WisdomTree, Inc.
Q1 2016 Earnings Call Transcript

Published: 29 Apr 2016

[Operator:]

Good day, ladies and gentlemen. Welcome to the WisdomTree First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I’d now like to turn the call over to WisdomTree. You may begin.

[Stuart Bell:]

Thank you. Good morning. Before we begin, I would like to reference our legal disclaimer available in today’s presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not, or the times at or by which, these results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including but not limited to, the risks set forth in this presentation and in the Risk Factors section of the company’s Annual Report on Form 10-K for the year ended December 31, 2015. Now, it’s my pleasure to turn the call over to WisdomTree’s CFO, Amit Muni.

[Amit Muni:]

Thank you, Stuart, and good morning everyone. This was a challenging quarter due to market volatility and a negative sentiment towards our largest ETF exposures. Yet despite the challenges, we generated solid financial results, reflecting the flexibility and efficiency of our business model. As a reflection of our strong financial position, we returned $46 million back to our shareholders through dividends and buybacks and in addition have increased our stock buyback authorization by $60 million to have a $100 million available to repurchase shares in the market. And lastly, we are continuing to make the right investments in our business to help further diversify and stabilize our asset base as well as best position to us for the future growth as we continue to stay ahead of the competition and remain amongst the leaders in the ETF industry. Now, let’s get into the results for the quarter beginning by first reviewing the U.S. ETF industry statistics. U.S. ETF industry flows were muted at $31.9 billion in the quarter. On the right, you can see the fixed income and gold led the flows. Investors tend to favor these two categories during times of volatility. Also of note, emerging market equities which have been out of favor historically, experienced inflows this quarter. Both hedged and unhedged international equities experienced industry outflows. Turning to the next Slide, we can review our results, how our results aligned with these industry trends. As you already know, our U.S. AUM declined 14% to $44.3 billion in the quarter, primarily due to $5.4 billion of net outflows and $2 billion from negative market movement. We also closed on our acquisition of GreenHaven this quarter, which increased AUM by $200 million. You can see in the middle chart, the majority of our outflows came from HEDJ and DXJ. Away from these two funds, we generated inflows in our other hedged and unhedged international equity ETFs. There are several themes currently resonating with clients. The first is an interest in small cap strategies both domestically and abroad. Second because of the volatility in the markets, clients are focused on dividends and quality dividend growth strategies as well as volatility reduction products such as our recently launched foot right strategy. Clients are also interested in product to take advantage of interest rates potentially staying lower to longer periods such as our [indiscernible] fixed income ETF. And lastly, we were having increasing conversations with clients on emerging markets. We have a strong product set and we are well positioned to take advantage and build on these themes as well as continuing to educate clients on the benefits of currency hedging. On the next two slides, we take a deeper dive into a two largest exposures. You can see in the first chart, the equity markets in Europe and Japan have been a negative territory with Europe down 7% and Japan down 13% in local currency terms and both markets are also down in U.S. dollar terms. That negative sentiment has led to outflows in Europe and Japan focused ETFs for both us and our competitors’ products as you can see on the right. In fact there were such a negative sentiment both hedged and unhedged ETFs have seen outflows. Given that we are the largest in the hedge category for these two markets, we have experienced largest inflows and outflows when market sentiment shift. However, we remain the leader in the hedge category. Turning to the next slide, you can see in the first chart both HEDJ and DXJ are more than 4 times larger by AUM and the next largest competitor and as the chart on the right reflects any change in our market share has been insignificant. Europe and Japan are important categories for investors and we believe we will see the benefits when these markets come back in favor. Despite the outflows, we remain focused on executing on our strategic growth initiatives we discussed earlier this year. Turning to next Slide 7. The objectives of these initiatives are to first increase our target market share of inflows to 5% to 7%, second to take step to diversify our asset base and stabilize our flows and lastly to best position us for the long-term growth of the ETF industry. On the product front, we continue to focus on staying ahead of the competition through innovation and diversifying our product set. So far this year, we have lost 11 ETFs in new categories including liquid alts, a suite of smart beta fixed income ETFs and dynamic currency hedged ETFs. We are strengthening our position with our core client segments by increasing our marketing and digital initiatives to bring more awareness of our products in the most efficient way possible as well as leveraging data to better target client segments. We are also expanding our distribution capabilities and footprints. To capitalize on the ETF industry growth in Canada due to recent regulatory changes, we will plan to launch Canadian listed ETFs in the coming months. In the U.S., one of our primary focuses is the institutional space and we recently hire the new head to lead this channel. We also added to our sales team covering new channels like private wealth and the independent broker dealers to capitalize on their continued ETF adoption. So far this year, we have added eight people in sales and sales support functions. To date we spent approximately $2 million of our target $12 million to $16 million on these important strategic growth investments, all these initiatives including our expansion into Canada is included in our $12 million to $16 million targeted spend. The next slide reflects our industry rankings. Our largest exposures were impacted by the hardest by market sentiment, which had a negative effect on our overall industry rankings versus the other ETF sponsors and publicly traded asset managers. While we are not pleased with this ranking, we think it represents more near-term market conditions, not our long-term growth prospects like our mutual fund competitors. On the next slide, we show our fund performance according to their Morningstar peer groups. These comparisons take into account fees and transaction cost and reflects how our equity, fixed income and alternative ETFs performed against active and passive mutual funds and other ETFs. Since inception, 67% of our ETFs outperformed their peer group, where 94% of the approximately $43 billion invested in our ETFs were in funds that beat our peers, a statistic we are proud of. On the next slide, we can review our results in Europe. Our European AUM continues to grow and reached $885 million at the end of the quarter. Our hedged equity products as well as inverse and leveraged oil products ebbed the flows this quarter. We are continuing to launch products and add to our team as we build up the business in a controlled manner. Now let’s get into the financials beginning on Slide 9. We generated solid financial results this quarter despite the challenging environment. Total revenues were essentially flat from last year at $61 million as higher revenues from our European business offsets declines in the U.S. Our net income was also flat at $12 million due to expense management and lower incentive compensation accruals given our results. Sequentially, revenues and net income were down due to lower average AUM. Turning to the next Slide, as you can see from both charts, the currency hedge categories continues to makeup more than 50% of our AUM in our revenues. However, it has been declining over sequential quarters. One of the goals of our strategic growth initiatives is to continue to innovate and differentiated products to help to stabilize and diversify our asset base. Our average revenue capture remains at 52 basis points in the quarter. Next we can review our key margin metrics. Gross margin from our U.S. listed ETF business was 82.9% in the first quarter. On our last call, we said we expect the gross margins to be between 81% and 83% in the near-term. In the chart on the right, you can see the pre-tax margins on our U.S. business increased from the prior year to 40.7%. So despite having lower average AUM than the year ago quarter and the spending increases margins improved reflecting the flexibility of our business model. Next, we will review expenses on slide 13. Third quarter total expenses were $40.8 million. Compensation costs decreased by a net $625,000 as higher seasonally payroll taxes, headcount related expenses and stock based compensation was offset by lower incentive compensation accruals given our operating results. Fund and third party sharing cost declined as well due to lower average AUM. Professional fees decreased due to lower recruiting fees. Marketing expenses increased $407,000 due to higher advertising expenses to the promote our ETF’s. Our Europe buyout costs declined $747,000 as a reminder last quarter, we updated the approach for recognizing the fair value of our buyout obligation. We also encouraged $418,000 in fees related to closing on our acquisition of GreenHaven in total expenses declined by 4%. On the right, you can see compensation as a percent of revenue for our U.S. business was 23% for the quarter. The lower annual target of 24% to 28% reflecting our current level of operating performance, this percentage would have been lower, if not for the high – higher seasonally adjusted payroll taxes due to bonus payments from last year. Let's review our balance sheet on the next slide. We ended the quarter with total assets of $238 million in cash and investments of $182 million. On the right, you can see we generated $29.7 million of cash from our operating activities. And we used $23 million to pay bonuses for 2015 performance. We brought back $35.6 million of common stock, during the quarter and distributed $10.9 million in dividends to return nearly $46 million back to our shareholders. We also used $11.8 million for our acquisition of GreenHaven to end with cash and investments of $182 million. Also today, we announced that we have increased our share buyback authorization by $60 million, bringing the total available today to $100 million. On the next slide, we can go through our taxes, we are continuing to utilize our remaining net operating losses. This quarter we generated additional tax losses, due to timing of cash bonus payments for 2015. At the end of the quarter, we had nearly $29 million of pre-tax income that could be sheltered from paying cash taxes. It is highly likely we will use out the remaining NOL by the third quarter. However, we continue to generate tax losses through employees exercising options, investing in restricted stock. The detailed information for that is on the right hand side of the slide. Before turning the call over to Jon let me give you an update on where we are so far, this quarter. As of yesterday, our AUM is essentially flat, as outflows are bolstered by positive market movement and on the right you can see our flows by category. So in summary, despite the challenging quarter, we generated solid financial results, reflecting the flexibility of our business model and we will continue to balance expense management with investments for growth. Thank you and I will turn the call over Jonathan.

[Jonathan Steinberg:]

Thank you, good morning everyone. As Amit discussed our overweights in Japan and more broadly the U.S. dollar led to outflows in our largest ETF’s. It was simply a very difficult market environment for WisdomTree. Looking ahead, we were pleased to see the final fiduciary rule from the Department of Labor, earlier this month. This rule is widely credited, as being constructed for fee based advisory models, ETF’s and passive investing. People can debate the precise amount of affected assets under management and revenue, but no one can debate the ultimate trends. WisdomTree’s ETF focused business model, stands to benefit, perhaps the most among publicly traded asset managers. I say that because WisdomTree has the highest percentage of AUM in revenue, tied directly to ETF’s and transparent product. These are the characteristics that are clearly benefiting from recent flow trend and new regulation. The fiduciary rule will reverberate well beyond the US retirement market and it reinforces the transformation of the asset management industry that is all ready, well underway. And it is only the latest in an ongoing trend of transparency around fees and advice. For example Canada’s CRM2 is amongst the most progressive laws of this nature which is one of the main reasons why we are so excited to enter Canada at such an opportune time. Recent headwinds for WisdomTree are not pleasant, but they do not change the long-term reality of ETF dominance. As a market leader WisdomTree is well positioned to participate in future industry growth. Our solid financial results and strong operating margins combined with our strong balance sheet underscores the inherent strength of our business, which allows us to stay the course on important strategic investments, which are geared towards diversifying our business and growing our long-term market share. We feel confident that we have the right balance between margin investment and capital management. Thank you for that. Now let’s open up the call to questions. [Operator Instructions] Our first question comes from Craig Siegenthaler with Credit Suisse.

[Craig Siegenthaler:]

Thanks, good morning.

[Jonathan Steinberg:]

Good morning, Craig.

[Craig Siegenthaler:]

I just wanted to circle back on the buyback authorization, it was nice to see that but I’m just looking were the dividend is today versus your earnings run rate and I’m wondering how will that impact the buyback?

[Amit Muni:]

When we think about how we return capital back to our shareholders, right we do it through dividends and we do it through buyback and we will do it based on what’s going on that time, where we see the industry where we see our growth prospects, where we see we need to put in capital to the business. So which ever way we’ll do it whether it’s through specials or if there is dividend, through buyback it just will depend at the time.

[Jonathan Steinberg:]

Craig this is Jonathan, last year we delivered something like $100 million over a $100 million in capital and more of that was in dividends than buybacks and as the stock weakened this first quarter you saw a shift a little bit more on buybacks versus dividends and so I think to Amit’s point we just have to flexible to where we are at any given moment.

[Craig Siegenthaler:]

Got it. And then just as my follow-up I want to understand how you structure your European business. And I’m wondering if a [indiscernible] would impact how you structure the use of business.

[Amit Muni:]

I’m sorry Craig, I didn’t give the exit of potential from the EU.

[Jonathan Steinberg:]

Our lawyers and our regulatory folks are monitoring that to see we do have Dublin-based usage and our regulatory folks are monitoring what would happen in case there would be an exit. So it’s something that’s ongoing and we’ll make adjustments as the rest of the industry since Luxembourg and Dublin are the two major European domicile areas for use of funds Europe.

[Craig Siegenthaler:]

Thank you.

[Operator:]

Our next question comes from Michael Cyprys from Morgan Stanley.

[Michael Cyprys:]

Hey, good morning. Just wanted to ask about some of the low volatility products, its been a very strong category this year, don’t quite certainly see a per se coming through in your flows but if you could just talk about your positioning in that category how you’re thinking about your positioning thoughts around product developments with respect to low volatility products?

[Luciano Siracusano:]

Todd, this is Luciano. So we as you know created 10 years ago dividend weighted funds around the world. So in some influences they do exhibit some of the characteristics of low volatility or certainly lower beta relative to the market. We have very strong first quarter in terms of the performance of those funds in part because of how well they did when the market was declining. So certainly we have some existing products I think that compliment to that model. Obviously we’re always looking for new ideas, the research we do is ongoing the test at this point would be to create better Lowville in what is serving in the market. I would note that with the market has noted that this some of these Lowville strategies are starting to get little bit stretched in valuations. And so some of the excitement about them may have been backwards looking but now you look at current fee ratios some of the expected alpha going forward might be called into question. So we will continue to innovate, we launched the put writing strategy recently which we think can be used in the portfolio to help lower volatility. And we also launched a short portfolio that can also be applied that way. So there is a lot of tools we think investors can use to lower overall Lowville while we continue to innovate in this space.

[Michael Cyprys:]

Great. And could you also talk a little bit about the fixed income products that you’ve launched, I know you mentioned Agee and I think you launched some other ones just the other week. Who the target customer is? The rationale for using the product maybe you could just also talk to an update on distribution around those products.

[Jonathan Steinberg:]

So Agee we launched almost a year ago when we've been able to attract upwards close to $100 million in it. That’s starting to get traction and warehouses are starting to get more approvals there. That just basically gives investors a way they enhance the yield on the existing Ag and we think it has a lot of application in an environment where the Fed maybe [indiscernible] longer than people expected. With respect to the recent product launch that was a smart beta fixed-income launch and that was really WisdomTree's floor way into fundamental fixed income ETFs. We think it's a very interesting strategy in U.S. credit space to screen for quality and towards income. That's really design for advisors and clients who are getting concerned where we are and the credit cycle where we are in the market cycle and they want at a higher qualitative screen applied to their credit it's exposure so we will be educating clients that will be a big push for us this year.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Our next question comes from Jason Weyeneth with Piper Jaffray.

[Jason Weyeneth:]

Thanks I guess first one for Amit. When we are thinking about sort of the comp ratio and the guidance range that you’ve given so what type of revenue growth or net flows or metrics should we kind of be thinking about that would land you in that range rather than maybe a little bit below like we saw this quarter.

[Amit Muni:]

So we have a pay-for-performance model right and so when the performance is not there, the AUM is not there is not there in the revenue is not there compensation will be reflected and you can see that in the first quarter and if you go back historically you can see where we had outflows and inflows how that comp ratio will change. So we are driving towards an annual target based on where our operating results are today. We would expect to see something towards the lower end of that. And if that tend sort of continues for the rest for the year. There may be a little bit of offsets based upon headcount growth that we think that we're going to do during the year that we think are very important for our long-term growth positioning. But as of right now, we're sort of still thinking about the low end of the range.

[Jason Weyeneth:]

Thanks, and then just following up on the themes that you highlighted on Slide 4. If you had to sort of rank those or maybe just highlight one or two where you think your product suite is currently best positioned which would those be?

[Luciano Siracusano:]

Hi, this is Luciano again. So obviously, when we're thinking about themes in the small cap space wasn’t really is one of the first of launch international small caps around the world, you saw influence there in to European small caps in the first quarter and that's an unhedged exposure so it’s a big complement to the hedged exposures, we have obviously there is a great deal of interest in dividends now in the slow yield environment, we're also coming up on ten year anniversary on our main dividend fund. So we have when you look through the assets under management and look at where our assets are in terms of $1 billion plus funds several of them are dividend weighted funds that were launched about ten years ago. And they're coming up on a ten year anniversary, once that screen hit people will be able to compare that the strategies that have been around the decade and I think at that point. You start to get it a potential catalyst for these longer-term funds. Obviously quality driven growth is a big theme for WisdomTree, we’ve seen some inflows there internationally as well as the domestically and we spoken about what we think we can add in terms of volatility reduction I think the key thing to keep in mind is that we believe we have competitive products. In every single category that's out there. So it’s really a function of the market environment and where we focused and then where we can execute as the wind start to blowback in our favor.

[Jason Weyeneth:]

Thank you.

[Operator:]

Our next question comes from Bill Katz of Citi Group.

[Bill Katz:]

Thanks very much for taking my questions. So it's nice to see that the repurchase authorization. So guys can you frame that out relative to how you think the share count proceeds, as you go through this year, we would have expect a little bit more but a deeper decline, just given the big buyback in the quarter. Is this good run rate or do you expect to have a net reduction of shares. How do you thinking about that?

[Luciano Siracusano:]

Sure. So we took out of our share count reviews by about little over 2 million of shares this quarter. To the extent we do increase buybacks to the remainder of the year you should see that share count continue to decline. We don't disclose the amount of share repurchases that we are going to do during the year. But philosophically we are trying to keep share counts somewhat flat, remember when we did – our buyback covers two things, one is to eliminate share count creep when we issued stock to employees with that probably remain flat. And it will be opportunistic when we think the time is right.

[Bill Katz:]

Okay. And then just going back to John’s discussion about striking that balance between volume versus margins. How do you think about the long-term margin the company these days given your sort of aspirational goal of that 7% or so market share within our growth. Is there any room just to give up profitability for growth or can you still sort of sustain that historical margin target of that 50% plus?

[Jonathan Steinberg:]

Hi, Bill, it’s Jon. So when we look at margins, investments and return of capital, you got to look at all three of them. So when we start from the margin perspective, last year we top ticked about $60 billion in AUM and we achieved the 50% margin. So from a margin standpoint, I feel like we really have accomplished tremendous things. Now our assets are down so we are averaging about $44 billion right now and we showed something more like 36% consolidated margin this quarter, a very strong number relative to the other public peers at such a small AUM, now you know that while we are showing you the 36% margin. We are making pretty significant investments. We are in Europe, we are launching in Canada. We have Japan, we are hiring people in the U.S. and launching a lot of funds, we are making investments, we are doing that because the opportunity we see it so huge, so tremendous that we want to make sure that we maintain our leadership position. And then from the standpoint of capital return. Last year we returned more than $100 million, this year $46 million from pretty significant return. All in general, we are trying to be a tremendously efficient organization. The investments are geared towards real scaling in the future and it’s our full expectation that we can achieve the highest margins of any of the publicly traded asset managers, as we scale. But I feel no pressure to do that at $44 billion.

[Bill Katz:]

Okay. And then just one last one, thanks for taking the three this morning. I’m sort of intrigued with your entree into Canada. Just sort of looking around the actual market size there, it seems to be somewhat small with somewhat entrenched players there. Can you talk a little bit about strategically how you plan to attack that market? Obviously appreciate the regulatory backdrop opportunity but just specifically how you sort of build more opportunity there.

[Luciano Siracusano:]

Sure, Bill. So I think when we think about foreign markets there is four things that we look at generally is – what's the rate of ETF adoption in those markets. Second are there regulatory changes that are happening there that we think will be conducive for ETF industry growth. Third, we look at how do our products strategies will they be accepted in that marketplace. And then lastly from a business standpoint do we think we can make money there and I think Canada, when we look there it sort of fits that sort of guidelines. The regulatory changes with CRM2 that's happening there to bring more transparency on fees, we think will be good for ETF industry growth there. And then, so when we look at our products set, with our smart beta products, our innovation or differentiated products set, we think that we can be very – we can be successful over there. Now look it's a – it's a competitive market, just like it here is in the U.S. you have the big, big players here that are there as well as some of the big local players. So you know it's not going to be explosive growth on day one but we think this is all incremental growth for us to help increase our targeted market share, remember about 14% of our assets, today come from non-U.S. investors. So this is not just about locally listed products in Canada. But it's also the ability for Canadian institutions to buy U.S. listed ETFs.

[Jonathan Steinberg:]

And Bill, let me just add a couple of things. So, we probably have close to $700 million in assets from the Canadian market now, so investors that have already bought our products. So that sort of proof-of-concept also because of their proximity to the U.S. they see our commercial. So we have brand awareness in Canada and because again because of the proximity a lot of the launch will be coming out of the U.S. the infrastructure is in the U.S. Canada was always one of the most logical first markets. Europe was our first market, and Europe is the second largest, so incredibly strategically important to the firm. But it's a much heavier lift, we had to do more because we had no supporting infrastructure nearby to support it. So Canada really makes a total perfect sense. It was either going to be first or second in our launch scheme, so anyway – and now it’s in the CRM2, it's just a perfect time.

[Bill Katz:]

Okay. Thank you very much. Operator Next question comes from Chris Shutler with William Blair.

[Chris Shutler:]

Hey, guys good morning.

[Jonathan Steinberg:]

Good morning, Chris.

[Chris Shutler:]

May just a follow-up on compensation expense if flows and AUM are flat for the rest of the year would you be at the low end of the U.S. comp ratio?

[Jonathan Steinberg:]

Yes, under that scenario. If we think we're going to be flattish than, yes, I would think low end of the range is kind of where we think about it.

[Chris Shutler:]

Okay. And then in Europe, AUM they are continues to increase nicely. Why did the fund management and admin line get down from a prior two quarters and what should we look at as the trend there?

[Jonathan Steinberg:]

Yes. So we incur some one-time cost when we launched some of our used funds out in Europe. So we launched a series of different share classes through our used funds. So that's what drove off some of these costs out there that you saw last couple quarters which didn't recur this quarter.

[Amit Muni:]

And Chris, thanks for the shout out on the success that the European team has shown. They really have grown quicker than many of their larger peers on really less resources. That’s been a very successful year-to-date start for them.

[Chris Shutler:]

Got you. And then maybe lastly could you give us the AUM by channel if you have it? And I'm curious in the institutional space, an area just made the hire there. The asset owners there I think it’s historically been pretty tied to benchmarks, which has lead the asset managers to be pretty tied to benchmarks, name bands and indices as well. So I'm curious in your conversations with intuitional inventors, you see much evidence where they are getting comfortable with I guess self indexed providers. Thanks.

[Jonathan Steinberg:]

Hi. It’s me again. WisdomTree for now a decade has been taking on the traditional indexes. And when we started, there wasn’t even a conversation of smart beta or factors of fundamental waiting. There's no question that the institutional investors have a historical legacy to the traditional benchmarks but there’s also no question that they are getting much more comfortable with a lot of the new innovation that has taken place in investing and including WisdomTree's offerings.

[Chris Shutler:]

Could you give us the percentages by channel if you have them?

[Amit Muni:]

Chris, it’s Amit. It really hasn't changed as much from what we have seen historically. So, we actually have third of our assets with the RIAA third within FX about 14% non-U.S. about 14% with intuition on the balance to retial.

[Chris Shutler:]

All right, great. Thank you.

[Operator:]

The next question comes from Alex Blostein with Goldman Sachs.

[Alex Blostein:]

Hey, guys, good morning. Was hoping you could spend a couple of minutes on pricing. It just looks like some of the newer strategies that you’ve launched, have a little bit of lower management fee than where we’ve kind of seen in the install book of business. And also competitive landscape on the Smart Beta fund is intensifying with a lot of more traditional players coming in obviously, but behind the curve, but more competitors. How do you expect to guess pricing to involve in some of your products?

[Jonathan Steinberg:]

You are right. We have launched recent funds at lower price points if they were with in a suite of product that we had launched years ago. So, but we knew that. That’s one of the reasons why we moved so quickly in general. There is no question that future product launches will probably be at lower prices than things that were done yesterday or ten years ago. So we are – we knew that and it is a part of the strategy and it is one of the reasons why we really tried to push very aggressively. In terms of still – I mean from that standpoint, since January 1 of 2015, we’ve launched 29 new funds. We really put down some important, very important markers, Liquid Alts, which I think will play a very large roll in WisdonTree’s success over the next 10 years. The fixed income suite that we were asked about earlier on the call, that has been something that we have been working towards for three years or four years. When we started with emerging markets, where we could be really be first in some of the executions. But you’ve seen that how we have attacked, the new U.S. fixed income market, first with zero negative duration funds. And Luciano spoke about the enhanced Ag. And then what we did today, we are actually on Wednesday with the smart data fixed income. It really is a very exciting development in the fixed income arena. There hasn’t been – there you have traditional data indexes. You have a few, successful active managers. There has been very little innovation on the indexing side and we are now a leader in that. It is very, very early days, but it’s something that the team here in New York, they are WisdomTree team – fixed income team that has been working on for three years or four years. So we are really trying to put those markers down as quickly as we can, knowing that it makes all the sense in the world that we are going to see more competition over time.

[Alex Blostein:]

Got you. And another kind of strategic distribution question for you guys. The importance of the automatic advise, the Robo advisor says obviously pickup over the last 12 months. And with the DOL rule, it feels like that part of the distribution mosaic will become more critical. Can you talk to us, I guess a little bit about how do you try to distribute to those channels and whether or not you are thinking anything on the more proprietary kind of innovative front starting your own [indiscernible] space line up for your ETFs line up.

[Amit Muni:]

So we are watching very closely the evolution of Robo, we have been looking at it for quite some time. They have tended to be the most vanilla execution in the fund selection to-date, but they’ll need to differentiate, just as the industry in general has to differentiate. We think that there are lots of opportunities in the future for us. I am not sure how big Robo will be – I mean there has certainly been some incredible short-term projection for asset growth. I think that’s – I think a bit optimistic but there is no question that technology can be very constructive in delivering advice. We also have models right now on our website that John and his team had been creating for couple of years. So we are providing a lot of advice to our clients. But stepping back, Robo just tend to be constructive to ETF. So from that standpoint we’re very happy with the development.

[Alex Blostein:]

Thank you for taking the questions.

[Operator:]

Our next question comes from Adam Beatty with Bank of America.

[Adam Beatty:]

Thank you and good morning. Couple of follow-ups. First on comp and incentives, appreciate all the detail there. Just trying to disaggregate, you mentioned AUM revenue and flows in terms of driving incentive comp, which of those in a scenario where let’s say you got some market benefit in key products and they bounce back pretty well, but flows were still somewhat challenged. What should we expect in terms of the movement of the incentive comp? Thanks.

[Amit Muni:]

Sure. Look, there’s four things that we look at when we think about incentive comp. First and foremost is net inflow level, that’s a very important factor that we look at. Second is our market share of inflows. Third is our pre-tax margins that we have targeted versus the beginning of the year. And lastly, how our stock is performed against the publically traded asset managers. So, of that I would say the biggest driver of all of those will be net inflow. So that sort of what you should look at.

[Adam Beatty:]

Great, thanks, Amit. And then on distribution, you mentioned potential incremental opportunity from DOL. And I am thinking in terms of allocation models with brokers and large retirement plans what have you. Right now, which of your products are gaining kind of the most traction there? What areas seem to be of interest in the intermediated retial channel? Thanks.

[Luciano Siracusano:]

Hi, this is Luciano. We continue to see interest this theme of solving for income. And so we think one of the areas we’re uniquely positioned is giving people a way to give broad equity exposure around the world, but in a way that’s squeeze as much dividend income as possible from the market, while still continuing to correlate with the market and in some instances generate returns that can exceed the market. So we’re certainly going to continue to maintain and try to improve the dividend weighted portfolios we have in our website and to the extent there is interest in those models across brokers and distribution potential partnerships and partners. We’re interested in speaking to people about different ways to make them more available to our clients and our advisers.

[Adam Beatty:]

Interesting. Thanks, Luciano. That’s all I have today.

[Operator:]

The next question comes from [indiscernible] with KBW.

[Unidentified Analyst:]

Hi, good morning and thanks for taking my questions. Just a quick question on the European business, you’d previously given guidance of $8 million or $11 million of free cash losses in Europe. Is that still about in line?

[Amit Muni:]

Yes, that’s the target and we’re currently aware way the business is running. We are inline with that.

[Unidentified Analyst:]

Okay, great. And you talked a lot about getting the market quickly in different geographies and spending just kind of run ahead. And so when you think about the European business there and thinking about the new product launches, the continued investment spend, and then growth of the business, internally how do you think about a breakeven point in that business? Either do you target certain asset levels internally or when you think about it, is it a couple of year kind of staying, is it longer than that, what are your goal?

[Amit Muni:]

Sure, a lot of the profitability or breaking even will be depended upon where we see the flows coming in and which product set. Our inverse and leverage boost upon our higher price and higher margin versus the use of funds which are price competitively in the. That have a on break-even. And just put that in context. When we did the investment and boost we put a $20 million investment we think that's how much cash it needs to get to break-even by somewhere at the end of 2017 and we are still roughly going on that track. It's a controlled build out that we are doing and everything is going as we had planned.

[Unidentified Analyst:]

Thanks for that color. And just a quick [indiscernible] $2 million that towards the [indiscernible]. Has most of those fallen into marketing [indiscernible] there is there anything else that you can pull out?

[Stuart Bell:]

I’m sorry Ann [ph] you were breaking up there. Can you repeat the question?

[Unidentified Analyst:]

Sure on the $2 million that you spent on the strategic initiative where is that all in. Is that mostly marketing line item.

[Stuart Bell:]

It's really been across-the-board. We have hired about ten people so far this year predominantly in sales and sales support. We have launched 11 funds. And you can see from our income statement we have picked up the marketing and sales related spending. So really it’s been across all those three categories.

[Unidentified Analyst:]

Great thanks for taking my questions.

[Operator:]

Our next questions comes from Keith Housum with Northcoast Research.

[Keith Housum:]

I was hoping you could provide more color in the investments in Canada and Japan. I appreciate the comments in Canada U.S. infrastructure. As you thank as you guys build on those practices over the next several years do you think it will take a trajectory close to how you are doing Europe or I guess how do you see those expenditures coming through for the next years? And corollary to that how do you think those revenue growth in terms of where it can be two or three years from now/

[Amit Muni:]

On the expense side what we did in Europe we will day standalone operations there. What we are doing in Canada is not that. Because of its proximity the English language spoken there we will be able to leverage a lot of what we're doing here in the U.S. up into Canada. It won't have the same expense base that you see there. In Japan what we have is basically we built out a sales office and our sales staff there is selling our U.S. listed ETFs and used [ph] funds to Japanese institutions there. And so again it's not as big of a buildout as we did in Europe. So expense wise they’re going to be a lot less but I would say from a revenue growth potential it’s going be dependent on the market size and how our products in the ETF are growing in those markets.

[Keith Housum:]

Got you. So right now you guys breakout Europe as a separate income statement. Is Japan [indiscernible] going to continue to be broken out included in the U.S. numbers or are you guys going to do international income statement some point in the future.

[Amit Muni:]

Yes I think we’re going to probably once the Canada numbers get to these larger they are very small right now but once they start to get to be larger I think we will probably just have a U.S. segment which is part of Japan is in our U.S. segment and then we’ll have probably have a non-U.S. to look at, as well.

[Keith Housum:]

Great thank you.

[Operator:]

Our next question comes from Bill Katz from Citigroup.

[Bill Katz:]

Hi just a couple of follow-ups. And thanks again. So you mentioned you are into your $2 million into your $10 million to $12 million range for this year, I mean I’ve seen a lot of things going on right now. What kind of flexibility do you have if the revenue backdrop was about to get weaker from here.

[Stuart Bell:]

Sure so these are all discretionary spending that we have. So can we rent them back if we had to, yes. But let me just reiterate which I said at the beginning from your other question to help put our spending into context, right. The mutual fund industry has been in decline. When we look at our competitors in the mutual fund space they are doing restructurings, they’re doing cost reductions because their industry is in decline. Our industry, the ETF industry is actually growing. And so when we think about the investments that we’re making they are very important for us, they’re targeting three things, continue to grow our market share 5% to 7%, continue to diversify and stabilize our asset base and position our self for the long term growth of the industry. So we think it’s very important for us to continue to make those investments. And again as [indiscernible]said put our margins in perspective. We’re the top three so far of the companies that have reported so far. We feel very confident in our ability to continue to make these investments. But we will always manage that with cost discipline.

[Bill Katz:]

Okay and one just one last follow-up from me. Just sort of looking through my numbers versus your dividend you touched on a little earlier. But when you initially said your dividend, I think your earnings would have been at a higher level. How do you think about strategically the right target pay out rate of earnings just so you try to think about the dividend a bit more closely.

[Stuart Bell:]

So the way we think about we don't necessarily think as far as payout rate, but when we first put out the dividend we looked more as sort at the dollar value of what we were going to put into a dividend. We felt very comfortable then. And we feel very comfortable now with the level of our dividends. And that’s why we feel so confident we are able to even increase the stock buyback authorization we have no issues in the level of our dividend payments.

[Bill Katz:]

Okay, all right, thanks again.

[Stuart Bell:]

Thanks.

[Operator:]

Our next question comes from Michael Cyprys of Morgan Stanley.

[Michael Cyprys:]

Hi, good morning thanks for taking the follow-up here. Just scrolling up here you mentioned that you are seeing interest in the team of solving for income. So just curious what the opportunity step for creating a multi-asset solution that you sold both equity and fixed income within the same ETF. And then could you also speak to some of the challenges of creating such a product what that might be?

[Luciano Siracusano:]

Hi, this is Luciano again. So I would just say that there is a category as you mentioned so called balanced fund that use both equity and fixed income, obviously there is a very large amount of assets in the mutual fund industry in those types of funds. So that’s a natural target to look at. We don’t comment on any specific funds that you may watch in the future or strategies. But I would just say that WisdomTree has shown an ability to execute in terms of building products that are both innovative and in sometimes funding is very complex. So I would just say I think we have a track record of being able to innovate and if we think clients are interested in categories that really have been equities yet and structure we’ll continue to take a look at that.

[Michael Cyprys:]

Great and just about – and just another follow-up you mentioned digital investments I assume that’s probably referring something maybe on the robo front just in terms of this conversations you are having we are thinking about wearable partnership or distribution. What products you think would make the most sense as you think about broadening distribution partnering with robo's with it the as they try and differentiate on their end, what are some of your thoughts there?

[Luciano Siracusano:]

Well, again this is Luciano speaking so John was right a lot of the first iteration were plain vanilla beta exposures. But one of the big themes over the last few years has been the importance of managing volatility internationally by hedging our currency rate. So I would say that the currency hedged category is still a big opportunity out there and obviously WisdomTree is a leader in that space. So I think as the robo advisors and some of these platforms expand beyond just un-hedged international equity. The WisdomTree products are natural consideration given the scale and the size and the volumes and the assets and the track record. So I would hope that these people are starting to look at hedging out at international currency as that’s obviously and something that’s resonating the clients.

[Michael Cyprys:]

Great, thank you.

[Operator:]

I'm not showing any further question at this time I’d like to turn the call back over Jonathan Steinberg.

[Jonathan Steinberg:]

So I just want to thank all of you for your time and attention. And we'll speak to you in another ninety days. Thanks everybody have a good day.

[Operator:]

Ladies and gentlemen thus conclude today’s presentation. You may now disconnect and have a wonderful day.