WisdomTree, Inc.
Q4 2016 Earnings Call Transcript

Published: 3 Feb 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to the WisdomTree Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to introduce your first speaker for today, Jason Weyeneth, WisdomTree Director of Investor Relations. You have the floor, sir.

[Jason Weyeneth:]

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 at times at or by which 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 and quarterly report on Form 10-Q for the quarter ended June 30, 2016. 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 most of the information for the quarter is already known, I am going to spend a few minutes discussing our key accomplishments in 2016 and then turn to our thoughts for 2017 before handing the call over to Jono for some closing remarks and then taking questions. Many of the slides we typically present each quarter are included in the appendix in today’s presentation. So, let’s begin. 2016 can be summarized as one with obvious challenges, but it’s important not to let the macro market sentiment driven challenges overshadow our significant developments in 2016. We had a record year for our U.S. equity product suite, taking in $1.9 billion of net inflows. We further diversified our product set with the launch of 12 new ETFs, including the industry’s first smart data corporate bond suite, the first dynamic currency hedged products and our innovative S&P 500 put write strategy. Out of the 245 U.S. listed ETFs launched in 2016, our dynamic currency-hedged international equity fund, DDWM, was the industry’s most successful new fund launch as measured by assets under management. Remember, that usually the best flows don’t come in the year the fund is launched. As such, we are expecting the 52 ETFs we have launched since 2013 will be important contributors to our future growth. We expanded our distribution team and went deeper and broader into client channels. On the institutional side, we added depth and experience in consultant relations and retirement solutions. We are leveraging the expertise in these key areas to launch collective investment trust to the retirement market. We also expanded into the private wealth and independent broker-dealer channels as ETFs continued to grow in these areas. We made an investment in adviser engine to deepen relationships with advisors and participate in the digitization of the wealth management industry. And outside the U.S., we also made several important steps. We purchased the remaining interest in our European business to position it for growth and integration with our U.S. operations. And we expanded into Canada with the launch of locally listed products to capitalize on the changing regulatory landscape. These accomplishments are important steps that lay the foundation for long-term growth. Now, let’s touch on our operating results on Slide 3. Our flows inflected positively post the U.S. elections, led by the strength of our U.S. equity product suite, which took in $609 million. The rising dollar post-election has also been positive in particular for DXJ. You can see in the chart on the right, outflows in our two largest ETFs have been decelerating and DXJ flows turned positive this quarter. Now, turning to the financials on Slide 4. Net income was $2.5 million for the quarter or $0.02 per share. During the quarter, we had three items I would like to discuss. First, we incurred a charge of $1.7 million as we wrote off the carrying value of goodwill related to our acquisition of Boost. The business will likely not be profitable by the end of 2017 as we had originally projected and therefore, we concluded the carrying value was impaired. Second, related to compensation. Given the outflows we experienced, the company’s incentive compensation pool was down significantly from 2015 levels. Our incentive compensation is awarded in cash and stock, which vests overtime. Because of the significant decline in the incentive pool, we paid a higher portion of bonuses in cash, which increased compensation as a percentage of revenue from the lower end of our guidance. The third item, effective this quarter, we will begin reporting our results as two business segments. The first is our U.S. business segment, which includes the operating results from our U.S. listed ETF business, including our office in Japan. Our second segment will be our international business, which includes our operations in Europe and Canada. Now, let’s turn to the balance sheet on Slide 5. We ended the quarter with total assets of approximately $250 million. During the quarter, we began investing some of our excess cash in short-term fixed income securities. On the right, you can see we generated nearly $50 million of cash from our operations and returned $83 million back to our shareholders to dividends and buybacks. We ended the year with $173 million of cash and investments. Now I will give you an update on where we are so far this quarter. Turning to Slide 6, as of yesterday, our AUM was up slightly to $40.6 billion and on the right, you can see positive flows into DXJ continues along with flows into our U.S. equity suite. Also to note, our European listed products have also gained $158 million to-date, so things are off to a good start for the year. With 2016 behind us, I would like to discuss our outlook for 2017, beginning with our international business segment on Slide 7. As I mentioned earlier, our European business will likely not be profitable by the end of ‘17 and we have taken steps to improve the trajectory of the business and better integrate it with our U.S. operations which started with a change in the management team last year. So far this year, we have taken in more flows into our use of products than we did in all of last year. Our Canadian operation was launched last year and has been structured to significantly leverage our U.S. operations and therefore runs much leaner. Both of these investments are long-term opportunities and we continue to remain attracted to these important markets due to the long-term growth potential of the ETF industry in those regions. In addition, the ability to package our strategies and uses is important as it’s the desired structure by investors in many parts of the world. These investors are in the early stages and therefore we are projecting our international segment will incur losses of $9 million to $13 million in 2017. We are targeting breakeven for our European business to be between $4 billion to $5 billion of AUM, assuming the current mix of products today and $1 billion to $2 billion of AUM for Canada to get to breakeven. We are driving our international segments to get to profitability in the next 2 to 3 years. As a reminder, you can check the progress of these region’s AUM from the IR section of our website. Now turning to the U.S., I would like to first begin with compensation. I know our compensation has been difficult to model given the volatility in our flows. We are targeting compensation to be between 28% to 31% of revenues in 2017. The chart on the bottom of the Slide 8 should help you understand how to get there. We reported a compensation percent of revenue ratio of 26% in 2016. After adjusting for the shift to cash from stock this year, which I discussed earlier, normalized compensation would have been 24% of revenues, which was the bottom end of our 2016 guidance. After taking into effect the full year cost of employees we hired in 2016 and anticipating growth in revenues, we are targeting compensation to be between 28% to 31% of revenues for the full year. I would now like to touch on taxes on Slide 9. As you know, our overall tax rate is higher than our U.S. tax rate due to the non-deductibility of losses we are currently generating in our international business segment. However, the tax benefit on the tax losses, are accumulating and can be recognized when the business is profitable. The tax rate for our U.S. business is approximately 40%. Beginning in 2017, U.S. GAAP accounting rules around tax recognition for the stock based compensation has changed. The net effect of this rule change is that tax windfalls and shortfalls related to equity awards will now flow through our tax expense. This will cause more volatility in our tax expense line. The chart on this slide explains how this could potentially affect our tax expense in the first quarter. As the chart below reflects, we will be incurring a tax shortfall charge of approximately $1 million in the first quarter, thereby increasing our U.S. effective tax rate higher than the 40%. It’s important to note that tax windfalls represent a real reduction in cash taxes while tax shortfalls are non-cash charges. Please be aware of this accounting rule change as you model our tax expense. Now let’s discuss how we see our expense base developing in 2017 for our U.S. business segment. Turning to Slide 10, for our U.S. listed business, we ended the year with $138 million in expenses. After accounting for one-time costs we incurred in 2016, the annualization of our year end AUM and compensation and some overhead increases, our operating expense base is expected to be approximately $135 million. We plan on making $3 million to $4 million of continued growth investments in 2017. So our baseline minimum expense base will be between $138 million to $139 million, which is essentially flat with last year. This is before taking into account any changes in expenses from higher or lower AUM and incentive compensation. As you can see, our growth investments are down significantly from prior years. We have already made substantial investments in our business over the last several years. Now we are setting up 2017 to capitalize on those investments, driving for higher growth and achieving operating leverage exiting 2017. Turning to Slide 11, we can go through our objectives and themes for next year. Our strategic objectives over the short-term remains to diversify and stabilize our asset base. In order to do this, we have been making strategic investments in four main areas; expanding our distribution capabilities, launching unique and differentiated products, integrating technology and data into our sales and client experience capabilities and expanding overseas. In 2017, we will leverage these investments to better target strategic buyers of ETFs, including mutual fund users beginning to transition their books to ETFs. There is a multi-trillion dollar pool of core assets looking for products that can generate alpha. We believe we have the investment methodologies, performance track records and value proposition to effectively compete for this money in motion. To attack the institutional retirement market, we will be launching our intellectual property through collective trusts. Jono will speak more about this initiative in his remarks. And lastly, we will deepen our relationship with our clients with the rollout of our practice management program and delivering digital wealth solution through AdvisorEngine. Some of the key investment themes we will be focused on that we believe are extremely timely for the market include; solving for income, navigating rising interest rates, managing volatility and capitalizing on our leadership positions in Japan and Europe. We have several forms in each category we believe are well positioned with these themes. Thank you. And now let me turn the call over to Jono.

[Jonathan Steinberg:]

Thank you, Amit. Good morning everyone. As you know, 2016 was an incredibly challenging year for WisdomTree. In many respects, it reminded me of 2008. The negative macro sentiment towards our largest exposures overshadowed our efforts. As the slide on Page 12 shows, Europe and Japan were by far the two most at a favor categories followed by Morningstar. I think it’s striking to see that out of the 96 categories followed, Japan and Europe ranked 95th and 96th from a flow perspective. You can see the industry outflows of those two markets created this incredible headwind that caused outflows for WisdomTree. Like 2008, WisdomTree stayed the course. We have very strong convictions on the future direction of the asset management industry, so we know how incredibly well positioned we are within the global asset management space, making staying the course easy – or at least easier. Post-U.S. elections, our flows flexed positively and we ended the quarter with positive inflows, which continue into 2017. Macro headwinds seemed to be shifting to tailwinds, setting the stage for a significantly better 2017. I believe it’s important not to let the macro market driven sentiment challenges during the year completely overshadow some of the accomplishments, as Amit has already mentioned, as well as a couple of developments I would like to discuss. In 2016, our U.S. equity franchise had its most successful year ever, generating inflows of $1.9 billion, bringing our AUM in the category to $12 billion. Our inflows for the year represented a 22% annualized organic growth rate, which is significantly faster than the ETF industry’s U.S. equity growth rate. U.S. equity ETFs are the most crowded and competitive segment of the global ETF market, making these flow numbers even more significant. Given our strong relative performance across the fund suite, we believe WisdomTree can continue to generate excellent organic growth in this product category. Semantics aside, this is what successful active investing looks like in the 21st century, beating the benchmarks with transparency and tax efficiency. This is an important example of WisdomTree’s superior positioning and highlights how incredibly capable and competitive we are within the ETF industry. Turning to Slide 13, in addition to our core global ETF efforts, we are building upon the ways we can package and sell our intellectual property and products. With regard to our AdvisorEngine investment, the deal partners to like-minded firms focused on the financial intermediary and makes WisdomTree’s asset allocation models more actionable via a new distribution channel. This is one more effort in driving more diversified flows into our products and importantly helps WisdomTree achieve greater market share with advisors. With the digitization of the asset and wealth management industry underway, we view AdvisorEngine as a crucial component to strengthening our relationship with advisors and to become more than just a product provider, but a true partner providing solutions to them and to their end clients. The initial feedback on the collaboration has been excellent, with AdvisorEngine receiving more than 100 new client prospects across RIAs, IBDs and banking channels. AdvisorEngine has already signed eight new clients – eight new client firms, bringing their total up to 35 firms with over $1.7 billion of AUM on their platform. This investment further enhances our position in the ETF industry. Secondly, as you know, we have significantly expanded our institutional team, adding depth and experience in consultant relations as well as in retirement solutions. In addition to our ETF sales efforts to the institutional market, we are leveraging the expertise of these key hires to target the retirement market through the sale of collective investment trusts with CITs. For several reasons, ETFs have been largely unsuccessful in penetrating the $12 trillion DB and DC retirement markets. CITs on the other hand, have seen meaningful acceptance with an estimated $4 trillion to $5 trillion of assets. The CIT structure should allow WisdomTree to leverage our existing intellectual property to penetrate the significant pool of assets that was previously out of reach to us due to product structure. CITs are the fastest growing structure serving this segment of the market. Our strategies and strong performance record should be well received by retirement plan sponsors. This effort should meaningfully expand our retirement assets in coming years, as well as provide numerous cross-selling opportunities. Wrapping up on Slide 14, 2016 saw a record $280 billion of inflows into ETFs, finishing the year with $60 plus billion of inflows in December, a record for a single month. Inflows of over $40 billion in January represent the ETF industry’s strongest start to any year. I would be shocked if the ETF industry doesn’t break $300 billion or even $350 billion of inflows this year. It is again this backdrop of incredible industry growth that we have laid the foundations for stronger 2017 and beyond. I am confident that the investments made over the last 12 years in people, products, technologies, and in geographies are the right ones for the quickly changing asset management industry. WisdomTree remains uniquely well-positioned. Now, let’s open up the call to questions.

[Operator:]

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

[Craig Siegenthaler:]

Thanks, guys. First one here on fees, while it makes sense that your newer product launches are coming in at lower fees, are you seeing a pickup in fee pressure in any of your established categories? And are there any segments where you think a reduction in pricing could actually increase inflows?

[Jonathan Steinberg:]

So, this is Jono. Thank you, Craig. Really the products that we launched have been holding up incredibly well from a fee standpoint. As an example, what we discussed about the U.S. equity inflows, many of those funds were priced 10 almost 11 years ago and the flows have been – the strongest that they have ever been. So I would say that we will look at our funds on an individual basis, make sure that they are competitive within their categories, but because of their differentiation and their performance, we feel very strong about the pricing to-date. And again just to remind everybody, we were created for this kind of a dynamic from the very, very beginning, again making us probably the best position to deal with the fee compressions on nonexclusive indexing.

[Craig Siegenthaler:]

Got it. And then I have a follow-up here on fixed income. I would have thought the last few months would have been pretty a good setup for your rising rate bond suite. And I know there has been some small creation, especially in HYZD, and I think you’ve had a pickup in overall volume too, which is a good signal. But are you little surprised that you haven’t had lumpier, chunkier creations across the rising rate fixed income suite?

[Jonathan Steinberg:]

So whenever we launch funds, so this particular suite, Amit mentioned the 52 funds going back to 2013. So the zero and negative duration bond funds or the interest rate hedge suite was launched at that in 2013. We were way early, very hard to establish traction up until just recently. So no, I am not surprised you were taking small funds and growing them. We are very encouraged by market sentiment by the increased volumes by how well these funds are performing. They are doing exactly what we anticipated they would do in a rising rate environment. We are seeing a real pickup, particularly as you mentioned in high yield zeros. We are certainly promoting them with research and marketing and have certainly laid the educational groundwork for significantly faster growth if rates should continue to be strong. So we are very positive on this suite.

[Craig Siegenthaler:]

Thank you, Jono.

[Jonathan Steinberg:]

Thank you.

[Operator:]

Our next question comes from the line of Surinder Thind from Jefferies. Your line is open.

[Surinder Thind:]

Good morning, guys. Just a couple of quick questions here. One, I just like to talk a little bit about where we are in the investment cycle. In terms of growth initiatives, you guys guided to about $3 million or $4 million this year. That’s about 25% of the level that was anticipated for last year. How should we think about that going on a going forward basis, not necessarily for 2017, but kind of where we are more broadly in your investment lifecycle as a young firm?

[Amit Muni:]

Hey, Surinder, it’s Amit. So, over the last several years, we have made a lot of investments in our business, right, in the people, the products, our technologies expanding geographically. And we feel that the investments that we have made so far, they are done. And now we are really gearing up to capitalize on those investments, drive those investments for further growth going forward and to really get to that operating leverage in our business as we exit 2017 and beyond. So, we don’t really see needs for major levels of investments going forward. It’s about capitalizing and growing.

[Surinder Thind:]

That’s helpful. And then maybe a little bit of an update on the European business or maybe the international business more broadly. When I kind of look back, I think in your initial estimates of where guidance was in terms of the loss that you guys would be at in terms of getting at 2016, 2017 was kind of roughly in the $6 million to $9 million range. Obviously, going forward, the new guidance is from $9 million to $13 million, but that also includes Canada. Can you walk us through kind of the changes there? And is there somewhat more of a greater investment that we are expecting in Europe or has traction been a little bit slower than we originally anticipated at this point?

[Amit Muni:]

So obviously, you saw the impairment charge that we took this quarter. So obviously, there is some differences between the actual results than what we had anticipated. And we made some changes in our European business last year and we have a new management team in place. We are already seeing positive results from that, I mentioned, from a flow perspective. So far this year, we have taken in more flows into our use of funds than we have seen all of last year. We are looking at how we approach the markets, we are looking at how we do our distribution capabilities, looking at our sales and marketing practices. So, it’s just taking a little bit longer than we had anticipated. But with the new management team in place that we have there, we believe very strongly that we should be able to drive that business to get to profitability in the next 2 to 3 years.

[Surinder Thind:]

That’s helpful. And then just one other final quick question, I will let my colleagues ask the others, but any update on Japan at this point and how things are in terms of operational capabilities there?

[Jonathan Steinberg:]

So Japan, this is Jono, Surinder. So, Japan – our Japan operations really has two functions. One is to sell to the Japanese market our non-Japan exposures to the institutional market, and we have been being very productive over the course of the last year. It is a slow moving market. But as markets have moved favorably from a standpoint of the need for additional income and yen diversification, I think we are well-positioned. We certainly were having some small wins but making real progress. The other efforts from the Japan team, is to sell the Japan theme to the rest of the world. And there we have been very, very pleased with how we have defended our leadership position. As Japan has turned since the election, year-to-date, we have taken 70% of the flows into Japan into the currency-hedged space. And that has been done by our constant reinforcing, our mind share leadership on the Japanese market during the course of 2016. So net-net, it’s very, very positive, but we are hopeful that there is rising interest rates in the U.S. We will have a very positive effect on the Japanese market overall.

[Surinder Thind:]

That’s helpful. I will get back into the queue. Thank you.

[Operator:]

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

[Chris Shutler:]

Hi, guys. Good morning. On the U.S. expense baseline of, I think, $138 million, you are expecting 2017, I think that’s before changes in AUM and incentive comp. On the incentive comp piece, assuming no change in assets and kind of flat flows, I mean, can you give us some sense where we should expect that incentive comp piece to come in? Would it be relatively similar to 2016?

[Amit Muni:]

So if you look at the 2016 amounts obviously and do some annualization for some hires that we made during the year, so it would be a little bit higher. I would say what we paid in 2016 in a very tough environment, it’s probably low levels or minimum levels of what we think compensation should be.

[Chris Shutler:]

Okay, got it. And then secondly, how are you guys thinking about an additional product innovation or product rollouts in 2017?

[Jonathan Steinberg:]

The way we always have, we are trying to look past just the moment, trying to be first to market, always differentiated, always adding improvement to the exposures. It’s sort of what we always do. There is no change in the way we are approaching this market. But we were very early from a product launch standpoint on the rising rate theme really both in equities, with our quality dividend growth strategies and in our zero in our duration hedged products. So we have really laid the foundation for maybe this market cycle. Last year, we touched on a couple of things, particularly on the liquid alts market. I think you will see us continue to invest in that nascent category in the ETF structure. But in general, the approach to product development remains unchanged.

[Chris Shutler:]

Okay, fair enough. And then lastly guys, on AdvisorEngine, can you just walk us through and maybe a little more detail how that solution works and within that, are you mainly partnering with home offices or is this more a sale to individual advisors, I am wondering how both groups are differentiating among all the different robo or digital solutions, because it seems like all ETF providers now are talking about robos and being a solutions provider? Thanks.

[Kurt MacAlpine:]

Hey there, this is Kurt MacAlpine, Global Head of Distribution. So first on AdvisorEngine in terms of what makes it different relative to other solutions that exist in the marketplace. So when we undertook the effort to look at how we could participate in technology in a more meaningful way, one of the most important factors for us was finding a partner that was, as Jono had mentioned earlier had a similar philosophy in terms of how they thought about the world and a similar approach to partnering with our clients. So through this effort, we found that AdvisorEngine was truly the only B2B solution that was designed to partner with the financial intermediary to help them serve clients. If you look at the traditional profile of a robo advisor, they tend to be a B2C platform, either continuing to focus on the B2C market or a platform that’s transformed from a B2C to a B2B. So what does that mean in terms of AdvisorEngine, what makes them unique, if you think about how an advisor partners with their clients, AdvisorEngine allows us to bring a solution that’s truly digital from end-to-end, so literally everything from initial prospecting through to billing can be digitized on the AdvisorEngine platform. So we feel like that solution based on all the research we have done in the couple of months that we have been out in the market, selling alongside AdvisorEngine’s truly unique and differentiated relative to what else exist in the marketplace. In terms of who we are selling it to, I think the answer is to your question all of the above, we see a lot of value in terms of selling this to partnering with home offices and allowing them to deliver this capability to their advisors. There is a lot of applicability in terms of selling it directly to RAAs and smaller platforms. And another benefit is that the platform itself is truly modular. So instead of just having to adopt AdvisorEngine or not, you can take various different pieces or components of it which we think makes it an attractive solution for home offices and larger platforms.

[Chris Shutler:]

Okay. Thanks a lot. I appreciate it.

[Operator:]

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

[Bill Katz:]

Okay. Thanks very much. I appreciate all the disclosure and guides, very helpful. Just a couple of questions come up as a result of that Amit, if I run some of the guidance through the model, it looks like the U.S. margin drops to about 30% or something like that, so I am just trying to understand why the investment spending cycle is slowing that, that ratio would drop so much and then as I think about the other side that in ‘18, what kind of incremental margin do you think is on the business at this point in time?

[Amit Muni:]

Sure Bill. So as I mentioned, the investment spending is down. We have made a lot of investments over the last couple of years. And now we are going to be focusing on capitalizing on those investments going forward and driving for growth. So the expense base is obviously different than what it was in prior periods and that’s probably accounting for the margin difference. As far as what it looks like post-‘17, as you have seen in the past, the way we have built our business, the operating leverage is there. As AUM scales, you will see – we will see improvements in our margins and that’s how we are driving the business for.

[Jonathan Steinberg:]

Bill, this is Jono. The one reason – the reason for the slowing in this spend is that we have achieved our goals expanding in the retirement space, launching the CIT business, the digitization of our business. And we have really achieved what we are trying to achieve. So that’s the reason for the spend slowing down that we have accomplished what we are trying to accomplish.

[Bill Katz:]

Well, I am just trying to [indiscernible] why the margin is compressing as much as it is against that, we could follow offline. Second question I have is, if I look at your Slide 12 from the supplement, you mentioned your equity, but if I do the math, it’s only about 1% market share of the related equity flows, I appreciate the faster growth and then if I take your comments about where the entry was for January versus your flows for January, that’s also about 1%-ish type of share, in the past, you said you are expecting sort of getting to 4%, 5%, 6% type of market share, what do you think it’s going to take to ramp the penetration and do you need to sort of pick up the marketing spend perhaps or advertising spend or maybe reorient it in some way to potentially increase the relevant share opportunity?

[Jonathan Steinberg:]

So we look at it across the full suite. So the U.S. equity business has really shown – has strengthened over time. And so we are feeling very strong that we are in a better position as our track records have become more established. We have our earnings family hitting their 10-year track records this quarter, which should enhance those fat family the quality gives in growth family has also, it’s not nearly as old, but were made for the rising interest rate. So we think those would accelerate. But we never expected that the 7%, 5% to 7% of the flows would come equally in every category. The U.S. market from day one was always so crowded. But there will be a combination of strong U.S. flows, hopefully participating much more fully in domestic fixed income. We have built out a very strong suite who I think is well-positioned for this market cycle. Strong dollar should add a lot of power to the currency hedged suite, where as I said we took, year-to-date, 70% of the flows into the Japan currency hedged suite. We think that though it’s a small market today, the liquid offs will be a stronger category and we will take strong market share in those categories. So net-net of it all, we think that we get to a higher market share. In addition, as our model portfolios get monetized, you are taking much – we are doing much more than just a product sell, but a whole suite sell and we should be taking more of the advisor market share. So I think it’s the investments that have been made already that should drive to those numbers. When we made those aspirational targets of 5% to 7%, it was with the knowledge that the investments that we are making would have a payoff some time in the future.

[Bill Katz:]

Got it. And thanks for taking my question. Just one last one, you had highlighted the retire market both DB and DC, those are getting a little tougher I think to crack, generally speaking and [indiscernible] strong competition by some of your larger competitors, could you talk a little bit about strategically how these products might be priced relative to legacy business, is that the right way to approach it, just wondering if there i a different structural pricing model for this particular channel?

[Amit Muni:]

So if you look at the collective trust more broadly, I mean when we undertook the transformation of our institutional team in 2016, accessing the retirement market in a more meaningful way was one of the primary objectives. Through the conversations, so we are now at a place where our collective trusts are operationally ready for funding. We have received our GIPS compliance certification. We are currently in the market having conversations with as that consultants, institutional investors and retirement platforms. In terms of pricing, the feedback we have heard early on was that, this was more around packaging our intellectual property in a structure that fits for the retirement marketplace for ETFs have historically as the structure struggle. We don’t have really guidance in terms of what the pricing is going to net out to be.

[Jonathan Steinberg:]

For us, we already had the IT. So here, we are trying to squeeze out additional efficiency on an asset that is already on the books, the intellectual property. And because it is a – it doesn’t cannibalize something that we are doing, it should be incremental. And similar to the ETF industry, proprietary indexing will get better pricing in what, as you know, is a price competitive market. But that was true also about the ETF business or the indexing business more broadly. So we should be getting superior pricing relative to much of the indexing business that exists today.

[Bill Katz:]

So like Schwab’s 3 basis point, you get a premium to that is what you are saying?

[Jonathan Steinberg:]

We are doing that in ETFs today. So I mean yes, we are doing that today. And everything that we do, we are not competing with non-exclusive beta on price.

[Bill Katz:]

Okay. Thank you very much guys.

[Operator:]

Our next question comes from the line of Michael Carrier from Bank of America. Your line is open.

[Michael Carrier:]

Thanks guys. Maybe just one on the investment spend and the outlook, I guess I am just trying to understand, when you look at like the investments that you are making and what you expect that return to be in terms of the organic growth, how you think about fees and maybe the timeframe on that when you reassess, like how things are trending or progressing versus expectations. Just wanted to get some understanding just given some of the pressure that we are seeing on the margin and maybe some of these things taking a bit longer to produce the uptick?

[Jonathan Steinberg:]

So I mean, with respect to sort of the core U.S. ETF business, it’s – don’t get confused by the massive outflows in the European and Japanese exposures across the board. So that’s just a headwind. But the investments that we have made in products, our expectations are dead on that nothing has changed whatsoever. With respect to some of the foreign markets, we are less confident that we will be profitable in 2017 as we had originally given you guidance, but I think we will make significant progress towards that and hopefully and now as mentioned early on the call, the segment does include Canada as well. But so all of our international operations, we are targeting for 2 to 3 years of profitability. But the expectations we know that much of what we are doing has been hard, particularly entering the European market, but so we are not really that surprised. So, I don’t know what else to say, it feels like it’s a strong balanced approach to investing, trying to capitalize on what is by far the most dynamic market in asset management.

[Michael Carrier:]

Okay, that’s helpful. And then just had a follow-up, just on the cash, maybe just I think you mentioned some going into securities portfolio. Just I don’t know maybe strategy there I don’t know if it’s the rate backdrop and you are taking advantage of some things. And then just given where the cash is in the earnings level just an update on the dividend?

[Amit Muni:]

Sure. So we are just trying to squeeze in more yield out of some excess cash that we started to buy some short duration fixed income securities, so nothing more than just managing our cash. And the second, when we think about capital management, nothing really has changed from last year. We are very focused on continuing to support our dividend and that’s where our focus needs to be. We are still generating a good amount of cash. We have – we are very comfortable with the cash that we have on our balance sheet.

[Michael Carrier:]

Okay, thanks a lot.

[Operator:]

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

[Mac Sykes:]

Good morning, gentlemen. Just two questions. I will just say them first. I do appreciate the industry flow trend expectations. But can you talk a little bit about the competitive aspects today? It seems like everyday we hear bigger and more well capitalized firms offering new strategies and products. And then as a second note, can you talk about the impact on flow share going forward should the SEC – or the new SEC approved nontransparent ETFs? Thanks.

[Jonathan Steinberg:]

So, the dynamic is not so dissimilar from what it was 10, 11 years ago with the largest players, State Street, iShares and Vanguard having roughly the same market share that they had then that they have now. You have many more participants who have entered the market in the last 5 or 6 years, mostly were focused as we have been since the very beginning on the three largest players. So, the dynamic hasn’t particularly changed that much. What you have seen is all of the new entrants are sort of validating the industry itself that this is really where the future of the industry is going. It is just a better investing experience and we are expecting flows to accelerate. One of the things that you are seeing with this new administration this sort of pullback of regulation has created, I think, sort of reignited the animal spirits of the investing community, which is just good for asset managers. The flow numbers in December and January have been records for those months. In fact, December was just the best month in the history of the industry. January, the best January in the history of the industry. We just think it’s going to accelerate and we are still playing for our – we are not changing the aspirational target of 5% to 7%. Our market share is only about 2.5% of the industry average. Anything over 2.5% would be we are taking market share. Again, don’t get confused by the challenges that we faced in 2016, which were really just macro, negative sentiment against the largest exposures. But in general, in many of these other categories, we performed very well and we feel better positioned in this new sort of higher interest rate environment than we were in a declining industry environment, particularly around the fixed income suite where we strategically positioned our entrance into the fixed income, looking to the next cycle. And at the time of those launch, that meant higher interest rates.

[Mac Sykes:]

And just wanted your thoughts on…

[Jonathan Steinberg:]

Yes, I am sorry, on the non-transparent it’s not something that we are interested in participating in. I am not sure that there is a consumer – this is a consumer-driven approach, it’s more of an incumbent structural approach to try to minimize the damage to their historical active mutual fund business. I am not sure it will be commercially successful. I certainly don’t think it will be a big driver of flows, that’s a personal opinion, but we will see. It’s not something that we are interested enough.

[Mac Sykes:]

Okay, thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Robert Lee from KBW. Your line is open.

[Robert Lee:]

Great, thanks. Good morning, everyone. Most of my questions have been asked. Just had a follow-up question on AdvisorEngine, I guess I am just kind of curious or interested in understanding the model a little bit more. So if you are providing your allocation and other models to them and they have an open architecture platform, I mean, just trying to get a sense of how you think that will actually drive demand for your products if they are open architecture. Do you get paid at all for the model usage? Is there some type of preferred positioning for your ETFs as part of the model? Just trying to swear the open architecture with driving kind of semi-proprietary flows?

[Jonathan Steinberg:]

Yes, absolutely. If you look at our – so first AdvisorEngine and our asset allocation effort overall, so for the model component of AdvisorEngine, so through our investment in them, we have been partnering very closely with them to bring our integrated capabilities to market, which is the AdvisorEngine platform in WisdomTree’s asset allocation capabilities and our underlying predicate abilities. So yes, the model, their offering absolutely allows for standardized models off the shelf, those could be standardized WisdomTree models. They could put in other models from another asset manager. And we also work alongside the clients of AdvisorEngine WisdomTree to design customized models for them. So, we feel at least based on the conversations we have had to-date that there is a meaningful role for both standard and custom WisdomTree models. And we continue to see that through the activity and the conversations we have been having with clients. And in addition, we will be getting a – participating sort of the wrap-fee for making those models. So, we do have that additional revenue stream and we think it’s – so we won’t be necessarily 100% WisdomTree in our models, but depending upon the models that they choose, very significant WisdomTree when it’s appropriate.

[Robert Lee:]

Great. And maybe also a follow-up question on the CIT initiative, I mean, I completely understand and appreciate the logic of leveraging your intellectual property. But I guess it strikes me as being pretty much a DCIO kind of strategy. And to the extent that you are going after that market and you have the strategies of track records. But I mean, are you going to see at all a need to kind of provide any kind of seed capital for any of these products to get a participant uptake or gets on to added to their platforms down the road or am I thinking of that the right way?

[Jonathan Steinberg:]

Yes I think – so first, in terms of if you think about the CITF overall, it’s a combination of targeting the defined benefit and the defined contribution market. You are right at the beginning, within the defined contribution segment, the DCIO component is the largest and fastest growing segment of defined contribution and our strategy is based upon how they are positioned will fit in well there. In terms of seed capital, it doesn’t necessarily work that way. With the collectives, I mean, the strategies themselves are operationally ready for funding today. We do have our GIPS compliance certification and we are in the market having these conversations. So we are in a place now as of the beginning of January where we are actually able to take quiet money into these strategies. But no, we don’t need initial seed to stand them up to get them operationally ready.

[Robert Lee:]

Great. Thanks for taking my questions.

[Operator:]

Thank you. Our next question comes from the line of Mike Grondahl from Northland Securities. Your line is open.

[Mike Grondahl:]

Yes. Thanks for taking my questions guys. Just two quick ones, trying to think about core expenses in 2017, sort of under what scenario could expenses be flattish, is that possible next year?

[Amit Muni:]

Hi Mike, it’s Amit. So our baseline operating expense base, if you look at our U.S. outlook on Page 10 of the presentation, we are projecting the baseline business to be flat prior to any variable expenses associated with AUM, which is primarily the fund costs and the incentive comps. So we are targeting it to be flat. If we wanted to take more actions, we can as we demonstrated last year, right. We took down our spending in the second half of the year. So we do have the capabilities to take it down further if we really want to. But I think it’s important to remember that we are not driving our business today to have the highest margins. Really, it’s about positioning it for growth, which we are doing in ‘17 and then seeing the operating leverage emerge as we exit 2017.

[Mike Grondahl:]

Got it. And then if I think about the total expenses, some of the European charges aren’t recurring, but it seems like they are kind of being offset with additional losses in Europe and/or Canada, is that fair?

[Amit Muni:]

No, I think – so now, we own 100% of our European business. We open – our Canadian business we stood up. So those expenses on a consolidated basis will flow through. And again we have given what we think breakeven will be in those businesses and we are driving those businesses to get to profitability in the next 2 years to 3 years. So they are on a consolidated basis, they are part of our expense base.

[Mike Grondahl:]

Sure. Okay. Thanks a lot.

[Operator:]

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

[Brennan Hawken:]

Hey good morning. Thanks for taking the question. So one on Slide 10, the $4 million in one timers, does that include the fourth quarter comp charge that you guys took, that $3 million?

[Amit Muni:]

Yes – no, I am sorry. That you see it’s adjusted in the true up that you see, when we annualize all of our AUM and comp, its taking part in that.

[Brennan Hawken:]

Okay. Alright, fine. And then just following-up on that to clarify on the last question there about how much flexibility you have in expenses, so I am trying to square that comment with the comment you made on comp, which I believe was that this should basically be viewed as a floor for comp which you did in 2016, so does that mean that if you were to choose to ratchet down expenses versus 2016, it would be in non-comp lines and that’s where the flexibility should sit?

[Amit Muni:]

That’s exactly right.

[Brennan Hawken:]

Okay, terrific. Thanks for clarifying that. And then one last one on pricing pressure just to follow-up, I think Jono, that you had in response to Craig’s question had made a comment about that you were built to sustain this pricing pressure, was that based around some of the pressure we have seen in the newer beta and the idea that you would be above that, is that the point?

[Jonathan Steinberg:]

So when we launched the firm go back 12 years, 13 years ago, sort of the original business was how do you live in a Vanguard world. So in today’s – using sort of a today approach we would say how do you live in a Vanguard, Schwab, Core iShares world, but fundamentally the Schwab or Core iShares doesn’t change the Vanguard comparison. Within the more non-beta, non-exclusive indexing world WisdomTree’s pricing is just held up incredibly well. The market has also hovered around WisdomTree’s pricing. You haven’t seen a lot of change. So when we built the models, we were always positioning WisdomTree on an after-fee basis against the no-fee indexes and we were adding value. So what you are seeing today does not change the dynamic. Now as Craig also mentioned, we have launched a new fund at lower price points, which is appropriate against the new categories that we have entered. But which was consistent with what we did 10 years ago. It’s also one of the reasons why we have for the last decade been so aggressive in product pricing because in product launch schedule, so that you could – you always will do better having started earlier, the fourth or fifth in the category that you will tend to become out at a lower price point. So that’s why we have always taken this approach to launch funds quickly, price to be very competitive with existing stuff in the marketplace. So we don’t want price to stand in the way. We don’t think that it has in the flows sort of indicate that we have done a good job on pricing. It’s not to say that we can never lower price, we have never lower price, but where we sit today, price is not something that has been holding back our growth.

[Brennan Hawken:]

I guess, the spirit of what I am trying to ask is that we have seen pricing pressure accelerate elsewhere and we are seeing increasing competition pickup in smart beta and so I guess the concern might be is that the next shoe to drop is increasing competition here, which is going to lead the pricing pressure. And given that you guys are sort of on the verge of scale and seeing some scale pressure and the need to continue to invest, people are worried about that squeezing your economics, I guess how do you intend to manage that in the marketplace?

[Jonathan Steinberg:]

Again with differentiated product getting to the market first, you did see iShares with price reductions in smart beta, those were actually started from a very high fee relative to their categories and sort of have been reduced to be in line with current pricing for many of the other players, including WisdomTree. So we feel good about the pricing on non-beta exposures.

[Brennan Hawken:]

Okay. Thanks for the color.

[Operator:]

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

[Keith Housum:]

Good morning gentlemen. Thanks for taking my question. As you look at the change in the present administration, you obviously have had as recently in the past few days some thoughts about perhaps through sending the fiduciary rule in April, if [indiscernible] thoughts in terms of what you are seeing with this administration and how it impacts not only the company, but also the industry?

[Jonathan Steinberg:]

So just on putting socialist views aside and only talking about economics, so one, lower taxes would be – corporate taxes would be extraordinarily constructive for WisdomTree. So they are talking about a 15% or 20% corporate tax rate. As Amit indicated, we have 40% tax rate, so a huge beneficiary of that. With respect to the fiduciary rule, which is at least being delayed, the growth in ETFs preceded the DOL rule. The ETF industry is taking market share just on the merits of the structure. The fiduciary rule proved to be an accelerant to what was already incredibly fast growth. Many of the distributors or platforms that were making changes under the fiduciary rule will probably find it hard to reverse them in things that they have publicly said. Also those that were slow adopters to ETFs have moved closer if not actually entered the sort of the ETF realm. So that’s a very, very positive. I think more broadly pulling back regulation in general has increased consumer and corporate confidence and you are seeing that in these flow numbers, which is very, very good. As flows into investment products come back, they are going to come back primarily into the ETF structure, that we are beneficiary of. So net-net, it feels like ETF have always been not lightly regulated but the regulation that the prior administration was putting on asset managers was really trying to make things like the liquidity rule, make other structures more ETF like. So really hadn’t affected us much, but we think just pulling back regulation is just constructive for overall sentiment, which will be good for investing, which will be good for WisdomTree.

[Keith Housum:]

Great. Thanks. And if I could follow-up, just a little bit on the change in your incentive compensation structure, is this a change that you see is permanent or when the stock price starts to move forward, you guys consider going back to really start with your given incentive comp?

[Amit Muni:]

No, I wouldn’t say it has anything to do with stock price. It more had to do with the level of compensation. Given that our incentive pool was down so much in ‘16, given our performance, we just felt it was appropriate to protect the lower end of the firm to give more cash as part of their compensation. The higher up you are in the organization, they continue to receive a higher portion of stock. So really that was the purpose of the change in mix.

[Keith Housum:]

Great. Thank you.

[Operator:]

Thank you. Next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is open.

[Craig Siegenthaler:]

Thanks. Just a follow-up on the S&P 500 China ETF, I see you guys have – you have the usage version, you have been now marketing it in Germany, Italy, I think the UK too, but I don’t think the U.S. version is out yet. And I wonder if that’s delayed or if there is anything there sort of holding you up?

[Jonathan Steinberg:]

So it will – I think the last call we actually gave sort of a guidance of sort of the April timeframe. I think it’s more June-ish. We are on-boarding a new sub-advisor, so we are just taking a little bit of time. And because China hasn’t really been in favor, we haven’t felt the need to sort of rush it, but it’s on target for probably towards the end of the first half of the year.

[Craig Siegenthaler:]

Thank you.

[Operator:]

[Operator Instructions] It looks like we have no other questionnaires in the queue at this time. So I would like to turn the call back over to management for closing comments.

[Jonathan Steinberg:]

Thank you all for your attention and for your interest in WisdomTree and we will speak to you in 90 days. Thank you.

[Operator:]

Ladies and gentlemen, thank you again for your participation in today’s conference call. This now concludes the program and you may now disconnect at this time. Everyone, have a great day.