Earnings Call Transcript - WT Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to the WisdomTree Q3 Earnings Call. [Operator Instructions] I would now like to introduce your host for today's conference call, Mr. Jason Weyeneth, Director of Investor Relations. You may begin.

Jason Weyeneth, Director of Investor Relations

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 and in the Risk Factors section of WisdomTree's annual report on Form 10-K for the year ended December 31, 2019. 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.

Amit Muni, CFO

Thank you, Jason. Good morning, everyone. I'll walk through the highlights for the third quarter and turn the call over to our President, Jarrett Lilien, who will provide a deeper dive on our U.S. and European products, and then to Jono for closing remarks before we open the lines for Q&A. So beginning on Slide 3. We ended the quarter with assets under management of $60.7 billion, up 5% from the second quarter, primarily from positive market movement. We have $468 million of net outflows. However, I'd note, so far this quarter, we are off to a strong start with net inflows of over $1 billion, and we have turned positive in net inflows on a year-to-date basis. Our U.S. products generated inflows each month of this quarter for a total of $575 million, representing 7% annualized organic growth. Building upon the momentum from last quarter, our dividend growth, ex state-owned emerging market, cloud computing and aggregate bond products generated approximately $1.7 billion of inflows in the quarter. However, we continue to face headwinds as nearly 40% of our AUM were in the worst 15 outflow categories for the industry. In Europe, we had outflows of $1 billion, primarily from our energy and gold products. However, we did generate inflows into our other precious metals, including silver, platinum and palladium and also our cloud-computing usage product. Now turning to the financial results on Slide 4. Revenues were $65 million for the quarter, up 11% due to higher average AUM and a slight increase in our fee capture due to mix change. On a GAAP basis, we had a net loss of $300,000. Excluding non-operating items, adjusted net income was $11 million or $0.07 a share. This quarter, we took a non-cash after-tax charge of $9 million for our future gold commitment payments, reflecting the increase in gold prices during the quarter, as well as a non-cash write-off of $2 million for our remaining carrying value in Thesys Technologies. As a reminder, our investments in Thesys had no cost basis to us and was a holding from the prior legacy business of WisdomTree. During the quarter, we completed a $25 million add-on to our convertible offering and bought back approximately 1 million shares with part of the proceeds. The terms for the add-on were on the same terms as our previous transaction, bringing debt outstanding to the same level as our previous term loan. Turning to margins on the next slide. Our operating margin expanded to 22.8% in the quarter, reflecting controlled expenses and higher revenues. Gross margins also expanded to 76.5% in the quarter due to higher average AUM. We still expect gross margins in the 75% to 77% range, but on the higher end. On the next slide, you can see the changes in our expenses. Our operating expenses remain well controlled, up only 7% from the second quarter. Compensation expense increased as we have seen a rebound in our earnings from the significant decline we experienced earlier this year. Due to this improved forward-revenue outlook, we anticipate fourth quarter compensation expense to be roughly in line with the third quarter, though it may trend a bit higher depending upon our results in the last 2 months of the quarter. Discretionary spending continued to remain well controlled despite the fact we strategically increased spending for marketing activities to support our brand and products. We are realizing efficiencies in this new operating environment, such as continued virtual client engagement, which greatly expands our reach. Because of these efficiencies and controlling costs, we now expect our full year discretionary spending to be $41 million. As a reminder, our guidance at the beginning of the year was $51.5 million for discretionary spending, which we reduced to $47 million after the first quarter and $44 million after the second quarter. We don't believe these reductions will have any negative effect on our long-term growth outlook. Our adjusted tax rate was 16.7% in the quarter. Because of the change in mix between the earnings contribution of our U.S. and European businesses, we see our go-forward tax rate at approximately 19%, which is lower than our previous guidance. Thank you. And let me now turn the call over to our President, Jarrett Lilien.

Jarrett Lilien, President

Thank you, Amit, and good morning. I want to now dive deeper into the positive trends we are seeing in both the U.S. and Europe. Beginning with the U.S., the pandemic interrupted momentum that had begun in September of last year. If you remember, February marked our sixth consecutive month of net inflows, which was the best streak the company had experienced in over 5 years. March and the pandemic interrupted this momentum and brought elevated redemptions, but these have been subsiding each month since. Nonetheless, these outflows have clouded an otherwise positive story, which is that we have also been experiencing strong gross inflows with average monthly inflows up 27% this year versus last. We are now on pace for our strongest annual sales in over 5 years. And in the third quarter, we generated $2.4 billion of gross inflows, up nearly 100% from a year ago and up 25% sequentially from Q2. Gross inflows for the first 3 quarters this year have outpaced the first 3 quarters of each of the past 4 years. Overall, momentum is back, and our U.S.-listed ETFs have now generated 4 consecutive months of positive net flows through October. And this is no accident. We are highly engaged with advisers in areas that matter most to them. We are investing in key platforms and partnerships, and we continue to provide strong-performing products, including both individual funds and model portfolios. A few highlights. We have maintained the elevated client engagement levels we discussed on both our Q1 and Q2 earnings calls. Driving our sales success this year, the number of high-quality client interactions have more than doubled from Q3 2019 levels. This is extremely encouraging and gives us confidence as we look towards the end of 2020 and into 2021. Our focus on key partnerships continues to pay off. Net flows in our IBD channel are positive year-to-date. During Q3, one of our largest IBD partners put $42 million to work in XSOE; another partner, a private wealth division of a major bank, put $250 million to work in DGRW, doubling their overall allocation. Along with strong flows in WCLD and AGGY, these are also examples of the diversity and broad appeal of our current product lineup. Separately, our models portfolios are resonating with investors, and our efforts are gaining traction. In September, we won a third-party model mandate from Merrill. This makes us one of 12 asset managers that have third-party models on Merrill's advisory platform. We launched the WisdomTree Siegel multi-asset income models to help Merrill advisers and their clients sell for income in a low rate environment. This is a major endorsement for our model portfolio business. Earlier this month, we announced a collaboration with 55ip to help advisers more efficiently and easily transition clients into model portfolios with ongoing rebalancing and tax management. The combination of our diversified model portfolios and 55ip's technology, which is integrated with major RIA custodians, will help a broad range of advisers run their practices more efficiently while delivering better client outcomes. In Q1, we will launch an industry-leading Models Adoption Center, the MAC. The MAC helps advisers engage with our customers more effectively around models use. It provides technology tools to understand how models will impact investor outcomes. And coupled with our leading behavioral finance work, it provides workflows to allow advisers to execute model trades in a tax-efficient manner. The combination of elevated adviser engagement, traction within our models initiative, strong partnerships and momentum across a broad product lineup puts our U.S. business in a strong position to drive continued net inflows. Turning to Europe, there is a similar story. In February, we had record AUM. The pandemic brought disruptions across our product suite, driving extreme volatility in our energy products and logistics challenges within our gold suite. In Q3, our focus was on growth, and we worked to make our existing platform more competitive and innovative. Some highlights. In August, WisdomTree WTI Crude Oil ETC, CRUD, moved to a new index. This was the result of extensive work between WisdomTree and Bloomberg to create an index resilient to extreme conditions in the WTI crude oil market. In September, the total expense ratio for WisdomTree Physical Swiss Gold, SGBS, was reduced from 19 to 15 basis points to match the lowest fee offering in the market. In October, we implemented enhancements to the SWOT parameters of our currency-hedged physical gold ETPs, and we believe they are now the most competitive products in the market. Also in October, we began applying ESG screens across WisdomTree's proprietary equity indices available to European investors. By the end of 2020, 12 WisdomTree proprietary equity indices will incorporate ESG principles. All of these enhancements have already generated positive returns. During Q3, net flows in our energy exposure stabilized. There has historically been a strong negative correlation between energy prices and energy product flows. As you can see on the chart on Slide 8, this trend played out again in 2020. March and April saw strong inflows as energy prices fell, and then flows partially reversed in May through July as oil rebounded. The past 3 months has seen more stable trends in both energy prices and flows. Separately, our gold platform is positioned to participate in continued strong demand. We have been a beneficiary of increased demand with our gold AUM up $4 billion or 28% year-to-date. While our flow market share hasn't kept pace in 2020, we were hit unusually hard by the pandemic. Concerns surfaced around the ability to source gold and move it across borders, which negatively impacted the trading spreads of our low-fee Swiss-vaulted gold product, SGBS, and drove heightened demand for blended vaulted products. We have worked hard and alleviated the technical trading pressure on SGBS, and the fund is now well positioned. Our initiatives with SGBS and our currency-hedged gold products are already having an impact, and we have taken in $728 million in gold flows in the month of October. This represents over 90% share of flows against our European competition. Also important to note is that we are succeeding more broadly within our commodity suite and now have 6 ETPs with over $1 billion in AUM, 4 gold ETPs, 1 energy and 1 silver, with silver gathering over $500 million in 2020. Finally, our UCITS platform at $1.2 billion of AUM has reached run rate profitability following recent growth and some rationalization of the product set. This is an important milestone and will contribute earnings as the platform continues to scale. All told, our Europe business is driving flows from all product suites and is once again approaching record AUM levels. Overall, we continue to execute against our strategic plans, and momentum continues to build across both the U.S. and Europe platforms.

Jonathan Steinberg, CEO

Thank you, Jarrett, and good morning, everyone. As Jarrett highlighted, we are seeing strong momentum in our business, and the team is executing at a high level to drive results. For example, I'm proud of the way we performed to win the third-party model mandate at Merrill. It was a long RFP process that involved team members from across nearly the entire organization, and we beat out roughly 2 dozen firms to be one of 4 providers of multi-asset income models. Merrill is the industry leader in home office-directed model portfolios, and we are excited to be a part of their investment management model program, which provides their advisers access to third-party models for the first time. The momentum we are seeing in our business and the wins we are producing like at Merrill are further evidence that we are operating at the highest levels remotely. Client engagement has been at record levels. Technology has brought our teams in various locations closer and driven productivity gains, and our funds continue to operate flawlessly with coordination with our third-party service providers. After 8 months experience of working 100% remotely, we have decided to take a remote-first philosophy. While we will maintain a physical presence, we plan to significantly reduce our office footprint in New York and London, which we anticipate will drive $3 million to $4 million of annual cost savings beginning in late 2021 or early 2022. However, I want to emphasize that we are taking this action because we believe it is the right decision for the business, not purely to realize cost savings. Simply put, we are working better as a firm remotely with better transparency into the business and more inclusion, which is driving better decisions. We have conviction that this is the right long-term operating structure for WisdomTree. Before turning to your questions, I'd like to spend a minute updating you on our tokenization initiative where we are driving industry innovation. Recall in Q4 last year, we announced our pursuit to launch tokenized versions of core assets, such as gold and treasuries, to improve the investor experience and unlock the power of blockchain technology. We approached the initiative recognizing that compliance and regulation at the highest standards would be required to gain the necessary approvals and differentiate our offering from current digital assets in the market. We have found the SEC happy to engage as we approach tokenization fully embracing their foundational principles of investor protection and maintaining fair and efficient markets. Earlier this month, I participated on a panel at a conference focusing on the innovation and regulation of digital assets. SEC Chairman Clayton also participated in the event where he made clear the door is open for tokenized ETFs that add efficiency, and we believe we can unlock the power of blockchain to achieve that. While there is no specific time frame for regulatory approvals or product launches, we are confident we are at the forefront of the industry and have the right approach to gain regulatory approvals and deliver a best-in-class product to the market. We look forward to sharing our progress on these important initiatives in the coming quarters. We have restored the momentum built prior to the pandemic through steadfast focus on what we can control and strong execution amid the highly volatile and unusual year. Year-to-date, net flows have turned positive with the strength of our U.S. and European-listed products in October. Important elements across our global franchise are starting to align, and I am excited about our growth outlook for the remainder of the year and into 2021. With that, we thank you for your interest in WisdomTree, and we will now take your questions.

Operator, Operator

[Operator Instructions] Our first question comes from Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler, Analyst

Following the Morgan Stanley - Eaton Vance merger announcement, we were looking for an update on your thoughts around asset manager M&A and if you think a financial services firm with a large wealth manager could help accelerate WisdomTree's AUM growth.

Jonathan Steinberg, CEO

Thanks, Craig. So first, as we discussed on the call, momentum is returning to the core business. We have higher earnings in 2020 versus 2021. And we have what we believe is an incredibly valuable franchise and are doing things to create more value for the franchise. But there's no question that the outlook for M&A seems to have improved with more firms participating and obviously encouragement from certain investors for transactions. So it's clear that the environment has improved. So we do recognize our fiduciary responsibility to our shareholders and the need to maximize shareholder value. So as always, and this is not a change, we would consider things if opportunities emerge. That said, we believe that we're doing everything to grow faster and that we have the right strategic vision to grow as an independent company.

Craig Siegenthaler, Analyst

And just as a follow-up on the macro one here. Given the robust efforts of global central banks to stimulate economic activity and indirectly, potentially higher inflation, can you comment on if you're seeing different investor groups raise their long-term allocations to gold, which could benefit your flagship European products like PHAU and GBS?

Jeremy Schwartz, Director of Research

Yes. We started discussing this actually maybe 2 quarters ago on the call that we do have a view, and our team has been talking about the increased importance of gold with all the fiscal spending, even more than the central banks. You have big fiscal packages, and that's one thing. I worked with Professor Siegel for 20 years, and he was showing the skeptics coming to gold; he had not been a big fan of gold. In our model portfolios that we run with him, we added gold allocation as just an example of that. There are people who are who didn't allocate to gold before coming along. We do believe there's going to be higher inflation. We've been talking about maybe 3% to 5% for the next few years when we've been trying to get to 2% inflation. And so we do believe gold has increasing importance, and that franchise is a really important part of that.

Jonathan Steinberg, CEO

I mean, let me just add before we move off of gold. We spoke in the prepared comments about our tokenization efforts. So we see a new technology to come out for an enhanced wrapper, a blockchain smart contract, regulatory-approved wrapper. This new wrapper not only will affect asset management, but we think it has the ability to transform financial services. This is being anchored by a belief in and conviction that we will see a central bank digital dollar that's based on the blockchain. So we envision gold emerging. Right now, gold's at the height of innovation for gold or our ETPs, but we can see gold emerging as a global currency using this new technology and that the outlook with inflation and all of the stimulus worldwide, the debasing of fiat currencies is really adding value to gold as an exposure through the new technology. So thanks, Craig, for the question.

Operator, Operator

Our next question comes from Brennan Hawken with UBS.

Brennan Hawken, Analyst

Jono, I just wanted to probe a little bit on the working -- the remote-first plan. Could you maybe give a little context of how you came to the decision? I think you're actually the first company that I cover that has come out with this. This disruption has shown us how much we can all achieve from our living rooms. What were the major considerations that you weighed? How did you counterbalance the benefit of efficiency, a smaller footprint, less cost with maybe some challenges in collaboration between teams? What processes are you going to put in place to ensure that, that collaboration continues? I mean WisdomTree is such an innovative firm that I would think collaboration and the need to sustain that creative energy is an important part of your culture. So I'm curious about how you are going to try to ensure that that's maintained.

Jonathan Steinberg, CEO

Thank you for that question. Jarrett, do you mind starting and giving your thoughts, and I'll add on at the end?

Jarrett Lilien, President

Sure. Starting out, necessity is the mother of all invention. This was sort of forced upon everybody, as we all know. So we went remote in March. Our transition was flawless. We adapted really quickly. One of the really important things we did right away was amping up communication in all areas, not only internally but also externally with our clients. That was also partially responsible for the elevated client engagement that we're seeing. What we found through our experience is that we operate better remotely. We spend more quality time on a broader set of topics with more people. We feel actually closer to the business, our employees, and our clients. It made us rethink what's an office good for. As you pointed out, certainly, there are things that being physically together is very important for collaboration, socializing, onboarding new employees, and some cultural parts that are very important to us. But when you identify those, you solve for them, which is what we've been doing. Our overall conclusion is that we found a better way to operate, which gives more flexibility to our employees. It will still call for a physical footprint, but a much smaller one. This is something we would never have experienced without the pandemic. But through this experience, we've found so many benefits that we will definitely carry forward into the future.

Jonathan Steinberg, CEO

And I guess the way I would nuance it a little bit is that you asked about creativity and collaboration. I feel a great conviction that the actual meeting will not ever go back to physical; it will remain virtual. We're finding that we are not missing anything from a collaborative or creative standpoint. Where we want to really keep our eye on things, and I think it’s really where physically getting together will matter, is just in maintaining our culture over time. But I think we answered your question. If there’s a follow-on, let us know.

Brennan Hawken, Analyst

Yes. You've certainly addressed a lot of my concerns there. It might be something that you might not want to discuss, but do you have alternative brainstorming sessions or meeting places? The relationship between the collaborative efforts in an office is one of those natural frictions that create opportunities.

Jonathan Steinberg, CEO

Well, first, I would say that at WisdomTree, we've all embraced it. We're getting together more frequently. We’ve tried to recreate opportunities for social interaction—hosting one-on-ones with those who don’t usually get together, bringing groups together to highlight new employees who have been onboarded since we went virtual. The actual—physically getting together feels delayed because of where COVID is, so it's not coming back very quickly. We're not—it's not hurting us in any way, at least I'm not finding it. From the way we have been working on things like product development, we're finding not only that we're creative, but we're also making it better by globalizing our product development. One of the great things for us has been how inclusive for the U.S. New York leadership team can interact with non-New York employees. We'll create opportunities when we are allowed to get together to socialize and hopefully have creativity. I really don't think it's hurting us in any way. If we want to change our mind, space will always be available, and we can always change our mind. But again, I have great conviction that the physical meeting will be replaced by the virtual meeting on a going-forward basis.

Robert Lilien, President

And just adding a couple of things to that. On the internal side, as Jono said, we've recreated a lot of social situations and have innovated those communications. But on the customer side, it's also been fascinating. I think it helps level the playing field a little bit. Previous to this, the size of your distribution team was an advantage. Ours being relatively smaller was a greater disadvantage than it is today. As our salespeople and clients have adapted, they're using more video. The expectation to physically visit is gone. Now you can cover people more effectively with video calls and content, and we're excelling in those areas. I think it’s directly leading to an improvement in the tone of our flows.

Jeremy Schwartz, Director of Research

And Jarrett, if I could add. This is Jeremy. I'd say I have a lot of client-facing experiences, and our research team also aids a lot in the sales process. My events and how many people I’ve been able to personally speak to over the course of the year has gone up even though we're not traveling. We've been doing so many more office hour series where we invite a broad group to listen. I'm doing more client events for our clients' clients where maybe we wouldn't have hosted a dinner for a broad group. I could host 3 Zoom calls in a day and reach more people, so it's been very productive.

Robert Lilien, President

We found we're operating better. We've discovered many benefits. But the driver was really safety first. We wanted to ensure our employees were as safe as possible. We’ve been very conservative in ensuring that people are not put in harm’s way.

Brennan Hawken, Analyst

Those are all really, really fair points. You guys have always been innovative, so I'm sure if there’s a way to figure it out, you guys will do it.

Operator, Operator

The next question comes from Robert Lee with KBW.

Jeffrey Drezner, Analyst

This is Jeff Drezner on for Rob Lee. Hope everybody's doing well. Just had a quick question, and I apologize if you mentioned this earlier. But in terms of pricing on the gold ETFs, it seems that Europe, the prices on some of the gold ETFs are a bit higher than peers. Is there some sort of price change, or how do you think about that?

Jonathan Steinberg, CEO

Jarrett, do you want to start, and then I'll jump in?

Robert Lilien, President

Sure. It's an important question, and we look at the quality and positioning of our products every day. When it comes to gold in Europe, we think we're in a good position. We have a suite of different gold products serving different clients at different price points. What we saw that happened to us this year was the pandemic, which was the real cause for us not taking in as much share as we normally would have. Concerns surfaced during the pandemic around the ability to source gold and move it across borders, which had a negative impact on trading spreads, specifically on our low-fee Swiss-vaulted product. We spent a lot of time working on these technical issues, and we got spreads back to more competitive rates. We also made enhancements to our other hedged physical gold products. All that got put in place during the quarter, and you've already seen the impact. We took in the majority of gold flows in October that went to WisdomTree.

Jonathan Steinberg, CEO

And I would just add that we bought ETF Securities, which had the earliest and broadest gold platform in Europe. The economics rely on what we have in our first-to-market beta. We have a number of early gold products that have strong economics in Europe. We've also launched lower-fee gold. Our historical funds have maintained their AUM, and we are trying to balance strong cash flows with fast organic growth. Last year, our WisdomTree Swiss gold was growing rapidly. With the unusual interruption of COVID, there was a concern that you couldn’t move gold bars from London to Zurich, but that has subsided. We feel good with our low-fee offerings. And our low-fee fund is very competitive. Net-net, we have the most knowledgeable team in the marketplace. I think we're well positioned to participate now that the markets have normalized for gold going forward.

Jeffrey Drezner, Analyst

Great. And if I could just have a quick follow-up. Just a broad overview in terms of non-transparent ETFs and how you guys think about that and how that's shaping up.

Jonathan Steinberg, CEO

Sure. I've been clear that this is not what I believe to be an investor-requested 'innovation.' I think about $650 million has been raised in non-transparent active. Much of that comes from sponsor seed. It's still early days. I don't think it’s a big category. I certainly don’t think it's going to challenge ETFs for investor interest. What we're doing on digital assets and tokenization is much more relevant as a going-forward exposure. We believe in active, whether it's index-based or truly transparent active, but I'm not particularly excited about what has been launched for the outlook for non-transparent active.

Operator, Operator

Our next question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst

I was just hoping if we could dig in a little bit more on the distribution initiatives. Certainly, congratulations on the Merrill platform win. But I was just hoping maybe we could dig into the IBDs and the RIAs, what that pipeline is looking like and how you're thinking about that opportunity set here?

Jonathan Steinberg, CEO

Jarrett, do you want to start?

Robert Lilien, President

Sure. That's a broad question. When it comes to channels, yes, there’s still quite a lot of opportunity in all other channels. What strikes me is still the mix between mutual funds and ETFs. In the wires, you have lots of mutual fund holdings. In the RIAs, it's skewed even to mutual funds; and the IBDs, even more to mutual funds. So that represents opportunity for ETFs, and that's one reason we focus on all channels, specifically on the RIA and IBD channel. The IBD channel has been net positive year-to-date. We’ve seen 4 consecutive months of net inflows, starting with the IBDs, then followed by the RIAs, and then the wires. We continue to focus on all. A key part of model success is having good models and good partners, hence partnering with the IBDs and the RIAs. The Merrill win is a great example and is super helpful, but so are things like 55ip, which makes it easier and more efficient for advisers to transition the models in a tax-efficient way.

Jonathan Steinberg, CEO

And let me just add one thing about Merrill. First, that RFP process was handled completely remotely. Our interactions, which included multiple team members, including Professor Siegel, were done flawlessly. We have had significant frustration with what we call modern alpha penetrating the wires. Our WisdomTree models are open architecture, but there's a significant amount of WisdomTree proprietary smart beta in our models. Being a preferred partner in a very important initiative for Merrill, we expect this cascading effect within Merrill beyond models because of all of the greater activity we have on their platform.

Michael Cyprys, Analyst

Great. And maybe just as a follow-up...

Jonathan Steinberg, CEO

Sure. I wanted to touch on the ESG enhancements you referenced in the European product set. What’s the appetite, if any, for launching a full suite of U.S.-based ESG ETFs?

Jeremy Schwartz, Director of Research

Yes. From the ESG investor standpoint, you've seen a lot more leadership out of Europe in looking for this. It's really been a requirement to be competitive. Across our equity family there, we've now embraced ESG screening as part of our next set of rebalances. Some funds have just rebalanced and are now incorporating ESG screens in addition to our traditional modern alpha index methodology. In the U.S., we transitioned 3 funds to be fully integrated with ESG. They transitioned the day everything shut down in the U.S. This hasn't been a #1 focus at the moment, but we have 3 from U.S. international emerging markets that are run actively. It incorporates our newest thinking on multifactor strategy that blends this ESG factor. We’re making more of an emphasis on this, both in Europe and in the U.S.

Jonathan Steinberg, CEO

Jarrett, do you have anything to add? Or was Jeremy complete?

Robert Lilien, President

I'd add that many initiatives, including models, require going beyond just launching products. You’ve got to come at it with your partners, your content, education, and research. Back in early 2019, we became a PRI signatory. Earlier this year, we released our first Corporate Social Responsibility report. We’ve done a lot of things internally. Our Women's Initiative Network focuses here at WisdomTree. We have ESG-friendly proxy voting that Mellon helps us with. We’re across all equity funds. There are a number of community service activities. We've got Board policies focused on diversity, equity and inclusion. We're currently doing a broader diversity, equity and inclusion review for the whole firm. All these are important initiatives. We’re working on a suite of 3 ESG products in the U.S. I'd like to see even more proprietary research to help advisers embrace this and enhance our screens in Europe. It’s a holistic approach.

Michael Cyprys, Analyst

And just thinking if I could have another one...

Jonathan Steinberg, CEO

I'd like to mention that our original ESG focused on 'G' for governance and ex-state-owned strategies. This includes our ex-state-owned funds that have won in the ESG category in the U.S.

Operator, Operator

Our next question comes from Ryan Bailey with Goldman Sachs.

Ryan Bailey, Analyst

I was wondering if I could start with a little bit more detail around how MAC will work? Ultimately, how we think about economics, either fees on ETFs or other revenues, and if there would be any sort of incremental expenses?

Jonathan Steinberg, CEO

Jarrett, I think, could you start with the MAC?

Robert Lilien, President

Sure. The MAC stands for Models Adoption Center. Our research shows there’s still a disconnect; many advisers believe they need to show their clients their value by being portfolio managers, while clients think the opposite. The MAC will solve for that disconnect, offering content and bringing together other elements. Being successful in models requires research and education, as well as access to workflows for tax-efficient transitions. We don’t see anything like it out there and believe ours will be the first and best.

Ryan Bailey, Analyst

Got it. I suppose when you think about the competitive dynamics in the model portfolio space, are competitors competing with you mostly on price? Or are they also competitive in terms of quality track record and other services?

Jonathan Steinberg, CEO

I would say you compete on net expense ratios for the portfolio. Open architecture is vital, and ease of use is crucial. This is meant to be a capacity enhancer for the intermediary. We must keep all of these elements strong.

Jeremy Schwartz, Director of Research

I think a lot of model providers are charging fees, while we offer many models with no fee on the strategist side, acting instead on the underlying economics of the fund. We're the most competitive on a fee standpoint with the lowest fees on that platform, which is exciting.

Robert Lilien, President

One advantage we have is this is a top priority for us. We’ve focused on this from the top throughout the firm. Our sales team has been trained extensively on the product.

Operator, Operator

Our next question comes from Keith Housum with Northcoast Research.

Keith Housum, Analyst

I just have a follow-up question on the Merrill Lynch deal. Can you provide a little color in terms of how long you think it will last and where you hope to see some impact from the models you have out there?

Jonathan Steinberg, CEO

Jeremy, do you want to start on this one?

Jeremy Schwartz, Director of Research

Just to add, this relates to the last question too. There was a study of 4,000 model portfolios, and the average expense ratio was 64 basis points in those models. Our models are about half that. We’re building across passive, active using modern alpha approach. We’re competing on execution, how we're putting asset allocation strategies together. We believe we have a strong position.

Jonathan Steinberg, CEO

Merrill had a strong proprietary home office model business. They do not have a multi-asset income model. We're competing with other third-party model managers and believe this asset is, if not the most requested, one of the most requested opportunities. We're bullish about the outlook.

Robert Lilien, President

We could go on about the models. We work with partners to customize. There's some level of customization with the Merrill models. But we have some partners in the RIA and IBD space leaning on our models IP and utilizing custom models.

Keith Housum, Analyst

I know this was announced in September, but is it already on their website and ready to run? Or will this be rolled out throughout the rest of the year?

Jonathan Steinberg, CEO

They launched it September 1. It's up and running. It's early days, but it's up and running.

Keith Housum, Analyst

Got you. Just a follow-up question. Amit, I know you guys have talked about before about preferences to save cash and pay off the debt in a few years from now. With the share price where it’s at now and the opportunity for rates to be above for a while here, is there any consideration to buy back more shares now and try to refinance the debt when it comes due?

Amit Muni, CFO

So we probably bought back about $30 million worth of stock. Right now, when we think about capital priorities, it’s to support the dividend, invest in the business, and build cash to eventually refinance the debt. The debt is not callable early; it's got a 3-year term. We have to wait for that. That’s why we did the buyback earlier this year.

Operator, Operator

Our next question comes from Shaun Calnan with Bank of America.

Shaun Calnan, Analyst

Earlier in the year, you mentioned that capital gains in mutual funds this year would create an opportunity for a shift from mutual fund assets into ETFs towards the end of the year. Do you still expect that in the fourth quarter?

Jeremy Schwartz, Director of Research

Yes, we held an office hours series on this just this week. We have a tool on our website to help advisers find capital gains expected to be paid across the industry. There were outflows across traditional funds. You can see funds that have capital gains exposure built in, and we're beginning to see that come out. We would expect turnover and outflows to put more pressure on capital gains. This highlights the benefits of ETFs and continues to be a great talking point for us.

Operator, Operator

And I'm not showing any further questions at this time. I'd like to turn the call back to Jonathan Steinberg for closing remarks.

Jonathan Steinberg, CEO

Thank you all for your interest and participation on today's call, and we'll speak to you next quarter.

Operator, Operator

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