Q3 2020 Virtus Investment Partners Inc Earnings Call
Ladies and gentlemen, please standby your conference call begin momentarily once again, ladies and gentlemen, please stay on the line.
[music].
Good morning, My name is Kevin and I'll be your conference operator today I would like.
Welcome everyone to the Virtus investment partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of diverse website www dot for to start.
This call is also being recorded and will be available for replay on the Virtus website.
At this time all participants are in a listen only mode. After the speakers remarks, there will be a question and answer period and instructions will follow at that time.
I would not want to turn the call the conference over to your host Chambord.
Thank you Kevin and good morning, everyone on behalf of Virtus investment partners I would like to walk him you to the discussion of our operating and financial results for the third quarter of 2020.
Our speakers today are George L., <unk>, President and CEO service.
Mike Angerthal Chief Financial Officer following.
Following their prepared remarks, we love the Q and a period.
Before we begin I direct your attention to the important disclosures on page two of the slide presentation that accompanies this webcast.
Certain matters discussed on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
And as such are subject to known and unknown risks and uncertainties, including but not limited to those factors set forth in today's news release and discussed in our SEC filings.
These risks and uncertainties may cause actual results to differ materially from those discussed in these statements.
In addition to results presented on a GAAP basis, we use certain non-GAAP measures to evaluate our financial results are non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the GAAP results.
Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in today's news release and financial supplement which are available on our website.
Now I would like to turn the call over to George George.
Thanks, Sean Good morning, everyone. Thank you for joining us on our third quarter earnings Conference call.
We're pleased with the consistently strong operating performance that continued to be demonstrated in the quarter, which included positive net flows and strong sales.
Hi, its level of assets under management revenues and earnings per share continued excellent investment performance disciplined expense management and an increased dividend continued debt reduction.
We're especially pleased with the positive net flows we generated in tolling across product categories annualized organic growth exceeded 4% in the quarter. It was nearly 3% over the trailing 12 months, which included a significant market disruption in the first quarter.
It will trend in flows and sales reflect a differentiated nature of our investment strategies.
Strong investment performance and the breadth and effectiveness of our retail institutional distribution.
Turning to review of the results well also.
Our long term assets under management at December Thirtyth reached their highest level, increasing sequentially by nearly 8 billion or 7% to 115 billion as a result of both market appreciation and positive net flows.
Total assets, which include liquidity strategies ended the period at 116.5 billion.
Sales momentum continued with 7.6 billion of inflows, representing our second best quarter of sales.
Well sales were down sequentially from the second quarter that was largely due to meaningful flows last quarter into an existing institutional sub advisory mandate.
Yesterday sales were up 54% significant increases in open end funds, we feel separate Kim and institutions.
For the quarter, we had 1.2 billion a positive net flows the strong momentum in both retail separate accounts and open end fund continuing the trend we've seen over the past year.
We just separate account the deliberate consistently positive net flows reaching 1.1 billion in the third quarter led by the intermediary sales channel.
Opened in net flows were positive point 4 billion, primarily due to strength in domestic equity in investment grade fixed income.
Institutional net outflows were point 3 billion down from 1.5 billion net inflows last quarter.
Over the past four quarters institutional has generated over 1 billion a positive net flows representing organic growth rate exceeding 3%.
Contributions from existing mandates and new account.
Look in effectiveness of our investment strategies continue traction.
Additional distribution.
In terms of what we're seeing in October for flows while still very early the trends we have seen throughout the year, both products and asset classes.
Our financial results for the quarter reflected the continued market rebound in addition to the impact of the current operating environment on travel.
Operating income as adjusted of 54.1 million and the related margin of 39.3% increase from 40.5 million and 34.3% respectively in the second quarter.
Earnings per share as adjusted reached their highest level, reaching 39% sequentially.
Who knows the 49 cents due to higher revenues and lower other operating expenses.
Turning now to capital, we continued our balanced and prudent approach to capital management, we maintain a capital position that provides flexibility for future growth opportunities during the.
During the quarter, we raised the quarterly common dividend by 22% we.
We purchased approximately 54000 shares 4.7% of shares outstanding you can.
Continue the consistent pay down of debt ending the quarter with net debt to bank EBITDA, a point onex over the past year, we reduced our debt by 26%.
Let me turn the call over to migrate more detail on the results Mike.
Thank you George good morning, everyone.
Starting with our results on slide seven assets under management.
At September Thirtyth long term assets were 115 billion up 7% from 107.1 billion at June Thirtyth.
The sequential increase reflected 7.1 billion in market appreciation and 1.2 billion of positive net flows.
All asset classes contributed a web growth during the quarter led by domestic and international equity which increased.
9% and 12% respectively.
Assets continues to be diversified by product type with.
With open end funds institutional and retail separate accounts, representing approximately 38%.
32%.
And 21% of long term aid when respectively.
In terms of asset classes equity assets represented 70% of long term value add.
With 77% of that in domestic equity and two.
And 23% in international.
Fixed income assets declined as a percentage of total to 26%.
Primarily due to the rise in equity markets during the period.
We continue to generate strong relative investment performance across our strategies as.
As of September Thirtyth, approximately 80% of rated fund assets at four or five stars.
And 98% for the three four or five star funds.
We currently have eight funds with a web of 1 billion or more that are rated four or five stars.
Presenting a diverse set of strategies from four different managers.
In addition to this very strong fund performance, 96% of institutional assets and 100% of retail separate account assets or.
For beating their benchmarks on a three year basis as of September Thirtyth.
And 66% of institutional assets and 84% of retail separate account assets were outperforming their benchmarks on a five year basis also 86% of institutional assets. We're exceeding the median performance of their peer groups on the same five year basis.
Turning to slide eight asset flows.
Net inflows of $1.2 billion in the third quarter represented a 4.3% annualized organic growth rate.
For the trailing four quarters net flows were positive 2.8 billion.
For a 2.7% organic growth rate.
In the third quarter net flow contributions were diverse.
By product with net inflows in retail separate accounts open end funds and exchange traded funds.
As well as by asset class with positive net flows in equity fixed income and alternatives no.
Notably this marked the seventh consecutive quarter for net inflows in equity.
While fixed income net flows also turn positive.
And while institutional net flows were negative this is.
This included 1.6 billion outflow from a single client.
For the year to date and trailing 12 month periods institutional net flows were positive.
Looking at open end funds net flows are positive point 4 billion consistent with the second quarter.
By asset class that domestic equity open end fund net flows were positive point $6 billion in the quarter.
With positive flows of 1.8 billion on a year to date basis.
14% annualized organic growth rate.
Flows are positive and large bid and smid cap with.
With Smith, particularly strong this quarter with a 28% sequential increase in net flows.
Fixed income open end fund net outflows were <unk> point 1 billion, a significant improvement from prior quarters as outflows in more credit sensitive strategies continue to abate.
International equity funds had net outflows of 2.1 billion as positive net flows in developed market strategies were offset by net outflows in emerging markets.
Total sales for the quarter continued to be strong at $7.6 billion, though down from record second quarter levels that included $1.8 billion of flows into an existing institutional mandates.
On a year to date basis sales were up 54%.
Led by growth in institutional retail separate accounts and open end funds.
For the quarter by product.
Retail separate account sales of 1.7 billion were up 16% sequentially.
Led by particularly strong growth of Smith and international strategies.
Fund sales of $3.8 billion decreased 2.6 billion or 14% sequentially.
Primarily due to lower sales of small cap and fixed income strategies.
Notable areas of growth for Smith.
38% and.
And international developed markets up 32%.
Institutional sales of 2.1 billion represented the second highest quarterly level.
And included flows into both existing and new mandates across multiple affiliates.
The sequential decline from 3.1 billion, reflecting the large inflow into an existing account in the prior quarter.
Turning to slide nine investment management fees as adjusted of $122.4 million in.
Increased $17.8 million or 17% sequentially.
The increase reflected 15% growth in average assets due to market appreciation and positive net flows.
As well as $2 million in performance related fees up.
Up from $8.6 million in the prior quarter.
The average fee rate on long term assets for the quarter was 47 basis points.
0.2 basis points sequentially.
With respect to open end funds the fee rate increased to 59.5 basis points from 58.4 in the second quarter rig.
Reflecting the significant market driven increase in equity assets.
The ongoing positive fee rate differential between sales and redemptions.
This quarter the blended fee rate on fund sales was 60 basis points, while the rate from redemptions was 57 basis.
Yes.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $66.1 million increased 12% sequentially.
Largely reflecting higher profit based incentive compensation.
As a percentage of revenues employment expenses were 48%.
We believe that this is a reasonable level for the fourth quarter all else.
All else being equal.
Turning to slide 11, other operating expenses as adjusted were $16.3 million.
Down sequentially from 17.4 million largely due to the impact of the point 8 million annual equity grant to the board of directors in the prior quarter.
The third quarter level of other operating expenses continued to reflect the operating environment as travel and related expenses remained muted.
Looking ahead to the fourth quarter, we anticipate that other operating expenses as adjusted will approximate recent levels.
Slide 12 illustrates the trend in earnings.
Operating income as adjusted of 54.1 million increased 13.6 million or 34% sequentially due to the increase in revenues part.
Partially offset by the higher employment expenses.
The operating margin as adjusted of 39.3% increased by 500 basis points from 34.3% in the prior quarter.
Non controlling interests as adjusted increased by $8.4 million to 2.4 million due to growth in earnings at a majority owned affiliate.
The effective tax rate as adjusted for the quarter was 27% unchanged from the prior quarter.
We believe 27% is reasonable going forward all else being equal.
Net income as adjusted of $4 at 49 cents per diluted share increased by a $1.25, 39% sequentially, primarily due to higher revenues as.
As lower other operating expenses.
I would point out that our weighted average diluted share count increased by 102000 shares or 1% from the prior quarter.
Reflecting the impact of a higher share price and performance adjustments in long term equity awards.
The calculation of diluted shares.
Regarding GAAP results third quarter net income per share of $3.71 compared with $1.43 per share in the second quarter.
And included the following items.
A $1.90 cents reduction, reflecting the increase in the fair value of the minority interest liability.
And 75 cents of realized and unrealized gains on investments.
Sure.
Slide 13 shows the trend of our capital position and related liquidity metrics.
Working capital was $159 million at September Thirtyth.
Up 2% sequentially as operating earnings more than offset debt repayments and return of capital.
Gross debt outstanding at September Thirtyth was 223 million as.
As we repaid $17.5 million during the quarter.
Over the past year, we have reduced gross debt by 78 million or 26%.
The net debt to bank EBITDA ratio, a 0.1 times at September Thirtyth was down from 2.3 times at June Thirtyth.
Ed 0.5 times, a year ago due to EBITDA growth low.
Lower debt.
At a higher cash balance.
Gross debt to EBITDA was 1.0 times at quarter end down from 1.5 times in the prior year.
Regarding return of capital to shareholders, we repurchased 53867 shares of common stock for 7.5 million.
Resulting in a 0.7% reduction in common shares outstanding.
And we announced a 22% increase in our quarterly common dividend to 82 cents per share.
With that let me turn the call back over to George George Thank you.
Thank you Mike.
Before we take your questions I'd like to provide an update on the strategic partnership with Allianz Global investors.
During the third quarter, we received the necessary fund board approvals and the fund's shareholder approval and consent process has commenced we currently expect to close early in the first quarter of 2021, we're very excited about this partnership which will add significant scale further diversify our business strategies with complementary and attractive offerings.
Provide incremental growth opportunities.
At September Thirtyth Aliansce assets related to the partnership had increased 25.7 billion and consisted of $16.8 billion of open end funds 5 billion of closed end funds $343.4 billion of separate accounts.
$25 billion of institutional with the blended fee rate of approximately 37 basis points.
Investment performance on the assets continues to be very strong.
On a combined basis for Virtus and Allianz.
80% of Morningstar rated you have would be in four or five star funds and 97% would be three four and five star overall, we would have 39, four or five star rated funds on a pro forma basis.
As we indicated in July the partnership is also financially compelling and will be immediately accretive given.
We have increased our estimated accretion to be 30% to earnings per share as adjusted based on the annualized third quarter results.
Provide more detailed prior to the close.
We'll now take your questions. Kevin can you open up the line. Please.
Ladies and gentlemen, if your question or comment at this time. Please press. The Star then one key on your Touchtone telephone. If your question. That's been asked already were somewhat yourself from the queue. Please press the pound key.
Our first question comes from Jeremy Campbell with Barclays.
Hey, Thanks for Us by my question here I, just want to clarify George on that Slide 15, you just ran through the fee rates that you're showing there or nets to Virtus correct, yes.
Yes.
On a comparable basis to what we show for or that be so they are net.
Perfect perfect and I.
No George we spoken Oh M&A at length in the past here and really happy to see that that Ali on the accretion guide higher.
Well, you know with Allianz being capital light and bird is now basically de levered, but it seems like the the asset manager M&A Hot stove is heating up here. So just wondering you wouldn't get your view on kind of a recent deal flow in the sector and maybe what the pipeline would look like for asset managers that have characteristics, you would find attractive but a good set to.
You heard us she.
Sure Yeah, so M&A or.
Organic actions in May.
I mean more broadly you know as we.
We've always said for us we're very thoughtful about our long term growth strategy to create shareholder value is not predicated on M&A, but.
But that being said given our business model in a significant experience and success with M&A that is a tool in our tool box.
It gives us the flexibility sort of look at it from the perspective of it being something to accelerate or expand or diversify future growth and we can be thoughtful about that.
So as we sort of look at the at the environment and again for some of the factors that you cite. We're currently we have organic growth we have good investment performance we have an.
Low end leveraged balance sheet that gives us a lot of flexibility in terms of kind of things we think about.
We're not being required to do any kind of an M&A. So as I sort of look at that environment, which we've always been very active in them and we're very selective we continue to think that given our business model as we sort of look to build out our portfolio of differentiated strategies is going to continue to be opportunities. We think we have a very.
A compelling value proposition as it relates to that and with the whole continuum. So those things, which are very strategic in terms of adding product capabilities.
It's sort of fundamental to our business model of being seen as a provider of very select specialized.
Best in class boutique managers, but that being said things that can unlock some of the scale and leveraging of our business model. We're also very attractive and things that would expand our client base.
Gross volumes, where it is so we actually feel very well positioned for the reasons that thats sort of justice does that doesn't mean that we feel in the Mississippi to do M&A for the sake doing M&A, but we feel very optimistic about our relative attractiveness and the opportunity set that's out there.
Great and then just maybe to follow up on the organic side, obviously, it's been pretty impressive here, especially once we kind of lap some of that but the bank loan headwind, there and you're kind of looking at the.
But really good string of inflows, especially equities active equities and that's an area where the industry is just seen a lot of structural outflows I guess when we take a step back here what do you attribute the strength to her vertis from it in flow perspective in phase loyalties sector headwinds.
Yeah, No. It's a great question and again I always start with it starts with.
Fundamental offering of a collection of very differentiated boutique managers that have.
Think if strategies and approaches to investing right. So we've never tried to generically offer all things that will keep or so when you talk about equity our equity managers came in this year is just two examples are very different and they're compelling nature of how they invest has made them attractive right. So and then I add to that so it's not.
It's with you really need to have good managers good investment performance.
I think in this competitive active versus passive and be conscious world, having a truly differentiated managers that can distinguish himself on a risk adjusted basis. In particular is really important but then you need to have effective distribution. So we've generally said we have to have both of those things working in tandem and because of that.
First of all of our products.
Our thought is that we will generally always have something that should be attractive to investors at a given point in time and I'm glad that you sort of pointed out the loan when loans are at one of our S. Class is out of favor we will participate so even during that period, where we had those outflows in loans I think as you sort of alluded to beneath that there was incredible stress.
In the rest of the products and the.
And there will be a time, where loans I don't know when it will be will be our best selling strategy I, just don't know whether its full quarters or eight quarters from now that's sort of the point of what we do with our portfolio of differentiated managers in offerings is really to have that holistic full set of building blocks that I think because theyre differentiate.
It from other strategies and I think our distribution in our marketing resources are very focused on being consultative and really thoughtful around how they position. It and then lastly, the other thing I'll say is we don't make money from raising assets, we make money from retaining assets. So a lot of the work that way.
We do is really about making sure that we sell something correctly. Therefore, it has a longer life, which then ultimately creates more accretion and profitability to the bottom line.
Great. Thanks, a lot guys.
Thank you.
Our next question comes from Sumit body with Piper Summer.
Thanks, Good morning, guys, just one more on the the Aliansce partnership I see the added detail around that and you have levels of performance just one.
Just wondering how the flow profile has kind of looked over the last quarter through October and particularly the that's amazing and the sabotage block being advised by Aliansce, how thats doing enough. We noticed a couple of the retail funds have liquidated last month. So just any color there would be helpful too. Thanks.
Well on the on the first part so.
In terms of the flows for their funds. So obviously, they're not our funds that were not going to give a lot of clarity in terms of.
The activities that are going on there and nor do we think the activity in their fund flows it will necessarily be indicative of what it should look like whether it's in our portfolio model, but they generally done well right. So.
The fun on the second piece.
The some of the other actions that they had previously taking in terms of their fund offering lineup are really sort of not related to that.
Funds that we will be taking on as part of our strategic partnership make one thing.
Oh, and I think you covered it and we've provided some detail by.
Asset.
And product type in the slide and I think you alluded to the fact that the women total route about 7% from the June 30 levels. So.
As George alluded to the investment performance up and down that product lineup is very strong and it complements our offerings very nicely yeah, and that's you know I want to highlight that point pieces that Pete.
I think some people may not be focusing on as much. They are really good products and if you went through the performance numbers that I provided you know we've always been very proud of our investment performance profile in that particular funds in the Morningstar site.
This is just as good at it so that's very compelling product. It is complimentary to what to what we have.
And again, if you look at the asset growth numbers, you can obviously from that derive that the those fund even in the midst of a few.
To control kind of activity are doing quite well.
Great. Thank you for that.
Just wanted to shift over actually to the Usats flows saw some particular strength over the last couple of quarters.
Secularly SGS global growth that you are small cap focused funds I'm wondering if you talk about that strengthen and kind of the outlook for that asset class.
Yes.
We don't.
We don't spend a lot of time talking about the offshore products and you will show funds in our approach to that just as a reminder, was several years ago, we launched incubated several products the anticipation of building very compelling track records, which not would our managers seeking nuclear site of all that.
In a really good job of building very compelling track record and we then been supporting and adding to that some some distribution. So we're actually very pleased that we've seen some of that growth in there and again, it's because some of those strategies are just very strong performers and we we do look to that as one of those areas of opportunity for us going.
Forward now that those funds have gathered assets.
Bill track records that are very compelling so whether it be on the on the institutional or institutional side or even potentially retail for different of those funds. I think there is a very interesting compelling opportunity set outside the U.S.
Great. Thanks for taking my question.
Thank you.
Our next question comes from my carrier with Bank of America.
Good morning, and thanks for taking the question.
You guys mentioned on the institutional side, some wins with new clients. Despite the one lumpy redemption to just wanted to get some color on the traction that you.
You have been seeing in that channel, including the number of your new clients are more mandate for current clients.
And then just curious on the one read outs in the quarter that was performance related or something else.
Sure.
Michael It's yes, Hey, Michael Good morning, It's Mike Angerthal so.
So on the on the redemption I'll hit that one first it was <unk> 0.6 redemption from a single client.
And is that it.
It wasn't a product that we have been managing had one of our affiliates since 2012, so over eight years and the key.
The client internalized those.
Those portfolio management activities, so nothing to do.
Nothing to do with performance and.
A single internalization with respect to new mandates they really balanced and we had flows both in new mandates as well as existing accounts and the new mandates was good to see that traction because it was across.
Really four of our affiliates, we had contributions balanced from.
[noise] GA, which we've been talking about and came as we've been talking about but we also had new mandates from delfin psych, So real good balanced contribution.
And we think that really.
Really support some of the traction that we've been talking about and although the sales levels were down period over period. It is important to note that institutional sales.
Were our second highest level on record so.
Kind of strip out that one.
Significant.
Mandate last quarter into an existing accounts, we have been really consistent seeing some traction on the institutional side to reject generally pleased with that.
Okay. Thanks for that and then so on the product side. It seems like the dispose and fund market is picking up a bit and there's more demand for these structures in certain strategies and getting that.
And given that Vertis has been fairly innovative and close the distribution partners over time.
Just curious if you see some more opportunities.
Go ahead.
Yeah again, we think it's a great product structure and we do think that closed end funds really are.
Compelling element of retail investors portfolio up so.
So we continue to look at areas, where we can use either existing or combinations of existing and newer strategies into that market. So we're pleased to see activity in that space. We do think it is something that investors should be thoughtful about and I think our strategy to manage.
There's sort of are well positioned for those types of things. So we continue to look at that as an area of opportunity as well.
Great. Thanks, a lot.
Yes.
Our next question comes from Michael Cyprus with Morgan Stanley.
Hey, good morning, Thanks for taking the question I just wanted to follow up on the international distribution uses products and so far it looks like you have about $4 billion of international give us I'll tell you I'm if I have that right here I guess just a question around how are you approaching distribution internationally, who are you partnering at what sort of channels that you're looking at.
How are you approaching that differently versus distribution in in the U.S. and at what point would it make sense to maybe further accelerate that three inorganic means on the international side.
Well, yes on the left so we do see is growing our non us client base as a very high long term strategic priority. So.
So I agree with that and again I think that can be done.
Through organically growing and investing in that business that.
That is also something else, we would look at in terms of inorganic kinds of opportunities in terms of our current D and what our distribution is in the non U.S. market. So.
So some of that is very affiliate centric in terms of individual affiliated managers, who have very successfully.
Teen mandates from non us clients and some of them bigger book than others. So for US. It is still a smaller part of our business seller of our affiliates have made great success, we have some non us.
Resources that are available to support those that need to support and then on the usage side, that's really sort of a combination of both non us clients as well as.
Okay.
Non U.S. citizen residents here in the us market, so we actually distribute them to use it.
Yes, both outside the us as well as in other channels.
Here in the us to to non residents. So we look at all of those elements to grow and our model is sort of very flexible in terms of.
How we can sort of support growth on the retail side, both us and then ultimately non us and on the institutional side, it's a mix of individual affiliate activities as well as virtus supportive activities.
A collection of affiliates and we think there's a great opportunity for all of our managers out there because many of them just have a lot of opportunity outside the U.S., where they're not as well known as they would be here in the us, particularly view as retail market.
Great. Thanks, and just maybe a follow up on the.
Hey.
Business and transaction you guys have done a couple years ago can you just talk about how that's performing relative to your expectations relative to maybe what you thought around the time, you had announced the transaction what metrics that you're looking at to us.
To assess that as well.
Well I mean, I start with my original impression and my thoughts of them. They were phenomenal firm and a great team and they have met and exceeded those expectations and that really everything in my mind sort of comes from that they've done a phenomenal job.
In terms of their quality in the discipline of their of managing of their clients assets their thoughtfulness about how they approach their overall business I think in partnering with US I think we we have what things to help make it.
More supportive for them in certain of the markets. So I think as we sort of look at what we expected there they've done they've done a great job.
As it is.
Our exit met or exceeded any expectations we guide.
Great and then maybe just a quick question did not get another one in here quickly just on the E. G. <unk> transaction, you mentioned that you're looking for that to provide incremental growth opportunities for Bruce can you just elaborate on that and what would you say are the top.
A couple of the areas that you're most excited about in terms of additive to growth.
Yes, well if you look at their profit.
I sort of went back to a point on the product. So again I am pleased that people are focusing on the accretion that people are looking in.
The financial benefits.
But the actual products are very compelling and we do think actually adding them to the sort of expand known some of the multi asset class and including in some of the GI side. Some other very interesting product offerings that are not currently in our product portfolios, we see those as growth opportunities because it again.
Fleets are set a building blocks of a well diversified portfolio. So we sort of look to that and then in one of the elements of that transaction will actually establish a new.
Establish a new boutique affiliates and I think.
In our model I think there will be opportunities there, particularly us not only in the retail on the separate account side, but also outside and then more of an institutional orientation. So again more to come we're very happy with the.
The investment performance, we're very happy with the transaction and we look forward to closing.
Great. Thank you.
Thank you.
That's good.
Includes our question and answer session I would like to turn the conference back over to Mr. Albert.
Okay I want to thank everyone for joining us today, and we certainly encourage you to call to have any further questions Stacy.
That concludes today's call. Thank you for participating you may now disconnect.