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Solid Markets Lift WisdomTree's Revenue

By Dan Caplinger - Oct 27, 2017 at 10:00AM

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Find out why the ETF provider is still having a tough time producing profit growth.

A rising market is good news for companies that manage money. Exchange-traded fund specialist WisdomTree Investments (WETF 0.74%) relies on the advisory fees that it charges to generate revenue, and higher values on the assets that it manages can help the company collect more from the percentage of assets that it charges most of its clients. Indeed, that business model is attractive enough that there's been new interest in acquisitions in the space recently.

Coming into Friday's third-quarter financial report, WisdomTree investors expected flat bottom-line performance but wanted to see signs of strength in generating revenue growth. WisdomTree largely delivered what those investors had expected to see, although modest fund outflows were still troubling to those who would prefer that the asset manager's offerings be more popular among its customer base. Let's take a closer look at how WisdomTree did and what's ahead for the ETF manager.

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Image source: Getty Images.

WisdomTree keeps pushing harder

WisdomTree's third-quarter results showed that the company still has to deal with tough conditions in the industry. Total revenue rose 12% to $58 million, just about matching the consensus forecast among those following the stock. Net income was little changed from year-ago levels at $7.98 million, and that produced earnings of $0.06 per share, which was also in line with what most investors had expected to see.

Asset growth continued to be an encouraging element of WisdomTree's success. The ETF provider reported an 18% jump in U.S. assets under management, reaching $44.4 billion. Average advisory fees stayed constant in the core U.S. business at 0.50%, and that helped produce advisory fee income growth of 12% compared to last year's third quarter.

WisdomTree has emphasized the need for international growth, and numbers in its overseas markets remained promising. Assets under management in Europe jumped by nearly three-quarters to $1.77 billion, attracting inflows of nearly a quarter-billion dollars. Canadian assets more than doubled from year-ago figures to $205.5 million, although a big decline in advisory fees on those assets meant that the unit didn't contribute as much to WisdomTree's bottom line. Even with its international initiative, WisdomTree still gets only a tiny fraction of its revenue from outside its core U.S. market.

Expense controls continued to challenge the ETF provider. Compensation costs rose by more than a quarter due to higher incentives, and fund management and administration expenses were up 5% from year-ago levels. Decreased marketing and advertising expenses helped bolster the bottom line somewhat, but substantial gains in sales and business development expenses offset much of that savings.

What's ahead for WisdomTree?

CEO Jonathan Steinberg sees the industry moving quickly, forcing WisdomTree to keep up. "During the quarter, we made further progress building out our suite of technology-driven solutions," Steinberg said, "designed to help financial intermediaries modernize their practices, generate better outcomes for their clients, operate more efficiently, and drive growth in their franchises." The CEO hopes that these moves will help build relationships with the advisors who recommend ETFs to their respective clients.

Yet so far, WisdomTree has struggled to gain traction in retaining its end users. Even in a strong market, the asset manager reported net outflows in its U.S. ETFs of $600 million. That's only slightly more than 1% of assets, but it still reflects a lack of confidence among fund shareholders that suggests a less-than-perfect fit between the products that WisdomTree is offering and what investors really want.

WisdomTree has had plenty of past success with the ETFs that helped make a name for the asset manager. It's now up to the company to find out once again what will drive fund demand while also producing the positive returns that in turn develop positive momentum. That's a challenging task, but it's one that's squarely within WisdomTree's ability to achieve.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends WisdomTree Investments. The Motley Fool has a disclosure policy.

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