Investment companies that serve particular niches have to deal with the changing preferences of their investors, and WisdomTree Investments (NASDAQ: WETF) has suffered from a decline in interest in its areas of expertise. Specifically, WisdomTree's largest funds offer currency-hedged international stock market exposure, and a temporary pause in the dollar's rise last year led many fund shareholders to shift their capital elsewhere.
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Coming into Friday's fourth-quarter financial report, WisdomTree investors continued to anticipate that earnings and revenue would fall sharply. However, WisdomTree's net income still disappointed many of those following the stock. Let's look more closely at WisdomTree to see whether 2017 could bring improved performance from the ETF provider.
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WisdomTree sees another big plunge
WisdomTree's fourth-quarter results once again showed the difficulties that the investment manager has faced. Total revenue fell by more than a third to $50.8 million, which most investors were expecting from the ETF provider. However, net income dropped even more sharply, posting an 88% decline to just $2.48 million. After accounting for a goodwill impairment charge, adjusted earnings of $0.03 per share were just half of the consensus forecast among those following the stock.
Looking more closely at WisdomTree's figures, the same general challenges again held the company back. Assets under management for its U.S. ETFs came in at $40.2 billion, which was 22% less than where WisdomTree started 2016. The company reversed prior-quarter outflows, bringing in $100 million in assets during the quarter, but that represented just 0.1% of all industry inflows for the period. Moreover, the ETF provider suffered outflows in its European operations, and that kept assets there at $1.02 billion, which was up by a third from year-ago levels but essentially unchanged from the third quarter. The company's newest Canadian operations were also relatively stagnant, with a rise of just $200,000 in assets under management to $68.6 million.
WisdomTree once again managed to control its costs somewhat, but it wasn't as successful as it had been in past quarters. Compensation expenses rose 18% because of a greater amount of incentive pay going to workers in the form of cash rather than stock. Impairment charges from its Boost acquisition in Europe lifted operating expenses by nearly 4% from the year-ago quarter, and WisdomTree boosted its marketing expenses by nearly a fifth in an attempt to drive traffic to its funds.
CEO Jonathan Steinberg tried to focus on the company's successes. "Negative sentiment around our two largest exposures in 2016 overshadowed several noteworthy accomplishments," Steinberg said. "The industry is rapidly evolving, and we continue to make the global investments necessary in products, people, and technology to be a beneficiary of change."
Can WisdomTree do better in 2017?
Despite facing a difficult investing environment, WisdomTree continues to count on the eventual recovery in popularity of its currency-hedged products. Steinburg lauded the launch of what he called "the industry's most successful new ETF: the WisdomTree Dynamic Currency Hedged International Equity ETF." By doing so, the ETF is making a big bet that dollar strength will continue to keep foreign stock markets under pressure when measured in dollar terms, making the currency hedging strategy more attractive.
WisdomTree is also working with partners to try to increase the distribution of some of its exchange-traded funds. During January, the ETF provider managed to get its put-writing options strategy ETF listed on the ETF OneSource platform at Charles Schwab (NYSE: SCHW), which offers commission-free trading of the fund to Schwab clients. Schwab receives remuneration from third-party ETF companies like WisdomTree that participate on OneSource, but WisdomTree has to believe that greater exposure will more than offset any promotional costs that the ETF provider will have to bear in the arrangement.
WisdomTree investors have to be disappointed with the poor showing from the ETF provider, even though the stock didn't move much in pre-market trading immediately following the announcement. Until the international stock arena starts performing extraordinarily well again, WisdomTree will face difficult prospects as it continues to bank on the success of global investing in the long run.
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