WisdomTree Inc (WT) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the WisdomTree fourth-quarter earnings conference call. (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, Mr. Stuart Bell, at WisdomTree Investor Relations. You may begin.

Thank you and good morning. Before we begin I would like to reference our legal disclaimer available on today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are generally identified by terms such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance, and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not or the times at or by which results will be achieved.

A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements including, but not limited to, the risks set forth in this presentation and in the risk factors section of the Company's annual report on Form 10-K for the year ended December 31, 2014.

Now it is my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Stu, and good morning, everyone. Despite the recent volatility, 2015 was a record-breaking year for WisdomTree. Our innovation led to the creation of a currency hedged category in ETFs, and our two leading products drove us to achieve record inflows in AUM. The operating efficiency of our business model translated our strong performance into record financial results, with operating margins that rivaled the largest players in asset management. And with these strong cash flows, we returned over $100 million back to our shareholders through dividends and buybacks.

We took steps to make strategic investments as part of our long-term growth plans. We focused on expanding our sales efforts and hired 17 new salespeople, including a new role overseeing global distribution. We continue to focus on innovative and differentiated products with the launch of 17 new ETFs.

We expanded our distribution relationships both in the US and abroad. And with the strength of our US accomplishments, we made our first steps into Asia, opening an office in Japan, as well as continuing to grow our European business. We are setting up the foundation for us to take part in the worldwide growth of the ETF industry.

Now let's get into the results for the quarter, beginning by first reviewing the US ETF industry statistics. Turn to slide three. US ETF industry flows increased significantly to $91 billion in the fourth quarter, and the industry reached $232 billion inflows for the year. US and unhedged international equities were the flow leaders this quarter, followed by US fixed income ETFs.

Turning to the next slide, our AUMs increased 31% for the year to $51.6 billion, due to the record inflows we took in during the year. AUM was down 3% sequentially due to outflows in the fourth quarter. Our two largest currency hedged ETFs made up about $2 billion of those outflows, followed by emerging market equities which had been out of favor for some time. For the full year, we reached a record $16.9 billion of inflows.

On the next slide we can do a deeper dive on the currency hedged category. You can see in the chart international equity AUM rose to $357 billion at the end of the fourth quarter, up 33% for the year. Currency hedged AUM has tripled for the year and now stands at 17% market share.

Approximately 40% of all international flows went into a currency hedged product in 2015, and we believe this trend will continue over the long-term. Therefore, we will continue to remain focused on this category. For example, we recently launched four dynamically currency hedged ETFs, and we will continue to innovate in this category.

The next two slides go through our industry rankings. Turning to slide six on the left, in the US ETF industry WisdomTree was ranked fourth in inflows for the year, and we had the third-best organic growth rate of the top 10 ETF sponsors as you can see on the next slide. WisdomTree was also the fifth best asset gatherer compared to all ETF and mutual fund managers in the US, according to MorningStar.

This translated into WisdomTree continuing to have the best organic growth rate versus the other publicly-traded asset managers. In fact, over the past three years, 10 of the 17 firms on this page have had negative organic growth rate over the last three years.

The key takeaway from this slide? The flow momentum is continuing to grow for the ETF industry, to the detriment of mutual funds.

On the next slide we show our fund performance 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. Since inception, 66% of our ETFs outperformed their peer group, or 94% of the approximately $51 billion invested in our ETFs were in funds that beat their peers.

I'd like to update you on our European business on the next slide. Our European AUM continues to grow, reaching $774 million at the end of the year. This quarter saw an increase in our WisdomTree use of ETFs, with the launch of our currency hedged suite, and flows into our Boost ETPs have more than doubled from last year. We are pleased with the progress of the business to date.

Now let's get into the financials on slide nine. Record net inflows for the year drove a 54% increase in our revenues from the fourth quarter of last year. And net income increased 113% to $20.5 million over the same period. Earnings per share was $0.15 for the quarter.

Sequentially, revenues and net income were down due to lower average AUM from outflows. For the full year, revenues were up 63% and net income increased 31% to $80 million.

Turning to slide 12, as you can see from both charts, the currency hedged category continues to make up a larger portion of our asset base and has contributed significantly to our revenue increase year-over-year. Our average revenue capture was 52 basis points in the quarter, down sequentially due to outflows in our higher-priced ETFs.

On the next slide we can review our key margin metrics. Gross margin for our US-listed ETF business was 85.6% in the fourth quarter. The increase year-over-year was due to higher average AUM. Gross margins were down sequentially due to higher fees for our third-party marketers.

In the chart on the right, you can see our US business had a 52.1% pretax margin in the quarter and our overall margin was 46.7%. For the full year, margins in the US were nearly 50%.

Next we will view expenses on slide 14. Third-quarter total expenses were $41.2 million. Compensation costs decreased $3.6 million to properly reflect incentive compensation for our full-year results, and takes into account the elevated outflows in the fourth quarter.

Marketing and sales spending was down $110,000. Professional fees increased $814,000 due to strategic consulting expenses and recruiting fees for our sales force. Third-party sharing expenses increased $693,000 to true up annual fees to our third-party marketer in Latin America. Costs for our European business increased $198,000 due to higher fund expenses from ETF launches.

We also recorded a $1.3 million higher charge to reflect a change in the fair value of the buyout obligation we have for our European business. As I mentioned on our last call, we have updated our fair value approach to model the buyout based on our AUM projection at the end of the deal term. We will remeasure this obligation every quarter, but I expect it will be about $800,000 per quarter and trued up annually, absent a significant change in the AUM during the year.

On the right you can see compensation as a percent of revenue for our US business was 23% for the full year, within the range we spoke about on our last call.

The next slide has changes for our full-year expenses for your reference.

Turning to our balance sheet on slide 16. Total assets grew to $293 million due to our strong cash flows. On the right, we generated $155 million of cash from our operating activities, due to our record inflow levels this year. We spent $24 million to buy back stock and we returned $79 million to our shareholders through our dividends. We ended the year with $234 million of cash.

On the next slide we go through our taxes. While we record GAAP tax expense, we don't pay cash taxes due to our tax losses. The tax rate for our US business is approximately 39%, and we do not yet get a deduction for the losses we are incurring in our European business, which drives up our overall effective tax rate to approximately 42%.

At the end of the year we have approximately $26 million of pretax earnings that can be sheltered from paying cash taxes. We will likely run through our current remaining tax yield in the first quarter. However, we continue to generate tax losses due to employees exercising options and vesting in restricted stock. The detailed information is on the right-hand side of slide 17.

I'd like to give you an update on our expense outlook for 2016. The trends driving the current environment and industry growth are firmly in place, and we see a combination of new catalysts to further accelerate industry growth globally.

First, ETFs are growing at the expense of mutual funds, and penetrating existing channels and continuing to break into new market segments. Second, while there has been investor demand-driven growth, we are also seeing positive external factors such as increased regulation, which we believe are favorable and should accelerate growth in the ETF industry.

Worldwide, markets are moving away from commissions to fee-based models with greater transparency around payment schemes. And lastly, two decades into the ETF industry's development, the ETF product continues to evolve into different strategies across asset classes. We see more investor demand for sophisticated outcome-oriented strategies. Innovative product development is in our DNA, and in this context WisdomTree, with one of the longest track records in smart beta, is well-positioned for this trend.

With that as a backdrop, we believe it is important to continue to invest in our business to capture the long-term growth trends we see ahead. In order to best position for this growth, we are focusing our investment efforts around three key initiatives.

First, remain a leader in product innovation. We will continue to launch unique product strategies in different asset classes, leveraging our self-indexing capabilities to grow and diversify our asset base. We intend to launch 12 to 15 new ETFs in 2016.

Second, we want to strengthen our positioning in our core channels. We will continue to invest in relationships we have today with our distribution partners and clients. We will use technology and data analytics to better target client segments. We will provide more value-added services to financial advisors to address their clients' needs, and increase our marketing and sales-related activities.

And lastly, we want to best position ourselves for the next wave of ETF adoption, as new investor segments in the US and overseas continue to adopt ETFs. We will complete our sales expansion plan we started in 2015, to go deeper and broader within the channels where we currently compete, as well as access new or emerging channels like the institutional space.

We will also continue to explore expansion into other non-US markets to grow our global footprint.

In total, we intend to invest $12 million to $16 million in 2016 on these important initiatives. Of that amount, $3 million is a carryover from our 2015 strategic spend.

On the next slide we can walk through our expense base change. Our US expenses -- our US business had expenses of $148 million in 2015. We had one-time costs of $2.5 million during the year. Annualizing our AUM at the end of 2015 reduced expenses by $1.2 million.

Resetting compensation to baseline levels, given our outperformance in 2015, net with higher stock-based compensation and annualizing costs for new hires further reduces expenses by $10.9 million. We anticipate about $3.4 million in administrative and other overhead cost increases.

We are targeting $12 million to $16 million for strategic investments, so our baseline operating expense base in the US will be $149 million to $153 million. From there, we will have savings or incur additional costs based on changes in our AUM. We anticipate our gross margins will be around 81% to 83% range, given our current AUM levels and planned fund launches.

Incentive compensation will also change based on our inflow levels. Because of the increase in our headcount from the prior year and this year's growth initiatives, we expect compensation for the US business will be between 24% and 28% of revenue for the full year. There may be some differences between the quarter and the annual target, given timing, the level of flows, as well as market movement as we have experienced in the past. We will update this guidance as the year progresses if needed.

Again, this is the expense base for the US business. Our expected pretax loss for our European business before any charges for the buyout obligation will be $8 million to $11 million.

Before turning the call over to Jono, let me give you an update on where we are so far this quarter. As of yesterday, our AUM was $46 billion, as a result of $4 billion of negative market movement and $1.8 billion of outflows. As you can see on the right, we all know January was a challenging month for the markets. The industry has had outflows and most of the players have also had outflows.

So in summary, we have demonstrated world-class results, reflecting the operating efficiency of our business model. We run a disciplined business. And as we have always demonstrated, we will balance expense management with investments for growth.

Let me turn the call over to Jono.

Thank you, Amit. Good morning, everybody. This was a weak quarter but a very strong year. As such, our strategy remains the same. Our discipline also remains the same. We are comfortably and carefully managing our business with an eye towards long-term growth. We are mindful of the volatility in the markets in the second half of 2015, which have carried through year-to-date. We will manage our expenses appropriately, just as we have done in years past, should these conditions persist.

But make no mistake, the environment for an ETF-focused asset manager is only gaining momentum. WisdomTree is uniquely positioned amongst the public asset managers to capitalize on these trends.

As you can see on this slide, from 2006 through 2011, the ETF industry averaged $126 billion of inflows, and WisdomTree's market share on average was 2%. From 2012 through 2015, the industry saw a significant step-up in inflows, averaging $210 billion a year, and WisdomTree also saw a significant step-up in market share, averaging 5% a year.

I think the ETF industry is poised for another step-up in growth. Just consider what happened this year. In 2015, ETFs took in $232 billion, while mutual funds bled $125 billion. In fact, this was the largest year of active mutual fund outflows on record, according to MorningStar.

In many ways, it's a zero-sum game. The growth of the ETF industry comes primarily at the expense of the traditional mutual fund.

Why am I so confident in this dynamic? Largely, it's common sense. The ETF is the better structure. Transparency, liquidity and tax efficiency, and the continued growing awareness of these benefits are driving market share gains. But the DOL's proposed fiduciary rule, if enacted, will further accelerate the trends. MorningStar estimated more than $1 trillion of assets could flow into ETFs in passive products as a direct result of this higher fiduciary standard.

We are continuing to invest in our business because we are so confident that recent trends in fund flows will continue to move strongly in favor of ETFs. And we expect that over the next five years, the ETF industry could very possibly average $350 billion a year.

What does that mean for WisdomTree? Since the launch of our first ETFs 9 1/2 years ago, WisdomTree has taken 3.5% market share of inflows. As just discussed, over the last four years we have averaged just over 5%. As you know, we have historically targeted 3% to 5% of the industry inflows, but we are a stronger company today. And with these investments, we will be a stronger company tomorrow.

Amit has walked you through this year's strategic investment spend plan, which builds upon prior years' investments. We are adding people, products and new distribution capabilities. This gives us the confidence to raise our target of inflows to 5% to 7% market share over the next 5 to 10 years. WisdomTree is positioning to take a greater share of a growing pie.

Before we open up the call to questions, I do want to remind investors that market share and flows in general are not linear. There will be moments of greater strength and weakness. But our history since inception is one of strong organic growth, and we are confident that the long-term trend is very much intact.

With that, let's open it up to questions.

(Operator Instructions) Craig Siegenthaler, Credit Suisse.

So in the fourth quarter, the two larger hedged products, DXJ and HEDJ, gave up some ground to the newer products at iShares and the X-trackers. I'm just wondering -- we know cap gains is partially behind this, but can you provide your updated thoughts on this short-term trend and maybe how your products are stacking up competitively versus iShares and X-trackers?

Sure. HEDJ is by far the dominant vehicle for European-hedged equities, and DXJ is dominant in Japanese-hedged equities. So as you have seen in other categories, specifically the biggest ETF often takes in the lion's share of flows when the market is in favor, and it typically sees the greatest outflows when sentiment reverses.

So to put it into context, HEDJ took in $16 million since September of 2014. That was a period when European stocks were in favor if you hedged out the euro. Now, most recently, European equity markets have sold off 10% to 15% since November. So it's not unusual to see HEDJ experiencing outflows.

But I'm glad you asked the question because there has been some misinformation out there. So let me set the record straight with respect to three important points -- taxes, trading and performance.

First, on taxes. So due to the timing of HEDJ substantial inflows, which occurred during a period when the euro was losing value relative to the dollar, as well as the timing of HEDJ's fiscal year, WisdomTree ended up distributing larger capital gains than competing funds from either iShares or Deutsche Bank.

So in the past few months, we know there was some repositioning to avoid capital gains. But we believe this was a function of timing and not methodology. So, for example, WisdomTree didn't pay any capital gains on the equity portion of HEDJ's portfolios. We had larger capital gains to distribute because we had larger gains on the currency forwards.

In other words, the fund worked exactly as it was designed to. In any given year, the size of those capital gain distributions can vary, and next year it could easily reverse itself.

With respect to trading, we have significant advantages when it comes to the cost of trading. Over the last three months, HEDJ traded on average five times the dollar amount of its major competitors. Its AUM is more than four times as great as its nearest competitor. And HEDJ is approximately 50% cheaper to trade versus its main competitors.

Any notion that creation-redemption fees are driving up the cost of trading HEDJ is simply not true. Such fees are typically included in the pricing of the bid/ask spreads. And again, we are very competitive here because each day millions of shares of HEDJ trade back and forth, which keeps the bid/ask spread very tight.

HEDJ typically trades a penny wide. So if you trade a penny wide at $50, the cost per trade is 2 basis points, excluding commissions. That compares to 4 basis points for funds trading a penny wide at half of HEDJ price. And that's where the other funds typically trade. So for many traders and investors, it's the all-in cost of trading and owning the ETF that matters.

Lastly, with respect to performance, this is an area where some of the greatest misperceptions seem to lie. Investors who look at Yahoo! Finance or their own brokerage screens may not see the full performance picture if they only see the price return of the fund. To compare performance, you need to use the total return of the fund, which means adding back the dividends and the distributions.

So HEDJ, for example, generated a total return of 6.7% at NAV in the fourth quarter of 2015. But the capital gains distributions and the dividends it paid in that quarter totaled $4 per share or roughly 7% of the fund's NAV.

If you were looking at a screen that did not include those distributions, you could have mistakenly concluded that Hedged lost money over the final three months of 2015, which it didn't. To the contrary, it literally put money in investors' pockets. So the truth is when you look at the total turn of HEDJ's underlying index, it's actually outperformed the MSCI EMU 100% Hedged Index by 62 basis points in the fourth quarter.

And since the inception of the WisdomTree Europe Hedged Equity Index in July 2012, it has outperformed both of the cap-weighted indexes that the other European hedged ETFs track.

Now, we did underperform in calendar year 2015. That can occur when you have different country and sector rates relative to the beta benchmarks. But those variations, Craig, can also turn in your favor. Thus far this year in 2016, for example, the WisdomTree index has already generated 170 basis points of excess return relative to the MSCI EMU hedged index. So that trailing one-year performance differential is closing.

So to recap, HEDJ paid a large capital gain distribution in December, as did DXJ, but those gains can vary year-to-year. HEDJ and DXJ remain among the most highly-traded ETFs in their category, and they both continue to exhibit competitive long-term performance stories.

So the outflows we experienced in Q4 have moderated in recent weeks, and we should see a recovery in European equity markets. Certainly, if you have further weakness in the euro and European equity markets do recover, we believe HEDJ could well benefit from that change of investor sentiment.

And Craig, let me just add one final point to what Luciano just said. So one of the real structural advantages of the approach that WisdomTree has taken is really business model related, which is really a forever advantage. Self-indexing, always being differentiated, is really just the better long-term business model. And that should carry through for years to come. We wouldn't change the structure of our business versus any of the other ETF sponsors.

Got it. And just as my follow-up, one of your HEDJ competitors uses a fund-of-fund structure in order to tap the liquidity of the larger unhedged base. Why is this not a competitive advantage for this product versus your products?

Well, we trade more than they do. We have higher volume, we have higher dollar volume. And our bid/ask spread as a percentage of the ETF is actually cheaper.

So I don't know. You explain to me why you think it's an advantage.

So, Craig, it's not necessarily an advantage or a disadvantage. But in this competitive a situation where we have the largest funds in the category, it's not an advantage.

Got it. Thanks for taking my questions.

Jason Weyeneth, Piper Jaffray.

Can you guys talk a little bit about capital management and the decision not to be more aggressive with buybacks, particularly December? And then just looking forward, how you think about buyback appetite as you take that into conjunction with the growth spending plan?

Sure. There are several factors that we look at when we are thinking about buybacks. Obviously, for competitive reasons, we are not going to disclose what they all are. But you can imagine, like in the recent periods we were approaching a blackout period. We were in the middle of an M&A transaction to acquire GreenHaven.

So because of all that, we didn't execute any buybacks during that period. But when we think about capital management, remember we are a growth company and we are balancing the needs to make the right investments in the business first, return excess cash back to our shareholders, and have dry powder in case there may be some other opportunities for us out there.

We've returned capital in the past. And what we said on our last call is just because of what we did in the past, don't think that's the way it's going to go in the future. We may change the way the mix of our capital -- of how we distribute capital back to our shareholders, based upon the time.

We have $75 million left in our share buyback program, and our goal is to have a very efficient capital management program. So that's how we will continue to think about it going forward.

Thanks. And on the gross margin guidance, how do we think about how much of the lower guidance is driven by the recent pressure on assets versus the growth plans and the new product rollout?

Sure. So the bulk of it is the result of the current AUM. We are at $47 billion today, and that's what's driving the gross margins down. If you go back historically and look when we were averaging about this level of assets, you'll see the gross margin was close to this. We are probably -- the guidance that we are giving is probably 1 to 1 1/2 points lower than that because of the additional funds that we have launched in 2015, and what we plan to do in 2016.

Thanks.

Surinder Thind, Jefferies.

I'd just like to touch base on the regulatory landscape here. So how important is -- it's assumed that the deal proposal will be highly favorable. How important is that to pulling forward demand or opening up some of these channels at this point versus if that rule wasn't going to be in place? Is it a couple years or --?

I'm sorry. Could you repeat your question?

Are we looking at just a couple of years of pull-forward demand, or how should we think about that dynamic at this point?

So first, regulation is a global phenomenon. So, obviously, we've had RDR in Europe and we've got other regions in Europe. There are other similar initiatives underway. Canada has an initiative underway right now. Now you have the DOL rule, which is expected to go into effect before the end of this year. And if that happens, there's probably an SEC rule that would follow and would cover a much broader swath of the advisor market.

I think that these trends are inevitably going to accelerate the growth of the ETF industry, push more channels, make advisors move their allocations faster than they might have done on their own; though you can tell from historical flows, advisors have been very strongly moving into the ETF industry in general.

So it really just feels like this is the icing on the cake, not that we really love government regulation; and there's a lot of government regulation. There's not just the DOL rule, but you also have things like the liquidity role which, though also challenging to asset managers, is still very favorable to the ETF market because the things that they are focusing on, liquidity and transparency, again very favorable to the ETF structure.

So I think that this is really a new -- particularly in the US market where the DOL rule is a new phenomenon, this is really an accelerant to what has been taking place historically.

That's helpful. And then can we also touch base on just part of your new initiative spend, which is your product launches? At $2 million to $3 million, is it fair to assume that that's roughly about 10 to 15 new products at this point?

Yes. We said it was about 10 to 15 new ETFs; that's the plan during the year. And remember, our cost for an ETF is roughly about $175,000. So it's phased in throughout the year.

Let me just add, product development, as Amit said in his remarks, has obviously been historically important to WisdomTree. We have been very good at this. At the end of last year we launched two liquid-alts, a DYB which is a bearish fund, and a long-short fund. And as you might know, we filed for an S&P 500 put-write fund. So in the relatively near future, you are going to see a really robust liquid-alt suite from WisdomTree. And for investors to get more information on this, you should go to WisdomTree.com.

We are also seeing some strength in domestic fixed income. We launched not too long ago a yield-enhanced ag which has recently found its footing and seeing significant growth. We just filed for, so it's public, fixed-income smart beta.

So by the end of this year, you will see a much stronger domestic fixed-income and liquid-alt suite that will be a part of our global equity suite, which is both hedged and unhedged. And obviously, we made an acquisition in commodities. So from a diversification standpoint, these are very important initiatives.

Thanks. And then maybe one quick question; any additional color on the Japan strategy at this point with the opening up of the new office, in terms of just you guys' outlook there, how you are thinking about that, the timing of things?

Yes. So we are still in the -- we are in the final legs of getting our license, hopefully, within the coming weeks. As soon as we get that, we will be in a better position to talk to you more about the Japan strategy.

You know, I'm working on regulation. I would not be surprised from my trips to Japan -- this is just my speculation -- that a version of the fiduciary rule makes it to Japan as well.

Okay. Thank you, guys. That's it for me.

Adam Beatty.

I wanted to come at the DOL fiduciary rule from a different aspect. As I read the proposed rule, one of the aspects of it seems to be the idea that lower fees per se are a benefit to investors. And given that WisdomTree has -- one of the good things about WisdomTree is that you have maintained fairly high fee rates, north of 50 basis points.

So ex that aspect of the fiduciary rule, are there other parts of the rule that are favorable to ETFs and WisdomTree in particular?

So the 50 basis points is just because of the mix of where the assets have come. So we really are a low-fee firm, period. DXJ is priced absolutely in line, exactly in line, with EWJ. So we are really not a high-fee firm.

What's most important in the DOL rule, I think, is if you are on a nonexclusive index, it really doesn't bode well to be the higher-fee alternative. So again, I believe this rule means self-indexing and an ETF focus is really the only viable long-term business model in asset management.

Got it, thank you. Then turning to the overseas market more generally, you've hired a head of global distribution. Could you give us a sense -- I know AUM inflows can be volatile.

Can you give us a sense of maybe a two- to three-year outlook of how much growth you would expect? US asset managers have had some success, both active and passive, in taking some share in Europe. How much of WisdomTree could be overseas domiciled within a couple of years? What are your thoughts on that?

It's really -- that's a hard projection to make. And what we've tried to do is manage the Street's expectations on the buildout of these real true start-up investments that we have been making. But as you saw in the US, there is a turning point where it really starts to accelerate.

Now, one, this is also a diversification effort for WisdomTree. So you are seeing flows in Europe even though we have actually had outflows in the US. And we are also seeing more foreign buyers of the US funds coming out of Europe. So really, we are starting to see the synergies. But we are going to have to give you greater guidance over time. But again, the growth should accelerate in these markets as their markets mature and as their advisor community gets educated, and as their new regulatory pushes also accelerates those transitions.

So we will update you on what it could be. But what you should know is we know we have the resources. We know it's a global phenomenon. And we are making the investments to be a global ETF sponsor.

Okay, appreciate the color. Thanks for taking my questions.

Bill Katz, Citi.

So, Amit, on the expense guidance -- and thanks for framing it out that way -- how much flexibility is there on the investment spend part of the business, on the left-hand side of the chart, if the markets and flows remain somewhat flat to choppy for the rest of the year?

So yes, we do have flexibility on our strategic spend. As we have in the past, we can ramp stuff up or ramp stuff down if we see market conditions changing. We have discretionary items such as headcount can slow down, the level of marketing spend that we want to do can slow down.

So yes, there is flexibility there if we need to. But I would say as we've demonstrated in the past, we have an extreme amount of expense discipline when we need to be.

But balancing that, these are important investments that we need to make, we think, for the long run to help continue to accelerate our growth and, importantly, help stabilize and diversify our asset base.

So let me also add, Amit is being a little bit humble. We're going into this moment with really maybe 2015 -- you know better than I -- did we have the highest operating margins in the industry this year? I think we might have. And I think one of the things that confuses many of the analysts is their coverage universe of public asset managers have historically, for years have had no organic growth. So that the only element that they have in a negative market-move environment is cost-cutting.

We have a very, very different dynamic. And we are the only pure-play public ETF sponsor, and so I know it confuses a lot of the analysts. But our growth outlook is just dramatically different than the other publicly-traded asset managers.

My final question against that is, as you look at the accounted balance between the spend which I think, if my math is right, is going to put your 2016 margin pretty much on top of the rest of the industry or very close to it; versus possibly linking up with a strategic player that might have a broader distribution footprint already.

So I guess the question is independence versus the buildout. Where are you on the mindset from that perspective?

So I know that the analysts have often speculated that WisdomTree makes a very attractive acquisition. And we understand the rationale from their perspective, and it's very flattering. And I definitely agree that we have built this incredibly valuable franchise.

But you also have to -- from our perspective, two out of the last three years we've been a top 10 asset gatherer in America. We have achieved the highest margins in the industry, and outlook looks incredibly well.

So we are very committed to being an independent company, but we will also do the right thing if the situation demands it. So we are focused, though, on building out the business and just growing our footprint.

If I can just one last one, on your $350 billion per year number -- I know you gave some very broad thoughts on it in your prepared commentary -- could you dive down a layer or two? What products and geographies do you think over the next year or two offer the greatest opportunity, in particular?

So, first of all, if you are talking geographies of US-listed funds and what regions will have strength, meaning Asia or Europe or America, I'm not going to make those types of market calls. I think really there is -- we are very excited about things that we have already put into place and some of the things that are coming to fruition. So like as an example, currency hedge is an important category for us.

I believe that if you look back -- if we look back 5 or 10 years from now, international equities, the default will either be fully hedged or dynamically hedged, and that the least favorable will be unhedged.

Now, in a moment where you see -- unless you have real conviction that you have dollar weakness, that's the only time you would really want to make your default or go into unhedged equities. So we think that we are really well-positioned in that category.

And as Amit said, we recently launched some dynamic currency and hedged products. It's still nascent for us in others, but we have an early lead. We are very excited about having a broader -- and this is something that we have been building out over time. It started with the euro and negative-duration domestic equity ETFs. But we are very excited about fixed income, domestic equities, and we are very excited about the smart beta funds that are coming out.

And then the liquid-alts, we are committed to being a leader in liquid-alts and we already have a very, very strong footprint in that category.

Thanks, guys. Appreciate the color.

Michael Cyprys, Morgan Stanley.

Just curious, we've seen some of the industry acquire online advisory advice platforms as just another avenue for distribution. So just curious how you are thinking about that as a potential opportunity for WisdomTree. And at this point, do you feel you'd have a full product suite for that type of robo advisory platform?

So the robo advice or the robo advisory is very, very positive for the ETF industry. These model portfolios tend to be very ETF-centric. So we are very excited about them. They are not large yet, but we think they will continue to develop.

And in terms of having the built-out suite for them, we see opportunities to continue to launch product to better align with all of these new emerging channels. So we are very focused on it.

Okay. And then just shifting to regulation, you mentioned earlier that regulation is favorable for ETFs. Could you touch upon some of the recent derivative regulation from the SEC, and to what extent do you see that impacting ETFs positively, negatively, for the industry; and then also specifically for WisdomTree's products and how that impacts your ability to use derivatives within your ETFs?

Thank you, great question. So the derivative rule really is another push by the regulators on top of liquidity, on top of fiduciary. And we are -- obviously, we are very supportive of the government's push towards transparency and liquidity.

That said, this rule, the derivative rule, tries to limit -- puts limits on derivative exposure and requirements concerning the collateralization of derivative exposure generally. So just in very simple terms, if the rule was passed as is, we can comply with it if it was passed as is. That's the simple answer.

But we definitely feel, as others have commented, that there may be some unintended consequences with this rule, and we hope that they do make some adjustments. But if it is as is, we can comply. And our competitors would be in very similar positions, meaning currency hedging would be on a level playing field for all of the ETF sponsors. But anyway, we are watching it very closely.

Would you have to make any tweaks to your products, whether existing or some of the new suite of fixed-income and liquid-alt products you have coming down the pike?

So, obviously, we have to wait to see what the final rule is, and we can make tweaks if we have to. But again, those tweaks would be in line with what others would have to do. It will be a level playing field for everybody.

Okay, thank you.

Chris Shutler, William Blair.

I wanted to get more clarity on the comp guidance. I think in 2015 in the US, you had about $68 million of compensation expense. You say in slide 19 to reset that by $11 million. So it takes you down to $57 million.

So just to be clear, I want to make sure I understand this. Would you expect that the comp in 2016 is roughly $57 million if AUM remained at year-end levels and there were no flows? I just want to make sure I understand how the flows and everything works into that $11 million decline in the base.

Yes, that assumes an average level of inflows that takes that net -- that takes that down that $10.9 million. Obviously, if we have flows, that incentive comp number will go up, and we assume that we will have flows. We're not telling you what that target is, but it's built into that percent of revenue guidance that we gave.

And as we've seen in the past, if we don't have the flows, we have a lot of flexibility in compensation. We have a pay-for-performance model. And if we don't have the flows, then the compensation will be reflective of that.

Okay, thanks. And then just one more. Jono, you said in the past that I think you expect the vast majority of the flows for WisdomTree and the industry to come from products that are already in existence. I'm sure that's true for the industry, but is that still your view for WisdomTree, or how has your thinking involved?

I think in general, that is true. But that said, we are an aggressive launcher of new products, and you will have moments where a new fund can really be a very, very significant asset gatherer. So that point I made in the past was a generalization. And I'm sure that in some of the new products that have been launched or will be launched in the near future, you will find some winners, significant winners, as well.

All right, thanks a lot.

Mac Sykes, Gabelli.

There seems to be quite a bit of interest recently in currency plays in China. We've seen some notable hedge funds commenting about potential short positions. And I know you have the CYB, which is not the most optimal product for that.

But just curious if you've -- thinking about that space, more awareness there in terms of developing other products that could be used to perhaps take negative bets on the yuan.

We really only comment on product development after it's been filed. So we are aware of lots of trends and opportunities, but we hesitate to give specifics prior to a filing. Sorry.

Okay, thank you very much.

Robert Lee, KBW.

This is Ann Dai standing in for Rob. Just wanted to circle back on the $300 billion projection and maybe the 5% to 7% market share that you guys had highlighted. So when we think about that growth in market share, how much of that is really just assuming that currency hedge and some of the products that you are stronger in take disproportionate share within the ETF market? And how much are you assuming comes from building those new relationships and growing the distribution channels?

I think that you are going to see currency hedging as a category continue to perform very well in the coming years, as more and more advisors are cognizant of the currency risk in their unhedged equity exposures. So I think that the category will see growth, and we are a leader in that category and so we will participate there.

And then we are going to see a lot of growth coming from some of the new suites of products that we see -- liquid-alts, smart beta fixed-income. And then we will also see continued growth from these expanded sales channels that we have referred to in our growth spends over the last year or so.

Okay, great, thank you. And just generally, when you think about launching a new product, can you take us through the timeline of how long it takes from the thought occurring to launching the product to the point where it really starts to get some traction and generate some sales for you guys?

It's hard to generalize this. So first of all, sometimes it can be very quick to launch a product in as little as 100 days from idea to putting it into the market. Sometimes it can be years before the product actually gets into the market.

Sometimes we launch a fund and it's out of favor, and we saw that in lots of things like the zero and negative durations we launched at the end of 2012, thinking rates might go higher, and they haven't. So sometimes the digestive process for these funds to find footing can take more time.

But then sometimes you just get lucky. So like DYB which we launched December 27, which is a bearish fund, has been trading incredibly well in these volatile markets. So really it's very, very hard to generalize.

Okay, appreciate it. Thank you.

Mike Grondahl, Northland Securities.

First of all, on the outflows are you seeing anything unique or surprising in terms of the mix? And then maybe just secondly, on your 12 to 15 new ETFs in 2016, any comments on the pace, if you think that's more front-end loaded or back-end loaded?

I'm sorry. Repeat the second half of the question.

Yes, the second question was just your 12 to 15 new ETFs in 2016, just the pace of those rolling out. Do you think they are more front-end loaded or back-end loaded?

Yes, I think they are going to be a little bit more front-end loaded, but we will have to see as the year progresses. But from a planning standpoint, we are thinking a little bit more front-end loaded.

And in terms of the outflows, nothing unusual. As Luc said, the largest funds see, in a downturn, more outflows, and usually see more inflows when the market sentiment changes favorably again.

Okay, thank you.

Keith Housum, Northcoast Research.

First question is for Amit. I'm just trying to understand the cadence of your comp experience a little bit more. In the fourth quarter, was there any inclusion of reversibles of (inaudible) incentive compensation accruals?

Yes. So when we were accruing during the year, we think about what a full-year amount would look like. As a result, we had outflows in the third quarter and we reflected some of that in our third-quarter accrual. And then we had accelerated outflows in the fourth quarter. So there was a little bit of an annual true-up in that fourth-quarter number.

Okay, helpful. Thank you. And then, Jono, just thinking about the industry and some of the conversations out there, can you speak to the competitive pressure in terms of pricing the advisory fees? Are you seeing pressure on the funds to lower advisory fees at all? Has the discussion been out there, or is it new, or just any thoughts on the matter?

The competitive dynamic is both a challenge and very exciting and a great benefit. I think we now have 74 or 75 sponsors. It's just becoming inevitable to everybody that this is where their energy should be. So it's really helping to grow the pie.

In terms of the pricing dynamics, again, the business model from day one really did anticipate this. And that self-indexing differentiated product really is the only business model long-term in ETFs that we see that is sustainable.

And we've launched products with an eye towards the long-term, and so you will see -- recently, the fund launches in some of the categories have been slightly lower than prior fund launches, just taking into account the lower fees at the moment that the funds are being launched.

But we are always looking at fees. We are very comfortable with where we are. It's a challenge, but it's also an opportunity, and we are very well-positioned for it.

All right. Is that challenge new or has that challenge always been there, or just need-based on a regular basis?

It has always been there. It has been there since 1993, and really we saw it very early. The business model, again, positions us for this. Again, this is the best business model in light of all of the regulatory and competitive pressures in asset management.

Great, thank you.

I am showing no further questions at this time. I would now like to turn the call back over to WisdomTree for closing remarks.

I just want to thank you all for your time and attention and support, and we will speak to you next quarter.

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