WisdomTree, Inc.
Q4 2014 Earnings Call Transcript

Published: 6 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the WisdomTree Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference may be recorded. I would now to like turn the conference over to our host of today’s call with WisdomTree Investor Relations, Mr. Stuart Bell. 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, 2013. Now it’s my pleasure to turn the call over to WisdomTree’s CEO, Jonathan Steinberg.

[Jonathan Lawrence Steinberg:]

Thank you, Mr. Bell. Good morning, let’s begin. WisdomTree achieved strong operating results in the fourth quarter. We had $4.5 billion in net inflows across our currency hedged equity, U.S. equity, and bullish dollar ETFs. The positive market dynamics supporting these funds, most notably, a strong U.S. dollar and a depreciating euro have gained momentum throughout 2014 and carried into 2015. HEDJ, our European hedged equity ETF has experienced significant strength with inflows of $5 billion last year, $2.8 billion of that in the fourth and another $3.5 billion year-to-date, which makes HEDJ our second largest ETF with more than $9.5 billion in assets. This has been the key driver behind the $4.6 billion in inflows in first quarter to-date results. More broadly at the ETF industry level 2014 can only be described as a year of strong momentum and enormous promise. Recently, ETF surpassed $2 trillion in assets in the U.S. alone and $2.8 trillion worldwide. Both are important milestones. Another milestone of importance was ETF industry inflows. In 2014, the industry had inflows in the U.S. of $239 billion, an all-time record. For some context, the traditional mutual fund industry has had $300 billion and $400 billion of inflows in years past. On today’s call, we will discuss some avenues of growth for the ETF industry and the plans WisdomTree has identified to capitalize on these opportunities. But before we get to the numbers in packets, let’s be clear about WisdomTree’s opportunity. It is so easy to be distracted by old debates like passive versus active or new terminology like smart beta and liquid alts. The simple truth is the ETF structure is just that, a structure by which you can access all of these asset classes and strategies. But it is a structure with the characteristics central to a positive investing experience

[Amit Muni:]

Thank you, Jono, and good morning, everyone. We got a lot to cover on today’s call. So let’s first begin by reviewing the U.S. ETF industry statistics. Turning to Slide 3, the industry reached record levels with $118.3 billion in net inflows in the fourth quarter, which helped to push the industry to a record $239 billion of net inflows for the year, as reflected on the chart on the right. We can review the category of flows on the next slide. US Equity has led the flows in the fourth quarter, followed by fixed income and emerging market equities had outflows. On the right you can see the same general trends for the full year except emerging market equities had slight inflows. Now, let’s begin to look at our results. Our U.S. AUM increased 13% to $39.3 billion and rebounding our flows in the fourth quarter, which was $4.5 billion, as reflected in the middle chart. This was the third best inflow quarter for WisdomTree. Our inflows for the full year were $5.1 billion. Turning to Slide 6, you can see the categories for our flows. Our HEDJ equity product was strong asset gatherers in the fourth quarter with HEDJ taking in $2.8 billion and DXJ taking in $1.7 billion. But as you can see in the box, we continue to face headwinds in emerging markets, where we experienced $1 billion of outflows across equity, fixed income, and currency categories. One highlight I would like to note. This quarter was the best ever quarter for our US Equity ETFs, which raised almost $1 billion. On the right for the full-year, we had $5.1 billion in HEDJ, which helped to offset the outflows we experienced in the emerging market category. Turning to the next slide, you can see the strength we demonstrated in the European category. Again, WisdomTree was the leading asset gatherer and European-focused ETFs. This was due to the success of HEDJ and we continue to be a leader in the currency HEDJ category. Turning to Slide 8. WisdomTree was the fourth best asset gatherer in the quarter, which helped us to achieve a 3.8% market share. On the next slide, you can see for the full-year, we ranked 7th and had a 2.1% market share. This came in below our target of 3% to 5% of industry inflows due to the headwinds we faced in the emerging market category during the year. However, product innovation and diversification like we demonstrated with HEDJ and the record inflow levels into our US Equity ETFs allows us to continue to grow even when certain categories are at a favor. Turning to Slide 10. We were ranked 5th in organic growth, when compared to the top 10 US ETF sponsors. As you can see in the chart on the right, we again had the best organic growth rate of any of the publicly traded asset managers. As we have said along all year, we continue to remain optimistic about our position in the fast growing ETF industry and in our long-term positioning in the asset classes in which we compete. On Slide 11, we show you how our ETFs have performed according to their Morningstar peer groups. These comparisons take into account fees and transaction costs and reflect how our equity, fixed income and alternative ETFs performed against active and passive mutual funds and other ETFs. In evaluating the performance of these funds, you can see since inception 64% of our ETFs outperformed their peer group. Put another way, 87% of the roughly $39 billion invested in our ETFs were in funds that beat their peers, a statistic we are proud of. Now, I’d like to update you on our European business on Slide 12. In the fourth quarter, we launched our first set of WisdomTree-branded ETFs in Europe. In addition, our Boost brand have shortened leverage ETPs expanded into Italy and Germany and added fixed income in currency ETPs. We achieved $175 million in net inflows for the year in our Boost ETPs and AUM in Europe reached $181 million at the end of the year, and as of this morning are just over $200 million. We are continuing to build out our sales force and look to launch up to five additional WisdomTree ETPs in 2015. On Slide 14, we can start to go to our financials. On the back of solid inflows this quarter, total revenues continue to decline, reaching nearly $15 million in the fourth quarter. Our U.S. listed revenues increased 14% from the prior year and 22% for the full year. Pre-tax income was up slightly from the fourth quarter to $16.7 million. Included in the quarter were higher compensation cost and one-time consulting expenses, which I will discuss further as well as expenses for our European business, which we acquired in April. Excluding the European business, pre-tax income declined 13% in the prior year quarter and 53% for the full year. Earnings per share was $0.07 for the quarter, which included approximately $0.01 for one-time higher consulting expense and $0.01 for higher incentive compensation than we anticipated at the end of the third quarter due to their higher inflow levels we achieved in the fourth quarter. Turning to Slide 15, you can see in the blue bar on the left chart, as a percent of our overall average AUM, the HEDJ equity category increased to 42%, which generated a 25% increase in our revenue from this category as you can see in the chart on the right. ETFs revenues reached a record $49 million this quarter and our average revenue capture remained at 52 basis points. On the next slide, we can review our key margin metrics. Gross margins for our US listed EPS business increased slightly to 82.5% and was 81.5% for the full year. And the chart on the right, you can see in the light blue, our consolidated pre-tax operating margin declined to 33.6% compared to the third quarter. Pre-tax margins for our US listed ETFs business in dark blue were 37.8%. Our pre-tax margins were particularly high during the first nine months of this year, as we significantly reduced compensation costs as a result of our inflow levels. To the right you can see for the year, our U.S. margins increased to 43% and only $35 billion of average AUM. Next, we’ll review expenses on Slide 17. Third quarter total expenses were $26.9 million. Marketing and sales related spending decreased by 113,000. Incentive compensation costs increased due to the strong inflow levels we experienced in the fourth quarter. We also incurred one-time higher professional fees. As part of our planning for 2015, we engage a strategic consulting firm to help us assess and benchmark our distribution and operational capabilities at this point in our development. This due diligence helped to validate and refined our plans across sales, marketing, technology and operations that we incorporated into our strategic spending for 2015, which I will discuss a little later. We are not planning to incur such expense in the future. Moving on expenses for our European business increased 526,000, as we launched the WisdomTree ETFs and continue to build out the team. Our inflow levels resulted in a 195,000 of additional costs, another expenses increased by 68,000 resulting in expenses of $32.9 million for the quarter, an increase of 23%. The next slide walks you through the major changes in our expenses for the full-year for your reference. Turning to Slide 19. On the right you can see from the annual numbers in the bar chart that our expenses continue to decline as a percent of revenues, reflecting the operating efficiency of our business model. Compensation as a percent of revenues for our U.S. business was 21.1% within the guidance that we gave at the beginning of the year of 20% to 23%. Based on our results for the first nine months, this was trending to the 20% level, but due to the strong rebound in inflows for – in the fourth quarter, this expense ticked higher to 21%. On the next slide, we can review the strength of our balance sheet. Total assets grew to nearly $221 million at the end of the year, which is primarily comprised of cash and investments which continues to grow, as you can see from the chart on the right. And lastly, with respect to taxes on Slide 21, as you can see on the left, the amount of future pre-tax income that is shielded from income tax is approximately $110 million at the end of the year. As the chart in the middle reflects, we continue to generate tax losses because of the deductibility of equity awards we granted to employees, assuming our closing price yesterday, we potentially have another $130 million of pre-tax income, which can be shielded from cash taxes in the future. Turning to Slide 22, as we have done previously in our year-end call, I would like to give you an outlook of our expenses in 2015. As Jono outlined at the beginning of the call, we are excited about the open-ended opportunity to the ETF industry and we continue to focus our efforts to position ourselves to take part in the industries growth. In recognition of this opportunity combining with our expanding resources, we intend to spend $12 million to $16 million over the course of 2015 on strategic investments across key opportunities continue to drive future growth. The majority of this spend directly relates to growing our top line revenues. These expenses include a significant expansion of our sales force another sales related activities in order to go deeper and broader in existing and new channels. As part of this, we will be hiring a new Head of Sales to focus exclusively on this effort and Luciano will be stepping into a larger Chief Investment Strategy’s role. We will be increasing our sales force by approximately 50%, by adding 20 to 25 new salespeople for our existing team of 40 people. We will also be adding a similar percentage of 8 to 12 employees. The team that supports our sales force with content and product support to bolster our client facing efforts. We estimate the cost for growing our sales-force, adding sales support staff and increasing other sales related spending will be approximately $7 million to $11 million. Second, we will continue to develop new products to expand and diversify our offering. We are targeting to launch 8 to 10 new ETFs this coming year. And the minimum cost for launching an ETF in the U.S. is approximately $175,000. Third, we plan to increase our marketing spend by approximately $1.5 million to support our ETFs and brand. And lastly, we plan to invest in technology initiatives to better provide business intelligent and distribution analytics for our sales-force, as well as more efficiency and risk mitigation to our operations. We also plan to increase our operational and administrative headcount by around 8 to 12 people, as we prepare for future growth. Total estimated investments for this is $2 million. Turning to Slide 23, we can walk through our estimated expense base for 2015. Our U.S. business had expenses of about $104 million in 2014. We incurred $3.7 million in one-time acquisition and consulting costs. Expenses should decrease another $1.4 million after annualizing our AUM taking into account new pricing of State Street and other savings as well as resetting compensation to baseline levels. We anticipate about $3 million in administrative and other overhead cost increases, and an additional $1.8 million in stock-based compensation. We are targeting $12 million to $16 million for strategic investments, so our baseline operating expense base in the U.S. will be $116 million to $120 million. From there we will incur additional costs based on changes in our AUM. We anticipate our gross margins will be around 83% to 84%, up closer to the 83% level in the near-term. Incentive compensation will also change based on our inflow levels. Because of the increase in our headcount from the prior year, and this year’s growth initiatives we expect compensation for the U.S. business will be between 21% and 25% of revenue for the full-year. Again this is the expense base for the U.S. business. Our expected pre-tax loss for our Europe business will be $6 million to $9 million. We have always factored in continued growth investments into our long-term margin guidance. And we are therefore still targeting a 50% U.S. pre-tax operating margin between $55 billion to $60 billion of average assets, assuming a 51 basis point revenue capture. Lastly, as to update you on our flow so far this quarter, this year is starting off very well and January has been the best month ever for WisdomTree. So far we have taken in $4.6 billion in net inflows and our AUM has almost reached $45 billion. On the right, you can see where the flows are coming from by category. So in summary, WisdomTree has grown rapidly over the last several years to become one of the leading players in the ETF industry. To support our growth in the U.S., we continue to expand our product set in existing and new asset classes and significantly increase our client facing efforts through research, sales and marketing. We have expanded our footprint by acquiring and building in operations in Europe, entering into marketing arrangements in Latin America, Australia, New Zealand, and making our ETFs available for sale in Japan. Our success has been through a combination of being focused, nimble, innovative and differentiated from our competitors. We feel the time is right to increase our strategic spending to capitalize on more opportunities to accelerate our growth. We believe these investments today are important to better position us for the long term. Thank you. Now I’ll open it up to Q&A.

[Operator:]

[Operator Instructions] And our first question comes from Bill Katz of Citi. Your line is open.

[William Katz:]

Okay, and good morning. I think it’s Bill Katz. Anyway, so Jono, I appreciate your opening comments. You have been very vocal on the merits and efficacy of the ETF versus other vehicles, whether it’d be a mutual fund, or more recently the ETMF initiative. I am so curious, as you’ve been going around meeting with gatekeepers in both the U.S. and increasing outside of the United States, or even the FAEs in some of the offices. What are you hearing in terms of the uptake in terms of relative merits of that is, is that what’s driving your view that the industry flows can step up from here? So curious.

[Jonathan Lawrence Steinberg:]

Thanks, Bill. It does deal, I mean – so we really had over the last 20 years substantial growth and this year was a breakout year $239 billion. But it does feel like we’re hitting some sort of tipping point where more and more advisors are really rallying around the ETF structure. And not just advisors, but different channels, institutional channels like insurance and pensions and endowments. So it feels that the more aware our people become of the benefits, the more success we as an industry are having. And it feels like this is an unstoppable trend and so it’s very positive. It does feel terrific. I don’t know what else to say about it. I mean from past comments how bullish we are and uncompromising we are with respect to the ETF industry.

[William Katz:]

Okay. And then, I don’t know maybe for Amit or yourself, Jono, just philosophically I certainly appreciate the guidance and it’s very helpful. You’ve had some very good growth of late in your currency portfolios. But what’s the hedge here, that if the AUM would come back the other way a little bit in terms of your investment spend. It seems like you’re putting a lot of fixed expense on. So what kind of operational hedge do you have, if revenues would come down the other side?

[Jonathan Lawrence Steinberg:]

Bill, the – we obviously have the ability to go slower. We have the ability to cut back on things like marketing and fund launches. So there is definitely ability to hold back. But, Bill, firms like Vanguard and iShares do not hold back, just because of some market loop. I mean, if we were talking about 2008 experience, we obviously had demonstrated in the past that we can control expenses tremendously. And in fact, on $35 billion of average assets delivering to investors of 40% margin, we have shown tremendous discipline. But at this stage, we do not want to give up some of the momentum we have just because of a little market volatility.

[William Katz:]

And just one final question, thanks for taking all these questions this morning. Your – so reported earnings were a $0.01 below your dividend, setting you off to a great start with AUM, it flows into New Year, even net of the expenses. So looks like some positive operating leverage. I am just feeling curious as to you are thinking philosophically about capital priorities for 2015?

[Amit Muni:]

Bill, this is Amit. Our capital priorities have not changed. The focus has always been on making the right investments in the business to help grow our top line revenues and you can see that we’re doing that $12 million to $16 million of strategic investments, where we have the benefit and fortunate enough that we can return excess capital back to our shareholders. And third is, there may be opportunities for us to get into asset classes or geographies, where we don’t compete today through M&A. I mean, those are the main three focus areas of our capital.

[Jonathan Lawrence Steinberg:]

And also just to add, as Amit said earlier, and we have a very substantial NOL that shields us from taxes and makes us very comfortable with the existing dividend policy.

[William Katz:]

Okay. Thanks for taking all my questions this morning.

[Jonathan Lawrence Steinberg:]

Thank you.

[Operator:]

And our next question comes from Adam Beatty of Bank of America. Your line is open.

[Adam Beatty:]

Thank you and good morning. First just a question on the European WisdomTree business, maybe just a clarification first of all on Slide 12, the five additional ETFs, I am assuming those are UCITS. And then more broadly, I guess, it sounds like, you are actually planning to roll out more new products in the U.S. than on the UCITS side in Europe. And I am just interested in terms of the limiting factor rolling out the UCITS fund. I think of that in terms of – maybe not so much new products as somewhat replicating some of the strategies you had through in the U.S. How do you decide what kind of pace for that? And what are the limiting factors there? Thanks.

[Jonathan Lawrence Steinberg:]

The UCITS funds – well, Adam, first thank you for the question, this is Jono. It’s a new operation in Europe that really expanded their sales-force, their operating resources. We’ve launched a series of funds, UCITS funds in the fourth quarter. We want to give those funds the opportunity to gain some traction. Those funds were very strategically planned. They allow us to tell the broader WisdomTree story to the non-U.S. institutional investor community, where we might get a benefit of brining money into the U.S. listed funds. That was part of the rationale for going into Europe. The limitations really are just like we do in the U.S. you want to give a new fund launch some ability to gain traction and the get the sales team the ability to focus on all of the new stores that they’ve put into the marketplace. But we will selectively add additional strategies that look constructive for the European market. Again, we’ve said in the past, we’re not replicating the U.S. suite and certain things that are successful here may have already been launched in Europe or vice-versa. So you have to check what works specifically for that market. I hope that answers your question, Adam.

[Adam Beatty:]

It sure does. Thanks, Jono. And then, one other question, I guess…

[Operator:]

It seems that he may have been disconnected. Moving forward, our next question comes from Tom Whitehead of Morgan Stanley.

[Thomas Whitehead:]

Hey, guys, good morning. I wanted to talk about the U.S. equity products for a second. As you mentioned it was the best quarter you had in 4Q, and just from the early days here in the first quarter that success is continuing. Just maybe if you could talk about a little bit about those products, like what’s changed with regards to client sentiment on those products, are there any channels where you’re seeing an uptick. A lot of those have been around for quite some time, so just curious to see kind of, why now we’re seeing the flow inflection.

[Luciano Siracusano:]

Tom, this is Luciano. So, one of things that happened in 2014, when you look at asset classes around the world, pretty much the best asset class was U.S. dividend paying securities. So I think in an environment where interest rates were declining there was an interest to get broad-based dividend exposure in the U.S., both for yield and total return. And so we had success last year in our funds like DLN large cap dividend, DLN which is the mid-cap dividend, they had very strong relative to performance, relative to other cap rated funds in their categories. And of course, they have the added benefit of paying out dividends on a monthly basis. So those funds, many of them now have bigger track records. And we’ve been telling our core dividend, explore the core story now for several years, and that’s an important priority for us because it’s a counterbalance to some of the other currency hedge strategies we have, which obviously do very well on a rising dollar environment. So I would say it was largely driven by the U.S. dividend family.

[Thomas Whitehead:]

That’s helpful. Thank you. And then one for Amit. You talked about, Amit, the comp ratio 21% to 25%. I’m just curious as we sort of lay that in throughout the year. First quarter flows have been strong. So, is that a scenario where that comp number quarter-to-quarter is going to be volatile or do you kind of keep the full-year in mind when you evaluate, okay, our target was X and we’re ahead of that, one quarter into the year.

[Amit Muni:]

Yes, hi, Tom. It’s a little bit of both, right? I mean, we did have – we did experience very – so far very strong flows, but we’re only one quarter into the year. So we try to do the best we can to project out what we think we would pay during the year. So I wouldn’t say, you think about it is accrued like sort of 25% every quarter. We have to sort of try to project out a full year amount, where are we in that continuum. So you may see a little bit of volatility in that as we get throughout the year, but I wouldn’t just divide – take a number and divide it by four.

[Thomas Whitehead:]

That’s very – yes, basically what I was trying to get at is, is if – do you maybe hold some back in your 1Q accrual versus almost like a quarter-to-quarter mark-to-market?

[Amit Muni:]

Yes, we may hold back. But again, we’re only one month into this as of right now.

[Thomas Whitehead:]

Absolutely, thanks for taking my questions, guys.

[Luciano Siracusano:]

Thank you.

[Operator:]

And our next question comes from Jason Weyeneth of Sterne agency. Your line is open.

[Jason Weyeneth:]

Thanks. How do we think about the sales-force growth longer term? Sort of when do you reach a point where you’ve got the appropriate U.S. coverage? I’m just trying to think about that in the context for the roughly 50% planned increase that you guys talked about for next year.

[Luciano Siracusano:]

Well, Jason, again, this Luciano speaking. So what we are doing with the sales expansion plan is really, we’re benchmarking ourselves to really what we think the opportunity is in each of the major channels in the U.S. So the lion’s share of the expansion will be happening over the next 12 to 18 months. We’re looking to go deeper into the channels where we’ve had success, the wirehouse channel, the REA channel, the institutional channel. But we’re also interested in getting a broader capability to go after channels that we really haven’t had the luxury of going after aggressively in the past and those include independent broker dealers and then some of the subsets of the REA channel, the regional bank trusts, the private banks and the insurance channel within the institutional. So we’re really looking to ramp up our sales capability to match it to where we see the growth in ETF assets, and those assets are increasing across the board and we really think this is the time to lean into it and to expand our capability.

[Amit Muni:]

And Jason, how do we think about the expense growth going forward? I would expect to see a sort of slowdown in our expenses after we make such a large investment in 2015, so that we could start to reap some of those rewards in future periods.

[Jason Weyeneth:]

Thanks and then a follow-up. Thinking about the recent expansion of the fund offering on Schwab’s OneSource platform, how do you think about the strategy for deciding which funds you put on there and sort of the trade-off in the economics?

[Jonathan Lawrence Steinberg:]

Well, one of the things we’re looking to do is to get differentiated funds on the platform where there is – they can be additive and complementary to what’s they are writing, that’s certainly part of it. Another piece of it is, we’re typically launching funds there that are earlier in their life-cycle, lower volumes, lower assets levels; getting them on the platform helps to incubate them. And once they get more volume to more assets that helps us get those funds on to other platforms. So we feel that it’s a very good working partnership for us with Schwab and we’re very glad to be on the OneSource platform.

[Jason Weyeneth:]

Thanks.

[Operator:]

And our next question comes from Chris Shutler of William Blair. Chris, your line is open.

[Christopher Shutler:]

Guys, good morning. On the hedge flows, first of all, this maybe a bit of a difficult question to answer, but any anecdotal evidence where at least a decent bit of those flows are coming from? Obviously, we see the big un-hedged Europe funds were in outflows in Q4 and you obviously saw very strong inflows. So just curious if there is any anecdotal evidence that money is flowing out of the un-hedged products and directly into the hedged?

[Luciano Siracusano:]

This is Luciano again. Yes, there’s certainly evidence. If you look at the fund flows in the fourth quarter and year-to-date, you can see the money moving to the hedged European strategy. HEDJ, there was $5 billion fund in December. Now, it’s closing in on $10 billion. I believe it’s the number one fund in the industry year-to-date in terms of inflows at any ETF. So to say which channel is showing the strength, it’s really happening across the board. And I would add, even globally there is interest in HEDJ. It’s become a juggernaut, and certainly, the ETF of choice to hedge out euro exposure in Europe.

[Christopher Shutler:]

All right, and then, Amit, you talked about the consulting fees a little bit, the one-time fees. Can you maybe talk about some of the key learnings from that effort and how that’s going to play into your activities in 2015?

[Amit Muni:]

Sure, so, we hired a consulting firm to really help sort of at this stage of our development benchmark where we are, have dialogues with our clients, how are we doing from an operational infrastructure capability. And a lot of that really helped to verify sort of our existing plans and then also helped us tweak our plans as well, which really focused into our 2015 planning, going deeper and broader into the existing channels where we compete, where we see ETF growth, to be able to use technology efficiently to access a lot of the business intelligence that we have, they were already – and to built-in – add some more infrastructure and risk mitigation to our operational infrastructure.

[Christopher Shutler:]

All right, got you, and lastly, I saw in the last few weeks, I believe, that you rolled out ETF model portfolio as you launched and just curious on the model portfolios how you plan on marketing and distributing that. Whether you’re going to be working with any platforms like in InvestNat or anybody like that? Thanks.

[Luciano Siracusano:]

Hi, this Luciano Siracusano again. So just to be clear, those are hypothetical ETF models that we’ve created for our clients who are financial advisors and intermediaries.

[Christopher Shutler:]

Got you.

[Luciano Siracusano:]

WisdomTree is not running any money against the models and they’re only shared with FPs. So they’re really designed to help show the intermediary how to use WisdomTree ETFs in a globally diversified portfolio. So we have an asset allocation group at WisdomTree which spans research and fixed income and we’ve been working on those models for over a year. And we’ve been trying to become a little bit more sophisticated in terms of our global macro-view using our view on asset allocation to help our clients figure out where the market is headed and then what are the most appropriate ETFs to use. So there is a conservative, moderate, aggressive portfolio, there is an old dividend portfolio, and we certainly encourage the advisors to check out the website and learn more about it. But we’ll be updating them quarterly and we’ll be updating them against benchmarks to show people how we perform at ETFs model level. So it’s something that we will be doing on an ongoing basis and will hold ourselves accountable.

[Christopher Shutler:]

Gotcha. Thanks a lot.

[Operator:]

Our next question comes from Mike Grondahl of Piper Jaffray. Your line open, Mike.

[Michael Grondahl:]

Yes, thanks, guys, and good morning. Just to follow-up a little bit on HEDJ inflows. Would you say that the institutional mix there is larger or really the same as some of your other funds?

[Luciano Siracusano:]

Again, this is Luciano. So we are not going to have the channel breakdowns for the month of January for a few more weeks. So I can’t comment really on the last $4 billion or so of inflows. But I would just say generally in the second-half of last year, the adoption was very strong across the channels. Don’t forget that in the wirehouse channel European exposure is a big part of the global asset allocation. And when they make a call to hedge out the currency that has very big implications in the sense of the advisors shifting from an unhedged exposure to maybe a partially or all hedged exposure. So I would just say that this is an example of a very large important asset class 20% of, excuse me – 30% of ETF is in current – is in stocks denominated in euro currency. So if you get very broad exposure there to Europe hedging out to euro that can have very broad application across the channel. So I would just say, it’s – I wouldn’t want to say it’s one channel than another, it’s hard to become a $10 billion fund unless you are getting broad-based adoption across all three major channels.

[Michael Grondahl:]

Okay. And then with the significant increase in the sales force, how do you think about potentially accelerating kind of your fund launches?

[Jonathan Lawrence Steinberg:]

This is Jono. So, we said, we’re – I believe we said, we plan to do 8 to 10 new fund launches this year, which is sort of consistent with last year or two. So I don’t think, it changes the fund launches and we’re not going to go into what we plan to launch, but we’re very excited about upcoming fund launches.

[Michael Grondahl:]

Okay. And then maybe just lastly, any updated thoughts just on consolidating or M&A and, is and when you look at targets out there, what is it you are looking for?

[Jonathan Lawrence Steinberg:]

Again, this is Jono. We have said in the past that we look at asset classes or geographies that can expand our capabilities. You have seen some M&A activity from traditional firms getting into ETFs. There are a number of subscale small ETF players that I would be surprised. There is more activity going back to sort of what, I think, your original question that Bill asked which is about, are you seeing a greater acceptance to ETFs, and I think that the traditional firms are really seeing the tide of history is working against them that the ETF is just an unstoppable trend. So either through organic launching of their own businesses or through M&A, I expect to see additional players come into this space.

[Michael Grondahl:]

Okay. Thank you.

[Jonathan Lawrence Steinberg:]

Thank you, Mike.

[Operator:]

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

[Surinder Thind:]

Good morning, guys. Just wanted to touch based on the sales force growth there. Can you talk a little bit about the expected ramp in terms of how smooth or lumpy that might be as the year progresses?

[Jonathan Lawrence Steinberg:]

I’m sorry, Surinder, if you were to – were you talking about the – can you repeat the question?

[Surinder Thind:]

Can you talk a little bit how smooth or lumpy the growth in your sales force will be as we kind of look out over the year?

[Jonathan Lawrence Steinberg:]

Sure. So, we are going to phase in the increase in the head count. There will be – I mean, I will give you an example. We already hired about four or five of the salespeople already. So they are going to be phased in throughout the year. So you will see a spread of that.

[Surinder Thind:]

And then in terms of the actual are you going to be – are you – is the growth in the new sales force more specific to targeting some of the different channels that you guys are going after, or is it – it’s going to be fairly good mix of adding to where your current capabilities are as well as maybe targeting some of the other channels?

[Luciano Siracusano:]

Yes, Surinder, this is Luciano, I think it’s the later, it’s the – a mix of going deeper into our existing channel bringing on some new bodies to go after channels we haven’t been quite as aggressive in, as well as hiring additional sales support personnel to help with data and other items here in the home office.

[Surinder Thind:]

Fair enough. And then just maybe turning to a little bit to Europe, how big is the current sales force over there? And then maybe if you can talk a little bit about some of the initial dialogue or feedback from clients, and then maybe your thoughts on the sales force or size or the sales force there going forward?

[Jonathan Lawrence Steinberg:]

Yes. So we have about 8 to 10 salespeople today, they’ve increased that from when we did the acquisition. As we’ve said, this is going to be a controlled build out of the team there. We will continue to make investments upon success. And so this is not about replicating WisdomTree, it’s a controlled build out. And so we’ll see incremental growth in that force with success.

[Surinder Thind:]

And then maybe just how have the initial dialogues with clients and stuff been in terms of feedback?

[Luciano Siracusano:]

This is Luciano, again. So I have the opportunity to travel with some of the sales team last fall, just introduced the WisdomTree IP. And I would characterize it as a lot of the initial interest in what WisdomTree is doing. There is obviously interest in smart beta in Europe, but again, it’s early. Typically, when you launch new products they can take three to six months before people really start to build where we get comfortable with them. One of the key triggers for dividend plans is the first dividend payment. So people can have some expectation about what the dividend distributions are. As those get distributed and become more regular, I think the products that will get a little bit uniform and people will have more expectation about what’s – what they can do for them. So I would say that the initial interest is there, but right now it’s really kind of in a wait-and-see mode to see how quickly they can ramp.

[Surinder Thind:]

Okay. Well, thanks a lot, guys.

[Operator:]

Our next question comes from Douglas Sipkin of Susquehanna. Your line is open.

[Douglas Sipkin:]

Thank you. Can you guys hear me okay?

[Jonathan Lawrence Steinberg:]

Yes, we can.

[Douglas Sipkin:]

Perfect. Good morning to all of you. Wanted to spend a little bit of time on the currency hedged products, obviously you guys are the leaders, tremendous success. Have you guys done any work sort of thinking through the potential for HEDJ? I say that in the context of it just feels so much like DXJ of last year. But obviously Europe is a bigger region. So have you guys spent any time looking at the potential for that product relative to DXJ, I mean, obviously, no one knows anything, but it just feels like it’s a bigger marketplace. It’s probably more focused – effectively continent. So I’m just curious for your perspective there.

[Luciano Siracusano:]

Well, this is Luciano again. I mean, the European securities represent a greater market cap portion of the MSCI for world or the EAFE index. So on the one hand you can say Europe is a bigger market opportunity. I think the real question is how long do the central banks in each country continue with very aggressive easing? Right now, the ECB is increasing its balance sheet, obviously, Japan has been doing so for two years. As long as the market expects that policy to continue and expects those currencies to depreciate relative to the dollar, that’s the open ramp for both funds. So I think, if you are thinking about the opportunity set, HEDJ is close to $10 billion, DXJ is close to $12 billion. But if you look at the broad developed world ETF industry, there is about $280 billion invested in the developed world ETFs. There is only about $28 billion invested in currency hedged ETFs. So the industry as a whole is still 90% unhedged, only roughly 10% hedged in the developed world. That to me really is the opportunity, because the yen and euro represent 50% of the currency exposure of developed world international investment. And if the view is the dollar gets stronger against those currencies over the next few years, you can see a larger percentage of the industry become hedged. And obviously that’s a very big opportunity for WisdomTree, and we have other products besides those two that can fill that gap.

[Douglas Sipkin:]

Great. And to just follow up along that sort of same view, have you guys ever given any thought to – I know it’s not your mantra, but some defensive launches, and effectively, what I mean is maybe an unhedged version of those products just because there will come a time at some point, maybe two years, five years, 10 years, who knows, when the dollar starts to weak, maybe the fed talks about lowering interest rates relative to other central banks. And it feels like maybe, from a defensive standpoint, that may be something you guys could think through.

[Jonathan Lawrence Steinberg:]

Well, we actually launched a product that fits that bill a few months ago, it’s a Europe dividend growth unhedged. So in effect that’s another way to play Europe if you want to get on the side of a potential appreciating Europe. So I would say, we have hedged our best, I mean, we are putting down markers to have a competitive product regardless of which way the euro goes and competitive products for different market environments in different asset classes. So generally, yes, it is something we think about. We’ve obviously diversified the product set over the five years. Five years ago when you asked that question, people were worried about our emerging market equity exposure, and two years ago, they felt we were too concentrated in Japan. So we like the fact that we’re picking up our concentration in Europe. What it says is, we’re diversifying our product set and we’re diversifying our revenue.

[Douglas Sipkin:]

Great. And then just final question, I know you guys in the past have talked about sort of the gross margins for DXJ. And obviously there is a lot of spending that you guys are looking to do beyond thinking about gross margins on just products. But maybe you could provide sort of a framework of sort of how the gross margin dynamic changes per ETF as it sort of scales? I think you guys had said that DXJ was maybe in the 80% to 90% range on a gross margin, obviously at $12 billion. Maybe you can just give some context of how sort of the gross margin scale as the ETFs rise in size.

[Jonathan Lawrence Steinberg:]

Sure. So we’re projecting our gross margins to be about 83% to 84% probably closer to 83% in the near-term. Average incremental gross margins are closer to like 85%. Then as ETF scales to the DXJ hedge levels, incremental gross margins are in the 90s once you get something like that. And so a lot of it is really just dependent upon the size of the fund, that really helps to drive that incremental gross margin.

[Douglas Sipkin:]

Great. That’s helpful. Thanks a lot.

[Operator:]

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

[Macrae Sykes:]

Good morning, gentlemen. Terrific start to the New Year, congratulations.

[Jonathan Lawrence Steinberg:]

Thanks, Mac.

[Macrae Sykes:]

Maybe to expand on Tom’s question a little bit, I appreciate the comp moving higher and the strong sales growth in 4Q. I understand some of the compensation is related to new sales by your sales team. However, there can be a lot of velocity in the vehicles, especially with institutions. So my question is how do you reward people fairly for their sales efforts while trying to deal with potentially elevated churn? And then secondarily, how do you track this at sort of an individual level, if that’s possible?

[Amit Muni:]

So we pay our salespeople based upon inflow goals. They have a distinctive inflow goal for the first-half of the year and the second-half of the year. And they’re paid on how they met those goals. We have goals per channel and we have individual performance goals as well, and we have third-party data providers out there that help us track this information. Something that happened in 2014, it was a little unusual where we saw a lot of flows coming in towards the end of the period, where we really haven’t earned the revenue on that yet. And so we will earn the revenues on that on a going forward basis. So, I would say, unlike other firms that maybe have trailers and the like, we pay only once on the flows that do come in.

[Jonathan Lawrence Steinberg:]

And Mac, this in Jono. One, we also only pay on net flows, so that takes clear of some of what we discussed about sort of churn or selling, and then philosophically, we’re always trying to be fair to our employees.

[Macrae Sykes:]

Great. Thank you very much.

[Operator:]

Our next question comes from Adam Beatty of Bank of America. Your line is open, Adam.

[Adam Beatty:]

Thank you. Can you hear me?

[Jonathan Lawrence Steinberg:]

Yes, welcome back.

[Adam Beatty:]

Excellent. Jona, thanks very much for your response earlier. Really appreciate it, that was helpful. A question on just the mechanics, I guess, and the cost of hedging in the big HEDJ product. The good news is it doesn’t seem to affect the economics of the firm. But what’s – I mean, DXJ has been sizable for quite some time now. What’s been your experience in terms of the cost of hedging? Any trends there and are there benefits to the fund scale in terms of the cost of hedging?

[Luciano Siracusano:]

Hi, this is Luciano. So with respect to the cost of hedging for Japan and for Europe, right now, the cost is virtually nil, because you remember that the cost of going short a nonrenewable forward contract is typically the differential in the interest rate. And right now, that’s slightly to the benefit of the U.S. and should the U.S. raise rates, we could actually be paid to short these currencies. So there really is no meaningful cost to hedging. And that’s one of the reasons I think the – those two funds have become so popular.

[Adam Beatty:]

That’s excellent. Thanks very much. That’s all I had today.

[Jonathan Lawrence Steinberg:]

Thanks, Adam.

[Operator:]

I’m showing no further question at this time. I would now like to turn the call back over to WisdomTree.

[Jonathan Lawrence Steinberg:]

We just want to thank you all for your interest and support and we’ll speak to you next quarter. Thank you, everybody.

[Operator:]

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation and have a wonderful day.