Good day, ladies and gentlemen, and welcome to the WisdomTree Q3 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, WisdomTree Investment. You may begin.

Good morning. Before we begin, I would like to reference our legal disclaimer available in today's presentation. This presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which are generally identified by terms, such as believe, expect, anticipate and similar expressions suggesting future outcomes or events. Forward-looking statements reflect our current expectations regarding future events and operating performance and speak only as of the date when made. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which may prove to be incorrect. Such statements should not be read as guarantees of future results and will not necessarily be accurate indications of whether or not or at the times at or by which results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in forward-looking statements, including, but not limited to, the risks set forth in this presentation and the Risk Factors section of the company's annual report on Form 10-K for the year ended December 31, 2015, and quarterly reports on Form 10-Q for the quarter ended June 30, 2016. Now it's my pleasure to turn the call over to WisdomTree's CFO, Amit Muni.

Thank you, Jason, and good morning, everyone. This was a challenging quarter due to the continued negative sentiments towards our 2 largest ETF exposures. However, despite the challenges, we are pleased with the continuing flow momentum and performance of our U.S. equity product suite and remain focused on continuing to position our business for the long-term because of the continued growth of the ETF structure and the significant regulatory changes soon to go into effect that we believe will further accelerate growth in our industry. Now let's get into the results for the quarter beginning by first reviewing the U.S. ETF industry statistics. U.S. ETF industry flows rebounded to $90 billion this quarter. On the right, you can see all categories had inflows with the exception of the international developed flow equity categories. The negative trend to the international category was a significant driver of our results this quarter, which we can begin to review beginning with the next slide. Our AUM declined slightly to $37.7 billion as $2.4 billion of outflows were partly offset by positive market movement. HEDJ and DXJ drove the majority of our outflows. However, the outflow levels have started to decline. On the right side, you can see industry-wide, both hedged and unhedged Japan and Europe strategies experienced outflows. Ex HEDJ and DXJ, our flows were positive this quarter and on a year-to-date basis. We are continuing to see positive momentum in our U.S. equity ETFs, which took in 50% greater flow this quarter and reached $759 million. We take a deeper dive into our U.S. equity flows on the next slide. As you can see from the chart on the left on Slide 5, our leading U.S. equity ETFs, most with ten-year track records, are generating solid annualized organic growth. The U.S. equity space…

Thank you, Amit. Good morning, everyone. The third quarter was incrementally better than the second quarter, but we are still obviously not pleased with the results. For perspective, I would categorize our performance as having very little market momentum but significant strength overall as a firm. WisdomTree remains one of the best positioned firms for where the asset management industry is headed. The Department of Labor's fiduciary rule is accelerating change across the entire industry, impacting product manufacturers and distributors. We have a business model designed to both coexist with low-fee beta and compete with it as our long-term track record underscores. We are strategically investing to ensure WisdomTree remains one of the best positioned forms for a post-DOL environment. Our investments are intended to maximize our long-term growth potential. Few companies are as well positioned to succeed in this hyper fast-changing global industry as WisdomTree. Thank you. Let's open up the call for questions.[Operator Instructions] Our first question comes from Craig Siegenthaler with Credit Suisse.

Just as a follow-up on the DOL rule commentary, I just wanted to see which products you think are best positioned to take share. And when could we start to see the positive impact on flows?

So I'm not sure specifically DOL changes any one specific fund's strategies. I think that the DOL is very, very positive for ETFs in general and that our differentiated proprietary approach, I think, lines up extraordinary well with the new regulations. We are starting to see positive flows, but we've been overwhelmed by the outflows of our largest exposures, as you're aware. Recently, I mean -- and we update on Saturday. You'll see there has been some more positive movements just on DXJ as the dollar-yen has been moving. But in general, we have to see market sentiment, at least, to continue to moderate on those large exposures.

And also, I was wondering if you could provide a quick update on the S&P 500 China ETF. I think as you last left it, you had a European share class but not a U.S. share class yet. So maybe just an update there?

Sure. So let me introduce, for this call, our Global Head of Distribution, Kurt MacAlpine. Kurt, would you take that first?

Sure. So -- thanks, Craig. So in regards to the S&P China 500, as you heard on the last call, we do have a global exclusive product partnership with ICBC Credit Suisse and WisdomTree. We've chosen to launch that strategy first in UCITS format in Europe with the expectation that we'd be bringing the product to other markets around the world. So nothing as of yet, but it's still our intention to take that strategy and the global exclusive partnerships that we have in place and bring it to new markets, including the U.S.

And our next question comes from Chris Shutler of William Blair.

I wanted to follow up on that same topic on the DOL and just better understand what specific initiatives are underway at WisdomTree, or what investments you're making to take advantage of the rule.

So I've read a lot of the transcripts of the other public asset managers. And unlike them, we're not changing our business model. We don't feel the need to reduce our fees. We built this business for sort of the commoditization of nonexclusive indexes. We don't have conflicts within our business model as others have to deal with. And we have been making steady investments from the very, very beginning of the launch of the firm. And so WisdomTree really doesn't change anything. But I'll let Kurt add a couple of other points he has.

Sure. So while -- as we think about how many wealth managers are responding, and many of them are still working through their strategies for DOL, we're really seeing a few, I guess, themes or trends emerge. So one is around providing more guardrails around the investment decision-making process for advisers. Second is they're trying to deliver more consistent client experience. And third is they're hoping to package this execution more through fee-based accounts and transaction-based accounts as a way of normalizing that experience. So the impact on asset managers, which we're hearing is focused on high-quality, focused on differentiation and looking for high-value, lower cost products. As Jono and I just mentioned, we feel our business model was essentially designed for DOL. The combination of an ETF focus, differentiated and proprietary products and our consultative selling process, that touches those platform gatekeepers and advisers, should position us very well when the dust settles and the firms have executed their strategy.

Okay. Great. And just one other quick one for Amit. Amit, you guys -- you have a very strong balance sheet, no debt. I know this hasn't been an issue historically, but what kind of debt levels would you be comfortable with as a business given the market sensitive nature of the revenue?

So a lot of that will be dependent upon who's providing the debt, right? There's obviously certain levels -- how many times even though that -- firms will be willing to give out. So I think a lot of it would just depend on sort of why we would take on debt, right? And that would really define the level of comfort of how much leverage we would put on the balance sheet.

And our next question comes from Michael Cyprys with Morgan Stanley.

Just curious if you guys could talk a little bit about how you're thinking about packaging your ETF products into model portfolios and SME accounts?

So in terms of packaging our products in model portfolios, so if you think about asset allocation and the role that WisdomTree's been providing in asset -- in delivering asset allocation to our clients for the last number of years, there's really been 2 components to it. So one is we have a suite of model portfolios that Luciano, our Chief Investment Strategist, oversees that asset allocation team and those standardized models that we have available for FP [ph] access today. We also internally have a customized asset allocation capability where we work individually with our clients to come up with asset allocation recommendations and then WisdomTree product recommendations within those asset allocation strategies. What you're starting to see us do more of over the last few months is taking this foundation and framework that we've built and applying it to asset allocation models that will be available for execution across a number of the different strategists and model managers that exist in the marketplace today. So we're in the midst of taking this process that we've been refining and using for the last number of years and applying it to the market in a way that people can execute our strategies in a more simpler kind of easy to access way.

And this is Luciano. And I would just add that we are actually running against the models so we can create a real-time performance track record. And we intend to have that monitored and updated by an outside third party so that performance record can get out there to the market. And we think that will help facilitate the process for us going forward.

Great. And if I could just ask a follow-up, a separate topic just around distribution as you're building out Europe, Japan, Canada. Just curious how you're approaching distribution differently. And perhaps each of these different markets relative to the U.S., how the markets are different and what your approach is in distribution, how that differs?

Sure. So as you look across the markets, I mean, there's a lot of similarities. So despite a different operating environment across each of the markets, there's a lot of similarities in terms of our business model, which is focused on the financial intermediaries or the most influential gatekeepers, and ultimately, the advisers that are placing assets. So at that level, things are largely the same. The investment -- intellectual property that we're bringing to our clients is consistent across markets and the role that we have to play in educating our clients, both those platform gatekeepers and the advisers is quite consistent. So there's definitely subtleties as we think about how you sell in Japan versus how you sell in Canada or Europe. But for the most part, the approach is largely consistent.

And the next question comes from Bill Katz with Citi.

I joined the call just a couple minutes in, so I apologize if you did cover this. Could you talk on a little bit about like the guidepost that you'd have that would range the comp from the fourth quarter between the high and low end? What kind of dynamics are you looking at with that?

Sure. So Bill, the biggest dynamic will obviously be the level flows, right? That's been the biggest driver of volatility in our compensation, as you've seen quarter-over-quarter. If you go back a couple of years ago, right, we had a big spike in the fourth quarter in our comp because we did see higher levels of flow coming in. So that will be the biggest driver of it. Remember, we're targeting that full year amount to 24% to 28%. And as based on our performance so far, I would say towards the low end of the range of that.

Okay. That's very helpful. And then, Jon, perhaps one for you. All we keep hearing from many of the traditional managers is sort of the downward pressure on pricing. You have, on one side of the table, a reduction on pricing on core ETFs by BlackRock and Schwab and others, and then just the inevitable decline in more of the traditional mandates or even hedge funds. So when you -- and then you look at the Smart Beta, it's been relatively resilient on pricing so far, although competition is picking up. Can you talk a little bit about how you sort of see the volume versus maybe fee rate dynamic playing out over the next couple of years for Smart Beta?

So again, it's very -- the trends that you're seeing are not new. There was always incredible price competition on nonexclusive indexes. So we're certainly not focusing on what the hedge fund industry is doing to make themselves more competitive. But when you look at what iShares recently did on some of their core, that really doesn't change the dynamic of what commoditized beta was doing when we launched the firm in 2006. In terms of Smart Beta, again, it helps that we're doing it off of a proprietary index that we got in early. So we haven't seen very significant at all pricing pressure. I'm not trying to say that we are immune to pricing pressure. We've never been immune to pricing pressure. We were just created for this environment. So it's just it's -- continue as we go.

Okay. And just maybe one housekeeping item. I just -- and maybe it's me and my numbers. It looks like there's been a restatement on the second quarter fully diluted share count. Is that right, or I just have a bad number in my model?

Yes. Because -- we had some noise in our share count in last quarter because the reclassification of how -- because our unvested securities, they do carry dividend and voting rights, so they're considered participating securities in how we calculate EPS under the 2-class method. So that had to had an immaterial reclass in our share count from last quarter. There was no change in EPS.

And our next question comes Ann Dai of KBW.

I did want to start again with DOL and understood that you're kind of seeing it from a long-term perspective. But I'm just wondering, in the short term, if you do feel like maybe there's some assets that are going to be in motion as people move towards fee-based accounts? And if so, are you doing any kind of enhanced outreach to distributors to try to take a larger share flows around the implementation date?

So this is Jono. Really DOL is extraordinarily positive for the ETF industry. And so we're very excited about how behavior will be changed as the rule gets implemented. There's also a lot of questions from the distributors on how they should navigate this. And we've spent a tremendous amount of time and energy with our partners in helping them to navigate. And so I think we're being viewed as a very constructive partner in these very challenging times for the distributor part of the asset management industry. Kurt, is there anything you want to add it?

I would just say that if you look at where the assets are in actively managed mutual funds, I mean they're predominantly -- overwhelmingly in U.S. equity, and U.S. fixed income. So I would expect that to be the place where the money would be in motion.

Okay. And if I could just get one follow-up. As was kind of -- when you talk about your European distribution, you talk about broadening the platform to some other geographies. And I'm just kind of curious what's ahead? And then when you think about what you have upcoming, is there anything that you can comment on from a expense perspective for the coming years? So just what type of incremental expenses are driven by that build-out?

So right now, globally, obviously, we have a very large presence in the United States. We have our first efforts internationally. We're actually in Latin America with the Compass Group. We're very, very strong with them, and it's been a long deep relationship now, coming on almost 8 years. Europe is a very big effort for the firm. We just launched in Canada. We have people -- a team in Japan. I don't expect adding any new markets beyond the bets that we've made, the investments that we've made to date. But we are positioned for actually the very largest ETF markets right now around the world. And those are -- they're also facing the greatest regulatory changes, which should spur faster growth of ETF adoption.

And as far as expense guide and how we're thinking, as we typically do, on our next call, we'll give guidance on 2017 and how we're thinking about expense growth from there.

And our next question comes from Mike Grondahl with Northland Securities.

It's Mike B [ph] on for Mike Grondahl. Maybe if you could just talk about, from a high level, not guidance or anything, but how you're looking at managing cost versus growth across your current geographies in the upcoming year if we assume AUM is flat?

Sure. So as we always do, we balance the need for expense management with growth, right? There's a lot of tailwinds in our industry, as we've spoken about over the years, particularly with the DOL rule coming in place. We're making the right investments to continue to position ourselves for that growth. As far as future guidance, as I said, on our next call, we'll be giving more guidance on sort of how we're thinking about expense growth, the key initiatives we'll be working on next year to help you sort of model out the future.

Got you. And then maybe just a quick follow-up towards that. I don't know the exact number, but do you see the trends in the next year of new funds launched being similar to what we've done the last few years?

Again, with that, we'll also give -- we give that usually at the -- our next earnings call.

Yes. On our next call, we'll give you guidance on new product launches that we're targeting.

And our next call from Mac Sykes with Gabelli Financial.

I have a 2-part question, I'll just ask the whole thing, and one of you can answer it. I think we've talked about this before, but thematic ETFs, we had a traditional competitor launch of thematic suite this summer. I just wanted to get your thoughts on how much opportunity is there for this approach, how much of your thoughts have been given about innovation here for your platform? And then in light of sort of that launch of ETFs, we've heard some commentary just before this on more ETF products. Maybe you could talk about the competitive aspects in terms of your marketing to advisers who may be seeing more approaches come at them.

So whether it's Smart Beta, rules-based active, thematic ETFs, it all rolls into sort of this giant bucket of index innovation. We think it's very, very constructive, even the fee cuts that Schwab and Barclays or iShares are doing constructive, making it almost impossible for any adviser to look anywhere else to put their money to work. In terms of WisdomTree from a competitive standpoint, really the energy has always been to compete with iShares and Vanguard and State Street, the largest and most -- the largest firms, that have been in the business the longest. We certainly have seen, over the last 10 years, numerous new competitors come in. But they come in -- most of them have come in just in the last couple of years. They've got a lot of work to build their name recognition within these channels, get their sales organization is geared towards communicating this new structure to their -- to the clients and potential clients. Luckily, we established our funds. We're a known entity. We're building these very strong track records exist. And quite frankly, the industry is evolving exactly the way the executive management team thought 10, 12 years ago. Kurt, would you like to add something?

Just in terms of ensuring that we're well positioned in front of advisers. So since the inception, WisdomTree has been playing a very active role in educating advisers on our products and methodologies and how to best execute them. So as you look, there's a lot of new entrants in the market, as you mentioned, a lot of new products. But we feel very strongly that we have both the infrastructure and the quality of the team that is well positioned to compete as new entrants come and go from the marketplace.

Yes. One just last point. We also had probably the strongest regulatory freedom for both active and self indexing, which, over a longer period of time, will help us deliver the best after-tax returns. And so net-net, we're again very well positioned.

Great. And congrats to Jason, I look forward to speaking with him.

Very kind of you to say that. And he's blushing.

Our next question comes from Keith Housum with Northcoast Research.

I hope you guys can provide a little bit of color. I think in the past, one of the challenges has been that the 401(k) administrators haven't been able to have a platform that can accommodate ETFs. What are you guys seeing in the marketplace in terms of progress in that market, and where you'd say the opportunity, perhaps, starts best?

So as you know, and those on the call know, we have been making a 401(k) effort for 7 or 8 years now, maybe longer. We, and the industry, we've had very little penetration as a structure into the 401(k) market. We believe we have very, very strong IP for the retirement market. We've recently hired a retirement expert. We've really built up our institutional channel. But we're going to have to continue to figure out a way to penetrate that market. As an asset manager, you don't want to miss such a large pool of money. But so far, the ETF industry just hasn't been successful.

And what's been, I guess, the administrators' push back in terms of why they haven't been able to -- or why they haven't updated their platforms to accommodate it?

It's not the administrator, in my opinion. It's more of the adviser that administrates the plan, the adviser to the plan. They're already in tax-protected accounts taking away one of the major benefits of the ETF structure. And then the ability to trade intraday is not necessarily something that they're comfortable with for a 401(k) plan. But almost every administrator has the ability to trade 401(k) but they just don't promote it.

Our next question comes from Alex Blostein with Goldman Sachs.

It's Grayson Bernard filling in for Alex here. Jono, I wanted to your take on the M&A environment. Recently, we've seen obviously Janus and Henderson announce a deal and we've seen a number of traditional players entering the Smart Beta space via M&A. So I wanted to get your view on how that landscape will evolve going forward, and how you think traditional firms will evolve under the DOL standard.

I think that there's a tremendous amount of capacity through all the different structures, just a tremendous amount. I think that you will see aggressive M&A. I think the rationale for Janus and Henderson to scale up, giving them more time to work through their transitions, makes a lot of sense from their perspective. In terms of the ETF industry, there's been tremendous amount of M&A historically INVESCO, BlackRock, all have been buyers. You've seen lots of the traditional firms, most of them buying smaller entrants into the business but it gives them a little bit of ETF DNA within their organizations. And I would imagine that it continues.

And our last question comes from Michael Cyprys with Morgan Stanley.

Just curious how you guys are thinking about using data and analytics to improve your sales efforts and more efficiently target financial advisers, intermediaries? Maybe just talk to what you're giving today but -- and also what the opportunity set is there longer term?

Sure. So we've had a big -- as Amit has talked you through on previous calls around our strategic priorities and strategic spending, using data as a tool to be more predictive with the advisers that we're talking to and then the conversations that we're having with those specific advisers has been an important initiative for us. We feel like we made very good progress to stay on that path. We've -- as you can imagine, aggregating data sources from multiple different places is a task in and of itself. We've essentially completed that and we're in the early stages of running predictive models against -- and predictive algorithms that will give us a better sense for who specifically we should target, what we should target them with, and then what's the message that we should deliver to them when we target them. So we're making very good progress. This, as you probably know, is a continuously evolving and improving capability. And we feel like we've made the investments required to be best-in-class in it.

Any sense early stages on what that could translate into in terms of better sales?

No, we're still in the process of refining the algorithms in the models. And we'll continue to test this in the market, which we're already doing and we'll get a better sense on it as we continue to spend more time using it as a key sales pillar.

So if there are no more calls, we thank you for your interest and support. And we'll speak to you next quarter. Have a good day, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.