviously different companies. This product, year-to-date, is up about 1.8% through yesterday. The Vanguard product, VWO, is down 13.7%. So we're ahead of it by 1,500 basis points this year and a lot of that comes because of our approach of tilting you away from high priced markets. We owned less of China, less of India on a relative basis as they blew up. One interesting thing that happened, we talk about the rebalancing process a lot, in June we rebalanced all the international products and we sold off, again lowered the P/E on the products and again, that has served us well. In that rebalance, oddly enough buying some Turkish companies, because their dividend yields have gotten high and now Turkey's been a nice out-performer for us. So we're very comfortable with the way this is all playing out. Quite frankly, we feel in a very strong position having a differentiated product set as the industry matures.
Steven Green - Ordnance Capital
Thank you very much and good luck.
Our next question is coming from Jeffrey Whithorn with Gilman Hill Asset Management. Please go ahead.
Jeffrey Whithorn - Gilman Hill Asset Management
Sales as a percent of revenues, as you mature or stabilize or wherever reach profitability, should be what percent?
My second question, I believe other than AIG helping you distribute some shares, I thought you had another working relationship with them where they're going to help garner assets for you. If I'm correct with that, and I'm not sure that I am, has that been successful or not?
And last question, when will you leave the world of pink sheets and get on another exchange? Or is that a matter of when we're closer to reaching profitability?
I will take the first two and then I will flip it back to John for your third question about the listing.
Your first question was I think, our sales effort as a percent of revenue and what that might be over time. It is a little difficult to give you an exact figure and we are not really going to forecast for you, but we have a team in place that we feel we can gather lots of assets with and again, we would not expect it to grow by leaps and bounds going forward.
There are about 30 people. There are plans to add a few more at the margin, but we would expect this to grow relatively slowly. This is part of what Wisdom Tree is thinking in terms of getting this thing to profitability quickly. We have tremendous operating leverage in the company in the sense of, we have now built an infrastructure that can handle multiple billions more than we have today without adding a lot of costs. I think that will start to play out in the numbers.
Your second question I think was about AIG, about a distribution relationship. We don't actually have anything formal with AIG. They came in as an arm's-length investor. We have a nice relationship with them. Win Neuger sits on our board and he is a real great addition to us. We have been talking with them about potential things to do over time, and we would welcome the opportunity to do something.
The deal we actually did was with ING, the Dutch insurance company and that is in the variable annuities space. We are talking with others. We are looking for ways to leverage our intellectual property that might include doing deals with non-US insurance companies. On pension side for the licensing business, we have had discussions with large pension funds around the world, Sovereign Wealth Funds, so there are really a lot of opportunity still. We are hopeful that Wisdom Tree is just getting going.
I'll answer your question about listing. We announced in the spring of 2007 that we intended to list last year on NASDAQ. However, as the market declined so did our stock price and we're no longer eligible for listing. The NASDAQ requires at least a $4 stock price and that is really the last hurdle for implementing a NASDAQ listing. So as we can get to that point, we will list.
One last thing, has Mr. Steinhardt sold any shares?
He had sold about 140,000 shares last year out of his 34 million shares. But this year in some of our open trading windows he was a buyer as were a number of our employees. Since we are not a fully reporting company those buying were not reported. What I think is most bullish from my standpoint is many of the employees that were buying were actually in the sales team, who have the greatest day-to-day contact with our customers.
Your next question comes from Mosel Katzter with J. Alden and Associates.
Mosel Katzter- J. Alden and Associates
Thank you. I'm calling over the Internet. Hopefully you can hear me. I think Invesco bought power shares. Has that purchase been very helpful to the power shares business?
My other question is, how much harder or easier is the next $5 billion under management than the first $5 billion?
I think I heard you at the beginning, Invesco bought power shares and what impact has that had? It is difficult for us to tell. We hear different things. It is very difficult for a traditional mutual fund distribution force to be married with the ETF distribution force just simply from a compensation perspective. Traditional mutual funds have a commission system and it is very easy to track the sale. In the case of an ETF you can't track the sale and it’s a different system. So it is very difficult to ask one salesperson to represent multiple products where they can track one and they can’t track others. It is hard pressed to pine on that.
The second part of the question was, if I remember correctly, is the next $5 billion easier than the first $5 billion? Before I answer that, let me just say one last thing about your question about Power Shares and their acquisition and did the combined entity enhance their ability to sell?
Just from a factual standpoint, year-to-date with less than half of the products, that we did take in more assets in creations. In terms of the second $5 billion being easier, there is no question about it. I think one of the points that I want Wisdom Tree to be recognized for, not only are we building an asset manager, but we are also building the full infrastructure of the company. If you go back three years ago, we were three people and a business plan and $500 in the bank. We have had an immense amount of success. So we are building the corporate infrastructure and the active manager simultaneously. It is going to be much easier going forward than it has been in the past.
I would just add to that, very importantly we are building our track record and so we now have different ways to get our intellectual property out in the market. I mentioned the emerging markets fund and that stellar performance. Certainly I would expect that we ought to be able to gain some assets in the separate account world with that as well as the ETF world.
Fortunately or unfortunately, lift off is the hardest part of building an asset management business. We definitely have lift off. We still have a lot of the costs that come with lift off. You haven't seen yet, the operating leverage that comes when the assets and the revenue starts increasing rapidly and the cost base increases very slowly.
Thank you. I will now turn the floor over for our web portion.
We are going to take a question from Charles Sharad from Raymond James. He would like you to discuss the prospects of your newest Middle East fund, GULF. In the room with us I have our Director of Research, Luciano Siracusano, one of the founders actually of Wisdom Tree. Luciano, why don't you take this question?
Thank you John. GULF is our Middle East dividend fund and it is designed to track the Wisdom Tree Middle East Dividend Index, which takes the hundred largest companies in the Middle East region by market cap, by dividend. The goal is to give investors in the US access to a difficult part of the world to reach, and an equity market that historically has not correlated very high to the S&P 500. In fact, it is one of the lowest correlating parts of the world left to invest in, in equities. What we have seen this year in 2008, is basically a trend of rising oil prices, rising gas prices and declining stock prices. The one part of the world that has really shown relative strength has been the Middle East region.
So we think this particular fund, GULF, at 88 basis points is a very attractive product to get broad exposure to the region in the ETF structure, owning principal to local shares using Wisdom Tree's fundamental weighted methodology.
Let me just add one thing to Luciano’s answer. In a generalization, we would say that the less efficient the market the better fundamental weighting works. These are very early stage markets from a capital market standpoint. The dividend weighted approach is a very conservative way to enter what is really a frontier market.
We're going to take one more question, two questions from a single individual, Jeff DeLay from PNC. The first part of the question is, how successful is the product offering to the Chilean pension fund?
The second part is, when do you expect to turn a profit?
What we did in Chile is we registered our funds for sale, I believe it was roughly the end of last year. They are now available for purchase by the Chilean pension funds. We have seen some sales go through. I don't know the exact amounts. I wouldn't say they are overwhelmingly large. This is the start of Wisdom Tree working throughout Latin America.
We have a group in Santiago that represents us. We would intend to expand our distribution to Mexico, perhaps Brazil at some point. It is very early days for us there. They like ETFs, they like Wisdom Tree's approach as a general rule and the Chilean market is a very strong market that is increasing its allocations outside of Chile.
As far as the profitability question, it is very difficult for us to predict when we will become breakeven. There are a lot of variables to that, obviously the most major one is our revenues, primarily based on what is going on in the markets. It is very difficult for us to predict what is going to happen in the market. Also our expenses there, there is a variable component of our expenses are based on the number of assets that we have, the mix of our assets. Because of all of those factors it is very difficult to predict when that will happen.
Let me just stress again that the company management here is very focused on closing the gap between our run rate revenues and expenses so we can get to cash breakeven as soon as we possibly can.
I would just add to that, I don't want to suggest that we have complete control over everything, but it has been a choice to continue investing in our business. We could breakeven more quickly but we don't think that would be in the best long-term interests of shareholders. Wisdom Tree is trying to put a big footprint out and I think we have been very successful at that. We're very focused on profitability, but not if it means that we are actually not maximizing the long-term shareholder value.
Your next question comes from Dan Weiskopf – UBS.
Dan Weiskopf – UBS
My question has been asked. Thank you.
I will now turn the floor back over to the host.
The question-and answer session is over at this time. At this time I would like to turn the call over to Jonathan Steinberg for final comments.
I want to thank all of you for your time this afternoon. I hope this has been helpful. We look forward to speaking with you at our next quarterly conference call. Thank you.
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