WisdomTree Inc (WT) 2014 Q4 法說會逐字稿

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

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to turn the conference over to our host for today's call with WisdomTree Investor Relations, Mr. Stuart Bell. You may begin.

Thank you. Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are generally identified by terms such as believe, expect, anticipate, and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not or the times by which these results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including but not limited to the risks set forth in this presentation, and the Risk Factor section of the company's annual report on Form 10-K for the year ended December 31, 2013.

Now, it's my pleasure to turn the call over to WisdomTree's CEO, Jonathan Steinberg.

Thank you Mr. Bell. Good morning. Let's begin.

WisdomTree achieved strong operating results in the fourth quarter. We had $4.5 billion in net inflows across our currency hedged equity, US equity and bullish dollar ETFs. The positive market dynamics supporting these funds, most notably a strong US dollar and a depreciating euro, have gained momentum throughout 2014 and carried into 2015.

HEDJ, our European hedged equity ETF, has experienced significant strength with inflows of $5 billion last year, $2.8 billion of that in the fourth quarter, and another $3.5 billion year-to-date, which makes HEDJ our second largest ETF with more than $9.5 billion in assets. This has been the key driver behind the $4.6 billion in inflows in first-quarter-to-date results.

More broadly, at the ETF industry level, 2014 can only be described as a year of strong momentum and enormous promise. Recently, ETF surpassed $2 trillion in assets in the US alone and $2.8 trillion worldwide. Both are important milestones.

Another milestone of importance was ETF industry inflows. In 2014, the industry had inflows in the US of $239 billion, an all-time record. For some context, the traditional mutual fund industry has had $300 billion and $400 billion in years past.

On today's call, we will discuss some avenues of growth for the ETF industry and the plans WisdomTree has identified to capitalize on these opportunities. But before we get to the numbers and tactics, let's be clear about WisdomTree's opportunity.

It is so easy to be distracted by old debates like passive versus active or new terminology like smart data and liquid alts. The simple truth is the ETF structure is just that, a structure by which you can access all of these asset classes and strategies. But it is a structure with the characteristics central to a positive investing experience. Transparency, liquidity and tax efficiency, plus overall flexibility and convenience, is a matter of fact, not opinion, that ETFs are superior to traditional investment products in these crucial respects. So, $2 trillion in assets and $200 billion plus in annual inflows is just the beginning. Transparent ETFs are competing for the heart and soul of asset management, and they are winning.

Again, for a perspective, over the past 10 years, the ETF industry in the US has taken in $1.4 trillion in net inflows. With continued growth in existing funds and existing sales channels, plus the momentum we are gaining from new products, new sales channels and new geographies, I believe the next 10 years will be even stronger.

I expect the ETF industry to average at least $250 billion to $300 billion of inflows annually over the next 10 years. That translates into $2.5 trillion to $3 trillion in inflows over that timeframe. It is easy to imagine that, in 10 years, the US ETF market having $5 trillion to $6 trillion in assets. It is against this backdrop that we are reaffirming our longer-term goal of $100 billion in AUM as well as our 3% to 5% market share of inflow targets.

WisdomTree is an important proxy for the ETF industry and at the Company level, WisdomTree's is also demonstrating exceptional growth. In fact, in the fourth quarter and even more recently year-to-date, we are demonstrating industry-leading growth.

For WisdomTree's leadership team, the most important question is what can we do to make sure we are positioned to maximize our growth potential at this point of Company development and industry inflection? WisdomTree's CFO Amit Muni will discuss our growth initiatives in greater detail. But broadly, we are investing in products, our people, our platform with continued investment across sales, marketing, research and home office infrastructure. These investments will enhance our position within the fast-growing ETF market and enable us to better exploit the tremendous opportunities we are seeing.

I am again pleased to announce this quarter the continuation of our $0.08 quarterly dividend. And finally, all of this is possible because we are realizing the benefits of our highly efficient, low risk business model. We have the growing financial resources, we have the clarity and vision and the commitment to the ETF global growth phenomenon, and we have the experience and know-how to be able to execute.

Now let me turn this over to Amit.

Thank you and good morning everyone. We have a lot to cover on today's call, so let's first begin by reviewing the US ETF industry specifics.

Turning to Slide 3, the industry reached record levels with $118.3 billion in net inflows in the fourth quarter, which helped push the industry to a record $239 billion of net inflows for the year, as reflected on the chart on the right. We can review the categories of flows on the next slide.

US equities led the flows in the fourth quarter followed by fixed income and emerging market equities had outflows. On the right, you can see the same general trends for the full year, except emerging market equities had slight inflows.

Now, let's begin to look at our results. Our US AUM increased 13% to $39.3 billion on a rebound in our flows in the fourth quarter, which was $4.5 billion, as reflected in the middle chart. This was the third best inflow quarter for WisdomTree. Our inflows for the full year were $5.1 billion.

Turning to Slide 6, you can see the categories for our flows. Our hedged equity products were strong asset gatherers in the fourth quarter with HEDJ taking in $2.8 billion and DXJ taking in $1.7 billion. As you can see in the box, we continued to face headwinds in emerging markets where we experienced $1 billion of outflows across equity, fixed income and currency categories.

One highlight I would like to note. This quarter was the best ever quarter for our US equity ETFs which raised almost $1 billion. On the right, for the full year, we had $5.1 billion in HEDJ, which helped offset the outflows we experienced in the emerging market category.

Turning to the next slide, you can see the strength we demonstrated in the European category. Again, WisdomTree was the leading asset gatherer in European focused ETFs. This was due to the success of HEDJ and we continue to be a leader in the currency hedge category.

Turning to Slide 8, WisdomTree was the fourth best asset gather in the quarter, which helped us to achieve a 3.8% market share.

On the next slide, you can see, for the full year, we ranked seventh and had a 2.1% market share. This came in below our target of 3% to 5% of industry inflows due to the headwinds we faced in the emerging market category during the year. However, product innovation and diversification, like we demonstrated with HEDJ and the record inflow levels into our US equity ETFs, allows us to continue to grow even when certain categories are out of favor.

Turning to Slide 10, we were ranked fifth in organic growth when compared to the top 10 US ETF sponsors. As you can see in the chart on the right, we again had the best organic growth rate of any of the publicly traded asset managers. As we have said along all year, we continue to remain optimistic about our position in the fast-growing ETF industry and on our long-term positioning in the asset classes in which we compete.

On Slide 11, we show you how our ETFs have performed according to their Morningstar peer groups. These comparisons take into account fees and transaction costs and reflect how our equity, fixed income and alternative ETFs performed against active and passive mutual funds and other ETFs. In evaluating the performance of these funds, you can see, since inception, 64% of our ETFs outperformed their peer group. Put another way, 87% of the roughly $39 billion invested in our ETFs were in funds that beat their peers, a statistic we are proud of.

I'd like to update you on our European business on Slide 12. In the fourth quarter, we launched our first set of WisdomTree branded ETFs in Europe. In addition, our Boost brand of shortened leveraged ETP has expanded into Italy and Germany and added fixed income and currency ETPs. We achieved $175 million in net inflows for the year in our Boost ETPs and AUM in Europe reached $181 million at the end of the year, and as of this morning are just over $200 million. We are continuing to build out our sales force and look to launch up to five additional WisdomTree ETFs in 2015.

On Slide 14, we can start to go through our financials. On the back of solid inflows this quarter, total revenues continued to climb, reaching nearly $50 million in the fourth quarter. Our US listed revenues increased 14% from the prior year and 22% for the full year.

Pretax income was up slightly from the fourth quarter to $16.7 million. Included in the quarter were higher compensation costs and one-time consulting expenses, which I will discuss further, as well as expenses for our European business which we acquired in April. Excluding the European business, pretax income climbed 13% from the prior-year quarter and 53% for the full year.

Earnings per share were $0.07 for the quarter, which included approximately $0.01 for one-time higher consulting expense and $0.01 for higher incentive compensation than we anticipated at the end of the third quarter due to the higher inflow levels we achieved in the fourth quarter.

Turning to Slide 15, you can see in the blue bar on the left chart that, as a percent of our overall average AUM, the hedged equity category increased to 42%, which generated a 25% increase in our revenue from this category, as you can see in the chart on the right. ETF revenues reached a record $49 million this quarter and our average revenue capture remains at 52 basis points.

On the next slide, we can review our key margin metrics. Gross margins for our US listed ETF business increased slightly to 82.5% and was 81.5% for the full year. In the chart on the right, you can see in the light blue our consolidated pretax operating margin declined to 33.6% compared to the third quarter.

Pretax margins for our US listed ETF business in dark blue were 37.8%. Our pretax margins were particularly high during the first nine months of this year as we significantly reduced compensation costs as a result of our inflow levels. To the right, you can see, for the year, our US margins increased to 43% on only $35 billion of average AUM.

Next, we will review expenses on Slide 17. Third-quarter total expenses were $26.9 million. Marketing and sales related spending decreased by $113,000. Incentive compensation costs increased due to the strong inflow levels we experienced in the fourth quarter.

We also incurred one-time higher professional fees. As part of our planning for 2015, we engaged a strategic consulting firm to help us assess and benchmark our distribution and operational capabilities at this point in our development. This due diligence helped to validate and refine our plans across sales, marketing, technology and operations that we incorporated into our strategic spending for 2015 which I will discuss a little later. We are not planning to incur such expense in the future.

Moving on, expenses for our European business increased $526,000 as we launched the WisdomTree ETFs and continue to build out the team. Higher inflow levels resulted in $195,000 of additional costs and other expenses increased by $68,000, resulting in expenses of $32.9 million for the quarter, an increase of 23%.

The next slide walks you through the major changes in our expenses for the full year for your reference.

Turning to Slide 19, on the right, you can see from the annual numbers in the bar chart that our expenses continue to decline as a percent of revenue, reflecting the operating efficiency of our business model. Compensation as a percent of revenues for our US business was 21.1%, within the guidance that we gave at the beginning of the year of 20% to 23%. Based on our results for the first nine months, this was trending to the 20% level, but due to the strong rebound in inflows in the fourth quarter, this expense ticked higher to 21%.

On the next slide, we can review the strength of our balance sheet. Total assets grew to nearly $221 million at the end of the year, which is primarily comprised of cash and investments which continues to grow, as you can see from the chart on the right.

And lastly, with respect to taxes on Slide 21, as you can see on the left, the amount of future pretax income that is shielded from income tax is approximately $110 million at the end of the year. As the chart in the middle reflects, we continue to generate tax losses because of the deductibility of equity awards we granted to employees. Assuming our closing stock price yesterday, we potentially have another $130 million of pretax income which can be shielded from cash taxes in the future.

Turning to Slide 22, as we have done previously in our year-end calls, I'd like to give you an outlook of our expenses in 2015. As Jon outlined at the beginning of the call, we are excited about the open-ended opportunity for the ETF industry and we continue to focus our efforts to position ourselves to take part in the industry's growth. In recognition of this opportunity, combined with our expanding resources, we intend to spend $12 million to $16 million over the course of 2015 on strategic investments across key opportunities to continue to drive future growth. The majority of this spend directly relates to growing our topline revenues. These expenses include a significant expansion of our sales force and other sales related activities in order to go deeper and broader in existing and new channels. As part of this, we will be hiring a new head of sales to focus exclusively on this effort, and Luciano will be stepping into a larger chief investment strategist role.

We will be increasing our sales force by approximately 50% by adding 20 to 25 new salespeople to our existing team of 40 people. We will also be adding a similar percentage, or eight to 12 employees, to the team that supports our sales force with content and product support to bolster our client facing efforts. We estimate the cost for growing our sales force, adding sales support staff and increasing other sales related spending will be approximately $7 million to $11 million.

Second, we will continue to develop new products to expand and diversify our offering. We are targeting to launch eight to 10 new ETFs this coming year, and the minimum cost of launching an ETF in the US is approximately $175,000.

Third, we plan to increase our marketing spend by approximately $1.5 million to support our ETFs and brand.

And lastly, we plan to invest in technology initiatives to better provide business intelligence and distribution analytics for our sales force as well as more efficiency and risk mitigation to our operations. We also plan to increase our operational and administrative headcount by around eight to 12 people as we prepare for future growth. Total estimated investments for this is $2 million.

Turning to Slide 23, we can walk through our estimated expense base for 2015. Our US business had expenses of $104 million in 2014. We incurred $3.7 million in one-time acquisition and consulting costs. Expenses should decrease another $1.4 million after annualizing our AUM, taking into account new pricing with State Street and other savings, as well as resetting compensation to baseline levels.

We anticipate about $3 million in administrative and other overhead cost increases and an additional $1.8 million in stock-based compensation. We are targeting $12 million to $16 million for strategic investments, so our baseline operating expense base in the US will be $116 million to $120 million. From there we will incur additional costs based on changes in our AUM.

We anticipate our gross margins will be around 83% to 84%, but closer to the 83% level in the near term. Incentive conversation will also change based on our inflow levels. Because of the increase in our headcount from the prior year and this year's growth initiatives, we expect compensation for the US business will be between 21% and 25% of revenue for the full year. Again, this is the expense base for the US business.

Our expected pretax loss for our Europe business will be $6 million to $9 million. We have always factored in continued growth investments into our long-term margin guidance and we are therefore still targeting a 50% US pretax operating margin between $55 billion to $60 billion of average assets, assuming a 51 basis point revenue capture.

Lastly, I'd like to update you on our flows so far this quarter. This year is starting off very well and January has been the best month ever for WisdomTree. So far, we have taken in $4.6 billion in net inflows and our AUM has almost reached $45 billion. On the right, you can see where the flows are coming from by category.

So, in summary, WisdomTree has grown rapidly over the last several years to become one of the leading players in the ETF industry. To support our growth in the US, we continue to expand our product set in existing and new asset classes and significantly increase our client-facing efforts through research, sales, and marketing. We have expanded our footprint by acquiring and building operations in Europe, entering into marketing arrangements in Latin America, Australia and New Zealand, and making our ETFs available for sale in Japan. Our success has been through a combination of being focused, nimble, innovative and differentiated from our competitors. We feel the time is right to increase our strategic spending to capitalize on more opportunities to accelerate our growth. We believe these investments today are important to better position us for the long-term.

Thank you. Now let's open it up to Q&A.

(Operator Instructions). Bill Katz, Citigroup.

Good morning. I think it's Bill Katz. Anyway, so Jon, I appreciate your opening comments. You have been very vocal on the merits and efficacy of the ETF versus other vehicles, whether it be a mutual fund or more recently the ETMF initiative. I'm sort of curious. As you have been going around meeting with gatekeepers in both the US and increasingly outside the United States, or even FAEs in some of the offices, what are you hearing in terms of the uptake in terms of the relative merits of that? Is that what's driving your view that the industry flows can step up from here? Sort of curious.

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

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

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

Just one final question. Thanks for taking all these questions this morning. So, reported earnings were $0.01 below your dividend, setting you off to a great start with AUM. It flows into the new year even net of the expenses, so it looks like some positive operating leverage. I'm just sort of curious as you're thinking philosophically about capital priorities for 2015?

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

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

Okay. Thanks for taking all my questions this morning.

Adam Beatty, Bank of America.

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

The UCITS funds -- Adam, first, thank you for the question. It's a new operation in Europe. They've really expanded their sales force, their operating resources. We launched a series of funds, UCITS funds, in the fourth quarter. We want to give those funds the opportunity to gain some traction. Those funds were very strategically planned. They allow us to tell the broader WisdomTree story to the non-US institutional investor community where we might get a benefit of bringing money into the US-listed funds. That was part of the rationale for going into Europe.

The limitations really are just like we do in the US. You want to give a new fund launch some ability to gain traction and give the sales team the ability to focus on all of the new stores that they put into the marketplace. But we will selectively add additional strategies that look constructive for the European market. Again, we have said in the past we are not replicating the US suite, and certain things that are successful here, they have already been launched in Europe or vice versa. So you have to check what works specifically for that market.

I hope that answers your question, Adam.

It sure does. Thanks. And then one other question, I guess -- (technical difficulty)

It seems he may have been disconnected. Moving forward, Tom Whitehead, Morgan Stanley.

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

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

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

It's a little bit of both. We did have -- we did experience so far very strong flows, but we are only one quarter in of the year, so we try to do best we can to project out what we think we would pay during the year. So I wouldn't say you think about it's accrued like sort of 25% every quarter. We have to sort of try to project out full-year amounts, where are we in that continuum. So you may see a little bit of volatility in that as we get throughout the year, but I wouldn't just divide, take a number and divide it by 4.

That's fair. Basically, what was I trying to get at is do you maybe hold some back in your 1Q accrual versus almost like a quarter-to-quarter mark-to-market.

We may hold back but again, we are only one month into this as of right now.

Absolutely. Thanks for taking my questions, guys.

Jason Weyeneth, Sterne Agee.

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

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

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

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

One of the things we are looking to do is to get differentiated funds on the platform where they can be additive and complementary to what's there already. That is certainly part of it. Another piece of it is we are typically launching funds there that are earlier in their lifecycle, lower volumes, lower asset levels. Getting them on the platform helps to incubate them. And once they get more volume and more assets, that helps us get those funds onto other platforms. So we feel it's a very good working partnership for us with Schwab, and we are very glad to be on the OneSource platform.

Thanks.

Chris Shutler, William Blair.

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

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

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

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

Got you. And then lastly, I saw in the last few weeks I believe that you rolled out ETF model portfolios you launched. And just curious on those model portfolios, how you plan on marketing and distributing that, whether you're going to be working with any platforms like an InvestNat or anybody like that. Thanks.

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

Got you.

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

Got you. Thanks a lot.

Mike Grondahl, Piper Jaffray.

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

Again, this is Luciano. So we are not going to have the channel breakdowns for the month of January for a few more weeks, so I can't comment really on the last $4 billion or so of inflows. But I would just say generally in the second half of last year, the adoption was very strong across the channels.

Don't forget that in the wirehouse channel, European exposure is a big part of the global asset allocation. And when they make a call to hedge out the currency, that has very big implications in the sense of advisors shifting from an unhedged exposure to maybe a partially or all hedged exposure. So I would just say this is an example of a very large important asset class, 20% of -- excuse me, 30% of EAFE is in current -- is in stocks denominated in euro currency. So if you get very broad exposure there to Europe hedging out the euro, that can have very broad application across the channel. So I would just say it's -- I wouldn't want to say it's one channel then another. It's hard to become a $10 billion fund unless you're getting wide, broad-based adoption across all three major channels.

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

So, we said, or I believe we said we plan to do eight to 10 new fund launches this year, which is sort of consistent with the last year or two, so I don't think it changes the fund launches. We are not going to go into what we plan to launch, but we are very excited about upcoming fund launches.

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

We have said in the past that we look at asset classes or geographies that can expand our capabilities. You have seen some M&A activity from traditional firms getting into ETFs. There are a number of subscale small ETF players that I wouldn't be surprised if there's more activity going back to sort of -- what I think the original question that Bill asked, which is about are you seeing greater receptance to ETFs? And I think the traditional firms are really seeing the tide of history is working against them, that the ETF is just an unstoppable trend. So either through organic launching of their own businesses or through M&A, I expect to see additional players come into the space.

Okay, thank you.

Surinder Thind, Jefferies.

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

I'm sorry. Were you talking about -- repeat the question?

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

Sure. We're going to phase in the increase in the headcount. That will be -- I'll give you an example. Like we've already hired about four or five of the salespeople already, so they're going to be phased in throughout the year. So you'll see a spread of that.

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

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

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

They have about eight to 10 salespeople today. They've increased that from when we did the acquisition. As we've said, this is going to be a controlled buildout of the team there. We will continue to make investments upon success. So this is not about replicating WisdomTree. It's a controlled buildout. And so we will see incremental growth in that force with success.

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

This is Luciano again. So, I had the opportunity to travel with some of the sales team last fall just to introduce the WisdomTree IP. And I would categorize it as a lot of initial interest in what WisdomTree is doing. There's obviously interest in smart beta in Europe. But again, it's early. Typically when you launch new products, they can take three to six months before people really start to get comfortable with them.

One of the key triggers for dividend funds is the first dividend payment, so people can have some expectation about what the dividend distributions are. As those get distributed and become more regular, I think the products, that will get a little bit more uniform and people will have more expectation about what they can do for them. So I would say that the initial interest is there, but right now it's really kind of in a wait-and-see mode to see how quickly they can ramp.

Okay. Thanks a lot guys.

Douglas Sipkin, Susquehanna.

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

This is Luciano again. The European securities represent a greater market cap portion of the MSCI or world or the EAFE index, so on the one hand you can say Europe is a bigger market opportunity.

I think the real question is how long do the central banks in each country continue with very aggressive easing. Right now, the ECB is increasing its balance sheet. Obviously, Japan's been doing so for two years. As long as the market expects that policy to continue and expects those currencies to depreciate relative to the dollar, that's the open ramp for both funds.

So, I think, if you're thinking about the opportunity set, HEDJ is close to $10 billion, DXJ is close to $12 billion. But if you look at the broad developed world ETF industry, there's about $280 billion invested in developed world ETFs. There's only about $28 billion invested in currency hedged ETFs. So the industry as a whole is still 90% unhedged, only roughly 10% hedged in the developed world. That to me really is the opportunity because they yen and the euro represent 50% of the currency exposure of developed world international investment. And if the view is the dollar gets stronger against those currencies over the next few years, you could see a larger percentage of the industry become hedged. And obviously, that's a very big opportunity for WisdomTree. And we have other products besides those too that can fill that gap.

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

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

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

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

Great. That's helpful. Thanks a lot.

Mac Sykes, Gabelli.

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

So we pay our salespeople based upon inflow goals. They have a distinctive inflow goal for the first half of the year and the second half of the year, and they are paid on how they've met those goals. We have goals per channel and we have individual performance goals as well. And we have third-party data providers out there that help us track this information.

Something that happened in 2014, it was a little unusual where we saw a lot of flows coming in towards the end of the period where we really haven't earned the revenue on that yet. And so we will the revenues on that on a going-forward basis. So I would say, unlike other firms that maybe have trailers and the like, we pay only once on the flows that do come in.

One, we also only pay on net flows. So that takes care of some of what you discussed about sort of churn or selling. And then philosophically, we are always trying to be fair to our employees.

Great. Thank you very much.

Adam Beatty, Bank of America.

Thank you.

Welcome back.

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

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

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

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

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

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