WisdomTree Inc (WT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the WisdomTree first-quarter earnings call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I'd now like to turn the conference over to WisdomTree Investor Relations, Mr. Stuart Bell. Sir, you may begin.

Thank you. Good morning. Before we begin, I would like to reference that a new [boast screen] are 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 or similar expressions suggesting future outcomes or events. Such forward-looking statements reflect our current expectations regarding future events and operating performance, so 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 and should not be read as guarantee of future performance or results. And will not necessarily be accurate indications of whether or not, or the times under 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, including but not limited to the risks set forth in this presentation and in the Risk Factors section in the Company's annual report on Form 10-K for the fiscal year ended December 31, 2013. Now, it is my pleasure to turn the call over to WisdomTree CFO Amit Muni.

Thank you, Stu. Good morning, everyone, and good afternoon to those listening to us from London today. On today's call, I will review our operating and financial results for the first quarter, update you on our plans in Europe, discuss our tax situation, and lastly, update you on our results so far in the second quarter. Jona will then make some closing comments before opening it up for Q&A.

So let's begin on slide 3 by first understanding the industry's backdrop in the first quarter. As we can see on the chart on the left, industry flows were $14.6 billion in the first quarter, which declined significantly from the first and fourth quarters of last year. In the middle column, you can see there was positive investor demand for international equities and fixed income ETFs. However, there was significant negative sentiment for emerging market equities. In the far right column, you can see Japan equities were down 7.5%, and the yen strengthened about 2% against the dollar.

As the next slide reflects, our operating results mirrored this industry trend. We had net outflows of $500 million in the first quarter. To the right, you can see this was due to $1.5 billion of outflows we experienced in our emerging market ETFs covering equities, fixed income, and one large outflow of nearly $500 million in our Brazilian currency ETF earlier in the quarter. We had slight outflows in DXJ. However, relative to the size of DXJ, these were very modest. On the positive side, we experienced $1.4 billion of inflows, primarily in our European-themed ETFs.

Turning to the next slide, you can see the strength we demonstrated in the European category. We were the third-best asset gatherer in the European category, representing 15% market share. Our Europe small-cap fund, DFE, is the industry's first and only small-cap ETF in this asset class. And our Europe hedged equity fund, HEDJ, took in $419 million, basically offsetting DXJ outflows. Part of our diversification efforts are to create innovative products that can gather flows in different market cycles, as we demonstrated this quarter. On the right, you can see the flow rankings of the US ETF industry.

As the next slide reflects, the outflows we experienced caused us to have negative organic growth when you compare us against the publicly traded asset managers and the US ETF industry participants. We are disappointed with this statistic. However, our largest exposures were in markets out of favor. We, nevertheless, believe in the long-term opportunities for these asset classes, and we will look to build upon our leadership within these categories, as well as continue on our diversification efforts.

On slide 7, we show how our ETFs have performed relative to their peer groups, as categorized by Morningstar. These comparisons take into account fees and transaction costs, and reflect how our equity, fixed income, and alternative ETFs performed against actively managed mutual funds, index funds, and other ETFs. In evaluating the performance of these funds, you can see, in the far right column, that since their respective inceptions, 58% of these ETFs outperformed their peer group. Put another way, 85% of the roughly $33 billion invested in ETFs were in these peer-beating funds.

Now to provide you an update on our international expansion initiatives on slide 8. We closed our acquisition of Boost on April 17 and renamed the company WisdomTree Europe. We are excited about this transaction as our new team in London will lead our efforts to launch WisdomTree ETFs in Europe sometime in the fourth quarter, along with continuing to grow the suite of short and leveraged products under the Boost brand. We contributed $20 million of working capital to the business, and believe that is enough for it to get to profitability in four years. We expect the business will incur losses of $4 million to $6 million in 2014, and $6 million to $9 million in 2015.

On our financials going forward, we will consolidate 100% of WisdomTree Europe's results and record 25% minority interest to reflect the piece we do not own. We will also be recognizing a charge each quarter to reflect the buy-out commitment we have for the remaining 25% at the end of four years. That charge is calculated as the AUM in Europe, multiplied by our global AUM multiple times 25%. On the right, you can see the assets where the Boost products have grown to nearly $100 million today.

Now let's turn to the numbers. Despite the challenging market, we generated solid financial results. Turning to slide 10, revenues increased 46% from the first quarter of last year, and were essentially flat with the fourth quarter. Pre-tax income more than doubled to $16.5 million compared to the first quarter of last year, and was also flat with the fourth quarter.

Turning to slide 11, you can see how the negativity towards emerging markets decreased our percentage of concentration and revenues in that category. However, we continue to see strength and growth in our hedged equity category. Despite the mix change, our average revenue capture remains at 51 basis points.

On the next slide, you can review our key margin metrics. Our gross margin increased to 78.6% in the first quarter as compared to the fourth quarter, due to the lower third-party sharing expenses. Our pre-tax operating margin increased slightly, to 38.4% in the first quarter.

On the next slide, I will review our expenses compared to the fourth quarter. Fourth-quarter total expenses were $26.7 million. We incurred expenses of $800,000 related to our acquisition of Boost, and a one-time transition fee from the Bank of New York of $475,000 related to moving our back office fund accounting and administration services to State Street. We also ended the double rent expense for our previous office space, which lease expired in January.

Compensation costs decreased as higher stock-based compensation, due to equity grants as part of 2013 year-end compensation was offset by lower accrued incentive compensation due to our level of outflows in the first quarter. The net outflows we experienced, as well as lower average AUMs in certain categories like emerging markets, decreased fund-related costs. Marketing- and sales-related spending decreased by $114,000. And other administrative and overhead costs decreased by $156,000, leading to a slight decrease in expenses of $26.4 million.

As the next slide reflects, we continue to carefully manage our cost base, yet make the right investments in the business, as our expenses continue to decline as a percent of revenues. The savings from switching our fund accounting services will kick in beginning in the second quarter, and we expect our gross margins for the US products to be between 80% and 83% for the remainder of the year. As we stated earlier, we intend to spend $6 million to $9 million on strategic growth initiatives, and we are still on track to make these important investments to support our growth. And, lastly, we still do expect our compensation costs to be between 20% and 23% of revenues for the full year.

On the next slide, we can also review our balance sheet. We had total assets of $160 million at the end of the quarter, which is primarily comprised of $105 million of cash and $12 million in investments. You can see our balance sheet continues to remain rock solid.

Now, I'd like to update you on our tax situation on the next slide. As you can see from our results this quarter, we released a valuation allowance on our deferred tax asset as we passed the more-likely-than-not threshold that we will be able to recognize the benefit of our net operating losses. We recorded a deferred tax asset of $13.7 million on our balance sheet, with a corresponding one-time tax benefit on our income statement. As a result of releasing the valuation allowance, we will be recording GAAP tax expenses going forward at a rate of approximately 45%. However, we will not be paying actual cash taxes because of our NOLs. As you can see from the chart on the left, we ended the quarter with a pre-tax NOL of $146 million, meaning we will save the next $66 million in cash taxes. Said another way, we will not be paying cash taxes on the next $146 million of pre-tax earnings.

As I discussed on our last call, we still continue to generate tax losses due to our employees exercising options and investing in restricted stock. As the chart in the middle reflects, assuming yesterday's closing stock price, we potentially have another $90 million in losses we can recognize over time, bringing our total tax savings to potentially $107 million. Again, even though we will be recording GAAP tax expense going forward, we will not be paying cash taxes for some time.

Now, to give you an update on our current flows. As you can see on our slide 16, we are facing similar trends as the first quarter. The US ETF industry has taken in about $19 billion. So far, we've experienced $368 million in net outflows, primarily in DXJ and our emerging market equity and fixed income ETFs. Though, just like the first quarter, our European equity ETFs continue to gather inflows. Our AUM is down about 1.5%.

So, in summary, despite the challenging environment, we've demonstrated solid financial results and improved margins, reflecting the strength of our business model. Now let me turn it over to Jona.

Thank you, Amit. To summarize, this was a quarter of strong financial results. Even against the backdrop of a challenging market environment for our largest exposures in emerging markets in Japan, we reported another quarter of strong revenue and earnings, demonstrating the scale and strength of our business today. The efficiency of our business model was evident this quarter as we reported a 38% pre-tax margin, with an average asset base of just $34 billion. In fact, WisdomTree has never been in a stronger financial position. With $115 million in cash, plus our growing cash flow -- $63 million last year -- our business is extremely well capitalized, and well positioned for the future. I am confident we can continue to profitably grow our business while reinvesting aggressively for future growth. We have invested in our products, we have invested in our people, and we are laser focused on what I know to be the most promising and exciting market within financial services -- ETFs.

While Q1 was a quarter of only modest inflows for the US ETF industry, the longer-term growth opportunity is simply tremendous. As an industry, I believe ETFs have an opportunity to capture the majority of long-term assets from traditional product structures over time. Education is the key. The [ETF] growth story may not always be linear, but it is vast. In fact, new distribution channels and new investments innovation, such as smart beta, in which WisdomTree is a pioneer, are further expanding the total addressable market every day.

Internationally, the story is equally bright as the ETF structure spreads to new markets. Earlier this month, WisdomTree completed our acquisition of Boost, and fully funded our European expansion plan. The Boost product families has already more than doubled to roughly $100 million in assets since we first announced this transaction on our fourth-quarter earnings call. And we are excited to build out a family of WisdomTree use in ETFs later this year. Together with the initiatives that we have already pursued across Latin America and Japan, we are increasing our global footprint and positioning the Company for global growth. But, in reality, we are already a global company.

This slide shows WisdomTree is already the eighth-largest ETF sponsor. I reaffirm our longer-term goal of reaching $100 billion in assets in the US market. As that happens, we will move up this chart to become the fifth-largest sponsor globally. I am confident we have the products, the team, and the resources, as well as the focus, to achieve our ambitious goals. With that, I want to thank you -- thank you for your support and interest in WisdomTree. And I will open up the call to questions now.

(Operator Instructions) Jason Weyeneth, Sterne, Agee.

The first question is on the hedged equity products. How do you think investors are using the product? Do think it's more of a way to remove currency risk, or to take an active currency bid in addition to the underlying exposures?

I'm asking in the context of the DXJ market share, which has obviously grown from about 12% to close to 40% today. And just trying to gauge how defendable that market share position might be in the extent of a continued pull-back in Japan demands.

Hi, thank you for the question. This is Luciano. So I would say in the case of DXJ, it reflects the investors' view on the direction of the yen. If they believe the yen will lose value or depreciate form here, they typically want to hedge the yen out. Particularly since Japan is a unique market where the equity market is actually negatively correlated with the currency movement. So if the prime minister and the Bank of Japan are effective in their policy and people believe the yen would weaken from here, we would expect there to be continued demand for DXJ, which hedges out that impact.

With respect to Europe hedged -- hedges out the euro -- there it's a different story. I think people are using it to reduce volatility of the European exposure. And they may continue to use it if they think there's more aggressive monetary policy coming from the UCB that would actually target the euro to try to stop its appreciation.

Thanks. And then just another one on WisdomTree Europe. Are you going to be developing products specifically for Europe? And if so, can you talk about how you manage that without diluting the US product development efforts?

Sure. We're continuing to look at equity markets around the world. And we're actually going to be launching a European dividend growth fund next week, which will attempt to give exposure to European and UK companies that are growing dividends on the Continent. So that would be a third major European exposure for WisdomTree. And we think that will complement our existing product line.

Jason, as far as WisdomTree Europe, we intend to launch the WisdomTree UCIT fund sometime in the fourth quarter. It's going to be a controlled build-out. This is not about replicating the entire WisdomTree product set in Europe. We will give a little bit more detail [the active part] that we're thinking about as we get closer to launch.

But the key, Jason, is that we'll -- after we launch some of the UCIT funds, is that we will have two structures -- the UCIT structure and the 40 Act structure. And the UCIT structure really is a preferred structure to many investors outside of the US.

Great. Thanks.

Surinder Thind, Jefferies.

I will just start off with a question around the taxes. How much leeway did you actually have in determining when to recognize the DTA and stuff?

Hi, Surinder. So there is a lot of judgment that goes into when you release the valuation allowance, and we've been on the cusp of that. But I would say, one, we have passed now three years of profitability.

But there is one really main event that really pushed us over that threshold. And that was really if you looked at our results this quarter. That even in a period of where we had no growth, we still had very solid financial results. Diversification efforts are proving to work and we saw outflows in funds where we had a lot of exposures, yet inflows in other products.

When you look at the combination of that together, from an accounting standpoint, that really pushed us over the edge of we believe more likely than not that we're going to sustain profitability and be able to use those NOLs. And that's why we have to release the valuation allowance this quarter.

Thanks. And then, touching -- just based on Japan and the overall strategy there. With the release or the introduction of a series of new sector ETFs there, it seems like you guys are looking at potentially a much bigger, longer-term opportunity. But is there also a chance that some of those products may be taking market share from DXJ itself?

Well, we want to have a large footprint in Japan. DXJ is a security that is known-well in Japan. And we've notified the Japanese regulators of certain of our Japanese funds. So there's broker-dealers in Japan that have an interest, not just from in DXJ, but also in the sectors.

We believe that as Japan develops and more money is flowing through it, people may want to make more granular bets. There has been obviously a lot of interest in DXJ. The sectors just give them another way to tilt or work with their tactical bets within the Japan market.

Excellent. In terms of traction, in seeing the take-up of some of the DXJ or -- what kind of a ramp are you guys expecting in terms of the local population there with the FSA approvals and stuff ultimately, once that's all done, the products gaining traction there?

Well, it's hard for us to speculate. We don't directly control that. We're just making it available, making sure that people are aware of it. But that's just a function of demand generally in Japan. One of drivers hopefully going forward will be more equity participation of Japanese investors. And there's certain reforms and tax incentives in place now to encourage that.

A lot of activity in 2013 came from investors outside of Japan. So we would expect creating firms, hedge funds who are interested in the Japanese equity story, once they become aware that these sector funds exist, may start to use them. There weren't any other Japanese sector funds in the market. And you've seen how successful sector funds have been in United States. So we think it's a good chance to give people the choice and new tools to manage their exposure to Japan.

Okay, thanks. Very helpful. That's it on my part.

Mike Grondahl, Piper Jaffray.

Can you help us think about your marketing strategy and marketing dollars around new funds versus in-favor or high-demand funds, how you allocate that marketing spend?

Hi, Mike. It's Jona. We are flexible. We have a growing inventory of television ads that we can market some of the existing funds, if we think they are in favor. Or sometimes we do have television ads for new funds.

The television ads really do create ticker awareness, and that we support the awareness with a lot of research on our website that really helps the sales team to sell the funds and to help create the reason and how you might put the funds into your own portfolios. Sometimes they were being just aggressive in trying to create the awareness when something is really working.

So recently you've seen some India ads on television. In the first quarter, India had some outflows. The market started trading better in the second quarter as they were approaching their election. And so we've seen some inflows actually in India in the second quarter. We've also just tried to make the most of the investor interest in the European exposures hedge and DFE, which have been on television quite a bit.

Okay. And in your distribution channels, are you seeing anything new or different in terms of just where you're emphasizing things?

This is Luciano. What we've seen in the first quarter of this year, there's been a lot of interest, as Jona said, in Europe. Some of the larger inflows have gone into the European-themed ETFs. So we have made hedged and DFE a major priority in terms of our education program with advisors across the country. So that's a unified approach we've used across the channels, and we think it's had a lot of success.

And I would just add to that, still has just currency hedged generally as a theme. And currency hedged is now -- represents the largest portion of WisdomTree's equity assets. And there we feel we are a mind-share leader in educating advisors about how to hedge out currencies under equity exposure.

Okay. And then just one for Amit here. Amit, how are you thinking about pre-tax margins in this $30 billion to $40 billion range for AUM?

Sure, Mike. So we have given two sorts of margin targets, right? On the shorter term, we're expecting a 40% operating margin at $35 billion of average AUM. That guidance hasn't changed. And then the longer-term margin guidance that we gave was, they are expecting a 50% operating margin at about $55 billion to $60 billion of average assets. And they were US assets at our current revenue capture. We're still on track -- that's our goals for the US business to operate at those margins.

Okay, great. Thank you, guys.

Bill Katz, Citi.

Just starting with the margin. The gross margin, Amit, you provided for us is a little bit higher than where you were previously. So how does it get affected, if you will, to the extent the non-US business was to grow? And then, since your overall margins are constant, are you looking to re-invest the incremental gross margin relative to the last quarter's guidance?

There's a couple of things happening on the gross margin. Let me first focus on the US parts of the business. We are switching our back office services to State Street. And so we are expecting to see an improvement in that gross margin. And so the guidance that we are giving is, we're expecting that gross margin to be between 80% and 83% for the rest of this year.

On the non-US part of the business, we are expecting, the Boost-related leverage in inverse products are very high-margin. They are very low-cost to actually operate those funds. We gave guidance on what we think the overall cost is of running that business in 2014. We are not going to get into the details of all those European products right now. We will get to that more as we get further on in the year.

Yes, so we should assume just from that, that the overall margin target of the Company being unchanged, that the gross margin improvement would not necessarily filter down to earnings at this point?

Well, again, we would expect some of it. But again I remind you, Bill, that we are growth Company. We still want to make the right investments in the business. We're going to spend $6 million to $9 million on the strategic growth investments. Right now we're trending towards the lower- to middle-end of that range. But the goal is to continue to make those right investments in the business. It's not about really the short term -- to get to those margins as fast as possible. It's about making the right investments in the business to support the revenue growth.

That's very helpful. And then, you've done a very good job collectively of expanding your product set in your distribution channels. Could you just talk a little bit about the traction you're seeing in the Latin American distribution area? That seems to be an area that of growth. What percentage of flows or gross sales may be coming from that? And maybe still early days, but curious what some of the early signs are there.

Hi, this is Luciano again. We get very good data out of Latin America, because the ETF assets there can tracked pretty precisely. So at this point, we have about roughly $600 million, $650 million in assets across the region. About 75% of that is concentrated today in Chile. And that number in Chile had been higher, but there had been some selling in the second half of the year there.

We have listed or cross-listed and cleared some of our ETFs with pension regulators in Mexico and Peru. So now the conference team in Mexico and Peru, and even Colombia, have more opportunity to sell those into ETFs. So we hope that they will start to track assets as those pension systems increase adoption of US-traded ETFs.

I just have two more. Thanks for taking those questions. Just -- Amit, on the 45% tax rate, it's obviously relatively high, given your New York City headquarters, if you will. Is there any opportunity -- maybe just mix as Boost grows -- but any opportunity to potentially reduce that tax rate? Any opportunity for some leakage, if you will?

We are going to look at ways to see if it's possible we can reduce that effective tax rate. As you mentioned, though, we are in New York State, we are New York City. We believe this is the right place for us to be. This is a town where we believe really is for industry. But we will look for incremental ways to see if we can possibly reduce that tax rate going forward.

Okay. And last one, Jona, for you was just, you've highlighted in the past that you think [in sail and tase quote] that the flows will flip more decisively to the ETFs. And you look at the April numbers, certainly a nice snap back from the overall Q1. But ICI data continues to be pretty stable itself when we look at some of the active business. What do you think is going to be the catalyst to really move that market share more deeply into passive on a go-forward basis?

I think it's -- one would be education. So I think that really as more investors become aware of the tax benefits of the ETF structure, you'll see more success there. As the business model of the financial advisors continues to move to the fee-based model, we'll continue to take market share there.

And then as we continue as an industry to innovate with things like smart beta and all of these unique innovative exposures that we in the industry are launching, we should continue to be able to take -- grow market share from that standpoint as well. I think it is inevitable but -- I think it's inevitable, really.

Okay. Thank you for taking my questions.

Thanks, Bill.

Marc Irizarry, Goldman Sachs.

Hi, thanks. This is Stephen Jones standing in for Marc today. First, I just want to start -- there's been more product launches year to date, more marketing and press around this smart beta theme. And I was hoping you guys could speak to the competitive dynamics there. Maybe in your conversations with advisers, how WisdomTree is differentiating. And if you're seeing the early signs of any fee pressure in this space.

Hi, Steven, this is Luciano. So last year about a third of the inflows into the industry came into so-called smart beta products -- products that were weighted by something other than market capitalization. We're seeing a great deal of interest in it.

And I think now advisors, advisory firms, investment committees, they are making evaluations between different smart beta approaches. And there, we are competing against equal-weighted strategies, to some extent, low volatility strategies and other fundamentally weighted strategies.

I think from the way WisdomTree is positioning ourselves is, one, with a track record that seven or eight years now of very impressive performance relative to traditional cap-weighted indexes. Number two, our indexes have tremendous investment capacity inside of them, because they're designed to scale for the size of the company. That doesn't necessarily apply to equal-weighted indexes, and puts limits on how widely adopted they could become.

And number three, our indexes have done a very good job of getting the lion's share of the market's upside capture over the last five years. That's not necessarily true of low-volatility strategies. They tend to only get a fraction of the market's upside. And at the end of the day, what really matters to investors is what was the return you got, and how much risk you did you take to get it? That's what we are trying to focus people's attention on, because that's where we think WisdomTree has the greatest competitive advantage.

Thanks. That's very helpful.

And with respect to fee pressure, the smart beta products are priced -- some of them are priced cheaper than us, some of them are priced more expensive. At the end of the day, it's really the delivery of the funds returned, after fee, after transaction costs. And there again, we think we have a competitive advantage.

Great, thanks. And on the fixed income side of the product set, how is the build-out going there? And maybe you could speak to the current rates environment, and what's it's going to take to get more traction, more broadly, with fixed income ETFs in the industry.

Well, with respect to WisdomTree, what it would take, it would take interest rates to start rising, both in United States and Japan. Any kind of rise in the market rate or any kind of federal reserve interest rate hike would, in fact, be bullish for our product set. Because they are designed to work in that market environment.

We had very good success with emerging market debt ETFs for the first few years after they were launched. But sentiment changed in EM over the last 18 months. That's starting to subside now and we're starting to see potentially a rotation back into some EM equity classes.

We think our EM debt fund, which doesn't have currency risk, on a currency side, should start to appeal to advisors going forward. And hopefully, there will be growing interest again in the local debt EM space, which has been sold off over the last year.

Great. Thank you for taking my questions.

Mac Sykes, Gabelli & Company.

I'm going to ask two questions, and maybe you could just answer them together. First is on Europe. How would you say the distribution has been holding? Are you targeting mainly institutions, retail, some combination? Both?

And secondarily, what were some of the differences between ETF adoption in Europe versus US? Are there some nuances that make your [stocks feel ]more competitive?

This is Luciano again. With respect to the roll-out of product and the distribution strategy in Europe, we're going to discuss that more as we get closer to it, so I won't comment on it specifically today. Except to say that in Europe, it's a very fragmented market. There are ETF assets in the UK, there are ETF assets in Germany, and also in Switzerland. So you need to know who are the ETF users, and then you need to figure out a way to talk to them and get them interested in and what WisdomTree does. And figure out how to work it into their practice.

Now, the good news in Europe is that they are starting to move to more of a fee-based model, where advisors are being discouraged, or in certain cases, prohibited, from doing business the way they used to, in terms of sales loads and so forth. The overall climate is becoming more conducive to low-fee product, and that's one of the reasons we are going into Europe now.

Thank you.

Adam Beatty, BofA Merrill Lynch.

First, a couple questions about WisdomTree Europe and the costs around that. You took some expenses in the quarter, just for integration and what have you. Apart from the operating loss of Boost and WisdomTree Europe, will there be any additional investment expenses?

And the second part of that question is, in terms of the charge-off of the acquisition cost, obviously there is a future point in time where the AUM and the multiple and what have you, will be fixed. Will there be periodic true-ups in charging off that cost? Thanks.

Hi, Adam. We think -- beyond this, we put in $20 million working capital into the business, into WisdomTree Europe. And we think that's enough capital the business needs to get to break-even at the end of four years. So there is not going to be any investment beyond that. That is the plan today.

And we expect that to burn about $4 million to $6 million in the first year, in 2014, and $6 million to $9 million next year. As we continue to ramp up the business, as we continue to launch more funds, we expect that loss to subside a little bit in the third year, and then get to break-even in the fourth year. It's a controlled build-up that we are doing over that four years. At the end of that four years, we have a commitment to buy out the remaining 25%.

And what you're going to see in our second-quarter results is that we will take a charge of what we believe that a future payout will be, based on the assets at the time, at June 30. And then, every quarter we are just going to basically going to true that up. Over the next four years, you will see that charge start to grow as the assets continue to grow into that business.

Okay, that's helpful, thanks, Amit. A follow-up on some of the earlier discussion around DXJ. Could you give us any color on how you see -- you've talked about the use of the product. How do you see the investor composition? Is it primarily institutional? Primarily retail? What kind of intelligence do you have around that?

DXJ represents about a third of our AUM, so it's been adopted across all the major channels. I would say that it does have a lot of international interest, it's a global security. So when we took a look at the outflows in the first quarter, the largest outflows we could identify were in [concervia] about this, that we typically associate with international and institutional. There may have been some international redemption of DXJ in the first quarter, but again, it is very widely held across the major channels.

Okay. That's helpful, thanks. And then one last one. Thanks for taking my questions. Just around the advisor channel, in the context of some of the comments around Europe, but also here in the US, in terms of advisors building more on AUMs as opposed to trading commissions, and what have you. What inning do you feel we are in, mainly in the US, in terms of ETF penetration, and [maybe] product in that context? Thanks.

I would say the US is obviously ahead of Europe, and we have seen tremendous adoption in the US. It started and in the RIA channel. I think over the last 10 years, you've seen more adoption in the wire house channel as advisors move to fee-based advisory platforms. I think that's good for the advisor, I think it's good for the client and I also think it's good for the overall Firm.

I would not put a [standing] on it. All I would say is that it's continuing to gain traction. And it's still, I think, relatively early, both in the ETF adoption cycle and in terms of practice management. I think that would be -- going forward, I think you will see more advisory assets falling in than commission-based assets in the future.

Adam, It's Jona. The only other thing I would add to that is, there definitely feels like there is a lethargic nature to flows overall, and that people aren't investing with enthusiasm. I think that's one of the things that are holding back the growth of ETFs, in general. That we still haven't, as an industry, broken $200 billion of inflows in a year yet. Still, there should be a lot of upside to the annual flows that we've seen going forward, when, at some point -- as some enthusiasm to investing comes back.

Got it. Appreciate the detail. That's all I had today. Thanks very much.

Thanks, Adam.

Chris Shutler, William Blair.

You highlighted emerging markets as one of the drivers in Q1 of the outflows, so a couple of quick questions there. To the extent you can tell, what channels were the outflows concentrated in? And then, secondly, to what extent, at least in the near term, do think investors are gravitating more towards active managers for EM?

This is Luciano again. With respect to your question, we saw one large redemption in our Brazilian currency fund that was a large RIA firm, which accounted for almost all of the currency redemptions. EM equity, as you mentioned, has been out of favor. So we did see redemptions there pretty much across the board, in terms of the channels.

With respect to active, there are periods when some active managers do a little bit better than the indexes. But over the longer period of time, I think the data is pretty overwhelming that the capacitive approach is better. Certainly we compare our emerging market strategies to active managers, and we do very well over a longer-term timeframe.

I don't think anything's really changed in terms of a strategic case for a passive EM exposure. I do think people are more open for a different type of exposure than they can get from the traditional [capilated] benchmarks.

And we have started to see, just in EM -- as I mentioned earlier, India has started have some influence this quarter. Emerging market small caps have inflows. So maybe we're seeing a bottoming of the negative sentiment.

Yes, it does seem to be dissipating. And then on capital allocation, just wanted to get your current thoughts -- particularly any incremental thoughts around buyback.

So Chris, the business is doing very well; we are generating a good amount of cash. But as we said, we are a growth Company, and our goal is to invest that money back into the business strategically, to help support that growth, whether it's through continued organic growth or whether it's through M&A.

We funded our acquisition of Boost and said there is lots of opportunities for us to use that cash. To the extent we believe we have excess cash beyond our investment needs for the business, we would consider returning that to investors.

And remind me, do you have an outstanding authorization?

The only buyback that we do today, we buy back the amount of what employees vest in their restricted stock, we buy back the tax portion of that. That is the only buyback that we do today.

Okay, thanks a lot.

Thanks, Chris.

Douglas Sipkin, Susquehanna.

I just wanted to spend a little bit more time on Europe. It sounds like it's a nice opportunity for you guys in a couple of years. So obviously, a big source of ETF flows in the US has been the emergence of these ETF money managers, like a Windhaven and things like that.

Where are we in Europe in seeing the development of money managers like that? I know it's probably early days there. As you guys alluded to, the migration to fee-based is still way behind where we are. But I'm just curious if you're seeing the emergence of the development of an ETF money manager universe in Europe?

Hi, this is Luciano. I think what we've seen in Europe is on the neutral fund side and the institutional asset management side. There, we are seeing folks use ETFs within broader allocations, either in a mutual fund usage structure or an institutional account. I don't think they are at the point yet of having enough of an RIA channel developed to have what we would consider RIA money managers. I think that's a driver in the future.

But as they move to fee-based approaches, that would be a natural evolution. As advisors start to get discretion over several hundred million dollars, adopt a fee-based approach, the natural next step is to create a model that they can use implementing ETFs. And then try to raise money with an ETF model. That's been very successful in the US, it's a major driver of assets in America and we've had a lot of success working with those RIA firms, finding a place in those models.

Great. So If I think about the opportunity in Europe, it sounds like it's probably going to come more from traditional guys just embracing ETFs more than they have in the past, in terms of flow generation over the next couple of years. Because it's still probably early days for those RIA models?

I think that's a fair assessment. Europe is the second-largest ETF market in the world, but it is still many years behind the US in its build-out. And particularly on the business model of advisors, it is still early days. But there has been important legislation that is encouraging this fee-based movement.

Got you. Okay. And then some financial questions. Obviously you guys passed the threshold and will be recording a GAAP tax rate, but still not take paying taxes for some time -- obviously still getting a big benefit from the shield.

I'm just wondering, to reflect this, is there a certain AUM level where dividends come into play? I know we're not there yet. It sounds like -- I think you guys have said you would probably be more inclined to pay a dividend than play buybacks. Is there a certain AUM level down the road where that comes a little bit more into play? And again, that would maybe better show the tax advantage you still have.

Doug, I wouldn't say it's tied, really, to AUMs. It's really tied to our investment needs. We're a growth company; we want to make the right investments to the business to support our growth. That is where our key focus is.

To the extent we believe we have excess cash beyond those investments needs, we would consider returning that back to investors. We've said primarily we favor dividends if we were going to do that. But the key is, it's not the AUM level that's really the driving factor, it's do we believe we have excess cash beyond our investment needs opportunities?

Got you. Okay, that's helpful. And then just finally, with the guidance around Boost. Are those numbers net? Or will you actually be able to get a tax benefit from those early development losses?

Those are pre-tax numbers there. The business is going to generate losses, right? So those are -- you will see some benefit of this on the effective tax rate from that. But they are small in the big scheme of things anyway.

Got you. Great, thank you.

John Dunn, Sidoti.

I had a follow-up on the competitive landscape. Can you give us an update on -- and you talked about smart beta building. But specifically on the non-transparent ETFs and some of the larger ETFs guys ramping up in your signature -- or some of your signature products?

With respect to non-transparent, I think you will need to attract a new ETF buyer from who is in the market today. The market in the US that has been buying ETFs likes the full functionality, which includes full transparency. Personally, I'm not that optimistic about non-transparent active, but that's what makes a horse race.

Got you. And then just give a flavor of the sales discussions for some of your newer vintage products, particularly the ones that are designed to address rising rates?

Sure. We have been speaking to RIAs and institutional investors, as well some advisors, who are on platforms that can use these strategies. In fact, we're going to have some advisors in about two weeks from across the country, as well as advisory firms. And this will be one of the discussions that we will be going through with them: how do you use, in effect, interest rate hedge portfolios to manage interest rates risk on future -- on going forward.

What we have heard from clients is -- when we launched this in the beginning of the year, the 10-year bond was about 3%. It got down to below 2.7%. So this is not a concern that's front and center for them today. But it is something that they feel they are going to need to manage and deal with in the coming next two or three years.

So we feel the suite of products we've launched, as well as the floating rate treasury product, will be well-suited for clients to use once we see the Federal Reserve raising interest rates, and market rates going up. But that might be 12, 18 months out. So I would say we are very early on the education cycle. But we are getting the word out that these products exist, and they are developing a decent track record in the interim.

Got it. Thank you very much.

Bill Katz, Citi.

Okay, thanks for taking these extra questions. I'm not sure these are related questions, but I will ask them together. Could you give us an update on what you're seeing in terms of opportunity set into the retirement business, particularly into the United States? And then more broadly, what you are seeing with [adding], in terms of any pricing pressure from the industry at-large?

Well, with respect to 401(k) and retirement, there have been some advances forward there. Overall, we think record-keepers across the country are going to come under some competitive pressure to have an ETF-enabled offering, both to get more investment choice in the system, as well as to get overall fees down. So we would hope that over the coming years, more opportunities open up on the record-keeping side.

We're also working with the RIAs who sell into these platforms, to get WisdomTree ETFs inside of their models. As those money managers get wired, in effect, to get inside these 401(k) distribution plans, that would be a potential driver for WisdomTree.

In terms of fee pressures, the industry has always -- even from 20 years ago when the [SPDR] was launched at nine basis points, it's always been priced very competitively. There's really been no change recently. It just is -- and we continue to choose our fund launches with an eye towards being differentiated, which has really been, I think, very constructive from a fee perspective. But we haven't seen any major changes this quarter or last quarter, or any of the quarters over the last year.

Okay. Thanks again for taking all my questions today.

Thank you. And with no further questions in the queue, I would like to turn the conference back over to Mr. Jonathan Steinberg for any closing remarks.

I just want to thank you for your interest today. And we will speak to you next quarter. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now all disconnect. Have a great rest of your day.