Wisdom Tree had record revenues and record GAAP net income in Q3.
In Q3, Wisdom Tree hired Greg Barton as its new Chief Operating Officer.
Wisdom Tree launched one new fund in Q3, which was China ex-financials. It repositioned its International Hedged Equity ETF into the European Hedged Equity ETF. This will help investors who want to buy European equities but are concerned about declines in the Euro. Wisdom Tree similarly re-purposed a Japanese ETF to hedge the yen two years ago and saw a large increase in assets.
Wisdom Tree expects to have more fixed income ETFs in the coming years.
Wisdom Tree successfully renegotiated its joint venture with Bank of New York on currency and some fixed income ETFs. At the end of this year, it will end the joint venture under which Wisdom Tree and Bank of New York split the profits from these ETFs equally. The joint venture had been scheduled to end at the end of March 2013. Although Bank of New York will continue to provide services for these funds, it will now be paid as a sub-advisor. As a result of this change, Wisdom Tree expects its gross margins to be between 70 and 75 percent, and ultimately 80 percent.
Wisdom Tree took in $1 billion of new money in Q3, well ahead of the pace from last year. It had $700 million in positive market move.
Wisdom Tree has 1.3 percent of total industry assets. Since inflows increased by 1.8 percent, it was taking industry share, although it would have liked to have seen more increase in market share since most inflows were into equity funds. The company underperformed in international developed equities. Wisdom Tree has a target market share of 3 to 5 percent of inflows.
Less than 50 percent of Wisdom Tree's fund are beating their 12 month, 3 and 5 year benchmarks; however, the benchmarks do not include fees and expenses.
Evaluation of industry.
The ETF industry had $58 billion in inflows in Q3, with equities and emerging markets having the largest inflows. There were outflows in currencies and alternatives. It is possible that 2012 could be the best year ever for ETF inflows, topping 2008.
The ETF industry is still growing and growth is outpacing mutual funds. In looking at inflows and outflows regarding equities and bonds, one should look at both ETFs and mutual funds. While there have been net equity outflows in mutual funds since 2002, there have been even more inflows into equity ETFs. Bond ETFs are newer and have not seen as much inflows, but Wisdom Tree believes bond ETFs will take market share away from bond mutual funds in the next 10 years.
There are three major factors causing the growing popularity of ETFs: (1) more advisers are moving to a fee-based business, and ETFs work well in that type of business, (2) more money managers are using ETFs, rather than buying individual stocks, and (3) since returns have been low, investors are more focused on lower fees and lower taxes.
Because the SEC has not been giving exempted relief grants and has baned the use of derivatives on actively-managed ETFs, it is very difficult for new participants to enter the market, which is a huge competitive advantage for existing players.
Financials.
Revenues increased 22 percent in Q3, primarily due to higher assets under management. Wisdom Tree's average advisory fee was 54 basis points versus 55 basis points in Q3/2011. It's average revenue capture is 54 basis points.
Operating income tripled from Q3/2011.
Operating expenses in Q3 increased by 5 percent, primarily due to compensation expenses and assets under management (AUM) related expenses. Third party sharing costs decreased by 33 percent due to lower AUM in its joint venture funds with Bank of New York. Expenses as a percent of revenue have declined and Wisdom Tree expects this trend to continue.
Gross margins, which are revenues less fund-related and third-party sharing expenses, increased to 68 percent in Q3 versus 61 percent a year ago. Pretax margins in Q3 were 22 percent versus 9 percent in Q3/2011. The higher margins resulted from stronger revenue growth.
Assets increased by 50 percent in the last year and by 12 percent since Q2.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/956411-wisdomtree-investments-management-discusses-q3-2012-results-earnings-call-transcript
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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