WisdomTree - Earnings Call - Q2 2020

Transcript

Speaker 0

Thank you, and good morning. Before we begin, I'd 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. 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 in the Risk Factors section of WisdomTree's Annual Report on Form 10 ks for the year ended December 3139. 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 WisdomTree's CFO, Amit Muni.

Speaker 1

Thank you, Jason, and good morning, everyone. Today, I'll walk through the important items for the second quarter, then turn the call over to our President, Jarrett Lillian, who will provide a deeper dive on distribution and operations and then to Jono for closing remarks before we open the lines for Q and A. So beginning on Slide three, we ended the quarter with assets under management of $57,600,000,000 up 15% from the first quarter driven by $7,000,000,000 of positive market move and net inflows of $126,000,000 Strong inflows into our European listed products were largely offset by outflows from our U. S. Listed ETFs.

Beginning in Europe, we generated $1,600,000,000 of net inflows, ranking us third in the industry, representing 30% annualized organic growth. The flows were well diversified across our commodities and leveraged in inverse product set. In what has been a truly historic period for energy markets, we are the clear leader in European listed energy ETF exposures. Our $600,000,000 net inflows in the second quarter represented 75% market share. Our leverage in inverse product suite had $312,000,000 of inflows driven by a diverse range of commodity and equity exposures.

We also remain a leader in precious metals with net inflows of $449,000,000 For our U. S. Listed products, we had $1,500,000,000 of outflows, of which approximately 50% were from Hedge and DXJ, as our product set was not well aligned with investor sentiment. U. S.

Industry flows were extremely narrow this quarter, with the vast majority going to fixed income, commodities and large cap growth, areas we have less or no exposure to. By contrast, 41% of our U. S. AUM were in the worst industry flowing categories. However, there were several bright spots.

Our cloud computing ETF continued to rapidly scale post its launch last fall, generating $324,000,000 of inflows, bringing its AUM at the end of the quarter to $419,000,000 one of our most successful launches ever. We have also seen continued strong asset growth success in XSOE, Aggie and degrow, products we have highlighted in recent quarters, which we believe to be very well positioned. Given these pockets of success, it's important to examine our flows on a gross basis as outflows have masked these successes. Let's examine that on Slide four. The chart on the left reflects our flows on a gross basis and the dark blue represents gross inflows and the turquoise reflects gross outflows.

As you can see, our gross sales have been strong, reflecting the positive impact from investments we have made around our distribution efforts over the past several years. During the second quarter, gross sales were nearly 2,000,000,000 up nearly 40% from the year ago quarter and up nearly 20% from the 2018. However, as you can also see, redemptions were elevated. As I touched upon on the last slide and reflected in the middle chart, our product set was not aligned this quarter with investor sentiment. We saw a lack of demand for non U.

S. Equities and value oriented strategies, which makes up 67% of our U. S. AUM. Those broader industry categories saw an aggregate $18,000,000,000 of outflows in the second quarter.

However, as the last chart reflects, we have seen a significant improvement in trends with a rebound in flows into our U. S. Equity ETFs in June and July. We are hopeful these trends continue to accelerate and macro sentiment better aligns with our international and value oriented U. S.

Product suite. Now turning to the financial results on Slide five. Revenues were $58,000,000 for the quarter, down due to lower average AUM and a one basis point decline in our fee capture due to mix change. Note, our average AUM this quarter is up 6% from the second quarter. On a GAAP basis, we had a net loss of $13,000,000 Excluding non operating items, adjusted net income was $8,500,000 or $05 a share.

This quarter, we took a non cash after tax charge of $23,000,000 for our future gold commitment payments, reflecting the significant increase in gold prices during the quarter. We also had a charge of $1,900,000 and a tax benefit of $2,800,000 from the extinguishment of our debt earlier than the maturity term. Turning to the margins on the next slide. Our operating margin was 20% in the quarter, reflecting lower revenues from the decline in AUM, partially offset by cost controls. Gross margins were 75.1% on the lower end of our 75 to 77% guidance range due to the decline in our revenues and higher costs for our oil related products given its volatility.

On the next slide, you can see the change in our expenses. Our operating expenses remain well controlled, down 3% sequentially and 12% from last year. Compensation costs remain relatively flat. Due to our improved forward revenue outlook, we are trending towards the higher end of our compensations guidance range of 65,000,000 to $70,000,000 Discretionary spending declined by $2,000,000 or 18% from the first quarter, primarily due to lower marketing and sales expense given the environment. Certain of these expenses have either completely stopped, declined significantly or we have shifted the spend to more cost effective and efficient means through more virtual and digital outreach to our clients.

Given what we have learned so far, we believe certain of these efficiencies will carry forward in future periods and we now expect our full year discretionary spending to be 44,000,000 As a reminder, our guidance at the beginning of the year was $51,500,000 for discretionary spending, which we then reduced to $47,000,000 last quarter. We don't believe these reductions will have any negative effect on our long term growth outlook. Now I'd like to comment on our recent debt transaction on the next slide. In June, we refinanced our term loan through the issuance of a convertible note. It was an unusual structure in that it had a high conversion premium, which is not the norm in this current market environment.

We were able to successfully execute the transaction and it was well received on announcement. The note has no restrictive covenants, which provides us the most flexibility to manage our capital. We raised $150,000,000 and used those proceeds plus cash on hand to pay off our term loan of 174,000,000 and use $25,000,000 to repurchase 6,700,000.0 shares. As we think about our capital management priorities going forward, they are to build cash for strategic opportunities and pay off the note and second, return capital to our shareholders through dividends and buybacks. Thank you.

And let me now turn the call over to our President, Jarrod Lillian.

Speaker 2

Thank you, Amit, and good morning. Amit has covered year to date flows. I will drill deeper into the strength we saw this quarter in global sales, product and operations. We are seeing momentum accelerate and this is due to our blocking and tackling approach and our focus on the things that we can control. At the top of this list is client engagement.

If we can elevate quality engagement, flows will follow. We've established ourselves as thought leaders on topics most relevant to advisors. We've created technology tools to help advisors better manage and grow their businesses. We've established access to key platforms and we continue to provide innovative differentiated strong performing products, including both individual funds and model portfolios. In the second quarter, we put all of this to work and client engagement continued to grow.

High quality interactions with financial advisor clients and prospects climbed to new record levels with 45,000 distinct interactions during the quarter. We are interacting with financial advisors in a variety of ways ranging from emails, phone calls, video conferences, webinars, research office hours, all the way to a virtual happy hour we held with professional golfer John Daly. As we talked about in recent quarters, we have focused some of our efforts on the IBD channel, where ETF penetration is lower but accelerating as more advisors in the channel transition to fee based relationships and gain a better appreciation of the merits of the ETF structure. We have entered distribution relationships with several IVDs and engagement with these platforms is growing. These relationships are driving positive flows both in Q2 and year to date and we expect momentum to accelerate as we deepen penetration based on merit, commitment and focus.

We continue to differentiate with our model portfolio offering and models will be a key organic growth driver going forward. During the quarter, we released proprietary research that indicates most advisors believe model portfolios will not only help them scale their businesses and improve efficiencies, but will also help improve the service they provide to their clients. The results of this survey further validate our bullish outlook for models and help position us as a thought leader in the field. Last quarter, we talked about being added to Park Avenue Securities platform as a model provider as well as being added to Ceterra's featured strategist list. Earlier this week, we announced model relationships with The Carson Group, Riskalyze, Quanti, ETF Logic and Orion and the pipeline remains strong.

On top of this is a strong stable of product with 25, four and five star funds representing 63% of our U. S. Listed AUM. A standout this quarter is WCLD, our Cloud Computing Fund. The fund was launched last fall and has built an impressive performance track record outperforming the other cloud focused ETFs in one of the hottest segments of the market.

We've coupled this with a global all oars in the water approach, focusing product, sales, marketing, research, capital markets and PR to take advantage of the opportunity in front of us. As a result, WCLD has scaled globally from $14,000,000 at the beginning of the year to roughly $800,000,000 as of last Friday, making it one of our most successful fund launches ever and illustrating again our strong global ability to execute. And the results are global. Looking more closely at our European listed products on Slide 10, our Europe listed AUM sits over $28,000,000,000 today, an all time high. The $28,000,000,000 of AUM is up 45 since the 2018 acquisition of ETS Securities, driven by $3,400,000,000 of net inflows.

By all measures, the deal has been a giant success for WisdomTree. We quickly integrated the two firms. We successfully diversified our AUM base, achieved immediate scale and profitability in Europe and strengthened our global team by bringing on and integrating additional talent. The $1,600,000,000 of well diversified flows in Q2 represents the strongest quarter since the deal closed, but it doesn't fully tell the story of how impressive our performance has been. The second quarter saw the most volatility ever seen in the energy markets where we have 70% market share representing $2,400,000,000 of AUM across 15 products.

As an example, on April 2021, the front month WTI contract traded down from $15 to a negative $38 and then back to a positive $9 It was the first time an oil contract has ever gone negative. Not surprisingly, this caused serious disruption in several energy products. The team responded flawlessly under great pressure. Along the way, due to this extreme volatility, we took action to close several of our leveraged and inverse products. In addition, we took initiative to temporarily halt creations in some of our energy products to protect investors, market participants and the firm, including in our WTI crude fund CRUD, which is the largest oil product in the European market.

Not only did we successfully manage through this challenging environment and reopen CRUD for creations, we use the Wisdom Game to enhance the product, the WisdomTree hallmark, resulting in best in class product designed to help investors navigate the financial markets. This is why WisdomTree is the leading commodities platform in Europe today and well positioned to grow in the future. Overall, strong performance from the global team and a payoff on many investments we've made over the past few years. With that, let me now turn the call over to Jono for closing remarks.

Speaker 3

Thank you, Jarrett, and good morning, everyone. I'll keep my comments brief before we turn to Q and A. We enjoyed a nice rebound in AUM during the second quarter and we start the third quarter with a revenue tailwind from higher current AUM compared to second quarter average. However, market move and investor sentiment are out of our control. We are laser focused on what we can control.

And in those areas, I am proud of how we are executing. Our sales and marketing teams are leveraging our expanded distribution reach and deep data analytics capabilities to drive record client engagement and strong gross sales results. The pipeline for new distribution relationships remains robust driven by our business development and solution team members. Our team in Europe managed nearly flawlessly through unprecedented volatility in energy markets driving better outcomes for our clients and for WisdomTree. Our technology team continues to deliver tools that are value added for clients and enhance the productivity of our teammates.

Our corporate finance and legal teams successfully refinanced our debt removing a near term overhang and affording us greater financial flexibility. We are now nearly five months into working 100% remotely as a firm. We hit our stride immediately and as Amit discussed, the new operating environment is driving some expense efficiencies. We have a talented, nimble and entrepreneurial team and I am proud of the way we have adapted. We are well positioned for growth.

We have the right team and the right strategy and we are seeing momentum in important lead indicators. I thank you for your interest in WisdomTree and we will now take your questions.

Speaker 4

Our first question comes from Craig Siegenthaler with Credit Suisse.

Speaker 5

Thanks. Good morning, everyone. Just given the very low yields available in much of the fixed income markets, do you expect to see lower bond ETF flows in the second half? And also which higher yielding products like Aggie are you marketing to investors which could benefit from an extended period of low rates?

Speaker 3

Thank you very much, Craig. Jeremy, do you mind replying? Sure.

Speaker 6

One of the we talked about how bond funds were one of the biggest categories for growth. And while we started recently in the last five years, we've been making a lot of investments. One of the exciting things for us is we're gaining share in some of these categories from a smaller base, of course, but we saw about 200,000,000 flows across our bond suite this year. And in particular, when you talk about the fears about those higher duration and ultra low, let's say, at the ten year, we have a five star fund shag, which is the short end of that yield enhanced ag just crossed $100,000,000 and is very well positioned for the low rates with that five star performance. We're seeing also in terms of the market environment with ultra low rates, people are looking at higher yield bonds.

We have again four star funds in the IO category and a fund that's WFHY, which is that high yield bond fund has ranked in the top two deciles this year. And you haven't really even had a major default cycle yet. So we think the positioning compared to traditional bond ETFs where they aren't making any qualitative assessments of what bonds could pay back the debt, we think that's very strong. And then we have things like our floating rate USFR, which is the shortest end of the maturity that if you do get a rate rising cycle in the future, it's sort of well positioned as a leader there. But if you think about the ultra low rates, it's also why commodities, gold and silver are incredibly strong tied to the low real rate environment.

So we have a lot of different positions for that low rate environment.

Speaker 3

Thank you, Jeremy.

Speaker 5

Yes. Thank you, Jeremy. And listen, it was nice to see all the creations in WCLD. Can you talk about some of the other thematic initiatives you may have in growthy sectors like tech and healthcare, where the industry is actually seeing a lot of positive demand trends right now?

Speaker 3

Jeremy, again, would you take that call? Jeremy, Director of Research.

Speaker 6

Thank you. And so yes, we are very excited. Now it's about $800,000,000 globally in cloud. And we've had some more funds in this pipeline. And one that I can speak to today is actually we have a modern tech platform funds, PLAT, that we are rebranding.

We're actually calling it the growth leaders fund. We think it better describes what's happening in those platform funds. You see on days like today, you see Facebook and Amazon. These are big exposures in that modern tech platform and these companies are growing at rates double things in the NASDAQ, the NASDAQ being one of the predominant the Qs being the predominant large tech growth fund. We think we're going to better position it from being an equally weighted strategy towards more market cap and equal weighting.

And so we're excited about this repositioning of Platt. And we've talked a lot about the model business. We're going to also incorporate WCloud and Platt into a more next generation economy model that we think will have legs and help position both those funds in an open architecture setting for the future. So we're very excited about all that and I think we'll continue to invest around this category.

Speaker 5

Thank you. Thank you, Jeremy.

Speaker 4

Our next question comes from Michael Cyprys with Morgan Stanley.

Speaker 7

Hey, good morning. Thanks for taking the question. I just want to come back to some of the new distribution relationships that you alluded to. Just hoping you could share a little bit more color around the new relationships that you added in the quarter with Orion among others. What those relationships consist of?

What are your expectations and aspirations there? If you could also just comment on the pipeline, you mentioned that's very strong. I guess how would that compare versus a year ago? Any color you could share about the types of firms, the size of firms that are embedded in the pipeline?

Speaker 3

Jarrett, would you please answer this?

Speaker 2

Sure. The platform relationships are really important. They give us access, really broad access to a variety of advisors. They're all sizes, from smaller, from the tech side, all the way to the larger and the more sort of hands on side. The pipeline currently versus a year ago

And we expect to have some other announcements over the coming months that we think are very exciting. But a very strong pipeline and very important are these relationships.

Speaker 7

Okay. Just maybe a follow-up question just on some of the gold products that you have. Gold is up, I guess, nearly 30% this year. So far, you've gathered maybe around $400,000,000 inflows or so that's about 5% organic growth into your gold ETFs. I guess how does that compare versus your expectations for what you would have thought you would get given such a strong rally in gold?

And maybe you could talk about some of the competitive dynamics there, how that's evolving in the marketplace and some of the initiatives that you have in place to further accelerate and capture the momentum in gold ETFs right now?

Speaker 3

Jerick, why don't you start with that one as well?

Speaker 2

Sure. In our prepared remarks, we talked about disruption that we'd seen in the energy markets in the second quarter. There was also some disruption in the gold markets and specifically some that we experienced due to the pandemic. There were some logistical challenges around physical transportation of gold that impacted perceived liquidity, especially in our lowest fee Swiss gold product, which did impact spreads and flows. That was short lived.

It has been resolved, but it makes it harder to read too much into the quarter. And it means really it's important to step back and take a look at our overall gold positioning where we remain a leader and very well positioned for the future. We have a whole range of physical gold ETPs with various features, various fees that really appeal to the whole spectrum of market participants. We also have the best gold economics in the market. And so we're very confident with our gold positioning and expect to be a major beneficiary going forward.

Speaker 3

But Mike, we obviously didn't expect the pandemic and the inability to move gold bars. So from an expectation standpoint, unusual and something we didn't expect. So but again, Jared spoke about how it has normalized. But I'd also say just to reiterate what Jeremy spoke about, we are the leader in all precious metals in Europe. And so our market share and strength in silver, palladium, platinum, they all benefit from the same dynamic of zero interest rates, global printing of money, social unrest, political instability, the whole suite is incredibly well positioned for the moment in time, particularly with the Fed saying rates will stay at zero maybe to twenty twenty four.

So anyway, we're very pleased with the outlook for the whole suite.

Speaker 7

Great. Thanks. Our

Speaker 4

next question comes from Robert Lee with KBW.

Speaker 8

Hi. This is Jeff Dresner on for Rob Lee. Thanks for taking my question. Just a similar question on fixed income flows. Broadly for the industry, we're seeing pretty massive inflows in CTS and kind of comparative to essentially flat flows year to date for your fixed income products?

Is there any plans to perhaps ramp up for some more fixed income products? Or how do you see the outlook for that?

Speaker 3

Jeremy, why don't you start?

Speaker 6

Well, I'd say you're building track records on some funds that have been in the market in the biggest and most important category. So there was a question on Aggie. They mentioned the yield enhanced aggregate, which is like the core fixed income reweighting the ag from market cap towards yield with constraints. That is the biggest category there is in terms of the core bond. And then we have that I mentioned shag, which is the short end version of that.

We have factor strategies for the investment grade market and for the high yield market. And so we think we have really the biggest categories. And of course, we look at what are the other big categories we're not in always and we have things that we're working on for some further segments. But I think we are in the biggest categories and then it's just working to positioning the strength and people seeing the track record. The Fed buying is just another example.

You had things like the Bank of Japan buying equities via ETFs and now you have the U. S. Fed buying bonds via ETFs. So I think a lot of people have thought you need an active manager, you need to be able to use funds and different structures for ETFs, but the Fed is giving the structure a big endorsement. And I think in general, I mentioned we're gaining share even though it's from a smaller base.

Were gaining share in three of those most important categories. And we think our performance track record in investment grade high yield and core bonds is going to speak for itself and keep gaining share over time.

Speaker 8

Great. Thanks. And if I could just follow-up quickly with one more. In terms of model portfolios and the inclusion of some more passive cheaper products, do you feel you need to include or even develop similar products for your model portfolios and how do you see that?

Speaker 3

Jarrett, you want to start with this?

Speaker 2

Yeah, Jarrett can chime in as well. I mean, a really important part of our model portfolios is that they are open architecture. And I think directly to your question, the lowest fee beta where you're really not differentiating or adding additional value by coming up with a Me Too product, we don't have to do that. We can go outside for those generic commodity low fee beta products. So those are in our models because of the open architecture nature.

And so I don't think we have to add anything there. But, Jer, do you want to talk to that a little more as well?

Speaker 6

No, I would just echo what you said. I mean, you can now get certain beta products for free. I mean, they're certainly low, They're very low fee. And so that's not been our model. We've had to we believe in modern alpha and trying to add value on top of what's in the market.

So I just I'd echo what you said.

Speaker 8

Great. Thanks for taking my question.

Speaker 4

Our next question comes from Brennan Hawken with UBS.

Speaker 9

Hey, good morning. Thanks for taking my question. Just one left for me. When you guys it seems like you've got some good momentum in third party distribution, in particular on the IBD channel, which is encouraging. How should we think about the third party expense line?

Is it best to think about it just as a percentage of revenue firm wide? I think that that kicked up 1Q into 2Q, 2.1% to 2.3% based on quick math. Will that continue to trend higher from here given your momentum and ultimately what should lead to good flows? Or is this the right level for some stability? How should we calibrate for that line?

Speaker 3

Amit, do you mind taking this?

Speaker 1

Sure, Brandon. So that line, remember we gave guidance last quarter that we thought it would be around $6,000,000 a year and we're kind of running at that run rate if you annualize the first half. If you think about the components of it for the platforms, some of them have fixed minimum fees, some of them have a percentage of our expense ratio that we share. So I think right now that $6,000,000 is still good. As we are optimistic that we will see a ramp up in the third party, some of that it will take some time to ramp and we've incorporated that in the guidance of 6,000,000 But if we do see that ramping up faster, which is a good thing, we'll update that number.

But I think the 6,000,000 for this year is a good number right now.

Speaker 9

And I guess some of those dynamics Amit, you know, the fact that it's a blend of asset and fixed fee make it a little bit harder to try to use percentage of revenue type metrics the way we have in the past and so it's to think about it.

Speaker 1

That helps. Yes, exactly. That's why we decided to switch to more of a fixed dollar at the beginning of this year because it was very hard for you guys to sort of track it given the mix of how it was changing.

Speaker 9

That makes a lot of sense. Thanks.

Speaker 4

Our next question comes from Mike Carrier with Bank of America.

Speaker 10

Hi guys. This is actually Sean on for Mike. So you mentioned that some of the cost savings in the current environment are sustainable longer term. We're just wondering if you could size the amount of savings that are permanent versus temporary and, just let us know where they're coming from.

Speaker 1

Amit? Sure. So a lot of it, the savings going forward and how much of it we'll realize will really depend upon how the economy and the market conditions open up going forward. If you look at this quarter, we found our major savings around our marketing and advertising, our sales related activities, T and E and conference spending and then some general overhead expenses. I'd say as we're thinking about it, we do believe some of it will carry forward.

The things that we're doing of shifting more to digital marketing, shifting more towards streaming services for our advertising, our virtual client events, like the things that Jared spoke about in his remarks, these are much more cost efficient and scalable for us. And I'd say, we're also reimagining our physical footprint. We've operated since the pandemic started flawlessly remotely. And I think some of that will carry forward. It's hard to put a number on it right now.

We're working through all that and we'll give more guidance around it when we announce our 2021 guidance.

Speaker 2

Putting maybe a little more color to that too, this is Jarrett. Also in the prepared remarks, you think about our client engagement. We are remote, but we are more in touch with our clients than ever before. And that's not a number that peaked in March and then fell off, actually it continues to increase as we've learned new things. And you wish a pandemic had never happened, of course, but we never would have had this experiment of how does it look when you operate remotely.

And what we're finding is that we're operating extremely well and there are a lot of new tricks that we're learning, a lot of new things that won't disappear no matter what the future holds. When we get back to normal again, there are things we've learned that we will put to use going forward. And those will include a more efficient way in spending less money and getting more for the money we do spend.

Speaker 10

Okay. Thanks. And then just one on capital. Given the restructured debt and the current cash position, can you guys discuss the pace of share repurchases versus debt pay down and then any potential smaller M and A?

Speaker 1

Sure. Yes. So when we're thinking about managing our capital and particularly the buybacks, we are definitely open to buybacks. We just bought back $25,000,000 worth of stock back in June. But I'd say over the short term, our priorities are to build cash and to support our dividend.

As the earnings power improves, we will definitely look at buybacks more. But right now, the priority is to build up cash because the note is due three years from now. So that's how I would sort of think about it for the short term.

Speaker 4

Thank you. Our next question comes from Ryan Bailey with Goldman Sachs.

Speaker 11

Good morning and thank you for taking our questions. So you indicated that you'd be at the high end of the comp guide range, but lower your discretionary expense guide and some of this is COVID related. But I was wondering if you could speak to balancing paying and retaining talent, but some of the non comp expenses that might be needed to drive organic growth.

Speaker 3

Amit, maybe you'll start and Jared you might have some additional color you might want to add.

Speaker 1

Sure. So because of the revenue outlook increasing, we did say first at the beginning of the last quarter we lowered the guidance for comp just given the environment. The revenue outlook has looked better. So we're still trending towards the higher end of that lower comp range that we gave. In the new environment, as you've seen, we are still able to engage with our clients very effectively and much more efficiently.

Maybe Jarrod can comment some more about that. But we are seeing our ability to be much more efficient and still increase client engagement and to continue to drive flows.

Speaker 2

And I think talking about sort of developing, retaining talent, I think some of that of course is comp and but we're a performance based organization. And so when last quarter we talked about it, it was a different environment. Today is a better environment. Who knows what the future holds? But we all know that that's the environment we live in.

As for morale and retaining talent, again another ironic thing that I think everybody's finding, or at least most firms are finding, and certainly we are finding that our connectivity, our team ness is tighter than it's been at other times. We are more together. Morale is very good. And a lot of it is down to the execution that we talked about, which is very satisfying. And one of the you look at Europe at record highs, managing through incredible volatility, that is something to feel really good about.

In The U. S, same thing, as we all know, these are difficult times, we've managed very well. If you look at something that I know the team is very proud about, you look at our top 10 names, not only are they really all inflowing for a very long period of time, these are the bright spots that Amit talked about in prepared remarks, but the net inflows of our top 10 products are more at the half year point than they were for all of last year. So this is momentum that you can kind of count on. It's multi year momentum that's building.

And again, that source of optimism really is good for morale. But it gets back to, I guess, the heart of your question. We're a performance based organization. We know it and we live and die by those rules.

Speaker 3

And let me just add that the whole industry suffered in March and April from this extreme negative market move. We're not so we're not in any way disadvantaged from the ability to retain or to recruit new people. So I'll end on that.

Speaker 2

And sorry, maybe to jump on it too. I mean, yes, if you look at the outside versus the inside, we started the year globally. So it's remarkable where we are today versus where we were a quarter ago. And that is a pretty stark contrast to the rest of the industry.

Speaker 11

Got it. That's very interesting. I was wondering, maybe I could ask about DXJ and Hedge J as well. On a combined AUM basis, they look like they represent probably the lowest AUM we've seen since they became flagship products. So I was just wondering how you think about ring fencing the potential organic decay from those products from you?

Speaker 3

Jeremy, can you start with that?

Speaker 6

Well, we still I think from the concept generally, I mean, one of the things encouraging, we have one of the products that in a broader sense, so Europe and Japan in the scheme of broader national are much smaller than the $2,000,000,000,000 plus in international developed generally. And we have one strategy, IHGG that raised over $100,000,000 in still currency hedging generally and one of the I think the highest of any currency hedged ETF this year. So that was very encouraging that our broad based exposure, which is equally a bigger long run opportunity is continues to gain assets. But we continue to innovate and develop international and emerging markets and have done things like international multifactor that we think is a well positioned long term strategy. It's less history, but it's off to a good start.

And we think we'll also continue that's part of its innovation and part of it's continuing to push some of

Speaker 1

the funds with longer track records.

Speaker 3

And Jeremy, is there a market sentiment shift that could be constructed though specifically for Hedge or DXJ?

Speaker 6

I mean coming into just the last few months, had a fairly strong dollar. It started weakening just recently, for last say, last three months. And so the dollar moves bounce around and I think part of that volatility helps us make the case generally that people don't know which way currencies go and makes the sort of stronger strategic rationale for not betting on currencies by hedging. And I'd say so it's probably it'll just be developed tied to those currency movements

Speaker 1

in the short run.

Speaker 2

I was just going to add a different take on it too. Those strategies are good strategies and they're performing in line with how they were built. And when we see outflows, we're still maintaining our share of the various categories. So the way I look at it is that, okay, if the categories remain out of favor from these lower asset levels, it's not really like they can hurt us as much as they could have two, three, four years ago. But also as Jono is sort of alluding to there, they could go back in favor.

And the biggest point is from these levels, there's is real diversification in our flows. I mean those two have moved down. They're still good funds with good asset levels, but they're not as meaningful as they were to the results. And the diversification of our holdings is much better, much more balanced than it's been at any time really in the last five years.

Speaker 3

And I might add that as the global economy sort of opens up again towards further in the year, you'll start looking to 2021 and Japan is expecting to open have their Olympics, which should have been in 2020, in 2021. That might actually prove to be a significant catalyst specifically for DXJ towards the end of the year.

Speaker 11

Got it. Thank you. Thank you for answering my questions.

Speaker 4

Our next question comes from Keith Housum with Northcoast Research.

Speaker 6

I understand a little bit more of the model platforms and the success that you guys are having. Is it possible to kind of conceptualize the growth that you guys have had, I guess, compared to last quarter? On top of that, is there any thought that this business might be stickier than your traditional business in terms of keeping the AUM there? Jared?

Speaker 2

Yes. Obviously, of our top initiatives and it's not something that we dreamed up like this quarter. It's something that we've been working on for over three years. And to be successful here is much more than just a model. It's a whole package.

So we start with a great stable of those strong funds that we talked about 24, four and five star funds. The open architecture that I mentioned in an earlier answer is very important and actually differentiating in the marketplace. We have a real team with a rigorous and institutional investment process. We brought Scott Welch over from who was the CIO at Dynasty. Obviously, we've got Jeremy Schwartz here on the call, Jeremy Siegel.

We've got a top team of the research study that we did bringing proprietary insight to the markets. We're building and have built the tech tools for advisors and advisor education and advisor cockpit. So there's real commitment and focus, and this is all the way throughout the firm. So to your point, this is something that is very important and the assets are very sticky, as evidenced by our experience this year, where in a very choppy year, we've been either flat or been positive on inflows every month of the year. And that's one of the really attractive parts of this.

But all in all, this is something where I think we've established a leadership position because it does take commitment. It is about a bigger package and we've made that investment and we're starting to see the payoff now.

Speaker 3

And just to reiterate one thing. I mean, you really we as a firm have shown a tremendous amount of asset volatility more than most firms. And you exactly hit one of our motivations is that the stickiness of the model business. So I mean, that's it isn't unintentional. It's really a premeditated push because of that element.

Speaker 2

And also premeditated because model portfolios are the fastest growing area of the intermediary sold product landscape. They are the fastest growing representing trillions and trillions of dollars of AUM. So it's a big market growing fast and it's growing with advisors from all channels are increasing their use of third party models. So this is a hot area. We identified it years ago and again starting to see the payoff now.

Speaker 6

Is it possible to know much

Speaker 3

go ahead. Go ahead.

Speaker 6

I'm sorry. Is it possible to by

Speaker 7

how much of your inflows

Speaker 6

have been driven by the model platform?

Speaker 3

Jack?

Speaker 2

Yes. Today, we're not disclosing those numbers. We're not breaking them out yet. What we're spending a lot of time on, obviously, it being such a key initiative is next year, what kind of metrics that we will provide and we'll want to provide metrics to just show the kind of growth and traction that we're seeing. But we're not breaking that out at the moment.

Speaker 6

Okay. Thank you. Our

Speaker 4

next question comes from Michael Cyprys with Morgan Stanley.

Speaker 7

Thanks for taking the follow-up question. Just wanted to circle back on the cloud computing fund. Nice to see the success early on in the fund's life. Can you just remind us if there's any sort of limitation or capacity constraint on how big this fund can get? And then I was hoping you could just give us a little bit of a sense on how this fund and strategy came to be.

What was the product development process, the genesis behind this fund? And given the early success that you are having with this product, how is that impacting your approach and strategy to product development and marketing from here?

Speaker 6

Jeremy, please start. So we are always looking at how do we innovate in the market and provide value added. And we often do develop indexes primarily ourselves. We started as a self indexing firm, but we have relationships all across the street. This was a very unique opportunity to work with a premier venture capital firm, Bessemer Venture Partners, who worked with the NASDAQ to create this basket for the cloud.

And as we heard about it and we talked with Bessemer and the team, we do have we think the leading not only sort of leading thought leader on what they're investing in early stage, they have a private cloud business. There's 100 private cloud companies that are going be coming public over the coming years. All 100 of them look to have $1,000,000,000 market cap today in the private market. It was we think we have a real edge in identifying the companies and then you see that playing out. And year to date, WCloud is one of the top few performing ETFs in the entire industry.

So it was one where there were a few legacy products, but we weren't going to be the legacy product. We thought this was a better execution and so it was a nice relationship and it's scaling. We've got other examples. I didn't bring this up earlier, but in Europe we have an artificial intelligence product that's also scaled to over 100,000,000 That's the leading edge of where we think the next twenty to thirty years, there's going to be a huge advancement in artificial intelligence. And we have that was another one where we did work with a group who's providing some signals.

They had some expertise that we hadn't developed. And we're going always look at what can an outside provider provide versus what can we do ourselves. The bar is high to use an outside provider because we have a great team that can do a lot of these things. But if there is a unique edge where the product is fairly different, we will. And we've done that in the bond space with things like our yield enhanced ag.

We've done it in other places too. But I think you'll see us continue to invest around we're showing success as we said in Europe with AI. They also did a battery solutions product in Europe. And we're showing with cloud, think you're going to see more from us here.

Speaker 3

And Jerry, how about capacity constraints?

Speaker 6

Sorry. I was alluding to that, I should have mentioned it. I was talking about the 100 private companies that are going be coming public over the course of this few years, it's a big basket today. I mean, are already growing big companies, but we expect a lot more to come public and it's just going to increase the capacity dramatically over the coming years. So I have no concern about capacity.

Speaker 7

Great. Thank you. And

Speaker 4

I'm not showing any further questions at this time. I'd like to turn the call back over to our host for any closing remarks.

Speaker 3

Thank you all for your time and interest today and we will speak to you soon. Have a great day. Bye bye.

Speaker 4

Ladies and gentlemen, concludes today's presentation. You may now disconnect and have a wonderful day.