Exchange-traded funds have been increasingly popular among investors seeking to cash in on the rising stock market while minimizing expenses. ETF provider WisdomTree Investments (WT -1.14%) has sought to claim its share of the booming market for funds, but its success has been mixed, as some previous focus areas that gathered the most assets for the company fell out of the limelight recently. That's left WisdomTree trying to figure out the best strategic moves to make in an increasingly competitive industry.
Coming into Friday's fourth-quarter financial report, WisdomTree investors wanted to see solid profit growth that would signal that the company is back on the road to a full recovery. WisdomTree wasn't able to deliver the full-sized gains on its bottom line that many wanted, and those following the stock seem nervous about when the fund provider will see more pronounced improvement in its financial performance. Let's look more closely at WisdomTree and what its latest numbers say about its prospects.
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More assets for WisdomTree
WisdomTree's fourth-quarter results continued the mixed showing that has become typical for the ETF specialist. Total revenue climbed nicely to $61.4 million, with the 21% growth rate outpacing the 19% consensus forecast among investors. Adjusted net income was higher by 25% to $5.19 million, but the resulting $0.04 per share was well below the $0.07 per share that those following the stock had wanted to see.
From an operating standpoint, WisdomTree saw positive effects from the roaring bull market in stocks. Assets under management in the U.S. were higher by 16% from year-earlier figures to $46.8 billion. Yet most of that growth came from investment gains, as WisdomTree brought in only $300 million in net inflows during the quarter, or 0.2% of the industry's total inflows. Average advisory fees remained stable at 0.5%, where they've been for most of the past year.
Outside the U.S., WisdomTree has seen better growth rates, but the amount of assets it controls is still extremely small. In Europe, exchange-traded products represented more than $1.8 billion in assets, which was up by more than 75% from year-ago levels. Even faster growth has occurred in Canada, where assets topped the $300 million mark and have more than quadrupled since the end of 2016. Yet even here, WisdomTree saw a troubling trend, suffering outright outflows in Europe and watching inflows slow dramatically in its Canadian operations.
The other problem WisdomTree keeps facing is a lack of cost discipline. Total expenses jumped 32% from year-ago levels, outpacing the rise in revenue. Much of those increases came from one-time transaction costs, but compensation and benefits were higher by 40% due to the impact of stock-based compensation packages. WisdomTree said that it shifted employees away from that compensation method during the quarter in the hope of limiting that expense, and accelerating vesting of various benefits allowed favorable tax breaks that could reduce future related expenses.
Can WisdomTree fully recover?
CEO Jonathan Steinberg tried to keep the big picture in mind. "2017 was a transformative year for WisdomTree," Steinberg said, "with the announcement of a strategic acquisition, considerable improvement in net flow breadth, and the rollout of technology-enabled solutions to help financial intermediaries thrive in an evolving industry landscape." The CEO also pointed to WisdomTree's "broad suite of differentiated products and technology solutions to fully capitalize on the tremendous global opportunity" in ETF management worldwide.
It's unclear whether WisdomTree's future direction is in line with what the industry wants. The company launched its first actively managed equity ETF in December, but it comes at a time when many investors seem quite content with the passively managed fund options they already have. With industry giants focusing on index funds, it makes sense for WisdomTree to keep trying to distinguish itself, but it's unclear whether its strategies will attract new assets.
WisdomTree shareholders seemed nervous about the news, and the stock fell 3% in premarket trading following the announcement. In the long run, WisdomTree needs to make a bigger splash in the ETF world if it wants to live up to its full potential in the years to come.
