WisdomTree Inc (WT) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to WisdomTree third-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 be given at that time. As a reminder, this call may be recorded.

I would now like to introduce your host for today's conference. WisdomTree, you may begin.

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 Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology, such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date of this presentation.

Such forward-looking statements are based on a number of assumptions which may prove to be incorrect. Forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not or the times at or by which such performance or results will be achieved. A number of risks and other factors could cause actual results to differ materially from the results discussed in forward-looking statements included, but not forward 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 fiscal year ended December 31, 2012, and quarterly report on Form 10-Q for the fiscal quarter ended June 30, 2013.

Now, it is my pleasure to turn the call over to WisdomTree CEO, Jonathan Steinberg. Thank you.

Good morning and welcome to WisdomTree's third-quarter conference call.

Fellow shareholders, the third quarter was another solid quarter. We ended the quarter with assets under management of $31.4 billion, up 87% year-over-year and up 8.3% sequentially. Third-quarter inflows came in at $1.2 billion and $12 billion through the first nine months. We also reported record revenues of $39.6 million, up 83% year-over-year and up 6% sequentially. We recorded record net income of $15 million, up 230% year-over-year and up 22% sequentially.

For the first nine months of the year, we reported over $35 million in net income. Our pretax profit margin in Q3 expanded significantly to 38%, a 5 percentage point increase over the second quarter. Later on the call, Amit Muni, WisdomTree's CFO, will walk you through our financial statements and updated margin guidance.

2013 has been a busy year for the firm on a number of fronts. First, we have launched eight new ETFs this year and expect the pace to remain robust over the next few quarters. We have expanded our headcount from 70 people at the end of 2012 to 84 people today, a 20% increase in nine months. Though expected as part of our planned growth investments this year, the number of new hires is still significant. Finally, we spent considerable time as a firm analyzing our custody and fund administration relationship and concluded that it made sense to make a change to State Street. The changeover will go into effect April 1, 2014 and Amit Muni will walk you through the significance of this transition later on the call. The fourth quarter is off to another solid start, with more than $700 million of inflows quarter-to-date and record AUM of approximately $33 billion.

Let's start by taking a closer look at inflows on page 3. At an industry level, ETF inflows were $55 billion in Q3, strongly rebounding from the second quarter. Almost exclusively, all of the flows went into equities; however, overall investor sentiment remains stubbornly muted, as you can see from the lack of meaningful growth over the last four quarters. This isn't an ETF problem, but a broader lack of confidence by all types of investors.

Let's look at WisdomTree's inflows on page 4. As we reported, we had $1.2 billion of inflows this quarter, almost $700 million from DXJ, our Japan hedged equity ETF. As you can see, DXJ's momentum slowed this quarter compared to the first and second quarters. If you look to the right, you can compare inflows of the first nine months, $12 billion versus $3.7 billion in the year ago period. You'll note that, in the first nine months of this year, we raised $3.2 billion in addition to DXJ.

On the next slide, we take a closer look at those inflows by category. As you know, we disclose inflow activity for our entire ETF family on our Investor Relations website, so I'll just make a few comments on flows this quarter. Emerging markets were mixed, but a relatively positive story for us, given the general emerging market weakness and the negative sentiment towards EM currencies and EM fixed income during this period.

We did see modest outflows in some of our broad emerging market equity and bond in currency funds; however, investors are beginning to find their entry points into specific segments of emerging markets. In particular, India has been one of the most out-of-favor emerging market countries this year, but we are now seeing that segment begin to reverse. Our India ETF had the most inflows this quarter behind DXJ. If sentiment towards India continues to improve, it would be an extremely positive development for WisdomTree, because we offer the leading Indian ETF, in terms of assets and trading volume. We also saw inflows in emerging market small caps. In fact, WisdomTree participated in the small cap rally across our domestic, European and emerging market offerings.

Lastly, I'd like to highlight an important point concerning DXJ and our entire currency hedged family. These products serve as a diversifier to our business. Remember that for most of our history, a strong dollar proved challenging for us, given that the vast majority of our assets were in non-US securities. Now in addition to our domestic equity family, we have a new suite of currency hedged equity products that benefit from a strong dollar. This is an exciting development and we are making a concerted effort to capitalize on the success of DXJ by growing our leadership position in currency hedged equities, as you can see on the next slide, page 6.

Here we break out our hedged equity suite, excluding DXJ. We have seen growing interest and rising assets into our hedged equity suite, which now is five ETFs in total. Excluding DXJ, they have approximately $500 million in assets. If you include DXJ, we have $11.5 billion in assets. So we have invested in this category by launching three new funds this year, including our most recent fund launch, Germany Hedged Equity. This suite is a good example of WisdomTree's innovative approach to product development. It's also a good example of how WisdomTree continues to diversify our investment themes.

Now let's look at our market share of inflows on the next page. On the left, you can see the last five quarters. As I said before, third quarter market share came in at 2.1%, which is equal to our market share of industry assets. As a reminder, market share can be volatile from quarter to quarter. On the right-hand side of the page, we look at our market share through the first nine months. As you can see, market share for the first three quarters of the year was 9.8%.

Let's look at the inflow and market share rankings for the entire ETF industry by sponsor. The $1.2 billion of inflows in the third quarter ranked us ninth in terms of inflows. On the right, you can see that year-to-date we are the third best asset gatherer in the ETF industry overall, behind Vanguard and iShares, again with 9.8%.

On the next slide, we will put this into even broader context by including all mutual fund families, as well as ETF sponsors. Year-to-date, WisdomTree ranks seventh overall. WisdomTree is the 56th largest asset manager by assets under management, so we are clearly growing very quickly and punching above our weight class.

Now let's look at our organic growth on the next page. WisdomTree remains the fastest-growing publicly traded asset manager, with 66% organic growth in the first nine months. This is an important metric for our shareholders; and as the only pure play publicly traded ETF sponsor, WisdomTree remains uniquely well positioned for investors who want direct exposure to the fast-growing ETF industry. On the right, we compare WisdomTree's organic growth in assets to those -- to that of the other leading ETF sponsors. Again, we remain the fastest-growing; but as you can see, the ETF sponsors are growing faster than the publicly traded asset management industry.

Now I'd like to introduce Luciano Siracusano, our Chief Investment Strategist, to walk you through the performance of our funds.

Thank you, Jono.

Page 11 summarizes the after-fee performance of our equity ETF's relative to their cap weighted or competitive benchmarks, which of course, are calculated without fees. Over the past year, the percentage of WisdomTree ETFs outperforming their benchmark has declined, both on a numerical basis and as a percentage of our equity assets under management. This is not surprising to us, as many equity markets have appreciated 20% to 30% in the past 12 months. Because WisdomTree's underlying indexes are not capitalization weighted, they often do not capture 100% of the market's upside and powerful momentum-fueled new moves, as we have had in the US and in the developed world over the past 12 months.

Although WisdomTree's three largest equity funds have continued to see strong inflows in 2013, all three have lagged their benchmark over the past year. The pie chart on the bottom left-hand side of the page reflects the disproportionate impact those three funds have had on our complex's performance on an asset weighted basis. But even with these headwinds, 53% of our 40 equity funds outperformed or cap weighted our competitive benchmarks since inception, and assets in those funds represented 41% of WisdomTree's equity assets under management as of September 30, 2013.

There are, of course, many reasons why investors use WisdomTree ETFs. Some use them for income, some use them to reduce volatility or to hedge currency, some use WisdomTree ETFs for their tactical sector or country exposure, or to gain access to a difficult-to-reach asset class. Performance is only part of the picture. But to get a better picture of how WisdomTree's core fundamentally weighted indexes have performed over a lower market cycle, we have included on page 12 the total returns for WisdomTree's total market in small-cap indexes that have at least a five-year real-time track record in major equity markets around the world.

Although past performance does not guarantee future results, we are pleased with the results we have seen in the equity markets that typically comprise core allocations in global portfolios. In six of the eight markets, WisdomTree's fundamentally weighted indexes generated higher returns than their comparable capitalization weighted benchmark since their respective inceptions.

The greatest out performance occurred in the least, or less efficient markets, in emerging markets, where the annualized differential was 290 to 425 basis points in WisdomTree's favor over the past six years, and in the US small cap segment, where our earnings weighted small cap index beat the Russell 2000 by more than 2 percentage points on an annualized basis since its inception in February of 2007. In the US, our broad dividend and small cap dividend weighted indexes lagged their comparable cap weighted indexes since their respective inceptions in 2006. This was understandable, given that growth stocks outperformed value stocks over this time period. With the media and the industry focusing on so-called smart beta alternatives to traditional cap weighted indexes, we believe that WisdomTree's track record in the core equity asset classes where we weight equity markets by income, rather than by a company's market value, will be an important source of competitive advantage for the firm going forward.

Now because investors cannot invest directly in an index, we created a new slide on page 13 to show how WisdomTree's broader product set has performed relative to their peer group, as categorized by Morningstar. These comparisons take into account fees and transaction costs and display how WisdomTree's equity fixed income and alternative ETFs have performed against actively managed mutual funds, index funds and ETFs. We believe these comparisons over these distinct time frames give investors a better idea of how WisdomTree ETFs have performed relative to the investable choices in the opened end fund world.

In evaluating the performance of our equity, fixed income and alternative funds, you can see in the far right column that since their respective inceptions, 55% of WisdomTree's 47 equity, bond and alternative ETFs outperformed their peer group. Put another way, 85% of the $30.8 billion invested in WisdomTree's 47 stock, bond and alternative ETFs were in these 26 peer-beating funds. Because WisdomTree continues to bring new active and passively managed strategies to market in different asset classes, going forward we will evaluate our ETFs relative to their peer groups. And so we will update this slide on future calls so that investors can get a holistic view of how WisdomTree ETFs are performing across different asset classes.

Now I turn the call over to our CFO, Amit Muni.

Thank you, Luc.

We continue down the successful path of another record-setting quarter. Revenues climbed to nearly $40 million in the third quarter, an increase of 83% from the same quarter last year, yet expenses only increased 46%. Our net income more than tripled to $15 million, or $0.11 per share, compared to last year's quarter, and up 22% from the second quarter. On a year-to-date basis, revenues were up 74% and net income nearly quadrupled to $35 million.

On the next slide, we'll go through the key drivers of our revenue growth. Starting on the left, you can see our AUM increased by $1.2 billion of net inflows and $1.2 billion of positive market movement. While period-end AUM was up 8%, average AUM increased 7%, due to the volatility we experienced in the middle of the summer. On the right, you can see as part of our overall revenue mix, the International category is growing as a result of the success of DXJ, which continues to drive our revenue growth as reflected on the next slide. Our ETF revenues reached a record $39 million in the third quarter, driven by growth in the International and US categories, as compared to the second quarter. The mix dynamics changed our own overall revenue capture to 51 basis points in the third quarter; however, it is 52 basis points today.

On the next page, you can see how this strong revenue growth has translated into improvement in our key margin metrics. Our gross margin increased to 77% in the third quarter. This improvement was due to two items. First, we experienced decreased variable cost as a result of lower inflows in the third quarter. And second, the previous quarter had higher cost due to the annual rebalancing of our international ETFs. Gross margins on a year-to-date basis was 75%, within our previous guidance of 70% to 75%. I will speak more about gross margins in a minute. Our pre-tax operating margin also continued to drive higher, reaching 38% in the third quarter and 33% year-to-date.

On the next slide, I'll review our expenses compared to the second quarter. Q2 expenses were $25 million. New product launches and annual registrations fees outside of the US increased fund costs by $253,000. Higher average AUM added $144,000. We had $550,000 in lower SEC fees, which are tied to inflow levels. Expenses were $213,000 higher in the second quarter, due to the annual rebalancing of our international ETFs. These changes led to an overall decline of $366,000 in fund and third-party related expenses.

We also incurred about $200,000 in compensation costs due to higher headcount, which stands at 84 today. We added six new people this quarter, predominately on the client-facing side of the business. Next, beginning in the third quarter, we began to pay our Board of Directors for their services. In the past, during our start-up phase, they had waived their fees. Also, as we discussed last quarter, we began to incur additional rent for office space we will be occupying in January. Since we signed the lease very late in the quarter, the amount came in lighter than planned, but will be for the full amount in the fourth quarter, in line with our previous guidance.

Offsetting these increases was a decrease in marketing and sales-related spending. Even though these amounts were higher than the levels we had historically spent in the third quarter, it came in less than the second quarter. And lastly, we had lower professional fees. So we ended the quarter with $24.7 million in expenses, down slightly from the second quarter.

As the next slide reflects, our expenses continued to decline as a percentage of our revenues, contributing to our expanding margins, in particular our fund-related and compensation costs. On a year-to-date basis, our compensation is within our previous -- our guidance of targeting 24% to 26% of revenue on a full-year basis.

The next slide reflects our strengthening balance sheet and liquidity. We had total assets of $118 million at September 30, which is primarily comprised of $87 million of cash and cash equivalents and $12 million in investments. We had 127.5 million common shares outstanding and 140 million shares in total, when you include our options and restricted stock. And as of the end of last year, we had a $61 million post-tax net operating loss carry forward. On our next call, we will give further guidance on the treatment of our NOL.

Now I'd like to update you on four items. First, on the status of our strategic growth initiatives. Year-to-date we have spent approximately $6.7 million on our strategic growth investments, which includes hiring more sales and other client-facing positions, launching more funds to grow our platform and diversify, and lastly, additional spending on marketing and sales to support our current and new ETFs. For the full year, we will be closer to the higher end of the $5 million to $8 million range, as we indicated on our last call. We believe these investments are important and lay the foundation for our growth and long-term positioning in the ETF industry.

Second, on gross margins. Third quarter gross margins were 77%, and year-to-date 75%. Based on our current AUM and mix, we expect our gross margins to remain in the 76% to 77% range for the next two quarters, as we continue to launch new ETFs for the remainder of this year and early next year. However, we have a different outlook on gross margins for next year, which leads me to my next item.

Beginning in the second quarter of 2014, we will be moving our fund accounting, administration and custody services to State Street. One of the benefits of our out-source model is our ability to drive continual improvement and efficiency. State Street is one of the global leaders in ETF servicing, and our move drives more value to our business. As a result of the change, we expect cost savings and an improvement in our gross margins. To give you a sense of the savings. If State Street's pricing had been in effect in the third quarter, fund expenses would be approximately $1.5 million lower, or $6 million in annualized savings. This would've translated into a 4 percentage point improvement in our gross margins, to 81%.

The next logical question is how much of the savings do we anticipate flowing to our bottom line? As we always do, we look for right opportunities to accelerate our growth and long-term positioning in the ETF industry; therefore, we may invest part of these savings into incremental growth opportunities. At this time, we have not completed our strategic planning and budgeting for 2014. We will have further guidance on 2014, our growth initiatives, as well as longer-term margin guidance on our next call.

And lastly, we will be filing shortly a shelf registration statement to register 835,000 shares of stock, underlying options that were issued in 2004 to RRE, one of our original venture investors. These shares represent the remaining unregistered holdings of RRE and WisdomTree. As you remember, RRE sold most of their holdings in our last offering, and this shelf will allow them to sell their remaining stake. They may sell these shares from time to time in the market.

Now I'd like to give you an update on our results so far in November, on the next slide. The fourth quarter is off to a solid start. So far this month, we generated $700 million in net inflows and our AUM has reached an all-time record of $33 billion. Our average AUM is up about 7%, which will again translate to higher revenues. As we disclosed on our website a few weeks ago, the currency category is leading our inflows, followed by equities. So far, we have seen minor outflows in DXJ. The industry has taken in $19 billion in inflows, predominately in equities, and outflows in fixed income, similar to our experience.

So to summarize, this was another great quarter that clearly reflects the operating leverage in our business model, as demonstrated by rising revenues and net income, coupled with expanding margins. We have also laid the groundwork for gross margin improvement in the future. I look forward to updating you on our next call with our full-year results, guidance for 2014, and our longer-term margin goals.

Thank you. Let me turn it back to Jono.

Thank you, Amit.

I will be brief. WisdomTree has never been stronger. 2013 has been a year of investment for the firm. We have added to our headcount, launched additional funds, and expanded our marketing and communications, but we're investing in our business in a very disciplined way. Bottom line, we have never been as well positioned for the future as we are today.

I want to thank you for your interest and support. This ends the planned portion of today's call. Let's now open this up to some Q&A.

Thank you, ladies and gentlemen.

(Operator Instructions)

Our first question is from Marc Irizarry from Goldman Sachs. Your line is open.

Great. Thanks. Hello, guys. Can you talk a little bit about the inflows, the currency inflows that you've seen recently, maybe where that's coming from? And then I have a follow-up.

Sure, Marc. This is Luciano. So the currency inflows, as you can see from looking at our website, came in principally into the Brazilian Real fund. It was a very large trade. And so we don't disclose individual clients, but it's fair to say it was a sizable inflow into that fund. We're also starting to see some more interest in our emerging market currencies, as the market sentiment changes.

Okay. And then maybe just related to that, could you talk a little bit about your progress from a distribution perspective? Where are you guys in the defined contribution/401(k) effort, if at all? Maybe talk to a little bit about the RIA, what you're seeing in terms of the RIA opportunity for you guys near-term versus maybe more of the wire houses.

Well, what we saw in the third quarter was inflows that pretty much represented our historical pattern. I would say if there was any particular strength in the third quarter, it was probably on the institutional side, as well as international. As you know, the 401(k) business remains a very small part of our business. It remains a very small part of the ETF business. It's certainly a large opportunity going forward, but it's a very long sales cycle and involves many players. We will continue to look for opportunities in defined benefit and defined contribution. But right now, we're principally targeting the smaller plans on the 401(k) side. And like I said, those sales cycles are much longer than the other channels.

Okay. And Jono, there's been some talk about some new competitive entrants from some of the bigger mutual fund complexes. Could you talk about strategically how you think about your competitive positioning versus maybe some other players that are coming into the space, maybe are you seeing anything on the competitive side in terms of encroachment in your key categories that suggest that maybe pricing could be pressured somewhat?

So the most notable new entrant, I think, was launched yesterday, which was Fidelity launched Domestic Sectors. They came in at a very competitive price point versus the other competitors in domestic sectors. That's not a place that we play. From a strategic standpoint, or for you when you look at the industry, when somebody comes to market third, fourth or fifth in a segment, there aren't many options other than competing on price, and Fidelity chose to do that. Interestingly -- and I don't know what to make of it, you'll make of it what you will -- but Fidelity, one of the world's largest asset managers, chose to hire Blackrock as the sub advisor on those funds. So they're trying, they're here. In general, I think it means that the category will continue to grow. It's another positive development, broadly, for the industry.

We've seen a filing, and an updated filing, by JPMorgan, where they're going to come into smart beta with affiliated indexing. Again, WisdomTree's position as the low fee innovator in the industry, I think is one of the most attractive spaces in the ETF industry. And I think we will continue to strive to maintain that position. I'll give you as another example, iShares has filed for a competitive product to DXJ, our hedged -- Japan hedged equity product. iShares will be coming out with their fund on an index that Deutsche Bank has already launched. So now there are four Japan hedged equity products. We have two of them. So we have already innovated by launching small cap. And in terms of satisfying investor demand for Japan solutions, you may note that we have already filed for our Japan bond bear fund. So again, we hope to stay ahead of the curve and be very, very sensitive to our customers.

Okay. Great. Thanks

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

Good morning, gentlemen, and congratulations on a really good quarter.

Thank you, Surinder.

I wanted to touch base a little bit on the value of your brand and the success that DXJ has had. How do you guys think about measuring that value, in terms of being able to sell yourself or stand out apart from the crowd? It seems like with more and more entrants trying to come into the ETF space, it might be harder to stick out, especially if there are lot more entrants.

So I think the WisdomTree brand resonates. I believe -- but it's more than just the name on the firm. It's how our employees handle themselves every day. As an example, one of the prior questions dealt with our Brazilian Real fund. So this was a fund that had $38 million in assets, and a very sophisticated RIA was willing to put in $500 million in one trade. So the brand definitely resonates, and people have confidence in WisdomTree. So I feel -- and again, being differentiated, and our product suite is differentiated -- is really one of the great advantages. So I feel very good about it, in general.

Sounds good. And then just one quick follow-up. Related to Europe, it seems like your small cap dividend fund over there has seen a nice pickup in flows in the last few months. The hedge product over there is doing really well, and you guys recently launched the Germany hedge product. Does there seem to be a lot more demand in the marketplace for European-based products, at this point? Are clients asking about these kind of things? Are you guys seeing a specific opportunity there?

This is Luciano. We've definitely seen a pickup both in client interest and inflows. Some of the reporting in the industry has also talked about more institutional interest in Europe. And fortunately there, we have two unique products, as you mentioned. The European small cap ETF from WisdomTree is the only European small cap in the entire industry. That was roughly a $25 million fund 12, 18 months ago. Today, it's a $300 million fund. So that is a very interesting ETF for folks looking to get completion to the European asset class. You also mentioned hedged, that was the first European ETF to hedge out the currency, and it gave people regional exposure to the continent. So today, hedged is a $400 million fund. So we are certainly seeing interest in Europe, and we hope to see continued flows there.

I will just make one other point on our European small cap. It is also the best performing European equity ETF in the market year-to-date. So again, performance is also driving investor interest.

Thanks a lot, guys.

Thank you.

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

Hello. It's Steve Fullerton filling in for Bill.

Hello, Steve.

I just wanted to touch on the momentum you're seeing in the eight new ETFs that you launched. Which of these have you gotten behind the most, in terms of advertising, and which do expect to get behind the most in the next quarter?

So what we've done, from a year-to-date product launch, we've done a suite of growth, dividend growth funds. We have also expanded our hedged equity suite, and then we've also invested by launching new funds in domestic, dividends and emerging market equities. So really, some of the core franchises of the business. The one that has attracted the most assets to date is our broad US dividend growth fund, and we are currently been marketing our most recent fund, our Germany hedged equity fund. We have a suite of commercials that allows us to be very sensitive to changing market cycles and sentiment, and we will play it by ear. But I think we are very, very pleased with the way we've expanded the franchise in all of those different opportunities. It gives us a lot more opportunities to satisfy different investor interests.

Okay. Great. And then just if I can get any more detail on the gross margin dynamics for next year. So I know this quarter would have been 81%, if you would've had State Street. Is it fair to think you could be running 81% for 2014, any lift to that, any more detail there?

Sure, Steve. We'll give a little bit more guidance on our next call on how we're thinking about gross margins and how they expand. But to help you think about it, under our current agreement that we have, incremental gross margins, on average, are closer to 80%. Under the new agreement, incremental gross margins will be closer to 84%. In the high end, you can get -- some of our higher AUM funds, you can get closer in to the 90% level. So that's to help you think about it as we grow, but we'll give a little bit more guidance on that on our next call.

Great. Thanks a lot.

Our next question is from Mike Grondahl from Piper Jaffray. Your line is open

Yes. Can you just help us think about your marketing outlook a little bit, and some of the money you'll be spending and what it will be focused on? And then also, help us think about the headcount outlook?

Hello, Mike. All of that is part of our growth initiatives, which we'll be talking about on our next call. But just to help you think about it in light of all of our expenses, as we've always said, that our expenses will continue to decline as a percentage of our revenues. And that includes marketing and sales-related spending. We may get a little bit of seasonal fluctuation intra quarter, but generally, overall, you should expect to see that decline. But I think once we get into our next call, we'll be able to give you a lot more guidance on how we're thinking about investing back on our marketing and sales-related initiatives.

As far as headcount levels, we did, as we said earlier this year, we wanted to invest. It was the right time for us to invest in the business. We've added to our headcount levels, predominantly in the client-facing side of our business. I would say we probably -- we did that investment now. I don't expect them to be at the same levels as they were going forward as they are this year. But we'll be able to give you a little bit more guidance on that on our next call.

Okay. Thanks, guys, and congratulations on those gross margins. That's impressive.

Thank you, Mike

Our next question is from Mac Sykes from Gabelli and Company. Your line is open.

Good morning, gentlemen. And I would also reiterate Mike's comments on the performance this quarter. Congratulations.

Thanks, Mac.

Just going forward in terms of your product launches, how much of a factor in your thinking is the field relative to your aggregate right now? Are you focused at all on managing the overall firm fee rate or should we just think about the margin opportunity?

No, we are not focused on the fee rate. Every fund that we launch needs to be competitive within its category. And so that's really what we focus on. If we can find opportunities to answer client needs, we're going to do that, regardless of the fee rate relative to what we are running at today.

Then obviously, you're benefiting from strong cash flows. That's almost $1.00 a share, at this point. I know you are going to be reinvesting, but have you thought about dividends at this point, or are we still a while off?

I would say we're still a while off there. We are a growth company, and our focus is on investing in the business. There are opportunities for us to use that cash and we believe that's the best use of our cash right now is to help really grow that business over the short term. To the extent we can't put it back in the business, I think our natural thing to do, as you say, is to trend towards dividends. But I wouldn't say you should be looking for that in the short term at all.

Great. Thank you, guys

Thank you, Mike.

Our next question is from Matt Kelley from Morgan Stanley. Your line is open.

Good morning, guys. I just wanted to make sure, on the gross margin -- sorry to come back to this. But if I'm doing my math right, it was about $1. -- if you have had State Street this quarter, it would've been about $1.6 million reduction to fund management and administrative costs, is that right?

$1.5 million for the quarter. We would have lowered fees by $1.5 million.

Okay. Got it. And then as we think about that going forward, I understand you're going to give us more guidance on your next call, but what would -- are there any other kind of low hanging fruit, if you will, where you can outsource or lower your costs that you're not currently doing that you've identified internally?

I think our overall philosophy, our business model, is to continue to drive efficiencies and try to find value. And we've done that through outsourcing the most risk-intensive, cost-intensive and labor-intensive parts of our business. And so to the extent we can continue to find more opportunities to do that, we will. But I think as we get bigger, we're able to drive much more value through our third-party service providers and we will continue to do that.

Okay. And then one last question on the margin. I think you, in your slides, you said you're $32.7 billion average AUM this quarter. So obviously, you're getting close to your target, your $35 billion, 40% margin. So is that something that we should revisit next quarter, as well, or any updated guidance there, given the new fund management costs that you laid out?

So there's no updated guidance on that. If we hit $35 billion of average assets before the switch over to State Street, that guidance that we've had still stands. If we hit $35 billion of average assets after the second quarter, from where we stand today, before any investments in growth initiatives, then you should expect to see, we said 40% before, so it should be 44%. But again, we're going to give updated guidance on our next call on the reinvestment and growth initiatives that we have planned for the business.

Got it. And then one last one from me. You guys talked a lot about performance of your funds earlier, and that was helpful to see how you're doing versus no fee benchmarks and versus actively managed funds. I'd be curious -- how do your different investors in the channels, how do they actually look at this? Are they looking at no fee benchmarks and actively managed funds? And maybe if you can segment that by your client types, what they're looking at for performance versus an index or a fund?

Sure. This is Luciano. I would say that the more sophisticated clients who are benchmarked to a composite are very concerned about how you perform against the cap weighted index, because they have that alternative. They can invest in cap rated indexes at very, very low costs in the ETF structure. So I would say in the core parts of the market, you certainly want to have performance over time that can beat the cap weighted index after fee, after expenses.

Now that's not to say that actively managed funds are not also being used. So I think the comparison to the actively managed peer group is also very useful. There are some clients who are 100% ETF portfolios, but many of them mix active managers with ETF managers. And so beating the benchmark and beating the active manager is very important in both cases. So I would just say that we try to focus people on the long-term performance, and we also try to get them to see some of the other attributes of using WisdomTree, which can include additional dividend income, it could include lower volatility; and for advisors who are interested in risk-adjusted returns, that's another reason that they're looking at our strategies.

Got it. And then one last one for me, and I promise I'm done. We've heard a lot about a lot of active managed, actively managed firms potentially looking at launching actively managed ETFs. And a lot of that seems to relate to whether they can get different transparency rules approved by the SEC. So I'd be curious in A, getting your view on whether that should happen; and B, if these active managers do enter with reduced transparency requirements, does that -- do you think that enters your clients, your end clients' selection mindset when they're choosing your funds versus some of these funds, or do they view it separately?

So I'll take it. This is Jono. I'm not going to answer whether the SEC should or should not change transparency standards. I would think, though, from a client standpoint, they want, they become used to, transparent portfolios, and that would be viewed as a step backwards for the client. So I am not personally expecting there to be great client demand for a less transparent execution on ETFs. And during moments of market stress, I would think that those would be the ones that would see wider spreads, when it becomes more difficult to hedge those positions.

Okay. Thanks, Jono. Thanks, you guys

Thank you.

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

Thank you. Good morning, guys. How are you?

Good, Doug.

Just wanted to first focus on one line item, and then a broader question. Just so I understand for modeling purposes, occupancy, what's the normalized rate for that going forward? I guess it sounded like you guys signed late, so there wasn't as big of an impact this quarter. Just for modeling purposes, I'm trying to think about how should I be thinking about that line going forward?

Sure. So on our last call, we gave guidance that we think it should be about $700,000 in occupancy -- additional occupancy costs. So you can add that to your fourth quarter model. And then probably about -- then for 2014 going forward, take that $700,000 out and add another $300,000 instead, and that will eliminate the double rent that we're paying for this short period of time.

Got you. Okay. Thank you. And then just a broader question. You're seeing more and more adoption of commission fee type of platforms. Obviously, Blackrock with Fidelity, Schwab OneSource, expanding more ETFs. Are you guys looking broader into doing some more of that aligning with distribution partners? Obviously, the flows to date continue to suggest that it's not a big issue for you guys, but down the road, as I'm just envisioning more and more products becoming available commission-free, is that something strategically you guys are thinking about aligning with more providers?

We are on the Ameritrade platform and the ETRADE platform, and it's a nice benefit. But when you think about what is a trading commission, a $7.00 trade, it's really not meaningful. Also, the vast majority of all money in this country goes to a financial intermediary. And so the self-directed retail, though attractive, is still a very small piece of the overall pie, in terms of assets.

Great. Okay. Thank you. That's helpful.

Thank you.

And then, I don't know if I'm still on. But I know you guys talked about broader initiatives abroad. Any update on that?

No, no update, Doug. We continue to find ways to cost-effectively reach non-US investors. About 6% of our assets today are held by non-US investors. We have crossed-listed funds in Mexico. We have filed notifications in Japan. And we do have a usive fund company in dormant stage that we can use, if we wanted to, in the future. So we are always evaluating the right way for us to cost-effectively reach that non-US investor.

Okay. Great. Thank you for answering all the questions, guys

Thank you.

Our next question is from John Dunn from Sidoti and Company. Your line is open.

Good morning. Congratulations, guys.

Thank you, John.

I know that market share, you said, could be volatile quarter to quarter, but can you talk about some of the dynamics that underlied it in the third quarter?

The numbers speak for themselves. It was a very volatile quarter intra-quarter, and where a lot of the flows for the industry went into really the largest, most liquid equity ETFs. So money went in very, very quickly, short-term into the SPDR and Qs. But in general, we had mixed but positive inflows in emerging market equities. Japan was positive, but slower. And in general, Japan was less of an impact versus the total industry pie in the first two quarters of the year. But you know, it's again, sort of just like in this quarter, Brazil, so much of it is market sentiment-driven. The ETF expresses market sentiment in virtually real-time.

Got you. And then you said new funds are going to remain robust for several quarters. You want to put out a new target for 2014, given that?

We'll do that on our next call, when we update on our overall sort of thinking for 2014 and growth initiatives.

Great. Thanks very much. Congratulations, again.

Thank you, John.

The next question is from Adam Beatty from Bank of America Merrill Lynch. Your line is open.

Thank you and good morning. Just a question about your product development philosophy -- and you've done a fair bit of that this year. Originally, I guess the firm was in the mode of building a better mousetrap. You saw the way the S&P was constructed and decided to do that a better way. More recently, you've had success with niche products, where I would characterize them as being more innovative in terms of the market and exposure that they target. What are your thoughts on that currently? It would be great to get those. And also, maybe more specifically, how much does the presence of an incumbent competitor weigh on your product selection, product development?

So first, if there's an incumbent product. We've never launched a Me-Too product. So it would have to be different. It would have to be viewed as better or an alternative. So when we launched DXJ, there was already a Japan ETF in the market, so it needed to be different. The same when we launched India, it had to be better. We did it in the '40 Act. And when you look at something like a DXJ, you might call it niche, because you hedged out the currency. But niche can be extraordinarily large, like certain sector funds can be very, very large.

So we have filed, what's public, we've filed for Korea hedged equity. We filed for, as I said earlier, Japan bond bear. That will be a first-to-market. We filed for a Bloomberg dollar bull fund, which we're excited about, as well. So we'll be investing in our currency category. And then we've also filed for some zero negative duration bonds. So again, we'll be expanding our franchise. But we play to be different and innovative and very customer sensitive.

That's helpful. Appreciate all the detail. Thank you. Just one more. Thanks for taking my questions. On the State Street relationship, I think of you guys as being aggressive in terms of outsourcing and having non-core activities done by third parties or what have you, but you didn't necessarily start out with the relationship with State Street. Was there something that changed in terms of maybe something as basic as a size threshold, or were there opportunities that you saw in the State Street relationship that hadn't been there before, or what was the dynamic around that decision?

As I said in my prepared remarks, we always are looking for the right way to drive more efficiency and value into our business. And State Street, being one of the global leaders in ETF servicing, we found the right way to drive value into the business, which is what helped us make the decision for the change.

Great. thanks. I appreciate it.

Our next question is from Todd Wachsman from Morgan Stanley. Your line is open.

Good morning, gentlemen, and congratulations on another outstanding quarter. First, I really just have -- (technical difficulty)

I'm sorry, Todd, you're breaking in and out. We can't hear your question.

Excuse me?

Can't hear your question.

Okay. Good. First, I really just have a comment regarding the total returns. I think that's a phenomenal thing showing that and I want to see that continue. The other -- the real question I have, though, is regarding the dividend growth speed of ETFs. How do you plan to expand that? Are you looking at mid-cap dividend growth, domestic, or any other dividend growth ideas?

This is Luciano, Todd. We've already launched a small cap dividend growth ETF in the US. So we are covering the small cap space. We've also launched emerging market dividend growth. So we are expanding that dividend growth theme around the world. And we've also continued to look at the theme going forward. We're confident it's a strategy that has the potential to resonate in this environment. We're trying to put together a more intelligent process for figuring out who's likely to grow dividends in the future. We don't think screens that only look backwards are optimal, because they're not, frankly, capturing who's raising dividends in today's environment. And so we are very bullish on that strategy, and we're going to continue to market it and our troops on the ground are going to continue to sell it.

All right. Great. Thank you. That's all for me, guys.

Thank you.

Thank you. I'm not showing any further questions in the queue. I'd now like to turn the call back to WisdomTree for closing remarks.

I just want to thank all of you for your interest and support in WisdomTree, and we look forward to talking again next quarter. Thank you.

Ladies and gentlemen, this does conclude today's conference. You may now disconnect. Thank you.