One of WisdomTree's new dynamic ETFs. Image: WisdomTree.
Assets under management are the lifeblood of any investment manager, and like most of its peers, ETF manager WisdomTree Investments (WT -0.46%) has been under pressure from the recent downturn in the global stock market. Unlike ETF rival BlackRock (BLK 0.36%), WisdomTree has carved out a niche in funds with unusual characteristics like currency hedging and dividend-weighted indexing, and coming into Friday's fourth-quarter financial report, WisdomTree investors expected strong growth despite a tough market. What WisdomTree said was encouraging in the short run but left questions about the fund company's future unanswered. Let's take a closer look at WisdomTree and what its latest results say about the company going forward.
WisdomTree stays strong
WisdomTree's fourth-quarter results showed some of the pressures in the ETF market as well as the manager's answer to them. Revenue for the company soared 53% to $76.5 million, exceeding even the ambitious 50% target that investors had for the ETF provider's top line. Adjusted net income more than doubled to $20.5 million, and that produced adjusted earnings of $0.15 per share, matching the consensus forecast among investors. As we saw last quarter, though, revenue and income both fell sequentially compared to WisdomTree's third-quarter results.
A closer look at WisdomTree's operational numbers shows the impact of the recent downturn. Assets under management in its U.S. ETFs were $51.6 billion at the end of 2015, up 31% from the end of 2014 but down about 3% since September. Outflows of $2.6 billion in the U.S. accelerated from the third-quarter's $700 million pace, and encouraging results from the fund manager's tiny European operations weren't enough to make a dent in the downward moves domestically. Advisory fees also fell by a single hundredth of a percentage point to 0.52%.
Cost-savings also helped WisdomTree's results. Compensation expenses dropped 20% over the past three months and rose only 10% on a year-over-year basis, and WisdomTree also kept fund management and administration charges in check. Sales and business development costs rose more sharply, but wider margins overall came as good news for the ETF provider.
CEO Jonathan Steinberg believes that ETFs will be the right place for WisdomTree to be. "Against a backdrop of $125 billion in mutual fund outflows in 2015," Steinberg said, "the ETF industry enjoyed $232 billion in net inflows." The CEO clearly sees WisdomTree as likely to capture more than its fair share of growth in the ETF universe, pointing to its "foresight and focus to establish strong positions in fast-growing product categories" that helps distinguish it from BlackRock and other ETF managers.
Where will WisdomTree grow next?
Steinberg also highlighted WisdomTree's international focus as bringing stronger growth opportunities in the long run. The ETF manager is building out its global ETF portfolio with efforts to launch products in Europe, Latin America, and Japan. Given that the company's U.S. ETFs already have a strong international focus, it should be easier for WisdomTree to use its reputation to gain a following overseas as well.
In addition, new ETF launches have emphasized the need for some active participation by ETF management teams. New ETFs in December and January feature what WisdomTree calls "dynamic" funds, in which WisdomTree's managers maintain the ability to change characteristics of an ETF over time. For instance, dynamic currency-hedged funds can change their exposure to foreign currencies from time to time, and managers hope to benefit when a foreign currency is strengthening while avoiding losses when it's weakening. The success of these more active funds will depend on whether they can demonstrate a sustainable return advantage over traditional passive index-tracking ETFs like the ones that BlackRock has made its bread and butter. WisdomTree hopes that just as the strong dollar has highlighted the value of its traditional currency hedged funds over non-hedged counterparts from BlackRock and other competitors, its dynamic approach will produce still-better returns.
Still, WisdomTree investors seemed somewhat troubled by the market's trends, sending the stock down 3% in the first couple hours of trading following the announcement. Until stocks stabilize, WisdomTree might have trouble convincing shareholders that it can keep moving in the right direction in the long run.
