U.S. Markets open in 3 hrs 28 mins

Edited Transcript of WETF earnings conference call or presentation 27-Jul-18 1:00pm GMT

Q2 2018 Wisdom Tree Investments Inc Earnings Call

New York Jul 27, 2018 (Thomson StreetEvents) -- Edited Transcript of Wisdom Tree Investments Inc earnings conference call or presentation Friday, July 27, 2018 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Jason Weyeneth

WisdomTree Investments, Inc. - Director of IR

* Amit Muni

WisdomTree Investments, Inc. - CFO and EVP of Finance

* Kurt MacAlpine

WisdomTree Investments, Inc. - EVP, Head of Global Distribution

* Jono Steinberg

WisdomTree Investments, Inc. - President and CEO

* Jeremy Schwartz

WisdomTree Investments, Inc. - Director of Research

================================================================================

Conference Call Participants

================================================================================

* Craig Siegenthaler

Credit Suisse - Analyst

* Brian Wu

Citigroup - Analyst

* Chris Shutler

William Blair & Company - Analyst

* Brian Bedell

Deutsche Bank - Analyst

* Michael Cyprys

Morgan Stanley - Analyst

* Brennan Hawken

UBS - Analyst

* Keith Housum

Northcoast Research - Analyst

* Mac Sykes

Gabelli & Co. - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the WisdomTree second-quarter earnings call. (Operator Instructions). As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Jason Weyeneth, Director of Investor Relations. You may begin.

--------------------------------------------------------------------------------

Jason Weyeneth, WisdomTree Investments, Inc. - Director of IR [2]

--------------------------------------------------------------------------------

Good morning. Before we begin, I'd 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. 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 factors section of WisdomTree's annual report on form 10-K for the year ended December 31, 2017, and quarterly report on form 10-Q for the quarter ended March 31, 2018. WisdomTree assumes no duty and does not undertake to update any forward-looking statements.

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

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [3]

--------------------------------------------------------------------------------

Thank you, Jason, and good morning, everyone. Since our operating data is already known, I'll quickly go through the important items for the quarter, and discuss some updated guidance around expenses. I'll then turn the call over to Kurt MacAlpine for some comments on our recent partnership announcements; and then Jono for some closing comments before opening it up for Q&A.

Beginning on slide 3. Our global AUM was $60 billion at the end of the second quarter, reflecting the April close of our acquisition of ETF Securities, partly offset by outflows and market depreciation. Despite the strengthening of the US dollar, increased political and economic uncertainty in Europe, and growth concerns in Japan drove continue outflows from HEDJ and DXJ.

As the chart in the middle shows, momentum continued to build around our fixed income strategies, which posted higher inflows for the fifth straight quarter. The chart on the right breaks down our flows by listing region, with Canada continuing to show strong organic growth.

Turning to the US segment flow highlights on slide 4. While the overall US segment endured outflows from HEDJ and DXJ, we continue to see the benefits of flow breadth and depth from our strategic initiatives around advisor solutions, investments in technology, and new distribution channels and partnerships. The number of funds with creations on a daily basis remains above historical levels and the percentage of our assets in core funds continued to grow, generating inflows for the 10th straight quarter despite the fact that the second-quarter flows for the industry were down 11% from the first quarter.

At the fund level we saw strong demand for our short duration fixed income strategies, including our zero duration, high-yield strategy, HYZD; and our floating-rate treasury strategy, USFR. USFR has generated $167 million of inflows during the quarter, and is the asset and liquidity leader in a category that could generate significant demand.

We saw a rebound in US equity flows with our quality dividend growth mid- and small-cap strategies generating solid inflows. Despite emerging markets shifting out of favor on the back of the strengthening dollar, our strong performing and differentiated emerging market fund, which excludes state-owned enterprises, XSOE, continues to resonate with investors and took in $59 million during the second quarter.

Let's take a look at our international segment flows on slide 5. Our international segment had slight outflows as strength in Canada was more than offset by outflows from European listed products. The Canadian franchise generated inflows of $98 million, driven by our suite of quality dividend growth ETFs, bringing total AUM to over $400 million in the first two years since we launched products in the region. Our European UCITS products generated inflows of $141 million or 67% annualized organic growth.

These results are particularly strong in the context of the European ETF market flows which slowed to just $3 billion industry-wide amid political and economic uncertainty. Strong performance of our enhanced commodity fund, WCOA, drove strong inflows which marked the sixth straight quarter of inflows for that fund.

Successful product launches also contributed to growth. We launched a UCITS version of our first-to-market S&P 500 Put/Write strategy, which generated immediate interest in the marketplace and represents another example of leveraging successful products in one region to multiple markets.

We also successfully launched the world's first contingent convertible bond ETF and have seen some early traction in the markets as it provides investors with a diversified exposure to an otherwise difficult strategy to access. The ETF Securities strategies we acquired had net outflows during the period post-deal, close to roughly $250 million, as modest gold inflows were more than offset by sentiment-driven oil and silver outflows.

Now turning to the financial results on slide 6. Revenues in the quarter grew 26% from the first quarter to $75 million; and net income grew to $17 million, reflecting the accretion from the ETF Securities transaction which closed in the second week of April.

We had two non-GAAP items this quarter. First, we recorded a $10 million pre-tax gain associated with marking to market the fair value of our gold commitment payments. And, second, we incurred $8 million of acquisition-related costs. Adjusting for these items, we earned $14 million or $0.09 a share in the quarter.

Turning to the US segment on the next slide. Gross margins were 83.4%, down slightly, reflecting lower average US listed AUM in the quarter. Based on current AUM levels, we expect gross margins to remain around similar levels. Adjusted operating margins for the US segment increased from the first quarter to 32.4%.

Total US segment expenses, excluding acquisition-related costs, declined 5% sequentially to $35.9 million. The decline was primarily driven by lower incentive compensation. The compensation ratio for the first half of the year was 28%, the middle of the range for the full-year guidance of 27% to 29%.

Turning to slide 8, I'd like to update you on some initiatives that will result in an update to our cost guidance for the second half of the year and also carry forward into 2019.

First, we are changing our distribution approach to Japan by expanding our relationship with Premia Partners. As a result, we will wind down our existing sales office in Japan which will yield savings of approximately $4 million annually. We announced a marketing relationship with Premia earlier this year where they would represent us in specific Asian countries.

We are very pleased to now be expanding that into Japan. This approach in Asia is similar to the very successful distribution approach we have taken for years in Latin America with the Compass Group, and we believe it will drive stronger results at a lower cost.

Second, as you know, we have made investments over the last several years, building an industry-leading approach to marketing and distribution through the use of data intelligence, AI, and predictive analytics. These initiatives allow us to better track client engagement at different levels.

As a result, we are generating efficiencies which will yield savings of approximately $3 million. So (technical difficulty) we will be realizing cost savings of nearly $7 million, of which $2 million will be recognized in the second half of this year, and the full effect into 2019. These savings represent approximately 7% of our current consensus earnings in 2019. While we continue to invest in our business to drive future growth, we anticipate recognizing additional efficiencies as we get into 2019.

Now turning to our international segment on slide 9. The international segment generating operating income of $4.1 million, driven by the results of the ETF Securities acquisition. Revenue jumped to $21 million, reflecting the April 11 deal close.

I'd like to spend a moment now highlighting some of the changes to our international segment financial statements, starting with the contractual gold payment. This expense results from a commitment we assumed through the acquisition of ETF Securities where we are obligated to pay a fee similar to a royalty on the physical gold ETFs based on the average daily spot price of gold. For the second quarter, this expense amounted to $2.7 million for the 89% of the quarter we owned ETF Securities.

Related to this, we recorded the fair value of this obligation as a liability on our balance sheet. The mark-to-market of this liability between periods flows through the nonoperating section of our income statement as a revaluation of deferred consideration. Given the decline in gold prices during the second quarter, the value of the liability declined; therefore, we recorded a gain of $10 million.

Finally, you'll notice the inclusion of interest expense in other operating expenses. The $2.1 million expense shown in the international segment relates only to the term loan raised to acquire ETF Securities. This amount is below the guidance we provided in May due to a lower LIBOR rate than what we had projected.

I'd lastly also like to highlight that we have recognized the majority of the $5 million of identified cost synergies from the acquisition, which is ahead of pace than we had initially outlined.

Now it is my pleasure to turn the call over to Kurt MacAlpine, our Global Head of Distribution.

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [4]

--------------------------------------------------------------------------------

Thank you, Amit. Good morning, everyone. Over the past 12 to 18 months, we've spent a lot of time discussing the investments that we've made in technology and distribution and the expected impact it would have on our relationships with our clients and prospects.

We've made these investments with two primary objectives in mind: to be the preferred business partner and the primary product provider for intermediary platforms and advisors. The combination of our technology-driven asset allocation tools -- which includes our digital portfolio developer tool, our open architecture model portfolios, our award-winning advisor solutions program, the investment in AdvisorEngine, and our data intelligence capabilities -- have positioned us well to achieve these objectives.

That capabilities that we bring to the table today and the resulting conversations we're having with platforms and advisors has transformed how we go to market. While it takes time to build better advisor relationships and negotiate platform opportunities, we've already announced significant wins globally, such as our relationship with TD Ameritrade, that have already meaningfully impacted the breadth and depth of our flows.

In the second quarter alone, we've entered into four types of new strategic relationships that we're excited to share with you today.

First, we entered into a strategic agreement with Cetera Financial Group, which is the second-largest independent financial advisor network in the nation with 7,900 advisors managing $240 billion in client assets. As part of this agreement, WisdomTree ETFs will be the first and currently only ETFs available as part of Cetera's no-transaction-fee platform. And we will be delivering our advisor solutions program to their platform and financial advisors.

We believe this is a groundbreaking relationship in our industry, as it is the first time that an ETF sponsor has partnered directly with an independent broker/dealer in this capacity. We believe strategic relationships like this could help unlock additional growth opportunities for WisdomTree (technical difficulty) segment of the market.

Second, we continue to realize strong success with our asset allocation initiative and are pleased to announce that our model portfolios are now available for execution on two new platforms this quarter, the Oranj network and Interactive Brokers.

Third, we're in the early stages of realizing the distribution benefits of the ETF Securities acquisition. In addition to having our UCITS funds approved on a number of new European platforms this quarter, we've also signed an agreement to be a participant on Swissquote's commission-free ETF trading platform. Switzerland is a large offshore market for ETFs where we have significant assets today, and Swissquote is the largest online platform in the market.

Fourth, we are beginning to realize the distribution synergies associated with our investment in AdvisorEngine. In the past quarter alone, we established three new strategic relationships with AdvisorEngine clients where we have seen a significant increase on our assets at these firms.

We've also signed a new agreement with a leading platform where they will be adopting the AdvisorEngine platform and using WisdomTree model portfolios. We are looking forward to publicly announcing this relationship in the coming weeks.

The negative market sentiment relating to our largest exposures has continued to significantly impact our top-line flow numbers, which is unfortunately masking the success we're having in building new strategic relationships. We believe that over time, the deals we currently have signed, plus those we have in the pipeline, will have an increasing impact on our flows.

I'd now like to turn the call over to Jono.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [5]

--------------------------------------------------------------------------------

Thank you, Kurt, and good morning, everyone. As the chart on slide 11 shows, DXJ and HEDJ remain a frustrating headwind, but it is important not to lose sight of the underlying growth our platform has exhibited over time. Over the past 12 years, our global position in the industry has never been stronger than it is today. The enhancements and investments we've made in our distribution strategy are now translating into formalized strategic relationships, and that is the underpinnings for exciting future growth, both in the US and abroad.

In Europe, the integration of ETFS is well underway; our European operations are now profitable; and we are fully equipped now to drive growth in the region. In Canada, we are generating excellent organic growth and establishing ourselves in a market we believe is poised for continued growth.

As Amit highlighted, technology and data investments made over the past few years are driving cost efficiencies across our platform, and we expect to drive more cost efficiencies over time. These technology investments and our advisor solutions program is allowing us to connect with clients and prospects in a way that wasn't possible a few years ago. The conversations we are having today are unlike any we have had before.

In addition to the relationship we just announced with Cetera, a clear example of this is the temporarily undisclosed independent broker/dealer Kurt just highlighted, that will be adopting AdvisorEngine's platform and making WisdomTree models available to their nearly 3,000 advisors. This is an important win that provides a cornerstone client for AdvisorEngine while also showing the strategic value of our investment in the firm.

The ability to have holistic discussions at the executive level around technology to more efficiently run their business, asset allocation products to drive better outcomes for their clients, and advisor solutions to improve the effectiveness and productivity of their advisors, is powerful. And it is clearly resonating with executives across a broad spectrum of firms, as demonstrated by our recent announcements.

Platform agreements like these, as well as the preferred access like Cetera and TD, are all an important source of future diversified flow. Nothing is as important as the long-term investment solutions, and we continue to prove that we are at the forefront of product innovation.

As an example, our US Multifactor Fund crossed its one-year performance anniversary at the end of June, having outperformed the 10 largest multifactor funds in the industry on an absolute and risk-adjusted basis. This is an important suite for WisdomTree. And we have recently launched a similar product in Europe, and we'll be expanding the product suite in the United States in the very near future.

Our Dynamic Long/Short and Dynamic Bearish ETFs both launched at the end of 2015 rank in the top percentile since inception. Liquid alternative strategies will prove an area of significant growth for the ETF industry, and WisdomTree is an innovation and performance leader in the category. This is what modern alpha looks like.

It's the totality of the quality of our investment strategies, the non-product Solutions we can provide clients, and the global reach we have, particularly following the ETF Securities acquisition, that positions us for the next wave of growth. As I said earlier, we have never been better positioned than we are today.

Thank you for your interest in WisdomTree, and we will take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions). Craig Siegenthaler, Credit Suisse.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [2]

--------------------------------------------------------------------------------

This is more of an industry-specific question than really WisdomTree. But we have watched institutional investors, tactical investors, and also the smart beta segment really take a pause in 2018. We saw with Invesco, we saw with BlackRock in the results this quarter, too. I'm just wondering on your -- what is your perspective on this trend, and could we see a rebound in the second half?

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [3]

--------------------------------------------------------------------------------

So, yes. Industry slows -- the industry saw a slowdown in flows, and it's global. I mean, Europe has been particularly pronounced this quarter. Prior quarters were running something like $20 billion to $25 billion of flow, and in this quarter came in at $3 billion. So I think the markets have been volatile. Higher interest rates and trade war concerns have unsettled the investors. And investors express their confidence or lack of confidence through ETFs more quickly than they do through other structures. But I really don't think anything is going to derail the growth of ETFs longer-term. I think this is just market sentiment related.

With respect to smart beta and those types of strategies, this has really been a momentum market since 2009, and you're seeing that momentum has been very hard to beat. I think if there is a correction, you will see alternative weightings, smart beta, modern alpha, liquid alts -- the things that minimize volatility -- really picking up steam to the advantage of WisdomTree and some other players.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [4]

--------------------------------------------------------------------------------

Great. And then just as my follow-up, on the robo-advisors and other tools offered by AdvisorEngine, can you update us on if there's any additional advisory firms that have signed up recently to use these tools? And also how should we think about AdvisorEngine and then the model portfolios contributing to flows over the next 12 months?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [5]

--------------------------------------------------------------------------------

Sure, Craig. It's Kurt MacAlpine here. So on your first question, so AdvisorEngine, as you know, acquired the Junxure platform -- which is one of the leading CRMs for wealth managers in the industry, which has over 1,500 firms managing over $600 billion of assets -- earlier this year. Since that acquisition, from a reporting standpoint, they report the assets and then the relationships in aggregate.

What I can let you know is that the platform itself continues to realize strong growth, onboarding a number of clients over the past few months, including the large client that we're looking forward to disclosing in the coming weeks to all of you as well.

If you think about the model portfolios, was your question more about model portfolios on AdvisorEngine, or just the model portfolio initiative in general?

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [6]

--------------------------------------------------------------------------------

It was actually both efforts, which are, like, separate from WisdomTree's legacy core business, and how they will contribute to flows to the cross-sell over the next 12 months.

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [7]

--------------------------------------------------------------------------------

Great. So if you think about our model portfolio initiative more broadly, we're still in the very early stages of beginning to monetize this investment, officially commercializing the portfolios late last year. Since then, we've already experienced very strong growth in our assets tracking our models. And over time we expect that this model portfolio initiative will be a significant contributor to both the consistency of our flows but also the diversification of our flows going forward.

I mean, despite only launching this last year, we already have the models available for execution today on TD Ameritrade, Envestnet, Oranj, Interactive Brokers, and then obviously through AdvisorEngine as well. So I think the strong start that we've experienced in the strong adoption on platforms is really a testament to how we construct these portfolios: the combination of running them open architecture, the blending of alpha and beta into one portfolio, and the strong track record. So we're really optimistic about the go-forward prospects for the models.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [8]

--------------------------------------------------------------------------------

Let me just -- one addition, Craig. So the last piece of models would be third-party models. And really particularly around the retail space, the adoption of what people call smart beta has really been minimal to date. But we are hearing and expecting that that will change maybe in the second half or significantly in 2019. So we do think that the totality of all models, ours and third parties, will continue to show substantial growth for WisdomTree.

--------------------------------------------------------------------------------

Craig Siegenthaler, Credit Suisse - Analyst [9]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Bill Katz, Citigroup.

--------------------------------------------------------------------------------

Brian Wu, Citigroup - Analyst [11]

--------------------------------------------------------------------------------

This is Brian Wu filling in for Bill. Wondering if you could provide some color on your expectations for growth, fee rates, and margins related to the Cetera partnership. Thank you.

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [12]

--------------------------------------------------------------------------------

So Brian, we don't disclose the fees that we pay in light of these partnerships. The expense that we do have goes through our third-party sharing line. And we've given guidance around that, that we expect it to be about 3% of our revenues.

--------------------------------------------------------------------------------

Brian Wu, Citigroup - Analyst [13]

--------------------------------------------------------------------------------

Great, thank you.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Chris Shutler, William Blair.

--------------------------------------------------------------------------------

Chris Shutler, William Blair & Company - Analyst [15]

--------------------------------------------------------------------------------

I also wanted to ask about the Cetera agreement. So can you just help us understand where on their platform those ETFs are going to sit? So I'm guessing you envision advisors mainly would use the ETFs in the fee-based parts of their book. I just want to confirm that's correct. And then any sense of how many ETFs would be available, and is the agreement exclusive?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [16]

--------------------------------------------------------------------------------

Sure. Let me take them one by one. So first off, in terms of where our ETFs are available for execution. So we have joined their no-transaction-fee program as the first and currently only ETF sponsor on that platform. That encompasses all of Cetera's various broker/dealers; they have six of those in total with nationwide coverage. So of the 7,900 advisors map to one of those six broker/dealers, and regardless of which one that you are part of, you are able to access our strategies.

Historically, ETFs have played particularly well in discretionary and fee-based or managed money portions of the portfolio, and Cetera has a large managed money component on their platform overall. But they are available for execution in both transaction-based accounts and fee-based accounts.

Regarding your question on exclusivity, the way that we think of it is we're the first and only kind of currently in the platform today.

--------------------------------------------------------------------------------

Chris Shutler, William Blair & Company - Analyst [17]

--------------------------------------------------------------------------------

And will it be all of the ETFs, Kurt?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [18]

--------------------------------------------------------------------------------

Yes, sorry about that. I missed that part of it. Yes, all of our ETFs are available, which is actually very unique if you'd looked at ETF commission-free or no-transaction-fee relationships, and if you look across the various platforms. So most of them have a subset of products from a particular sponsor. But yes, all of our ETFs will be available on the Cetera platform, which is also very unique.

--------------------------------------------------------------------------------

Chris Shutler, William Blair & Company - Analyst [19]

--------------------------------------------------------------------------------

All right, great. And then on the advisor agreement -- or AdvisorEngine agreement with this 3,000-advisor IBD, should we think of you as replacing any legacy technology providers? Or is AdvisorEngine sitting on top of whatever the advisors are using?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [20]

--------------------------------------------------------------------------------

I'd say it's a combination of both. For some advisors that are already using an existing technology or fee-based platform, this would and could act as a replacement for it. But we also expect, given the comments Jono made on just strength of model portfolios and asset allocation strategies in general, that a relationship like this, that allows an advisor to fully digitized their business and benefit from open architecture models, will drive a lot of new growth to the platform as well. So I think we see it as an opportunity in both to replace existing managers and platforms and also to generate new interest.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [21]

--------------------------------------------------------------------------------

But I think Chris was asking about: would AdvisorEngine be replacing other technologies? And at the start, it will be side-by-side; but over time, according to their management, so we would expect them to encourage a switchover to AdvisorEngine.

--------------------------------------------------------------------------------

Chris Shutler, William Blair & Company - Analyst [22]

--------------------------------------------------------------------------------

Okay, that's encouraging. Thanks a lot.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Brian Bedell, Deutsche Bank.

--------------------------------------------------------------------------------

Brian Bedell, Deutsche Bank - Analyst [24]

--------------------------------------------------------------------------------

Maybe just come back to the whole concept and strategy of -- really what I'm getting at is the open architecture versus exclusivity. And so very encouraging that you are announcing a lot of new agreements; it's been going on for a little while here. But maybe as you think about how you are tackling these new -- how you are getting into these new partnerships, both from a technology angle; so, think about it from AdvisorEngine's angle and then also from your product.

What is your view of how important open architecture is going to be from availability of ETFs on the agreements. And then also as your AdvisorEngine competes against, say, other established platforms like Aladdin for Wealth or Jemstep, or even internal -- other internal model portfolio construction. How do you see the technology competing on an open architecture versus an exclusivity basis?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [25]

--------------------------------------------------------------------------------

It's Kurt MacAlpine here. So first off, when you are thinking about open architecture as it relates to model portfolios, so we believe -- our intent with our model portfolios is to act in many capacities as the investment engine for a particular RIA, or a client or a firm of that nature.

When you think about how people build portfolios themselves, very rarely do they build their own portfolios only using the products of one underlying asset manager. But when you look at how most asset managers build their model portfolios, they build them only using their own products.

So, for us, it was very important when we launched this initiative to build portfolios that reflect how investors actually want their portfolios built. And in our opinion, that's best-of-breed, regardless of manager. So, for us, it is very unique in the industry to be building them open architecture. But we actually feel it aligns much better with how advisors, platforms, and investors prefer to construct their portfolio. So I think that decision aligns better with how they operate, and has allowed us to get off to a strong start, both in terms of asset gathering but also our assets on particular platforms.

As you think about open architecture related to our technology investment, so particularly AdvisorEngine, part of the appeal when we made the initial investment in AdvisorEngine at the end of 2016 was the flexibility of the platform. We found that a lot of the other platforms in the industry were too rigid. So by that I mean either they weren't -- they required an advisor to fundamentally change how they were doing business. So, for example, they would have to change their trading tools. They might have to change their CRM. They might have to change their goals-based planning in order to use or adopt that technology.

So AdvisorEngine, which aligns very well with how we think about the world, preferred to build an open architecture platform with completely modular components. So if a particular platform or an advisor or a firm onboards AdvisorEngine, it's up to them to choose which components of the platform that they want. And it's been built in a way that has seamless integration across proprietary capabilities, and third-party capabilities as well.

And I think this is quite unique, as well, on their side. And I think it's playing really well, which is helping to drive the strong adoption. Because it's allowing asset managers, or wealth managers in this case, to continue to operate the business [in] they want while realizing that digital experience for their clients.

--------------------------------------------------------------------------------

Brian Bedell, Deutsche Bank - Analyst [26]

--------------------------------------------------------------------------------

Great, that's helpful. And maybe just -- I don't know if you have a -- it's probably too early to ask this, but a range of market share within your agreements in terms of what proportion of that open architecture you think WisdomTree can grab.

And then just one other follow-up. You mentioned data intelligence, the initiative there. What portion of your AUM base are you able to analyze at this stage?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [27]

--------------------------------------------------------------------------------

Great. So first off on the open architecture model portfolios, I mean we really build them with an open architecture lens in mind. So it starts with the end client's objectives. What are they looking to achieve? And then we will build the portfolio accordingly. So some of those portfolios have a very high share of WisdomTree; others have a more modest share of WisdomTree. But it's really based upon the objectives that the client is looking to achieve, and the risk tolerance and things like that that go into that decision-making. So we really do truly build them open architecture for them.

Regarding the data intelligent efforts, we talked a lot about this on previous calls around the efforts we've made around putting -- building or establishing one integrated database. So right now, we are able to -- from an individual client perspective, we really have a holistic view.

So what does that mean? It means we have all of our sales interactions, captured via our salesforce capability, in that database. We have all of our marketing, tracking, and intelligence efforts tracked in there as well; all of the public filings around assets and flows that are available in the industry, plus the data agreements we have with a number of strategic relationships as well.

So all of that is put into one integrated database where we are able to see, at the client, level, not only the activities and the engagement, but also the assets and the flows from them.

We also, last year -- and rolled it out late last year -- collaborated with IBM Watson. So we're the first and only asset manager using Watson's capabilities in the distribution process. What that has allowed us to do, in addition to having a machine learning model that helps determine who best -- who we should be targeting, what we should be targeting them with, and then specifically how we should be targeting -- it also came with a lot of demographic data and information on those particular advisors and clients that's very helpful to our segmentation and prioritization efforts.

So I would say the way to think about the data intelligence effort is we are now in the execution phase. Obviously we're continuing to add on and strengthen the capabilities, but it's been up and running in our distribution organization for the last few months.

--------------------------------------------------------------------------------

Brian Bedell, Deutsche Bank - Analyst [28]

--------------------------------------------------------------------------------

In the level of observations -- and when you say client, that's at the intermediary level, not at the actual holder -- the actual personal individual holding that ETF. Is that correct?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [29]

--------------------------------------------------------------------------------

Correct, yes, at the financial advisor level.

--------------------------------------------------------------------------------

Brian Bedell, Deutsche Bank - Analyst [30]

--------------------------------------------------------------------------------

Yes, okay. Great. Thank you so much.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Michael Cyprys, Morgan Stanley.

--------------------------------------------------------------------------------

Michael Cyprys, Morgan Stanley - Analyst [32]

--------------------------------------------------------------------------------

I just wanted to circle back on Japan, being it's a little bit of a change in approach. I was just wondering if you could share just a little bit more color around closing the office and the new marketing agreement. And maybe just your perspective on what's changed relative to your expectations when you first went into Japan.

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [33]

--------------------------------------------------------------------------------

Sure. So it's Kurt MacAlpine here again. As you think about the Japan strategy, this is a different approach for us to Japan. So the way that we think about it is it allows us to keep the on-the-ground presence and the optionality in the Japan market while doing it in a more cost-effective manner for WisdomTree and its shareholders.

So the relationship that we are pursuing -- so before, as you probably know, we had a physical presence in Japan with our own dedicated team. We are now, as Amit had mentioned earlier, incorporating Japan distribution into our relationship with Premia Partners who's been our distributor in Asia, ex-Japan, since earlier this year. So for us, it allows us to maintain optionality on the market, continue to engage with the clients that our team has laid a nice foundation for, but to do it in a much more cost-effective manner for us.

If you think about what's changed, I don't think anything has changed in particular on the Japan market. I would say that the rate and pace of regulatory reform is probably slower than everyone would have liked. We remain confident that it's going to happen and we want to make sure that we're set up for success when it does happen. So I think the combination of the intellectual property that we offer plus the ongoing and continued presence via Premia Partners will position us well to achieve this, once that change happens.

--------------------------------------------------------------------------------

Michael Cyprys, Morgan Stanley - Analyst [34]

--------------------------------------------------------------------------------

Okay, great. And just moving to the US, we saw an SEC proposal on a rule on ETFs to streamline the issuance process there. Just curious, what sort of changes, if any, you need to make to your existing lineup of ETFs, and how you are thinking about the competitive dynamics and strategic implications of that rule set. Does it lower barriers to entry? How are you thinking about that?

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [35]

--------------------------------------------------------------------------------

So, the rules really were a net positive for WisdomTree. There was some equalization that others got with respect to some creation and redemption basket flexibility that we have. But we also picked up significant greater flexibility around index-based product, where the vast majority of our revenue and assets lie. So benefits that an iShares or some of the earliest competitors had that first in self-indexing was hampered with, meaning us. So net-net, I think it's a straight positive.

--------------------------------------------------------------------------------

Michael Cyprys, Morgan Stanley - Analyst [36]

--------------------------------------------------------------------------------

Great, thank you.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

Brennan Hawken, UBS.

--------------------------------------------------------------------------------

Brennan Hawken, UBS - Analyst [38]

--------------------------------------------------------------------------------

Just wanted to clarify on the comment on third-party distribution costs. I think previously you had indicated the US -- those US costs would be 2.6% to 3% of investment advisory fees. Is that now just 3%? And as you guys are able to generate more success in landing these deals, should we assume there's upside to that guidance if those assets continue to grow proportionally?

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [39]

--------------------------------------------------------------------------------

Hey, Brennan, it's Amit. Yes, so right now, you can see it's running at about 3%. We had given guidance of about 2.6% to 3%. The reason it is running a little bit on the higher end of that range is not because the expense is higher -- you can see actually sequentially the expense is down; in fact, the revenues have come down because of the outflows that we've seen in HEDJ and DXJ and the fact that those two funds don't really make up a large percentage of some of these platform deals that we have.

So I think using a 3% number for your models, going forward, is probably a good number to use. If we do see some of those trends changing, we will give updated guidance on that.

--------------------------------------------------------------------------------

Brennan Hawken, UBS - Analyst [40]

--------------------------------------------------------------------------------

Okay. And then early days, but what are your initial thoughts on the de facto hedge from the ETF Securities commodities products? And it looks like both of the suites, the currency hedged and the commodities, are in outflow quarter-to-date. So what do you think might be happening in July that has caused that hedge to be less effective? Understood that it's a short window, right? I mean, we're not even dealing with a month. But it would be helpful, I think, to hear your thoughts on that.

--------------------------------------------------------------------------------

Jeremy Schwartz, WisdomTree Investments, Inc. - Director of Research [41]

--------------------------------------------------------------------------------

Hi, this is Jeremy Schwartz, Director of Research. So from a pure asset class level, one of the things that's hampered gold demand, you'd say, so we've had rising interest rates. And rising interest rates is one of the negative offsets for gold. So in the second quarter, you saw a very strong dollar, 5% move higher in the dollar. And that was negative for commodities, negative for gold, so you saw some relationship there. And you hadn't seen the strong dollar trends that yet to sort a renewed interest in currency hedging, just given the global trade uncertainties.

So, no; we do think you're right that there is this natural weak dollar hedge from gold itself towards the [general currency hedging] family. But the sort of unique nature of the market environment so far hasn't seen that really come to fruition yet.

--------------------------------------------------------------------------------

Brennan Hawken, UBS - Analyst [42]

--------------------------------------------------------------------------------

Okay. Thanks a lot for that.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

Alex Blostein, Goldman Sachs.

--------------------------------------------------------------------------------

Unidentified Analyst [44]

--------------------------------------------------------------------------------

This is actually Ryan on behalf of Alex. Sort of actually kind of a follow-up to the prior question. As you think about timing of potential synergies of having the combined platform to ETF Securities, when are you thinking that there might be some uplift in that distribution and [grow sales of that]?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [45]

--------------------------------------------------------------------------------

Sure. It's Kurt here. So from a distribution and marketing standpoint, if you think about the acquisition just having closed this quarter, we've been focused on integrating the team; getting the team members cross-trained on the new products that each of them are assuming, given we have folks from legacy WisdomTree and legacy ETF Securities; making new client introductions and getting our UCITS approved on platforms where ETF Securities has had access historically where WisdomTree didn't have it.

In addition to that, we're in the process of streamlining the brands into one brand, which will be using WisdomTree across all the ranges of products. That's expected to happen this fall.

So I would say, look, it is very early days. I'm very optimistic, given how well the team has done since the integration has happened, the adoption that we've seen on the platforms that have set our UCITS products up for strong success going forward. So I don't think it will be -- we're certainly in the early days, but I am optimistic that we'll start to see an uplift in the near future.

--------------------------------------------------------------------------------

Unidentified Analyst [46]

--------------------------------------------------------------------------------

Got it. Okay, thank you. And then maybe just another quick question on Cetera. It might be a little bit of a challenging one to answer. But as we think about ETF usage on that platform in general, do have any sense -- maybe more qualitative, around how much ETFs are currently used?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [47]

--------------------------------------------------------------------------------

Sure. So in terms of the specific breakdowns of the platforms, I can't share Cetera's ETF usage versus other structures. Part of what excites me about the opportunity for us to collaborate with Cetera and then the IBD community in general is if you look at ETF adoption by IBDs, or independent broker/dealers, it's actually been lower than what we've seen in other channels: the RAs, the wirehouse channel, and some institutional segments as well.

So I'm excited because this platform allows us to participate in a no-transaction-fee platform; be a partner of Cetera overall, which will give us a great form to go out and engage with and interact with the advisors that affiliate with all their different broker/dealers.

So I think this should be a great catalyst for us to certainly increase awareness of WisdomTree, give us a platform for us to tell the story about our strategies. And I think we're very well set up for success.

Often, if you look at the types of strategies that resonate with IBDs -- and this isn't a Cetera-specific comment, but just about independent broker/dealers in general -- a lot of them are seeking alpha-generating strategies. And if you think about our modern alpha approach to investing, this is what we do. So while the structure may be newer to independent broker/dealers in general, the philosophy around alpha generation, or in our case modern alpha, is something that resonates very well. So I think this relationship sets us up well for success.

--------------------------------------------------------------------------------

Unidentified Analyst [48]

--------------------------------------------------------------------------------

Got it. Thank you very much.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Keith Housum, Northcoast Research.

--------------------------------------------------------------------------------

Keith Housum, Northcoast Research - Analyst [50]

--------------------------------------------------------------------------------

The first question regarding the average advisory fee drops year-over-year from 50 basis points to 48. Is that more reflective of the mix of the ETFs? Or is that attributable to the ETF acquisition, or just some commentary on the [decrease in the basis fee]?

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [51]

--------------------------------------------------------------------------------

Well, there was certainly some -- a slight overall decrease in fee capture with ETFS, that they were at a slightly lower fee capture than the broad traditional WisdomTree platform. In terms of -- and then most -- the rest of it has to just do with the mix. So as an example, the quarter in terms of flows for us in the US were led by domestic fixed income. And so it tends to be at a lower fee rate, but it's really the asset mix that's driving that.

--------------------------------------------------------------------------------

Keith Housum, Northcoast Research - Analyst [52]

--------------------------------------------------------------------------------

Okay, great. And then just coming back to the AdvisorEngine questions that were previous -- in previous quarters, you guys had given some metrics in terms of the client additions that AdvisorEngine has gone through. Is there any metrics you guys can give us an idea about how AdvisorEngine has been growing over the past year?

--------------------------------------------------------------------------------

Kurt MacAlpine, WisdomTree Investments, Inc. - EVP, Head of Global Distribution [53]

--------------------------------------------------------------------------------

I mean certainly, so the number of client update was kind of tied to how AdvisorEngine had disclosed their clients, which they did on a standalone basis prior to the Junxure acquisition, which has been integrated since then.

I can tell you, just speaking about the overall trends, the adoption of the platform continues to remain strong. AdvisorEngine had rolled out a new version 2.0 of their platform earlier this quarter, which has sparked strong adoption in firms that had previously signed up for the platform that were waiting for version 2.0 to come out are now transitioning onto that platform. So in the last quarter, both the number of firms using the platform has increased, and the assets on that platform has increased.

The pipeline, as it has for the last while, continues to remain strong and continues to grow. And as we continue to demonstrate through more clients on the platform, but notable wins like the one we're going to be disclosing in a few weeks, just continue to reinforce of the strength and the power of the platform and set us up well to grow, going forward.

--------------------------------------------------------------------------------

Keith Housum, Northcoast Research - Analyst [54]

--------------------------------------------------------------------------------

Okay. I appreciate that. And then Amit, just a little bit of a housekeeping item here. Other income was up significantly compared to prior periods. And I understand from your guys' release that was creation redemptions from the ETF Securities acquisition. Would we expect that to continue? Or is that just a one-time blip in other income this quarter?

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [55]

--------------------------------------------------------------------------------

No, that should continue. So it's just a different revenue stream that ETF Securities business had, where they break out their creation redemption fee. They have a separate fee for that, so that should be an ongoing item.

--------------------------------------------------------------------------------

Keith Housum, Northcoast Research - Analyst [56]

--------------------------------------------------------------------------------

Okay. Thank you.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Mac Sykes, Gabelli.

--------------------------------------------------------------------------------

Mac Sykes, Gabelli & Co. - Analyst [58]

--------------------------------------------------------------------------------

I just had two questions. I'll just say them first. First, do you think the proposals that Mike had just talked about affect your operating costs at all, going forward, in terms of some of those SEC adoptions?

And then I've asked this in the past; but maybe you could just give us an update on where you see the industry in terms of potential innovation share of the overall market? So what I'm trying to understand is in terms of your growth going forward, how much of that do you see as new products that you've innovated on versus just taking additional share of adoption of the overall market? Thanks.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [59]

--------------------------------------------------------------------------------

So, with respect to implementing whatever the -- as the proposal from the SEC stands today, it will have really almost no cost effect.

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [60]

--------------------------------------------------------------------------------

There's no cost effect of that -- of the new proposed SEC rule on us, Mac.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [61]

--------------------------------------------------------------------------------

And in terms of future product, we do believe that the -- well, we believe that the significant flow will come from future product, particularly post- some sort of correction which will really play into our push into active strategies, transparent active strategies, things like the multifactor which we discussed earlier; the liquid alt strategies; the new rising rate fixed income.

We are very, very optimistic about future flow from new products or relatively new products. But we're incredibly encouraged by -- for the last three or four quarters, how well historical product has [flown]. Whether it's things like DEM or DGS, some of our historical flow leaders, are also continuing to flow. So it seems balanced, but we are very excited about the new product.

--------------------------------------------------------------------------------

Mac Sykes, Gabelli & Co. - Analyst [62]

--------------------------------------------------------------------------------

Great, thank you.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

Bill Katz, Citigroup.

--------------------------------------------------------------------------------

Brian Wu, Citigroup - Analyst [64]

--------------------------------------------------------------------------------

This is Brian again. Thanks for taking my follow-up. Just a quick modeling question. For the US comp ratio guide, is this gross or net of anticipated savings?

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [65]

--------------------------------------------------------------------------------

So the guidance that we've given -- so yes, we gave guidance about 27% to 29%. We're running right now at about 28%. I expect us to be in that middle of that range for the rest of 2018. And then obviously for 2019, because we do have the operating leverage in the comp line, as the revenues increase I would expect it to -- that range to drop in future periods. But we'll give updated guidance on that when we do our Q4 call.

--------------------------------------------------------------------------------

Brian Wu, Citigroup - Analyst [66]

--------------------------------------------------------------------------------

Great, thanks. And then one more. For non-comp expenses in second-half 2018, could you provide some color on the outlook for that?

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [67]

--------------------------------------------------------------------------------

So generally speaking, if you look at our historical trends, you can see that we generally have a slowdown in certain of our spending in Q3. But I don't see any major changes from what you see from the first half to the second half, absent some of the cost initiatives that we disclosed in today's call.

--------------------------------------------------------------------------------

Brian Wu, Citigroup - Analyst [68]

--------------------------------------------------------------------------------

Great. Thank you so much.

--------------------------------------------------------------------------------

Operator [69]

--------------------------------------------------------------------------------

Michael Carrier, Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Unidentified Analyst [70]

--------------------------------------------------------------------------------

This is actually Jeff stepping in for Mike. Regarding the $7 million of annual cost saves you guys now see, do you expect to realize all of that? Or is it possible that you may deploy some of that into new growth opportunities that may have previously been on the back burner?

--------------------------------------------------------------------------------

Amit Muni, WisdomTree Investments, Inc. - CFO and EVP of Finance [71]

--------------------------------------------------------------------------------

No. I think we expect all of that to flow to our bottom line. This is just a matter of we have efficiencies, the fact that we're gaining leverage and able to allocate some resources in other ways, we expect all those savings to flow right to the bottom line.

--------------------------------------------------------------------------------

Unidentified Analyst [72]

--------------------------------------------------------------------------------

Great. Thanks for taking the question.

--------------------------------------------------------------------------------

Operator [73]

--------------------------------------------------------------------------------

That is all the questions we have. I would like to hand the call back over to Jono, WisdomTree's CEO, for closing remarks.

--------------------------------------------------------------------------------

Jono Steinberg, WisdomTree Investments, Inc. - President and CEO [74]

--------------------------------------------------------------------------------

I just want to thank you all for your participation today, and we look forward to speaking to you next quarter. Thank you. Have a good day.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.