WisdomTree, Inc.
Q3 2018 Earnings Call Transcript

Published: 26 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the WisdomTree Q3 Earnings 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 may be recorded. I would now like to introduce your host for today's conference Mr. Jason Weyeneth, Director of Investor Relations. Please go ahead.

[Jason Weyeneth:]

Good morning. Before we begin, I'd 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. 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 WisdomTree's Annual Report on Form 10-K for the year ended December 31st, 2017. WisdomTree assumes no duty and does not undertake to update any forward-looking statements. Now it's my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

[Amit Muni:]

Thank you, Jason, and good morning, everyone. Since our operating beta [ph] is already known I will quickly go through the important items for the quarter and then turn the call over to Jon off with some closing remarks before opening it up for Q&A. So beginning on Slide 3, our global AUM was $59 billion at the end of the third quarter reflecting net outflows partly offset by market appreciation. Continued political and trade war uncertainty in Europe and Japan drew further outflows from HEDJ and DXJ. However, we did see DXJ flows turn positive in September driven by Japan market technical's and slight weakening of the Yen. During this brief period of demand, we exhibited market leadership producing inflow market share of greater than 80%. As the chart in the middle shows, demand for our fixed income strategies remained near record levels while domestic equity suite generated inflows for the ninth time in the past 10 quarters. The chart on the right breaks down our inflows by listing region with Canada continuing to show strong organic growth. Turning to the US segment flow highlights on Slide 4. Despite the outflows due to DXJ and HEDJ we continue to see the benefits of breadth and depth from our strategic initiatives around advisor solutions, investments in technology and new distribution channels and partnerships. The number of funds with creations on a daily basis remains above historical levels and the percentage of our assets in core funds continues to grow generating inflows for the 11th straight quarter. At the fund level, we saw demand for our US equity ETFs which had their strongest flow quarter in nearly two years led by the mid and small cap funds from both our dividend and earnings weighted families. Demand for our floating rate treasury strategy has also accelerated. USFR generated $208 million of inflows during the quarter with strength continuing into October. While our US listed ETFs had outflows for the quarter. We did see trends improved on a monthly basis with inflows of $188 million in September and positive flows continued until volatility this week. We saw strength in USFR, our dividend growth fund DGRW and our US multi-factor funds USMF. Let's take a closer look at our international segment flows on Slide 5. Our Canadian products generated inflows of $78 million driven by our quality dividend growth and yield enhanced kind of aggregate bond EPS. Organic growth remains impressive and we've raised over $500 million of assets since entering the region. In Europe, industry flows overall remain muted and commodities where the majority of our exposure is we're out of favor. We had $268 million of gold outflows which is roughly in line with our AUM market share. On the positive side, though through the first few weeks of October we have seen a reversal of trends with inflows across Europe and into our Gulf products helping offset the equity market volatility. Also in the quarter, we continue to leverage our enhanced scale and resources in Europe bringing two new ETFs to market, borrowing from the IP of our US strategies. Now turning to the financing results on Slide 6. Revenues were just under $73 million reflecting lower average AUM due to outflows and market pressure on certain asset classes and regions. Non-GAAP operating net income increased slightly to $14.7 million or $0.09 per share in the quarter. A reminder, we had two non-GAAP items first the gain associated with market-to-market a fair value of our future goal commitment payment and acquisition related cost. The adjusted tax rate in the quarter was 27.6%, as we look forward we expect a blended tax rate of roughly 26% to 27%. The reduction from our prior guidance which was 29% to 30% reflects tax planning within our international segment and the overall regional mix of our business post the integration of ETF securities. Turning to the US segment on the next slide. Gross margins were 82.3% down sequentially reflecting lower average AUM and mix shift in the quarter. Recent product launches a new regulatory cost. Based on current AUM levels, we expect gross margins to remain around similar levels. Adjusted operating margins for the US segment increased slightly on the second quarter to 33.5%. Total expenses excluding acquisition related cost declined 7% sequentially to $33.5 million. The decline was primarily driven by lower incentive compensation as well as the marketing efficiencies we identified on our last quarter's call. The compensation ratio for the first nine months of the year was 27.6% lower end of the 27% to 29% guidance range. As we think about full year results, we anticipate the compensation ratio in the US will remain in the bottom half of the guidance range. Turning to Slide 8, let's take a look at the operating results of our international segment. Gross margins were 71.3% down sequentially reflecting cost for new fund launches in the quarter. We expect gross margins going forward up 72% to 73% in the near term as we see the benefits of our Canadian platform scaling. Adjusted operating margins for the segment were 23.9%. Total expenses excluding acquisition related cost increased 3% sequentially to $17 million in large part reflecting the full quarter ownership of ETF securities. Speaking of ETF securities, the integration continues to go very well and we will soon be launching a rebranding campaign that will continue for the new few months. Thank you. And now it's my pleasure to turn the call over to Jon.

[Jon Steinberg:]

Thank you Amit. Good morning, everyone. Given the recent heightened focus by investors on industry fees. I wanted to spend a minute discussing why WisdomTree's positioning in an increasingly intense competitive environment is amongst the best in the industry. In the early 2000's, when I was formulating the plan for WisdomTree despite - had already been on the market for nearly a decade price at 9 bps and the three largest asset managers in the world, with the three largest ETF sponsors. It was obvious that pricing for beta would only go down from there. With no legacy issues to confuse me, I saw clearly the nearly unlimited potential of the ETF structure and knew what would be the future of asset management. But I also knew, that to build the viable and profitable business, we'd need a different product strategy. If you're going to launch beta, you need to be first like what ETF securities did in Europe around commodities or what we did in the US around floating rate treasuries and the China 500. But beta is a tough business to defend. If you aren't first, you need to be better. Whether be fundamentally weighted index based or fully transparent active. The majority of our ETFs are designed to beat beta. We're delivering the promise of active management with the benefits of the ETF structure. We call this Modern Alpha. The results of our product strategy and business model have been impressive over the past 10 years. Our approach has resulted in faster growth than our active and passive competitors, while achieving superior economics, while this chart is backward looking. The combination of the performance records, the early entry and speed at which we've been able to get products established in the marketplace and the competitive initial pricing of the funds, allows us to better navigate the pressure and this is also repeatable going forward. To illustrate these points, let's take a deeper look on Slide 10 at US equities. The most competitive category where fee pressure has been the most intensive and where we have generated average inflows of $1 billion year over the past six years. The table on the bottom left shows a pricing comparison of active mutual funds versus WisdomTree's Modern Alpha approach versus ETF beta. We're delivering an active like experience at less than half the cost of active managers operating in the legacy structures. While more expensive than beta, we're in beta and we deliver an altogether different experience and value proposition. WisdomTree offers strong performing differentiated strategies and solutions in the right structure, at the right price. Looking at the table on the right, in aggregate since inception our $15 billion domestic equity franchise has been 84% of active and passive mutual funds and ETFs, net of fees which charging just 20 bps for large caps and 38 basis points for mid and small. In several categories the performance is even stronger with return since inception beating over 90% of active managers and beta and even more impressive would be our after tax and after fee returns. We generated these strong returns for investors while delivering virtually zero capital gains. This is Modern Alpha. These track records reflect both funds launched 12 years ago as well as newer funds with higher active share and even more differentiated investment approaches because of a number of factors including model portfolios, solutions and partnerships. We expect even faster growth in this segment of the market. We feel very good about our product innovation and product strategy, not just in the US equities as illustrated here, but across our entire product line up. We're very well positioned to thrive in this competitive environment. We've also made great strides in our diversification effort and the platform is the most balanced it's ever been as you can see on Slide 11. We have three significant categories. International equities, US equities and commodities each with over $15 billion of AUM with attractive fee rates. While fixed income and liquid Alts remains a smaller category we're very excited about the product positioning and growth potential. Year-to-date our fixed income product suite has generated over $1 billion of inflows more than doubling in assets since the start of the year. Over the past four years we've been positioning our domestic fixed income fund launches for a rising rate environment. It feels to me, we're stronger in domestic fixed income in 2018 than we were in US equities in 2006. The $25 million outflows from DXJ and HEDJ since their peak has masked the impressive execution of our growth and diversification strategy. In addition to the strong positioning of a product platform, we've enhanced our marketing effectiveness, leveraging technology and advanced data analytics. We've also expanded our distribution through our solutions offering and partnerships. During the quarter, we signed additional distribution agreements to make our funds and model available on platforms with preferred access and/or with no transaction fees to customers. This quarter we added Cetera the second largest independent broker dealer network. Ally Financial where we're the primarily ETF provider in their commission-free platform and E-Trade's TCA ETF platform where 77 of our ETFs are available. We've also expanded our global reach through ETFs securities acquisition, our Canadian expansion and new distribution relationships in Asia. Looking past the pain from DXJ and HEDJ. WisdomTree is on cusp of the next wave of growth while delivering sustainable, attractive financial returns for our shareholders. I appreciate your interest in WisdomTree and we can now open up the call to questions.

[Operator:]

[Operator Instructions] our first question comes from Craig Siegenthaler from Credit Suisse. Your line is open.

[Craig Siegenthaler:]

I just wanted to start on the technology business. So we know AdvisorEngine results aren't consolidated yet, as WisdomTree's ownership is still below 50%, but I wanted to see if you had any data points in terms of how the business is performing including like new sales activity, revenues or any color on the aggregate number of client touch points?

[Jon Steinberg:]

Yes, thanks Craig. We're going to have Kurt MacAlpine, Global Head of Distribution touch on that.

[Kurt MacAlpine:]

Greg, so on the AdvisorEngine the feedback on the overall platform continues to be very strong. This feedback gives us confidence that we've invested in and what we believe to the best technology platform in the industry. As you'll probably remember, we through AdvisorEngine closed the transaction with Junxure in January which across the combined business of AdvisorEngine and Junxure we now have relationships with 15,000 advisors across 1,500 firms that account for over $600 billion in network industry assets. So over the course of the past few months our team alongside the AdvisorEngine team has really been very integrated and we're collaborating on sales and client development in a very active manner. We're now at a place where we have a series of clients that have either already adopted the AdvisorEngine platform or are in the process of adopting it, signed contracts and have also already selected WisdomTree as a [indiscernible] owner of their investment management offering. So we're definitely still in the earlier days as is the overall kind of digital industry of business, but we're seeing some very promising early results and have a very rich pipeline of prospects that we're jointly selling through together.

[Craig Siegenthaler:]

Thanks Kurt and then on the recent inflows since your rising rate fixed income ETFs including USFR and also the interest rate HEDJ products. Who has been the biggest buyer of these ETFs? Is it RAA's, hedge funds, retail?

[Kurt MacAlpine:]

It's Kurt again Craig. The primary buyer so far has been the RAA channel. It is a channel we've obviously had historical success, very strong relationships. The theme in the product is resonating extremely well, but it tends to be primarily from RAA's with some diversification from the wirehouses and independents as well.

[Operator:]

Thank you. Our next question comes from Bill Katz from Citi. Your line is open.

[Brian Wu:]

This is Brian Wu on for Bill Katz. Thank you for taking the question. You announced the number of recent distribution partnership wins. Anyway to quantify the incremental opportunity of this relationship and how should we think about the impact of third party cost.

[Kurt MacAlpine:]

It's Kurt again. So just to step back and talk about the strategic partnerships. So we believe we're kind of on the cutting edge of the forefront of the various types of deals that you've seen in the industry and the range of firms that we're entering into strategic relationships with. So despite these only being in the market on the long end for a little over a year. These partnerships have really demonstrated a material, it have been a material contributor net flows to us a firm. So we don't break it out specifically in terms of attributing those to deals that we've conducted versus not. But just to give you a little bit more of sense of the types of partnerships that we're going after and what we look to get from them. So there's really to simplify, there's really two types of partnerships. The first one is firms where we're partnering with firms or platforms that have advisors that are already actively using ETFs today. So think of these as RA custody platforms and firms that are just heavy users of ETFs. So as we think about these partnerships these are areas where we can generate a material flow in a very short period of time because essentially the partnership is reducing the friction cost of trading and allowing us the opportunity to deliver our strategies and advisor solutions program to them. So TD Ameritrade is probably the best example of this and we've realized really considerable results as a result of it, both from our individual strategies and our model portfolios. The second type of partnerships that we're going after are with firms that have yet to fully embrace ETFs. So think of these as like independent broker dealers or retail platforms. So for these we think the potential is great and probably just as great, if not greater than those are using ETFs today. But there's a huge education component both on the ETF structure, our strategies and the advisor solutions program. So these will take a little bit longer to realize the results, but we do feel that the potential for these is the same.

[Amit Muni:]

And on the cost side of it, we do have a revenue sharing arrangement that's based upon growth of assets from these partnerships. You can see it on our income statement and guidance that we're giving around, think about it as sort of 3% of our advisory fees is a way to think about modeling it.

[Brian Wu:]

Very helpful and just to follow-up. The launch of index based transparent active funds, can you provide some color on the value proposition of that vehicle. How it differs from ETFs and a bit on the long-term opportunity there?

[Jeremy Schwartz:]

This is Jeremy Schwartz, Global Head of Research. So we think that will emphasize very heavily, our Modern Alpha approach to trying to add value, we're not beta. We're trying to increasingly add Alpha and we've done that through index strategies from 12 years ago with dividends and earnings, certainly the market volatility is making than ever more relevant, managing valuation risk. But we're increasingly pushing out the Alpha curve and trying to add even further value to differentiate by these higher active products. So just a recent example in two months ago we launched our Emerging Markets Multi-Factor. These have 85% type active share. There's been a lot of volatility in international markets over broad cap waiting. These right here have 400 basis points into develop world 500 basis points in the emerging markets other multi-factor strategies being very unique in the marketplace and so it's really allowing, little bit more qualitative assessment than pure index base and we do think this is the next generation of where ETFs are going, it's going after the active funds in a much more holistic fashion.

[Jon Steinberg:]

And if you go back to my slide that showed sort of pricing and the CAGR of our business. These trends or these types of funds are how we sustain sort of that sweet spot of pricing for the next decade.

[Brian Wu:]

Great. Thank you very much.

[Operator:]

Thank you. Our next question comes from Michael Cyprys from Morgan Stanley. Your line is open.

[Michael Cyprys:]

Just curious if you can update us on the international initiatives that you have in place, you spoke a little bit about just curious, if you're just going to go around the world and just update us on some initiatives. Europe, Canada, Japan and other places around the world where you're thinking about next making some moves.

[Kurt MacAlpine:]

Sure, so it's Kurt MacAlpine here, so just to give you a quick kind of tour around the world for where we're at, we have locally listed products in three different markets. Obviously in the US, in Europe, in the ETF securities acquisition as you mentioned it really kind of strengthened the foothold there. And about two years ago we had launched locally listed products in Canada as well. In terms of where we're distributing our products today. We're essentially positioning ourselves to get in front of, but 90% of the global wealth opportunity either through our own proprietary distribution in these three markets or through distribution alliances or strategic partnerships. So the most critical markets for us on the partnership front in addition to where we have around offices. Latin America is a large and fast growing market for us, we have a partnership relationship in Israel and then we also have a distribution partnership which is newer in nature, across Asia and then we have a limited distribution partnership in Australia and New Zealand as well.

[Jon Steinberg:]

And just for clarity, we don't anticipate, starting a new market where we are launching locally listed products because right now which is just US, Europe and Canada. I'm not sure there's anything else on a horizon.

[Michael Cyprys:]

Got it okay, so just those three markets is where you would have local products and the other regions you're going in with US listed product is that right?

[Jon Steinberg:]

US and USID [ph] and in fact, why ETF securities was so important to WisdomTree, is overtime the usage structure will become the predominant structure for the international investor, the non-US investor because of the tax efficiencies that they get on the usage structure. So it's an incredibly important franchise.

[Michael Cyprys:]

Got it, okay and then just follow-up on M&A. so you've done the ETF securities acquisition. How are you thinking about M&A here, is there anything left as you're thinking about increasing scale on terms of ETFs in an AUM or is it more about distribution and then sort of M&A that could come from that or any sort of additional technology, capabilities that could be helpful as you're thinking more strategically.

[Amit Muni:]

Mike its Amit. Yes so I think what you just rattled off are the areas that we focus on, areas that we can either expand or diversify our product offering getting to different asset classes, particularly also very, very interested around our technology and building out technology solutions, digital wealth. We have the dry powder for it, but I think right now our focus is really on the ETF securities acquisitions making sure that's properly integrated. We always will keep our eyes and ears out, but right now our focus is more looking inwards.

[Jon Steinberg:]

Really focused on organic growth.

[Michael Cyprys:]

Got it. Okay any quantification of dry powder as you're thinking about it for potential M&A at some point.

[Amit Muni:]

We have capital, when we think about allocating capital we try to balance it between the returning capital to our shareholders, paying down the debt that we just took on as part of the ETF securities acquisition and the remaining piece is dry powder and to make internal investments for growth. Right now the balance that we have is, we're kind of happy with.

[Michael Cyprys:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Melinda Roy from Deutsche Bank. Your line is open.

[Melinda Roy:]

This is Melinda Roy filling in for Brian Bedell. Could you maybe just talk about how your franchise has performed in the last week, given the recent equity market volatility and maybe just give us a sense of net buy and selling activity for retail versus institutional investors?

[Amit Muni:]

I'll give you some numbers for the week and then maybe I'll have Jeremy talk a little bit about some of the market performance, but just as you if you look at this week on a net basis. We had about $160 million of outflows globally, but if you break that down by region. If you backed out HEDJ and DXJ which was predominantly of the outflows that we had in the US, it were actually about $100 million positive and $100 million was really coming in from flows in commodity themes as well as our US fixed income strategy. So here's a particular example of why we did the ETF Securities acquisition so that we had more balance to our overall product mix.

[Jeremy Schwartz:]

Yes just to add a little bit more color to that. So the equity markets are down, almost 10% in October and our AUM is really just down less than 3%. You've seen gold rising over 3% in October so you really saw from hedging to whole active base of the firm. You even [indiscernible] solution from gold diversifying the equity so that acquisition is really showing through your global market risk beta for our AUM. But further just on our equity platform how it's performing certainly it's been a momentum market, a growth market and we had a lot of value oriented strategies which have shown up incredibly well in October, so relative performance even on our equity franchise has been very strong in October. And so I think the overall we're seeing good opportunities from that.

[Jon Steinberg:]

In fact, if Jeremy if you go back to the US equity slide that I was talking about we had very strong 10, 12-year performance numbers against a very unfavorable backdrop for these strategies. We would expect more reverse into the mean where the next 10-year should look better than the last.

[Operator:]

Thank you. Our next question comes from Chris Shutler from William Blair. Your line is open.

[Chris Shutler:]

Some pretty intriguing product launches, some Multi-Factor ETFs back in August, a lot of feature spec into these products. It would seem like those types of strategies have good long-term potential. In general, I don't think Multi-Factor ETFs have really gotten a ton of traction industry-wide to-date. So maybe just talk about why at a category level, you think that's the case and I'm guessing why you expect that to evolve?

[Jeremy Schwartz:]

Yes, I mean I think we also are positioning these very much as part of our evolution into more active product. So we talk about Modern Alpha these are true active, high active share to empathize, 85% active share and so it is, you don't just one specific factor. We start off the varying lot of value and quality - this is incorporating a much broader range of factor including a currency factor. So we're really the only one in the industry doing something like that, maybe launch a dynamic currency hedge program back in 2016, we'll be the first trying to educate people that you shouldn't be betting on currencies that is un-computated [ph] risk and we still have very strong conviction and this year by the way the strong example of that. The Dollar is at 5%, foreign currencies are down 5%, so people are compounding their equity risk with foreign currency loses. You can have much lower volatility by just focusing on the stuff. But as one of the multi-factors in these multi-factor, these are currency factor and we believe that's going to help. We're seeing that, real-time in the emerging markets what's happening the EM [ph] currency fell off, we're 75% hedged today. And so it's a really unique set of funds and we believe that through the future for ETF is getting more active, we're strong positioned.

[Jon Steinberg:]

Also Jeremy maybe a little bit about the liquid Alt and volatility.

[Jeremy Schwartz:]

Yes I mean so there's few different areas we're going with Alt, options and certainly the rise in volatility is supporting of the option suite, when we launched the first PUTW writing fund in the US. We brought that over to Europe and in a very quick launch from the European standpoint, they [indiscernible] $80 million in the European business in PUTW writing. We launched more in the US with Russell 2000 and we had more coming. And we're sort of leader in options that we believe that's going to be a great family for us with all the volatility, this option sweet. But we're also doing Dynamic Long/Short fund has a very strong performance in our category. We think we're at the forefront of what's happening alternatives, which is one of the highest fee rates with very ETFs and so we're at the forefront there as well.

[Chris Shutler:]

Okay, thanks. Just one more Amit I think from time-to-time you talked about AUM by channel. Can you just give us an update on AUM by channel. And I'm particularly interested if you were to exclude like the two big currency hedged products, how that changes the AUM by channel. Any stats you have on the channels that the recent flows have been coming from?

[Amit Muni:]

So Chris there's not been too much of a change in overall mix I'd say, maybe a little bit down a little bit on the institutional side or maybe up a little bit higher on the RAA side, but let me ask Kurt to give a little bit more color around that.

[Kurt MacAlpine:]

Yes I think the biggest change that you will see is when you exclude the flows of DXJ and HEDJ, it really emphasizes or magnifies the strength that we have in RAA channel. When you really look within that channel, we have a very diversified set of flows and very deep strategic relationships with RAA's and very broad adoption across those platforms. I think that will be the only set up you would see between adding or removing the DXJ and HEDJ factor.

[Chris Shutler:]

Can you give us some sense of like what the AUM and RAA channel is today?

[Kurt MacAlpine:]

We don't give that breakdown in that particular that granularity. But it hasn't changed as much like Chris from a percentage basis.

[Chris Shutler:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Michael Carrier from Bank of America.

[Unidentified Analyst:]

This is Jeff filling in for Mike, most of my questions have been asked, but just one on the annual cost. As you guys called out last quarter, I think you're expecting to realize $1 million this quarter. So just curios if that was case, just trying to get a sense of what are the numbers this quarter?

[Amit Muni:]

If you look at the results this quarter, you can see what the cost savings that we identified around marketing efficiencies and compensation. Those numbers all flow through this quarter. The savings you'll see coming in the next quarter will be mostly coming in from us closing down our local Japan office. Remember that we shifted our distribution strategy instead of going with our own team with partnership with Premier partners to get into Asia. So yes we're on track with those costs savings that we had talked about in the last call.

[Unidentified Analyst:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Brennan Hawken from UBS. Your line is open.

[Brennan Hawken:]

So I know you mentioned that Europe has picked up quarter-to-date which is great. But overall ETF was in a region that has been pretty disappointing especially given the expectations for the impact of [indiscernible]. What do you attribute that to and do you foresee anything specific might because that growth to accelerate?

[Jon Steinberg:]

It's Jon, no you're right. The flows in Europe have been even more restrained than in the United States where the flows are down a lot. I think a lot of it has to do with the market uncertainty, one just market uncertainty, volatility in the market but then you have Europe has some certain issues like BREXIT like European elections that have heightened uncertainty to investors and then money just seems to be frozen. So just like in the United States our long-term prospects I think for ETFs are completely undiminished, but in the short-term market sentiment gets expressed very quickly in ETFs.

[Brennan Hawken:]

Okay, that's fair. So basically geopolitical risk kind of trumping some of the other maybe market structure factored to [indiscernible].

[Jon Steinberg:]

The market innovation structure stuff exactly right.

[Brennan Hawken:]

Yes that's fair. Okay appreciate your comments also about the fee rate and value proposition Jon. We've seen the fee rate under pressure for a couple years now. And just want to try to get a sense or how much of that is mixed verses fee cut?

[Jon Steinberg:]

So it's almost all from mix DXJ and HEDJ, $25 billion at something like an average of 54 basis points. It's almost mix, we had very selectively lowered some fees on some emerging market funds that were very, very small in AUM. But I would say for your question it's all mix.

[Brennan Hawken:]

So do you think then as a follow-up to that is, somewhat parallel to what we're seeing in the active world, where the lower fee products are continuing to flow and is there any reason to think that would change. Do you have any reason to believe that might change for some reason?

[Jon Steinberg:]

So I'm not quite sure of the nuance of your question, but first let me say that the last nine years have been the perfect beta market. Cap waiting is a momentum strategy. The markets have been up since the election almost straight up. So one their performance has been very strong, but we all know though it's hard to execute the most important number is not fee, but after fee return. If you have a positive value proposition against three beta then you have a positive value proposition and we do and we're doing it in the structure that is growing versus the historical structure. So we're feeling very strong about our pricing historically pricing going forward and what we've done, where we are going forward. It's not - I wouldn't' say that lowering fees necessarily raises your growth rates. All it does, is guarantee lower revenue and most of our competitors had really they rely more than they need to or maybe not, but they rely very heavily on just fee component versus the innovation in products. I mean, Jeremy just spoke about adding 400, 500 basis points in two and three months because of the volatility. So I feel very good that all we have to do is continue to launch these fantastic innovative products and we have some of the longest track record in all of ETF land for our performance indexing or Modern Alpha and with occurred doing on the distribution side, people are really starting to embrace it and it's what's allowing us to go after firms like DFA trying to take DFA advisors and making them WisdomTree advisors and asking them and getting from 30% to 50% of their book of business. So we're very optimistic about the positioning.

[Brennan Hawken:]

Thanks for all the color Jon.

[Amit Muni:]

Really, really briefly. We've been going up against that - those kind of firms for the last 12 years and we've had better performance and some of those advisors well. We didn't have the business model in the same way that they did, but what Kurt's doing on advisors [indiscernible] really is taking our better funds and then marrying it with [indiscernible] business package that really is competing at different level today.

[Brennan Hawken:]

Thanks so much guys.

[Operator:]

Thank you. Our next question comes from Keith Housum from Northcoast Research. Your line is open.

[Keith Housum:]

Question for you on compensation expense. Obviously it's lowest spend in several quarters and I understand the restructuring efforts are part of that, but perhaps a little bit of color there on if the number that was provide us [indiscernible] sustainable or was there any onetime that perhaps brought down lower than what you might expect next quarter.

[Amit Muni:]

So when we think about compensation [indiscernible] around the US side first. We give guidance around that, we expect it to be in the lower end of the range of the full year guidance that we gave 27 to 29 will be in the lower half. Where we sit today it's all moves based upon our performance and that's really what's driving it down to the lower end of that range.

[Keith Housum:]

Okay, a follow-up if I could one the distribution partnerships that you guys have with independent RA's. I understand you can't give lots specifics in terms of numbers, but perhaps can you talk about [indiscernible] 20% quarter-over-quarter or just some cover on the success you're having with new relationships.

[Kurt MacAlpine:]

So there's really, it's Kurt here again. So there's really two types of relationships within the RAA channel that we're going after. There's the custody type of relationships reducing the friction cost associated with trading, accessing the platforms in a more strategic way, getting better data and getting in front of those advisors. So that business for us has proven it to be very high performing and a very significant contributor. So growth level there are very, very. The way we're accessing those advisors once we've created that access is twofold. One through our sales team. So we're working alongside RAA's and establishing deeper more strategic relationships. Jon made the comment around we've launched the solutions program, a Modern Alpha approach with the objective of being 30% to 50% of an advisors books for the advisors that we're establishing partnerships with. Jeremy touched on from a performance standpoint how we have the product performance to go do that. So I think the narrowing of the product performance with the advisor solutions program has a allowed us to start to displace and use kind of legacy DFA relationships. So we now can count a handful of firms that have either eliminated or scaled back relationships with DFA in favor of building those types of relationships with WisdomTree. The second piece though that the partnerships allows us to do is through our digital marketing effort. So because we have better platform access because we have better data on these particular advisors. We can extremely targeted with our digital selling efforts both in terms of the nature and type of the RAA's that we're going after. So as an example for RAA's that tend to be more planning centric or focusing on client service. We can be very tailored around the messaging around their model portfolio initiative which is very unique building those portfolios open architecture blending Alpha and Beta into one particular portfolio or of those that play a heavy role in portfolio construction, our digital efforts are all around thematic investment ideas that align with market sentiment. So probably we're not showing a specific number but the growth has been very, very strong and it's really coming those kind of two different areas.

[Keith Housum:]

Great I appreciate the color. Thank you.

[Operator:]

Thank you. Our next question comes from Mac Sykes from Gabelli. Your line is open.

[Mac Sykes:]

I actually have two questions, but I'll just say them upfront. We have heard some advisors like using the mono portfolio some do not [indiscernible] growing it to options of the platforms. Is there any way to parse out the penetration of the model approach where it was five years ago, now where do you see it going and then secondly, maybe you can just provide a little perspective given the recent market volatility, how will take effect sort of yearend higher seasonality for [indiscernible]?

[Kurt MacAlpine:]

It's Kurt here. I'll take the first question and then I'll turn it over for the second one. So on the model portfolio front. So we just began commercializing our model portfolios last year. So while we have been providing portfolio construction services to the marketplace for a while kind of having our models available from an execution perspective on top [indiscernible] really only got launched in the fourth quarter and through the first quarter of this year. The adoption has actually exceeded the expectations that we have set for ourselves internally. So it's a part - little bit I'd say from a - when you think about people that are accessing model portfolios you typically think about the advisors that's outsourcing the investment function focused on financial planning and client services and looking for our partner there. We figured we will do well there given the open architecture and the blending of the Alpha and Beta into one portfolio and we have done well and that's kind of met or slightly exceeded our expectations. I think the area that where we're really outperforming relative to our expectations [indiscernible] some of these tactical and thematic models. And those are really resonating with advisors that are playing this active role and portfolio construction. So instead of selecting an individual funders or strategy for particular asset class. They were actually opting to use one of our thematic or tactical models. And I'd say the growth there has been significantly above the expectations, we had originally suffer.

[Jon Steinberg:]

And just one point, it's incredibly frustrating how slow sort of the street has embraced the marriage of beta and smart beta and it's really only just now being integrated into broad books of business from advisor standpoint. So it's been a long education period you know we've been doing this now for 12 years and you're starting to see a go main stream for the first quarter. The other point I guess you were asking about sort of volatility and what to expect for lows going forward. So it's hard to predict flows going forward, but I think that the mid-term elections regardless of how they go, just having some clarity will stabilize the markets and allow the flows to accelerate in the second half, but it's hard to predict.

[Mac Sykes:]

Thank you.

[Operator:]

Thank you. And we do have a follow-up from Michael Cyprys from Morgan Stanley. Your line is open.

[Michael Cyprys:]

Just question on the profitability of the international segment that came up in the quarter about $5 million operating income which - just curios your thoughts on that going forward. It's like $20 million annualized is that the right way to be thinking about that as we go into 2019?

[Amit Muni:]

Bill, obviously it's all been driven by AUM and at these even levels you see the cost structure I think that's okay way of looking at it, just whenever you're going to assume on flows.

[Michael Cyprys:]

Okay, thanks.

[Operator:]

Thank you. And I'm showing no further questions from our phone line. So I'd now like to turn the conference back over to Jon Steinberg for any closing remarks.

[Jon Steinberg:]

I just want to thank you all for your time and attention this morning and we'll speak to you next quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.