Q3 2020 Wisdom Tree Investments Inc Earnings Call
Ladies and gentlemen, thank you for standing by for the Wisdomtree Q3 earnings call.
At this time all participants are in a listen only mode. After the speakers presentation to help your question and answer session.
A question drug, especially the first star one on your telephone if you require any further assistance. Please press Star then zero.
I would now like to be sheltered this conference call Mr., Jason why not director of Investor Relations you may begin.
Thank you and good morning, before we begin I'd like to reference our legal disclaimer available in todays 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 state.
Mitch, including but not limited to the risks set forth in this presentation and in the risk factor section of Wisdomtrees annual report on form 10-K for the year ended December 31st 2019, 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 Wisdomtrees CFO.
Maybe.
Thank you Jason good morning, everyone.
Walk through the highlights for the third quarter and turn the call over to our President Jarrett Lilien, who will provide a deeper dive on our U.S. and European products, and then to Johnno for closing remarks before we open the line for Q1 night.
Beginning on slide three we ended the quarter with assets under management of 60.7 billion.
5% from the second quarter, primarily from positive market movement.
We have 468 million of net outflows. However, I know so far this quarter, we're off to a strong start with net inflows of over a billion and we have turned positive net inflows on a year to date basis.
Our U.S. products generated inflows each month of this quarter for a total of 575 million, representing 7% annualized organic growth.
Building upon the momentum from last quarter, our dividend growth ex state owned emerging market cloud computing and aggregate bond products generated approximately 1.7 billion of inflows in the quarter.
However, we continue to face headwinds, that's nearly 40% of our you when we're in the worst 15 flowing categories for the industry.
In Europe, we had outflows of 1 billion, primarily from our energy and gold products. However, we did generate inflows into our other precious metals, including silver platinum and Palladium and also our cloud computing usage product.
Now turning to the financial results on slide four.
Revenues were 65 million for the quarter up 11% due to higher average and you win and a slight increase in our fee capture due to mix change.
On a GAAP basis, we had a net loss of 300000 X.
Excluding non operating items adjusted net income was 11 million or seven cents a share.
This quarter, we took a non cash after tax charge of 9 million for our future gold commitment payments, reflecting the increase in gold prices during the quarter as well as a noncash write off of 2 million for our remaining carrying value and pieces technologies.
As a reminder, our investment thesis had no cost basis to us it was a holding from the prior legacy business wisdom tree.
During the quarter, we completed a 25 million add on to our convertible offering and bought back approximately 1 million shares would part of the proceeds.
The terms for the add on work on the same terms as our previous transactions, bringing debt outstanding to the same level as our previous term loan.
Turning to margins on the next slide.
Our operating margin expanded to 22.8% in the quarter, reflecting controlled expenses and higher revenues.
Gross margins also expanded to 76.5% in the quarter due to higher average or you want.
We still expect gross margins in the 75% to 77% range, but on the higher end.
On the next slide you can see the changes in our expenses.
Our operating expenses remain well controlled up only 7% from the second quarter.
Compensation expense increased as we have seen a rebound in our earnings from the significant decline we experienced earlier this year.
Due to this improved forward revenue outlook, we anticipate fourth quarter compensation expense to be roughly in line with the third quarter. So it may trend a bit higher depending upon our results in the last two months of the quarter.
Discretionary spending continued to remain well controlled despite the fact, we strategically increased spending for marketing activities to support our brands and products.
We are realizing efficiencies and this new operating environment, such as continued virtual client engagement, which greatly expands our reach.
Because of these efficiencies and controlling costs, we now expect our full year discretionary spending to be 41 million.
As a reminder, our guidance at the beginning of the year was 51.5 million for discretionary spending, which we reduced to 47 million after the first quarter and 44 million after the second quarter.
We don't believe these reductions what any negative effect on our long term growth outlook.
Our adjusted tax rate was 16.7% in the quarter.
Because of the change in mix between the earnings contribution of our U.S. and European businesses, we see our go forward tax rate at approximately 19%, which is lower than our previous guidance.
Thank you and let me now turn the call over to our President John Lillian.
Thank you Amit and good morning.
I want to now drilled deeper into the positive trends, we are seeing in both the U.S. and Europe beginning.
Beginning with the U.S. the pandemic interrupted momentum that began in September of last year. If you remember February marked our sixth consecutive month of net inflows, which was the best Street. The company had experienced in over five years March and the pandemic interrupted this momentum and bright Ella.
He did redemptions, but these have been subsiding each month since then.
Nonetheless, these outflows is clouded and otherwise positive story, which is that we have also been experiencing strong gross inflows with average monthly inflows of 27%. This year versus last we are now on pace for our strongest annual sales in over five years.
In the third quarter, we generated 2.4 billion of gross inflows of nearly 100% from a year ago and up 25% sequentially from Q2 gross inflows for the first three quarters of this year have outpaced the first three quarters of each of the past four years.
Overall momentum is back and our U.S. listed D.T.S. have now generated four consecutive months of positive net flows through October.
And this is no accident.
We are highly engaged with advisors in areas that matter most to them. We are investing in key platforms in partnerships and we continue to provide strong performing products, including both individual funds in model portfolios. A few highlights we have maintained the elevated client engagement levels. We just.
Yes on both our Q1 and Q2 two earnings calls driving our sales success. This year the number of high quality client interactions have more than doubled.
From Q3 2019 levels. This is extremely encouraging and gives us confidence as we look out towards the end of 2020 and into 2021.
Our focus on key partnerships continues to pay off net flows in our IB D channel are positive year to date. During Q3, one of our largest IBT partners put 42 million to work in excess so we another partner a private wealth division of a major bank put 250 million to work.
GG R.W. doubling their overall allocation along with strong flows in W. cloud and Aggie. These are also examples of the diversity and broad appeal of our current product lineup set.
Separately, our models portfolios are resonating with investors and our efforts efforts are gaining traction in September we want a third party model Mandy from Merrill. This makes US one of 12 asset managers that have third party models on Merrells advisory platform.
We launched the Wisdomtree Segal multi asset income models to help Merrell advisors and their clients solve for income in a low rate environment. This is a major endorsement for our model portfolio business.
Earlier this month, we announced the collaboration with 55 IP to help advisors more efficiently and easily transition clients into model portfolios with ongoing rebalancing and tax management.
The combination of our diversified model portfolios and 55, I piece technology, which is integrated with the major are a custodians will help a broad range of advisors run their practice is more efficiently while delivering better claim outcomes.
Q1, we will launch an industry, leading models adoption center the Mac. The Mac helps advisors engage with their customers more effectively around models use it provides technology tools to understand how models will impact investor outcomes and coupled with our leading behavioral finance work it provides workflow.
Those two allow advisors to execute motto trades in a tax efficient manner.
The combination of elevated advisor engagement traction within our models initiative strong partnerships and momentum across a broad product lineup puts or U.S. business in a strong position to drive continued net inflows.
Turning to Europe. There is a similar story in February we had record day when the pandemic brought disruptions across our product suite driving extreme volatility in our energy products and logistics challenges within our gold suite.
In Q3, our focus was on growth and we work to make our existing platform more competitive and innovative some highlights in August wisdomtree W.T.I. crude oil E. T. C. C. R. U D moved to a new index. This was the result of extensive work between wisdom.
Tree and Bloomberg to create an index resilient to extreme conditions in the W.T.I. crude oil market.
In September the total expense ratio for Wisdomtree physical Swiss gold EPS GBS was reduced from 19 to 15 basis points to match the lowest fee offering in the market.
In October [noise] implemented enhancements to the swap parameters of our currency hedge physical physical gold the TPS and we believe they are now the most competitive products in the market.
Also in October we began applying yesterday's screens across wisdomtrees proprietary equity indices available to European investors by the end of 2000 2012, Wisdomtree proprietary equity indices will incorporate SG principles all of these enhancements.
Have already generated positive returns during Q3 net flows in our energy exposure stabilized there has historically been a strong negative correlation between energy prices and energy product flows as you can see on the chart on slide eight this trend played out again in 2020.
March and April saw strong inflows as energy prices fell and then flows partially reversed in may through July as oil rebounded. The past three months has seen more stable trends in both energy prices and slows separately, our gold platform is positioned to participate.
Continued strong demand we've been a beneficiary of increased demand with our goal to you on a whim of 4 billion or 28% year to date.
Well, our slow market share hasn't kept pace in 2020, we were hit unusually hard by the pandemic concerns surfaced around the ability to source gold and move it across borders which negatively impacted the trading spreads of our low C. Swiss voted gold product as GBS.
And drove heightened demand for London vaulted products, we have worked hard and alleviated the technical trading pressure on EPS GBS and the fund is now well positioned our initiatives with EPS GBS and our currency hedge gold products are already having an impact and we've taken in 720.
8 million in gold slows in the month of October this represents over 90% share of flows against our European competition.
Also important to note is that we are succeeding more broadly within our commodity suite and now have six IGI piece with over 1 billion in a whim for Goldie Teepees, one energy and one silver with silver gathering over 500 million in 2020 finally, our use its platform at one point.
2 billion, a b U M has reached run rate profitability. Following recent growth and some rationalization of the product set. This is an important milestone and will contribute earnings as the platform continues to scale.
All told our Europe business is driving flows from all product suites and is once again approaching record AUM levels. Overall, we continue to execute against our strategic plans and momentum continues to build across both the us and Europe platforms and with that let me now turn.
Call over to John for closing remarks.
Thank you Jeremy and good morning, everyone.
As John highlighted we are seeing strong momentum in our business and the team is executing at a high level to drive results. For example, I'm proud of the way we perform to win the third party model mandate at Merrill who is a long RFP process that involves team members from across nearly the entire Oregon.
As they should and we beat out roughly two dozen firms to be one of four providers of multi asset income models. Merrell is the industry leader in home office directed model portfolios and we're excited to be a part of their investment manager model program, which provides their advisors Act.
Yes to third party models for the first time.
The momentum we are seeing in our business and the wins, we are producing like Merrell are further evidence that we are operating at the highest levels remotely.
Client engagement has been at record levels.
Org has brought our teams in various locations closer and driven productivity gains and our funds continue to operate flawlessly with coordination with our third party service providers after eight months experienced working 100% remotely.
We've decided to take a remote first philosophy.
While we will maintain a physical presence we plan to significantly reduce our office footprint in New York, and London, which we anticipate will drive three to 4 billion of annual cost savings beginning in late 2021 or early Twentytwenty, Jill However, I want to emphasize.
We are taking this action because we believe it is the right decision for the business not purely to realize cost savings simply put we are working better as a firm remotely with better transparency into the business and more importantly, it which is driving our decisions we have taken.
This shift that this is the right long term operating structure for Wisdomtree.
Before turning to your questions I'd like to spend a minute updating you on our Tokenization initiative, where we are driving discrete innovation.
Recall that Q4 last year, we announced our pursuit to launch Tokenized diversions of core assets, such as gold and treasuries to improve the investor experience and unlock the power of block chain technology, we approached the.
King recognizing that compliance and regulation at the highest standards would be required to gain the necessary approvals and differentiate our offering from current digital assets in the market.
We have found the FCC happy to engage as we approach tokenization fully embracing their foundational principles of Investor protection at me.
They're inefficient markets earlier this month I.
Participated on a panel at a conference focusing.
The innovation and regulation of digital assets.
FCC Chairman Clayton also participated in the event, where he made clearly heard the door is open for Tokenized, yes that AD efficiency and we believe we can unlock the power of blockchain to achieve that.
While there is no specific timeframe for regulatory approvals or product or product watches. We are confident we are at the forefront of the industry and have the right approach to gain regulatory approvals and deliver a best in class product to the market, we look forward to sharing our progress.
These important initiatives in the coming quarters.
We have restored the momentum built prior to the pandemic through steadfast focus on what we can control and strong execution amid a highly volatile and unusual year year to date net flows have turned positive with the strength of our us and European listed product in October.
Important elements across our global franchise or starting to align and I am excited about our growth outlooks for the remainder of the year and into 2021 with that we thank you for your interest in Wisdomtree and we will now take your questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press Star then the one key on your Touchtone telephone. If your question has been answered or you wish you with yourself from the queue. Please press the pound key.
Our first question comes from Craig Siegenthaler with credit Suisse.
Thanks, Good morning, everyone.
Good morning.
So Paul Morgan Stanley Eaton Vance merger announcement.
We were looking for an update on your thoughts around asset manager M&A and if you think a financial services firm with a large wealth manager could help accelerate with subsea trees am correct.
Thanks, Craig.
So first you know.
As we discussed on the call momentum is returning to the core business. We have higher earnings in 2020 versus 2021 add we have but what we believe is an incredibly valuable franchise doing things to create more.
More value to the franchise.
But there is no question that the outlook for M&A seems to have improved with more firms participating and obviously encouragement from certain investors for transaction. So it's clear that the environment has improved.
So you know, we do recognize our fiduciary responsibility to our shareholders and the need to maximize shareholder value. So as always you know and this is not a change we would consider things if things emerge that said, we believe that we are doing everything to.
Grow faster and that we have the right strategic vision to grow as an independent company.
Thanks, John I will address is they are all by the matter one here.
Given the robust efforts, a global central banks to stimulate economic activity and indirectly potentially higher inflation can you comment on if you're seeing different investor groups raised their long term allocations to gold, which could benefit your flagship European products like Tha you in GBS.
Hi.
But for sure we have a very strong internal outlook for gold, but Jeremy why don't you take this question.
We started talking about this actually maybe two quarters ago on the call that we do have a view and and our team has been they've been talking about the <unk> increased importance of gold with all the fiscal spending even more than the central banks is that you have big fiscal packages and that's one thing that I've worked with professor Siegel for 20 years. He was trying to say.
Sceptics coming to gold he had not been a big fan of gold and he and our model portfolios that we run with them. We added gold allocation is just an example of that.
Our people, who are who didn't allocate to go before coming coming along and we do believe there's going to be higher inflation, we've been talking about maybe 3% to 5% for the next few years when when we've been trying to get for 2% inflation and so we do believe gold has an increasing importance in that franchise is a really important part of that.
I mean, let me just add before we move off of gold.
We spoke in the.
In the prepared comments about park Tokenization networks, So we see a new technology.
To come out for an enhanced wrapper.
A block chain smart contract regulatory approved wrapper and that this new wrapper not only will affect asset management, but we think it has the ability to transfer for financial services and that's being.
Being anchored by a belief in and conviction that we will see a central bank digital dollar that based on the block chain. So we couldn't see gold emerging right now golds at the height of innovation for both our E TPZ, but we can see gold emerging as a global currency using this.
New technology and that outlook with inflation and.
All of the stimulus worldwide the debt.
Basing the currency is really adding.
Value to gold as an exposure through the new technology.
Thanks, Greg the question.
Thank you John.
Jeremy.
Our next question comes from Brennan Hawken with EUV, yes.
Hey, good morning, Thanks for taking my question.
John I just wanted to.
Probe a little bit on the working the remote first plan.
Could you maybe give a little context of how you came to the decision I think you are actually the first company that I covered that has that has come out with this and obviously this disruption is showing us how much we can all achieved.
From our living rooms.
But.
What.
Were the major considerations that you you Wade.
How did you counterbalance the benefit of of efficiency, a smaller footprint less costs with.
Maybe.
Some challenges in collaboration.
Between teams what what processes are you going to put in place to ensure that the DAC collaboration continues wisdomtree is such an innovative afirma that I would think collaboration and the need to sustain that that creative energy is is an important part of your culture.
So I'm I'm curious about about how you are going to try to ensure that that's maintained.
Thank you for that question Jack do you mind, starting to giving you our thoughts and I'll add on at the end.
Sure.
Well you know starting out you know now.
Saturday's the mother of all invention.
This was sort of forced upon everybody as we all know so we went remote in March our transition was flawless, we adapted really quickly.
One of the really important things, we did right away with amping up communication in all areas and that was not only internally, but also externally with our clients and that was also partially responsible for the elevated client engagement that we're seeing.
But what we found through our experience is that we operate better remotely.
Spend more quality time on a broader set of topics with more people, we feel actually closer to the business in closer to our employees and closer to our clients. So it made us rethink what spinoff is good score and as you pointed out certainly there are things that.
Physically together is very important for collaboration socializing Onboarding new employees in some cultural parts that are very important to us, but you know when you identify those you solve for them, which is what we've been doing so our overall conclusion.
Is that we found a better way to operate which gives more flexibility to our employees. It will still comp call for a physical footprint, but a much smaller ones. So.
You know again.
This is probably something definitely something without a pandemic, we would never have had the experience with the experience. There. So many benefits that we found that we will definitely carry forward.
Into the future.
And I guess the way I would.
Nuance it a little bit.
So you asked about sort of the creativity and the collaboration.
Feel great conviction that actual meeting.
Well not ever go back of physical that it'll remain virtual we're finding that it is we're not missing anything from a collaborative or creative standpoint, and where we want to really keep our eye on things and I think its really we are basically getting together will matter will be just to maintain.
Our culture overtime.
So I think maybe we answered your question but is.
Theres, a follow and let us know.
Yes.
Yes, you did certainly I mean to the extent that any of this stuff is known at this point, it's such a it's such an unknown and.
I just was kind of curious about how how you're doing with that maybe this might be something that that you might not want to discuss or what have you but.
I guess.
Our do you or have you all developed or created.
Alternative.
No brainstorming sessions or or or meeting places, where because the thing about the office that at least and maybe im just projecting a little of my own frustration city living room for six months.
You don't have that frictional bump into people at the water cooler phenomenon that can sometimes lead to.
Opportunities getting and explored on.
And so that sort of natural friction can sometimes create.
Good things in an office environment is there a specific attempt to try to recreate that or have you found that if you.
You can.
Created a similar sort of proxy the.
Online chat rooms or or.
Zoom meetings or what have you.
Just curious about how bouncing out or maybe I'm, just putting way too much emphasis on that and it's really not that important.
Well first I would say that.
Wisdomtree Weve all embraced it and so we're all getting together more frequently we certainly tried to break out opportunities for sort of water cooler like experiences.
Where we are hosting one on ones with people, who don't usually get together, we're bringing certain groups together to highlight like recently new employees that have been onboarded. Since we went virtual for the rest of the company to see.
The actual first of all basically getting together feels like it's delayed the costs of where cove. It is at so it's not coming back very quickly we think.
And so we're not I don't think we're suffering in any way from the from the just sort of communicate again and spring things on at least I'm not finding it in any way Ed well the way we have been working on things like product development.
Not only are we find that we're creative.
We're also making it better in the globalizing, our product development, because one of the great things for us has been how.
Inclusive for sort of the US New York leadership team can interact with non New York employees. So the European team and the non New York you FTD have never been more closely aligned.
And again, we will create opportunities when we are allowed to get together to.
Socialize and hopefully have creativity, but I really don't think it's hurting us in any way now let me just start one.
We want to change our mind space always is available we can always change or Mike, but again I have great conviction that the physical meeting will be replaced by the virtual meeting on a going forward basis.
And just adding a couple of things.
Just adding a couple things too and the.
Internal side.
Again as John has said, we've we've recreated like a lot of social situations and have begun.
So is communication, but on the customer side. It's also been really fascinating and I think in a way helps to level, the playing field a little bit.
Previous to this.
The size of your distribution team was an advantage and so ours being relatively smaller was was agreed or disadvantage than it is today and as our salespeople and as our clients have adapted to this and started using more video and then where John was saying world.
Physical meeting really ever come back to what it was previously it was expected that you visit people now its not.
Now you can cover so many more people so much better with a video call video content and we're excelling in those areas and I think it's directly leading to an improvement in the tone of our flows.
And Karen if I could add as Jeremy.
I'd say I have a lot of client facing the research team also really AIDS and a lot of the sales process and I'd say my events and how many people have been able to us personally speak to over the course of year had gone up even though we're not traveling and that's you know to Gerrys point on the pandemic boosting things you might not have done otherwise we're doing.
So many more what we call like office hours series, where we invited a broad group to come listen we're doing more I'm doing more client event for our clients clients, where maybe we wouldn't have posted.
A dinner for a broad group.
So many of those I could host resumed calls in a day and get to People's clients. So I think we are hitting more people in an efficient way.
Tickets and been very productive in addition to the outward facing turn.
Turnell collaboration has gone seamlessly as well.
And that's going to add one maybe one final comment is.
What we found is we're operating better we found all these benefits, but again the driver was really safety first Jimmy we really wanted to make sure that our employees were safe as possible. We've been very very conservative in making sure that people are not put in harm's way and so safe.
The first and then we found that there are all these benefits.
Those are all really really fair points and lets you guys have always been innovative so so I'm sure if theres a way to figure. It out you guys are doing so.
One last thing on this.
One last thing on this we have left legacy infrastructure.
Sort of like what as we approached asset management, we had left legacy infrastructure. So we could go where the world was going you know lots of asset managers and financial service companies had really a heavy investment to their physical presence much more than we do and that probably isn't so easy to give.
It's less easy my guess is though over the next decade, you will see others follow in our path.
Great Thanks for that.
Our next question comes from Robert KBW.
[laughter].
Hi, Good morning, this is Jeff Tresor on for Rob Lee.
Okay, Great then well.
Quick question I apologize if you mentioned this earlier, but in terms of pricing on the cold.
It seems that your the prices on some of the coldest, yes or higher than peers and I'm just wondering.
There was some sort of.
If you think of some sort of price change or how you how you think about that.
John you want to start and then I'll jump in.
Sure.
You know it's a it's an important question, we look at the quality and positioning of our products every day when it comes to gold in Europe. We think we're in a good position, we have a suite of different gold products, serving different clients at different price points really what.
We saw that happen to us this year that I think was the real cause for us.
Not taking in as much share as we normally would have.
As the pandemic and all of these concerns surfaced during the pandemic around the ability to source gold and move it around the cross borders and that had a negative impact on trading spreads.
Most specifically on or a low key Swiss molded product.
We spent a lot of time.
Working on these sort of technical issues, we got spread back to.
More than competitive rates, we also made enhancements to our other.
Hedged physical gold products and all that got put in place during the quarter and then you've already seen the impact and I think it's sort of the proof point is that by getting that the spreads back to good place on with gold and then making some other enhancements that.
Made our other gold products, we think the most competitive in the market. It had an immediate impact and we saw you know.
We took in the majority of gold flows.
In October went to Wisdomtree.
And I would just add so we bought EPS securities. They had the earliest and broadest gold.
Platform in Europe.
And what I always say about beta the economics, you lie with first to market beta which is what we bought so we have a number of early gold products that have sort of best in economics.
In Europe, not dissimilar from what state Street adds in gold in the U.S. similar to state Street in the U.S.. We've also launched lower fee gold.
And I'm quite pleased with the way the historical for funds have maintained their web. So that we are trying to balance strong cash flows with fast organic growth last year, our switch gold, which wisdomtree, which we launched under Wisdomtrees ownership.
Very quickly growing and again, what an unusual interruption co bid provided where there was a concern that you couldn't move gold bars from London to direct.
That has subsided and so we feel very good with our low fee offerings as well at our LOPI fraud.
Three and a half almost 4 billion dollar fund also so incredibly competitive and then we have the differentiated goal with the with the currency hedge gold, which is a hallmark of Wisdomtree as well is Egypt securities historically, and so that we have the most.
Knowledgeable team in the marketplace and I think we're really very well positioned to participate now that the markets have normalized for gold going forward.
Okay.
Great. Thanks, and if I could just have a quick follow up.
Just a kind of a broad.
Overview, maybe in terms of non transparent EPS and how you.
Think about that and how that's shaping up.
Sure. So I've been pretty clear that this was not what I believe to be an investor requested quote innovation.
I think that there's been about 650 million.
Raised in Nontransparent active I think much of that comes from sponsors feed and.
And so I think it's still very early days.
I don't particularly think it say a big category I, certainly don't think its going to challenge Ats.
For Investor interest I mean, I think what we're doing on digital assets and Tokenization is much more relevant added going forward exposure and so we believe an active whether it's.
Index based or truly transparent active.
But not particularly excited about what has been launched for the outlook for.
Nontransparent active.
Great. Thanks for taking my question.
Thank you.
Our next question comes from Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for taking the question I was just hoping if we could dig in a little bit more on the distribution initiatives.
Certainly.
Congratulations on the the Merrell.
Platform win there, but I was just hoping maybe you could dig into maybe more on the IB DS and the auriga days, what that pipeline looking like and how you're thinking about that opportunity set here.
John you want to start.
Sure that's a pretty broad question.
I think when it comes to channels, yes, I still think there's quite a lot of opportunity in.
Oh the channels, but when I look at is still at this point, which is amazing to me is whats the mix between mutual funds and Dts and in the wires.
Still have a lot of mutual fund holdings.
And then in the our A's, though it's skewed even a little more to mutual funds in the east began even more to mutual funds. So that's all opportunity for EPS and that's one reason that.
You know, we focus and spend a lot of time on all the channels, but spis, specifically on the IRA and IBT channel as we said in some of the prepared remarks.
We the IBT channel has been net positive year to date.
We actually saw in terms of channels turning positive.
Again, we've now in the U.S. had four consecutive months of net inflows.
The Ibds led that then followed by the armies and then the wires. So we continue to focus on an all in terms of models, which I think is a big part of the question too and it ties into all of this distribution and a key part of model success.
As a number of things you've got to have good models, good IP, which we have.
But you need good partners and so partnering with the again the ibds. The ARIA is the marrow win was a great example is super helpful. But so are things like other partners 55 IP.
It's something that makes it easier and more efficient for advisors to transition the models in a tax efficient way.
We're also adding things and needs are.
This is content that is available for all of our partners. We do a bunch of proprietary research. We've done some really good proprietary research and he is GE, helping clients understand both.
Advisors understand what their own clients are thinking in kind of a.
Addressing any disconnect but when it comes to models. We did some proprietary research interviewing thousands of advisors in their end clients and again, hoping to dispel myths and misunderstandings and help really bring advisors their end clients in models together so.
So it's a real holistic approach hopefully it was a long answer addressing a lot of things but.
You know, we're applying all of these things to all of the channels and again I guess to your question seeing a lot of success with the Ibds.
As well.
Great and maybe 10, let me talk up Okay. Before you guys. Let me just add one thing about Merrell. So first that RFP process was handled completely remotely and so our interactions which included multiple key members, including professor Siegel.
Done flawlessly and I think many of you I think you Michael understand how much frustration I've had with what we call modern alpha penetrating the wires, we'll obviously our wisdomtree models are okay.
Open architecture, but there's a significant amount of wisdomtree proprietary what people call smart beta we call modern asphalt exposure in our models and so really its mainstreaming.
Wisdomtrees approach to EPS in the wires and cost now that we are a preferred partner in a very important initiative for Merrell, we expect this task.
Cascading effect within metals beyond models, the cost of all of the greater activity that we have on their platform I would start interrupt you added second question.
Yes. Thanks, Thanks for the added color I, just wanted to dig in a little bit more on the EPS GE enhancements that you were referencing the European product set I was hoping you could elaborate on that maybe just talk a little bit the opportunity set there and what's the appetite if any for launching a full suite of U.S. based on ESG EPS here in the U.S.
Jeremy our director of research do you mind answering this to start yeah, I think from the SG Investor standpoint, you've seen a lot more leadership out of Europe in looking for this and really even require me to be really competitive so really across our equity family. There we've now embraced.
Sorry screening as part of basically the next set of rebound to some of the funds have just rebalancing within the last few weeks and they are now incorporating.
SG screens. In addition to our traditional modern Alpha index methodology is going to continue to make sure as we as we go throughout the rest of the year the whole the whole family will be that way.
Really in the U.S.. We also did transition three funds to be yes, GE forward.
The integrated actually tradition basically the day everything shutdown in the U.S. So this is one that hasn't been a number one sort of focus at the moment, but we do have three from U.S. international emerging markets that are run actively it incorporates our newest speaking on multi factor.
I do that also incorporates the CSP factor in the selection and waiting. So we are we are making more of an emphasis on this both in Europe and in the U.S.
Jack do you have anything you want to add or was Jeremy complete.
And just a couple of things to it it's sort of like a lot of the initiatives.
You know models is another one where you can't just put together a few models and and hope for the best you've got to come at it with you or your partners with content with education and research and so on and it's the same thing for EPS Gee I don't think you can just launched product youve actually.
We sort of got to mean it.
And so a few things that we've been working on this for.
Well over a year.
Back in early 2019, we became a PR I signatory.
Earlier this year, we released our first corporate social responsibility report we've done a lot of things internally, we've got what we call a win so women's initiative network at Wisdomtree.
We got SG friendly proxy voting that melon helps us with its across all the equity funds. We've got a number of community service activities. We've got bored policies focused on a diversity equity and inclusion we're currently internally doing a more broad.
Diversity equity in inclusion review for the whole form Ho from basically all of these are important I think we've always been a good corporate citizen, but we're always striving to be better and that's really the backdrop and then against that you have with Jeremy mentioned, we do have.
A suite of three SG products in us.
I'd like to see us even have more.
Sort of of that.
Criteria research I mentioned more content that is helpful to advisors and embracing this and then the things that we're doing to enhance our screens in Europe. So it's a holistic approach that we've been working on for quite some time.
And just to get another one I'm sorry go ahead.
I was going to Jeremy you might want to just you know our original sort of SG to one that are focused on the GE on the governance, our X state owned.
Maybe you want to just touch on that as part of the broader suite as well short and this has been one of the award winners in DSG category in the U.S., we have three X state owned strategies one access so we use our broad emerging markets, China XD don't see X. I see and then more recently in India and that has been a a flow leader for us.
Your next state owned in the broad sense.
When the broad emerging market categories has been tough and seeing a lot of outflows from the biggest funds its rates over around a billion dollars and now our second largest fund in the U.S. and so this is a a fund that has really strong.
And that's why people like.
When people are going towards TSG. There's his question are you.
Are you forced to sacrifice performance.
And we don't think you art. This one exemplifies that having a live six year track record. It does get there and he also has the underweight energy in the broad emerging market sense and so we're excited about that.
That family as part of this effort.
Hey, He's funny do these U.S.G. funds have you see in the fund name or is that something you consider adding to enhance the appeal and to train folks are aware that these are he has cheapened.
The the three Jeremy pronounced the three I referenced earlier or do have SG there ex Daytona.
We are.
Sizing to govern intelligent being the XT and then we need additional support we.
How about it there as well.
Okay. Thank you.
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Our next question comes from Ryan Bailey with Goldman Sachs.
Good morning, and thank you for taking my questions. I was wondering if I could start or if you could start with a little bit more detail around how Mac will work.
Ultimately, how we think about it.
Economic EPS.
There are other revenue.
And if there would be any sort of incremental expenses.
Jared I think could you start with the Mac.
Sure so the Mac.
You know something again, we're going to.
Launch in the first quarter.
That stands for just in case, everyone didn't get its a model models adoption center and that really sums up.
What it's about right now and our research shows this there's still a little bit of a disconnect a lot of advisors believe that they need to show their clients their value by being portfolio managers and actually our research shows that claim.
Since I don't necessarily agree with that if position that you are getting access to the best in port.
Portfolio management and asset allocation and the best in models clients actually think Thats, a better choice for their advisors to be participating in so that kind of disconnect is really important to solve for and getting advisors and clients to adopt models. So.
The Mac has a lot of the content there, but it also brings together all the other elements as I was saying before being successful in models.
About that kind of research and education and it's also about the models themselves.
But it's also about things like workflows, how good and not so much for the wires that have those kind of workflows, but again for some of the IRA isn't ibds, where those workflows are really important access to the custodians access to rebalancing.
And access to doing that on a tax efficient way so really the Mac.
We don't.
We don't see anything like it out there we believe ours will be the first and therefore, the best but it brings together everything debt and advisor needs to be successful with models.
Got it.
I guess, maybe maybe kind of following on from that the Merrell when was definitely very encouraging I suppose when when you think about the competitive dynamics in the model portfolio space.
[noise] is our competitors competing with you mostly on.
Price or are they are they also competitive on sort of quality track record in August so yes.
We sort of know where you stand out on the education on the quality and track records are they trying to compete as an offset on price I guess this question.
I would let me start.
This is all in packaging so.
You're competing on net expense ratios for the portfolio for sure.
Open architecture is a big importance to most advisors the ease of use is crucial to win.
This is supposed to be a capacity enhance your for the intermediary the financial intermediary.
Actual ease of use whether it's the Mac or 55 IP.
Credibly important and then obviously performance all the buttons themselves with the portfolios are one element that also goes into it. It's an all in competitive package that we don't sacrifice on any of those elements.
John you want to add on that.
Well Jeremy go ahead, I can see a lot of the times some of the model providers are charging fees and we are really offering many of our models really with no fee on the strategy side and so we are open architecture and really just collecting fees from the underlying economics on the funds into the tip to that point.
In the <unk> I think we are in that Merrell income models that we're running I think we are the most competitive on a fee standpoint with the lowest type fees on that platform, both not charging to see on the model, but also just the selection that we put in there is the most competitive so I think we're excited about that.
And I guess I'd just add one of the advantages I think we have is that this is a top priority for us we're really focused on this from the top throughout the firm.
We've got our sales team focused on it we've done extensive training on the product with our team. So we're really well versed in and then simple things like either with Jerre. Just mentioned, we don't charge generally any kind of strategist fee on top.
Funny enough that can be a differentiator and I think John mentioned open architecture with her.
Wisdomtree funds make up a big part of the allocations within the fund, but there are there are competitors currently in our models and to.
To me that sounds like that should be standard with us that is standard, but that's not necessarily standard for the industry. So.
Just a real all encompassing solution that we have here that we're all very excited about.
Thank you that's really interesting and thank you for taking my questions.
Our next question comes from Keith I'll start with Northcoast research.
Good morning, guys just a follow up question on the Merrill Lynch.
A deal in terms that you guys are also joining are several other players in that space can get provide the color in terms of how long you think black.
How long it will last and in terms of where do you hope to see some impact from the miles you have out there that of course, because you have a number different compared to the same place Merrill Lynch. How do you differentiate your models and their recent everybody else's.
Jeremy do you want to start on this.
Yeah, I did just to add on I think as it relates to the last question as well.
Are the data points, we find there was a study of 4000 model portfolios and that the average expense ratio was 64 basis points in those models and our models are really half of that and so I think we are we are on track for just keep emphasizing this open architecture nature, we are below.
Moving across passive active we're using our modern alpha approaches as many that the exposures, but I think we're trying to compete on selection weighting how were you know putting these sufficient strategies together.
What I would add is on.
Mellowed themselves had a very strong.
Proprietary home office model business, meaning narrow models.
They actually do not have a multi asset income model. So we're not actually competing with merrill themselves, but with the other three.
Managers, who were also up.
Included in this third party mandate on and we're under the impression that this was not the most requested.
Hole in the Merrell model opportunity acid multi asset income was if it's not the most it's one of the most requested week. So we're very bullish on it and it's nice to only be competing with third party model managers at Merrill Lynch themselves.
And you know another thing too we could probably go on and on about.
Models, but.
We work with our partners to.
Customize and so you know there is some level of customization with the Merrell models, but we also have some partners in the.
Okay, and Ibds space, where they.
They're leaning on what we've developed which is real models, the IP and utilizing our models IP. We've developed custom models, we're having great success with those as well.
Yes, I know it was announced in September but as it already on their website and ready to run or is this going to be put up there through the rest of the year.
They launched it September 1st it's up and running it's early days, but it's up and running.
Got you and then just a follow up question I mean, I know you guys were talking before about the preference is to say the cash for it to pay off the debt when a few years from now, but you know with the share price where its at now and perhaps the.
The opportunity for rates to be low for a while here is there any consideration to buy back more shares now perhaps try to refinance the debt when it comes due.
So.
Already bought back about $30 million worth of stock.
So I'd say right now our let me think about capital priorities that support the dividends invest in the business.
The bill that cast to eventually refinance the debt the debt is not callable early it's.
I've got a three year term so we do have to wait for a week.
So that's why we did the buyback earlier this year.
All right. Thanks.
Okay.
Our next question comes from Mike Carrier with Bank of America.
Hi, guys. This is actually Sean comment on for Mike. So just a quick one from US earlier in the year, you mentioned that capital gains and mutual funds. This year would create an opportunity for a shift from mutual fund assets into EPS towards the end of the year. So we just wanted to see if you're still if you still expect that here in the fourth quarter.
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Gerrick or Jeremy would you like to start with that.
Jeff why don't you start and I'll add on.
And we were doing these office salary series that was actually the topic of one of our office hours. Just this just this week and we do have a tool on our website to help advisors find capital gains that are expected to be paid across the industry. There was outflows across traditional funds and you can see funds that potentially have capital gains.
Exposure built in and we're starting to see some of those come out so.
We would expect there to be a season, where there was turnover and outflows that could then put more pressure on capital gains. So I think that is something we will see the question will investors and react to that but we do think it highlights the benefit of VTS and it can easily be agreed talking and education point.
Okay. Thank you.
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And I'm not showing any further questions at this time I turn the call back to Jonathan Steinberg for closing remarks.
Oh, Thank you all for your interest and participation on today's call and we'll speak to you. Our next quarter. Thank you everybody have a good and safe deck.
Ladies and gentlemen, this conclude todays presentation you may now disconnect and have a wonderful day.