Q2 2021 Victory Capital Holdings Inc Earnings Call
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Good morning, and welcome to the victory capital second quarter 2021 earnings Conference call.
All callers are in a listen only mode.
Following the company's prepared remarks, there will be a question and answer session.
Ask a question during this session. Please press star 1 on your telephone.
I will now turn the call over to Mr. Matthew Dennis Chi.
<unk> of staff and director of Investor Relations. Please go ahead Mr. Dennis.
Thank you before I turn the call over to David Brown I'd like to remind you that during today's conference call. We may make a number of forward looking statements. Please note that victory capital's actual results may differ materially from these statements. Please refer to our SEC filings for a list of some other risk factors that may cause.
Actual results to differ materially from those expressed on today's call.
Victory capital assumes no duty and does not undertake any obligation to update any forward looking statements. Our press release that was issued after the market closed yesterday disclosed both GAAP and non-GAAP financial results. We believe the non-GAAP measures enhance the understanding of our business and our performance reconciliations between these non-GAAP.
Measures and the comparable GAAP measures are included in tables that can be found in our earnings press release and in the slide presentation accompanying this call both of which are available on the Investor relations portion of our website at IR Dot V C M Dot com.
It's now my pleasure to turn the call over to David Brown, Chairman and CEO David.
Thanks, Matt.
Good morning, and welcome to victory capital second quarter 2021 earnings Conference call.
I'm joined today by Michael Pellekar Po, our President Chief financial and administrative officer, as well as Matt Dennis our chief of staff and director of Investor Relations.
I'll start by providing an overview of a very strong financial and operating performance, we achieved in the quarter.
Then I will cover our investment performance, which continues to be excellent.
After that I will turn it over to Mike who will review, our second quarter financial results in greater detail.
Following our prepared remarks, Mike, Matt and I will be available to take your questions.
The business overview begins on slide 5.
We made great progress against a number of our strategic objectives. During the second quarter and ended the period with total assets under management of 162 billion in long term assets under management of 159 billion.
With solid execution by our distribution and marketing teams, we generated record high gross sales of more than $10 billion in the second quarter.
During our last call I featured a number of highly rated products with significant open capacity that had been tracking assets as investors continue to recalibrate their portfolios.
Products like our Morningstar 5 star rated victory floating rate fund and the victory market neutral income fund has continued to attract assets in the current market environment.
Combining this with many of our high performing active equity strategies, new platform wins for products managed by our USA investments franchise, a robust pipeline and th being older would starting to gain traction we have many reasons to maintain our optimism around organic growth outlook as we move forward through 2021.
And into 2022.
Our victory shares ETF platform generated positive net flows for the third consecutive quarter.
Additionally, there were net flow improvements in our direct investor business that began in the middle of last year and continued through this quarter.
All of the 8 for mentioned culminated in positive for companywide net long term flows for the quarter.
We're continuing to see deposits net long term flow momentum in the third quarter as well keeping in mind, we're only a little more than a month into the quarter.
Investment performance remains strong and the investments we were making in distribution and marketing are continuing to yield positive results Mauro.
Moreover, while we had a few mandates fund during the quarter, our won but not yet funded book of business continues to grow reinforcing the positive organic growth outlook.
Revenues grew 4% from the first quarter and were 22% higher than in the same quarter of last year.
Adjusted net income with tax benefit per diluted share grew to $1.18, which was up 4% from the first quarter and up 33% from last year's second quarter.
Our integrated operating platform continues to be efficient with adjusted EBITDA margins coming in above 50 per cent for the fourth consecutive quarter.
As we have guided we allocated the vast majority of our excess cash flow to reducing debt.
The $57 million of debt reduction in the quarter lowered her outstanding debt to 681 billion at the end of June and improved our leverage ratio to 1.4 times.
For the fifth consecutive quarter, we increased the cash dividend paid to our shareholders.
With the latest increase to <unk> 15 per share we've tripled the dividend compared to the 5 cents per share we distributed in the second quarter of last year.
Given our steadily improving cash flow, we are generating sufficient cash to continue our pace of debt reduction while simultaneously returning a greater amount of capital to shareholders.
We will continue to evaluate the pace of reducing debt versus increasing returning capital shareholders as we move for us.
Turning to page 6 I'll provide an update on our direct investor business and touch on some new product developments in several broader ESG initiatives.
A referral agreement with USAA continues to generate new investor accounts on the improving trajectory net flows associated with this channel has persisted.
We are investing for the long term success of our direct investor business and have been executing on our strategic investments in people sales tools and other technical resources to maximize its potential.
The second quarter was our best flow quarter for the direct investor business since the acquisition and customer satisfaction scores are exceeding targets.
Our contact center had a 140000 direct interactions with investors during the quarter, which are proving to be valuable touch points.
Given this level of engagement, we recently created a new high net worth advisory group dedicated to serving the needs of more affluent investors. While it is still early we are exceedingly pleased with the sales and services group has generated in a short period of time and our clients are benefiting from this personal attention, which is provided at no additional cost for them.
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This as well as results from other trial initiatives reinforces the confidence in our strategy for this unique part of our business.
When we reach a normalized steady state with this business, we intend to report additional kpis in future disclosures.
Turning to new product development, the private crypto currency Index fund that we announced in June was officially launched a few days ago.
The fund provides a credit did U S investors with an efficient and convenient way to gain diversified exposure to a basket of digital assets and a private fund they track for NASDAQ Crypto index for.
The index developed by NASDAQ in collaboration with Hashtags dynamically rebalancing its constituents on a cap weighted basis, thereby reflecting a benchmark for digital assets.
Through our partnership with NASDAQ and Hashtags victory capital will be the exclusive sponsor of private funds and other vehicles for U S. Investors based on Nasdaq's Crypto index.
Additionally, we also fought for an exchange traded product.
Racking the index, which based on our information is the only registration currently filed for a multi quaint E. T F for non accredited investors in the U S who are seeking diversify exposure to digital assets.
We've been busy executing on other new product initiatives as well and file for 3 new active ESG Etfs first is the th be mid cap ESG ETF, which represents our first active equity ETF.
Given the investment performance in Th vs. Mid cap strategy. Our distribution teams are eager to be able to offer it in an ETF wrapper.
We also filed registration statements for 2 active fixed income ESG Etfs there'll be managed by our USAA investments franchise with ESG factors incorporated into the investment decision making process.
We are accelerating our company wide ESG initiatives on a number of fronts from actions that further advance our corporate social responsibility at the enterprise level to incorporating responsible investing practices and portfolio to satisfy clients' objectives.
To increase transparency around specific actions, we are taking we recently published our first corporate social responsibility report, which can be found on our website.
I encourage you to download and read about the many ongoing activities underway and our future plans.
During the second quarter, we announced the victory scholars program and our strategic Alliance with Xavier University of Louisiana.
We are providing direct financial support for students for expenses not covered by existing grants and awards. In addition, we provided the funding to see the university's first student led investment club, providing hands on learning opportunities the.
The primary goal for this aligns us through equity and social mobility for students of color and to ultimately build a more robust pipeline of diverse high quality candidates to fill jobs across the financial services industry.
On the responsible investing side, we are proud to have been recently recognized by Morningstar for proxy voting record. According to Morningstar. We ranked in the top 3 fund companies for our overall votes on climate transparency and climate governance issues.
On slide 8 you can see that our investment performance remains exceptionally strong with the majority of for assets under management outperforming their respective benchmarks for all measurement periods.
22 of our mutual funds and Etfs ranked in the top quartile of their respective peer groups for the trailing 1 year period ending on June 30, with various products managed by our franchises, including integrity, THP and USAA investments ranking in the top decile.
On a consolidated basis.
64 per cent of or are you on the outperformed their benchmark over the trailing 12 months and more than 70 per cent outperformed over the critical free 5 and 10 year periods.
In addition, the majority of our strategies also outperformed benchmarks on an equal weighted basis.
We are actively engaged with a number of prospective M&A targets, while we have no news to announce today, our strategic acquisition criteria has not changed and we remain focused on opportunities that will make us a better company.
As I said last quarter, and we'll reiterate again, we're moving potential targets through a diligence process with some being in the very later stages.
Acquisitions are an important component for overall corporate strategy, and we prepared our balance sheet to be able to execute.
I anticipate that over time, we will execute on a number of wonderful opportunities that will be very value added to our business.
With that I will turn it over to Mike for more in depth discussion of our financial results.
Mike.
Thanks, Dave and good morning, everyone. The financial results review begins on slide 10.
Revenue increased 4% on the first quarter, reaching $222 million in the second quarter of the year.
Our operating margin expanded 78 basis points on a GAAP basis for.
$42.1 per cent in the first quarter to 42, 9% in the quarter just ended.
The margin improvement was primarily due to seasonally higher payroll tax and benefits related expenses in the first quarter of each calendar year.
Adjusted EBITDA margin remained above 50 per cent for the fourth consecutive quarter and came in at 56 per cent for the second quarter.
Adjusted EBITDA set a new quarterly record of $112.2 million in the period.
Increasing 5% from $106.8 million in the first quarter.
GAAP net income set a new record high at $69.3 million for 93 cents per diluted share up from $65.2 million or <unk> 88 per diluted share in the first quarter.
This was up more than 50% from the same quarter last year.
Adjusted net income with tax benefit of $1.18 per diluted share with another company high up 4% from the first quarter and 33% higher than the 89 cents per diluted share reported for the second quarter of the prior year.
As we guided on our capital management priorities, we continue to reduce debt paying down $57 million in the quarter, which was a 14% increase from the $50 million of debt repaid in the first quarter.
This reduced our leverage ratio to 1.4 times by quarter end.
Subsequent to quarter end, we repaid an additional $35 million.
Additionally, we returned a total of $18.3 million to shareholders in the form of cash dividends and share repurchases.
During the quarter, we repurchased approximately 288000 shares.
And our board approved a 25% increase in the dividend to <unk> 15 per share payable on September 27 to shareholders on record.
On September 10th.
Turning to slide 11.
AUM rose, 5% for in the quarter to $161.9 billion from a combination of market action and positive net flows.
AUM is up 25% on the same time last year with our long term 8 a M.
Ending the second quarter at $158.7 billion.
On slide 12, we would cover a long term asset flows.
Gross sales increased sharply in the quarter.
We achieved a 49% increase in long term gross sales compared with the first quarter and nearly double the level of gross sales during the same quarter a year ago.
You can see the steady progress of our improving net flows depicted by the yellow line on this trial.
After the fourth consecutive quarter of improvement net long term flows turned positive in the second quarter.
The improvement in our net flows has been broad based as we generated better net flows in the direct investor channel.
Institutional channel.
And in the intermediary retail retirement channel, where we continue to increase shelf space for our fixed income products managed by our USAA investments franchise for.
For example.
Rob recently added the USAA income fund 2 at select list.
On fixed retirement platforms added products managed by USAA investments to their menus or select list during the second quarter.
Turning to slide 13 quarter over quarter revenues increased by 4% on higher average AUM.
As we discussed on our prior call a small amount of performance fees slightly boosted the average fee rate in the first quarter of the year.
This combined with slightly higher quarter over quarter waivers for reimbursement in the second quarter contributed to the sequential decline in average fee rate.
Additionally, certain non investment management related revenues, such as funding ministration distribution and Ta fees, while higher on an absolute dollar basis declined as a percentage of assets due to asset growth vehicle mix and the fixed nature of some of these revenue streams.
There was no quarter over quarter change associated with the fulcrum fees on certain USAA mutual funds.
Those fees reduced our IAC rate by 4 tenths of a basis point in both the first and second quarters of 2021.
Hence we have significant remaining upside potential here.
On reaching breakeven, which would add 4 tenths of a basis point to our companywide realized average fee rate.
We have the opportunity to earn positive for confused with the potential to increase our companywide average fee rate by 1 to 2 basis points.
As we've stated in the past fee rate realization is less of a focus for us than profitability.
Happy to see our AUM increased in lower fee products provided the margins meet our minimum criteria.
The quarter over quarter and year over year margin increase in the second quarter nicely reiterate at this point.
Moving to slide 14, you can see our total expenses increased less than 2% from the first quarter.
Lower quarter over quarter compensation expenses were more than offset by higher acquisition restructuring and integration expenses, which increased by $2.1 million in the quarter.
The non cash change in consideration payable for the USA acquisition earn out increased to $5.7 million.
Up from $2.5 million in the first quarter.
It's more than offset a $1 million quarter over quarter decline in other acquisition restructuring and integration costs.
Non personnel related operating expenses, which are highly variable were up $2.8 million for 5%.
Reflecting the increased level of AUM. In addition to the continued investments we are making in technology data and distribution to drive future growth.
You can see from the chart the cash compensation as a percentage of revenue was relatively steady and the decline quarter over quarter reflects the seasonality of certain payroll tax and benefits costs.
Also as usual the deferred compensation mark to market of $1.8 million was 100% offset by the unrealized gain on those investments below the operating line in other income.
The non-GAAP metrics for the quarter are presented on slide 15.
Adjusted net income with tax benefit per diluted share of $1.18 was up 4% from the first quarter and up 33% from 89 cents per diluted share reported in last year's same quarter.
Adjusted net income of $87.2 million achieved in the quarter included a $6.9 million tax benefit.
Adjusted EBITDA margin widen compared with the first quarter.
We are continuing to make investments in the business and thus we are still maintaining our adjusted EBITDA margin guidance of approximately 49%.
As we've discussed in the past this can fluctuate quarter over quarter, and even year over year, depending on AUM levels, and the timing and structure of our investments in the platform.
Moving to our balance sheet and capital management activities on slide 17.
Our interest and other financing costs are highlighted to illustrate the substantial decline in our absolute cost of debt. Since we originated the term loan in the third quarter of 2019, when we closed the USAA acquisition.
The result of rapidly paying down the debt combined with lowering of our interest rate has driven our run rate debt servicing costs down by nearly 2 thirds over the past 2 years.
As a reminder, our term loan is free of restrictive covenants and all required payments have been made for the remaining term of the loan and we have not drawn on our $100 million fully committed revolver.
In the second quarter cash generated from operating activities of $85 million was 14 times, our cost of debt in the quarter.
Additional capital management activities are detailed on slide 18.
Our growing cash flow generation has allowed us to accelerate debt repayments and increase the amount of capital we're returning to shareholders.
After repaying $50 million of debt in the first quarter, we paid down an additional $57 million in the second quarter, which lowered our leverage ratio to 1.4 times.
Subsequent to quarter end, we paid down another $35 million, bringing year to date debt reduction to $142 million.
This compares to a total of $164 million, we paid down for all of 2020.
At the same time returned a total of $18.3 million to shareholders through share repurchases and dividends.
Second quarter, we repurchased 288000 shares.
In may we exhausted, our former $15 million share repurchase authorization and the board authorized a new program of the same $15 million size that expires at the end of 2022.
We also announced our fifth consecutive quarterly cash dividend increase yesterday.
The board authorized a 15 cent per share dividend, which is up 25 per cent from the dividend paid in the second quarter.
The second quarter of last year, we have tripled the quarterly dividend paid to shareholders, while simultaneously accelerating debt repayments.
That concludes our prepared remarks, I'll now turn it back over to the operator for questions.
Thank you Sir at the Sun with day to take any questions you might have for us today.
As a reminder, if you would like to ask a question over the phone simply press Star then the number 1 on your telephone keypad.
We have on my first question from the line of Alex Bluestein from Goldman Sachs. Please go ahead.
Yeah.
Oh, great. Good morning, Thanks for everybody for taking the question.
Dave I was hoping we could start with your commentary on M&A. You mentioned there are a number of potential targets that are in their late stages. I think as you described it within your pipeline can you expand on maybe the size and capabilities of the managers that are kind of in this later stage bucket.
Sure Good morning, Alex.
I would say that really you could bucket them in 2 buckets.
The first being in think of it as the impactful acquisitions very similar to the th b in the Alder wood, so smaller very strategic.
<unk> brings us potentially organic growth a different product.
And really maybe gets us into a different distribution channel and I'd say, that's 1 bucket and there are opportunities there and then I'd say kind of on the other end of the spectrum I would say transformational.
Think of in the past you know our USAA acquisition for us, which is of significant size and scale.
And you know brings us numerous things and probably uses more capital than many impactful I'd.
I'd also add maybe another twin.
Twist to it which is we have been evaluating our managers in the alternative space. That's an area of interest we've talked about that in the past.
And when you think about our platform and our business and.
Eventually the retailers Asian alternatives, meaning bringing alternatives to.
Buyer or buyers set where you're thinking about buying alternatives and maybe retirement accounts or in smaller investment accounts, we think that there could be some really potential opportunities there that could be very value added to our business. So we are evaluating those as well so I'd I'd really.
Sage 2 buckets, but with maybe a little twist on would be alternatives.
Great. Thanks, Thanks for that.
And then second question around the organic growth and great to see an improvement in the net flow picture, obviously now positive for the quarter.
Can you spend a minute on maybe sustainability of flows and I heard you sort of mentioned that it's pretty broad based but maybe some specifics around net flows across the 3 categories that you described so.
Kind of self directed intermediary and institutional channel.
And maybe as a follow up on that I know institutional has been gaining traction for you guys maybe comments around the pipeline on institutional deals helpful. Thanks.
Sure. So let me start off with if.
If you go back and look at the last few quarters, we've had an improving trajectory and that has continued and I think I've used the term turning the corner and I feel like we've turned the corner on flows.
It is broad based and I think all organic growth really starts with are you delivering for your clients.
So do you have good investment performance and you know, we do and especially in areas that matter and if you think about some of the investments we've made over the you know over the past year or so.
I think about the fixed income side with USAA investments.
We built that distribution quite significantly and we've highlighted that last quarter. We highlighted some of it this quarter, that's starting to come in.
Our institutional pipeline.
As we mentioned some has funded.
It has continued to build and that's really broad based as well you'd think about some of the acquisitions. We did over the last 12 months with THB, Inc.
When we made in all other wood, we have not monetize those yet those are coming on line and I think those are a great opportunity going forward and lastly, I'd say on the direct side, we have seen improvement over the last few quarters and we continue to see improvement and as we continue to build out that business and really.
<unk> build a digital marketplace, we think there's great opportunity. There. So it has been broad based and you can see from our gross flows that we had quite a significant jump theres a little bit of noise in that but if you really peel that peel it back theres been quite an increase in gross flows.
And I would imagine US you know when I think about going forward in 'twenty, 1 and into 22 that that would continue.
Great. Thank you very much for taking on cars.
Thank you. The next 1 we have Kenneth Lee from RBC capital markets. Please go ahead.
Hi, Thanks for taking my question.
Staying on the topic of net flows wondering if theres any kind of.
Items that you want to call out in terms of meaningful contributors to the solutions business inflows that you saw on the quarter. Thanks.
Yeah, I'll take that it's Dave.
Our solutions business is really pretty widespread you know think of it as really an investment engine for us.
We have our ETF platform within the solutions. So as we highlighted I think its the third straight quarter of growth for our ETF platform. We've launched you know filed for 3.
New Etfs plus.
For the crypto Etfs.
So we think that's an area of growth it's been growing.
There have been some customized portfolios that we've taken on which accounts for some of the growth, but we've talked about this for a while the solutions platform is an area, where we think we can grow going forward. It's growing today and we think with what investors are looking for we're able to solve a lot of issues in portfolios.
With that group.
Great and just 1 follow up if I may you talked about.
Starting up a high net worth for advisory units within these direct investor business wondering if you could just elaborate on longer term plans and potential benefits that you could see from this unit down the line. Thanks.
Sure, it's really a group.
That's giving customized client service too.
2 what we define as high net worth investors in the direct investor business.
It's early on it's a high touch on.
Service and you know as we look at the profile of those high net worth clients in the direct investor business. We thought it made a lot of sense to carve out a group again I think there's great opportunity there to expand wallet share with that group to gain new high net worth investors and.
You know we're in the early stages of that initiative and many other initiatives in the direct investor business.
That's an area, where if we look out a year or so we anticipate that to be a driver of organic growth for us as well.
Great very helpful. Thanks again.
Thank you. The next 1 we have Robert Lee from <unk>. Your line is open.
Oh, great. Thanks, So good morning, everyone and thanks for taking my questions. Maybe just sticking with flows just kind of curious I mean for.
Net income performance has been good you've pointed out there.
They're getting it on more platforms to Schwab select list, but you know I guess this quarter of kind of at least on a flow basis kind of felt.
I felt like it's slipped back so Keith maybe just call out if there were some particular onetime items or how should we think of kind of the you know.
On the pickup in redemptions there this quarter, just given you know kind of.
The positive underlying trends.
Sure. It's Dave again, we had 1 large client internalize there.
Fixed income capabilities that we were managing for them. So I think there's a lot of noise in that total gross number if you were able to see the detail you would see that.
No.
That has picked up and especially with building out the distribution over the last few quarters, we anticipate.
Ex that 1 time item, you'll see some momentum there on the fixed side, we're very encouraged.
With that platform with the asset class. If you go back a number of years, that's been an asset class that has attracted a for net.
Net flow positive flows we have tremendous investment performance, we have a great team there in the USA investment franchises and in core. So we're really excited about that and that's been an area that again, we have built out kind of brick by brick on the distribution.
Syed and that's an area, where we look forward, we think thats going to contribute to organic growth as well.
Okay, Great and then maybe just as a quick follow up I mean, as you pointed out I mean profitability.
Improved nicely you know you have your EBITDA margins you know now.
50% give or take a tiny bit so understanding you don't manage to a specific margin, but how how should.
Should we think of you know the ability to.
You know continue to kind of scale from here or are there. Some additional kind of investments you're kind of planning on over the coming quarters or so that you know may not put pressure on them, but may kind of limit additional expansion if.
You know assuming revenues can continue to trend higher.
Okay.
Hi, Rob This is Mike good morning.
That's a good question as you said this is our fourth consecutive quarter of 50 plus percent margins.
For us that's not surprising based on the business model, we have and the scalability of what we've built across our centralized model.
We have in the past and continued and in our prepared remarks, we will continue to guide to a 49% long term.
We are making significant investments in the business on that is included in our current <unk>.
56% margins as well.
But the areas that we are investing really around data.
On our distribution and the Digitization of our distribution across marketing and really all 3 distinct distribution channels that we have.
And so we'll continue to make those investments and you'll see those as we move forward.
We'll have we'll have quarters, I think still going well, we'll have quarters going forward that will be above the 49% margins.
But that's still a long term range, we think the business is scalable absence, a large transformational.
Acquisition, you know what.
Continue to operate in the same level of margins that we are today.
Great. Thanks for taking my questions.
Sure.
Thank you.
Next 1 would be calling Johnson from B Riley.
Please go ahead.
Hey, good morning, and thank you for taking my questions on.
First 1 here just kind of looking at the new crypto ETF product on the registration statement filed with the SEC can you just remind us where the SEC stands.
Broadly on the issue.
Broadly given the okay for the ETS types of products and you think it would be relatively low.
Approval burden from here.
Okay. So lets Dave they have not approved.
Any of the Etfs, yet too much to my to my knowledge.
What we actually launched was a private fund.
That's available to today too.
2 our credit investors in the U S and our take on this asset class is that it's you know.
It's a viable asset class we've had many conversations with many clients and you know there are many clients that want exposure to this asset class.
We've partnered with NASDAQ and hashtags.
2 I'd say, leading organizations 1 everybody knows NASDAQ on 2 Hashed Act you know in the <unk>.
The World is a is a leader.
And has been managing crypto portfolios for a number of years so.
So we have a live product today, that's available in a private setting and the and the ETF.
Net debt will eventually hopefully get approved overtime with others. We think will just expand out our opportunity set there we're really excited about about this.
1 of the unique things about our offering is it's a collection of coins, it's not a single coin. So it's not a big coin ETF for bitcoin product, it's actually an index, it's the NASDAQ Crypto index.
Rebalanced every quarter and today within the index. There are a number of coins. So if you're looking at getting exposure to the to the asset class. This is a way to do it where you're almost getting if you will a benchmark type exposure.
And as I said in my prepared remarks, we believe we're the first ones to to file in Etfs with this kind of product. So we're excited about it.
And you know over the last couple of days, there's been a lot of discussion from various folks at the SEC around regulation and we actually welcome the regulation I think with regulation comes institutionalization. So it gives many investors' confidence to invest in this asset class.
So we welcome the regulation, we actually are very happy about it and we think as the FCC goes through and creates rules and regulation and even tax.
On rules around this from the IRS I think it's going to be great for the asset class and we think it's something that's sustainable we don't know we don't know the size of it I'm not sure anybody knows the size of the opportunity.
But we know we think we have a great product and a great offering and we can be really competitive.
Great. That's helpful and then kind of sticking with crypto just recognizing these products for maybe still on there.
<unk> do you have any kind of idea of what level of management fees. These products might be capable of commanding just as we try to Lucy gauge their revenue generation potential might be.
Maybe maybe a little bit higher closer to fixed income type product or then or maybe lower closer to us.
Large cap equity or any color there would be helpful.
I think the I think the fee rate.
The establishment of the fee rate in different products in different markets has not been established yet I would imagine that fee rate would be higher than your traditional fixed income product.
But that has but I think that that's yet to be determined is as this asset class continues to kind of gain traction and mature.
You know for us.
We want to be relevant in clients' portfolios.
<unk> always tried to be on the side of charging a fair fee.
And we think that this product will have the same characteristics of of that of what we've done with other products.
Great. Thanks, that's helpful. On those are all my questions. Thank you.
Thank you. The next 1 we have Ken Worthington from JP Morgan. Please go ahead.
Hey, good morning.
Victory continues to integrate a number of acquisitions, maybe talk about your current top priorities are on your list of things to accomplish.
Still with regard to USAA and the other more recent deals that you've closed.
I can.
So from an integration perspective, we have completed everything.
That we've set out to with respect to USAA and THB THB. It was a smaller acquisition it was on boarded quite quickly.
And has been successful there, they're managing money and executing as we expect I think as we've said.
We've executed on the financial side with respect to the USA acquisition and the THB acquisition, and we spent quite a bit of time on our last call talking about the.
Pipes that we're building out for distribution I think that's the element that we're still executing on and want to continue to drive the strong investment performance from the USAA fixed income franchise through those distribution platforms. Both on the retail retirement and institutional segments of our business.
We're still looking to execute on that further.
And then we've also spent some time talking about the digital platform that we've built out it's now live and has been for 6 or 7 months on our platform and we're continuing to look at and enhance the opportunities to drive.
Incremental wallet share we've talked a little about the high net worth group that we formed within that and we've also looked at enhancing the offerings from a product perspective too.
To include more offerings to those clients as well as we build out kind of the overall marketplace for them. So those are things that are still happening as we speak and we'll continue to as as we move forward and we're excited about the opportunity to be able to monetize those and really drive incremental growth through that platform.
Both on the USAA fixed income side and the direct investor business.
Dave I would add 1 more thing if you think about the staging I mean, as Mike said, we fully integrated.
You know the acquisitions THP in USAA and you know have effectively gotten the cost out that we had we had guided.
And I think the next stage of that is to actually go and recognize the organic growth.
We're starting to see that with USAA investments are franchised.
We talked about the direct investor business I think those are.
Yet to come that pieces, you have to come the th B, we've owned the business for a quarter, we've launched 1 of our ETF active Etfs.
That we launched as a T H B E. T. S. On the first actual mid cap ESG ETF, that's been launched or at least been filed.
And I think THB, we've yet to really monetize that from a growth perspective, and so that's yet to come. So when you think about where we are.
It's integrated into our business, it's part of our business, but the growth aspect, we have not recognized yet.
And you've got to be pretty wide just okay.
Is THB plugged into our.
All of the distributors that you.
The other day.
The other franchises use within a victory or you know are you 20 per cent there you're 80% there.
Are you 100 per cent there I assume it's not there yet but you know my.
My assumption is it takes awhile to get those products registered on these different platforms. So I was curious to see how far along that process.
You are.
So for THB, that's historically been on institutional products. So if you think about the retail intermediary side, we're in early stages there.
Introducing it to the different large platforms.
Having research type meetings have had some success there, but we have a ways to go with very positive early indications.
Some product development side, we talked about the ETF filing and then on the institutional side, introducing to consultants and existing clients as well on its way.
But we're in early innings, there on I don't think it's fair to put a percentage on it early innings, but with very very good feedback from potential clients on platforms.
Great. Thank you very much.
Thank you.
Next is Michael Cyprus from Morgan Stanley. Please go ahead.
Oh, Hey, good morning, Thanks for taking the question I was just hoping you could talk a little bit about your separately managed account platforms can you just update us on how much in assets you have there today, how meaningful the flows is that contributing and maybe just more broadly how many strategies do you have on that today and maybe you could talk a little bit how you were thinking about building that out and adding.
More strategies to the other yes my platform.
So it's a smaller portion of our business today.
I would say we have a handful of strategies that are available on the SMA platform. We've had some recent.
<unk> placements with our SMA strategies, that's a smaller portion of our business, it's an area of growth and opportunity for us.
An area, we're focusing on I would tell you with th be that's 1 of the product development, our structuring development opportunities. We know that 1 of the larger platforms have verbally told us that you know th people will join.
On the platform and in SME SMA format. So that's an area of growth for us and an area of opportunity we see the industry data, we see the growth of that spin.
Specific structure and we have a few products that.
That we're seeing some growth and we have a few products that will launch.
On to that part of the market and I think over time that'll be a much bigger part of our business.
Great and just on capital management, you have continued to raise the dividend here for a number of quarters can you just talk a little bit about how you're thinking about that what the right payout ratio could make sense for victory and more broadly on capital management, you've been able to pay down debt buy back stock, maybe you could talk a little bit about that.
The approach that would influence those decisions on which way you go and how far you go down each path.
Sure. Good morning, Mike I think we've we've always.
Outlines our capital allocation strategy.
To match the business strategy and for us that is.
To be able to execute accretive M&A. So we've always thought to have flexibility with respect to our capital allocation strategy.
And I think we've done that is as you said we've been very.
Focused on creating the balance sheet flexibility to create the opportunity to do M&A.
Ready to do that.
We've been active in paying down the debt as you've said we paid down.
Hundred and $42 million year to date, we've paid down over 41% of the original debt from the USAA transaction.
So that's been a focus for us to create that flexibility, which we've done.
At the same time as we've been paying down debt and we've been able to lower the cost of that we've been able to take those savings and drive shareholder return through buybacks and through increased dividends over the last 5 quarters, we've increased the dividend.
Triple what we're paying today that we announced yesterday compared to a year ago.
And we'll continue to evaluate that.
I think we've increased our shareholder return quarter over quarter by close to 30%. So we've been able to drive because of the strong free cash flow and the execution from a financial perspective to increase that leg. If you will of shareholder return, we don't look at a specific payout ratio I think.
As we evaluate the capital allocation policy and the things that we're doing ongoing on a quarterly basis.
We're doing that based on facts and circumstances at the time based on looking at our ability to execute on M&A and how we need to do that as we've talked about we've got a number of tools to be able to do that but we also look at the current leverage levels on the business they've come down dramatically from from 2.7 times.
In July of 2019, 2 to 1.4 times today.
The cost of that and then just our ongoing <unk>.
<unk> for my business perspective.
And we'll continue to look at that going forward I would expect that.
As we look at where we are today from a leverage perspective, we'll continue to evaluate increasing shareholder returns.
Most likely we'll do that through through dividends as we've done over the last several quarters.
Great. Thanks for taking my questions.
Sure.
Thank you the next 1 day.
The line of Owen now from Oppenheimer. Please go ahead.
Good morning. Thank you for taking my questions. So I will go back to the crypto price for fun can you. Please talk about the traction of that product for fun.
The demand there in what concerns your clients have expressed that may have prevented them from investing in digital assets. I mean, if you can talk more about your conversation with clients that would be great. Thank you.
So we just launched it I'm just just a few days ago. So we're very very early stages on actually having the product.
Just generally speaking I think that there has been a discussion with clients around.
What percentage should I allocate for this asset class.
And so you know the sizing of the investment based on an overall portfolio I think the second aspect of it is is do I want you know a single coin where do I want a basket of coins and as I've mentioned earlier, our product is a basket of coins and then the third is.
And you know really security and viability and when I think about security and viability.
1 other reasons, we've partnered with NASDAQ and partner with Hashtags. These are leading.
Leading organizations and you know, there's there's all kinds of checks and balances and for these coins to get into a basket. So those I'd say are the 3 big.
Pieces of the conversations.
You know, it's very early in <unk>.
Marketing efforts, it's encouraging.
The conversations we've had and on.
I think as this asset class gets better understood and I'll go back to what I said earlier I think as the selling on the IRS and other agencies start to regulate this asset class it becomes much more investable and I think as it becomes much more investable.
I think you'll see demand for it in lots of different areas I think it's very early on.
In.
Indeed in investing in this asset class, it's very misunderstood.
But in things that are early in asset classes that are early typically start out this way and as people understand them as people can put them into portfolios and size them and decide how they want to have the exposure you see you know.
Lots of clients coming into it after you get over that initial hump on I think we're still in very early stages.
Quite honestly for us.
This is a this is a really innovative.
Entrepreneurial.
Product for Us and we're really happy to be early in this in this process.
Got it and then other than price of fun and E. T. As you say Andy other cash.
Area that you think victory May also participate in this area and its 2 assets area or.
Should mainly be like in the ETF and probably for fun space.
Well I think we're evaluating a lot of different structures, we're evaluating different ways. In addition to the index to have our clients get exposure to digital assets.
We'll continue to have discussions and based on those discussions.
We'll develop product, but but.
I would anticipate that we would have.
Additional products and potentially additional structures in the digital assets space.
Alright got it thank you very much.
Thank you we have a follow up question from the line of Michael Cyprus from Morgan Stanley.
Oh, thanks, so much for taking the follow up really appreciate it just on the USAA direct channel and the digital on a.
On mobile rollout that you have coming I was hoping you could just update us on.
Your strategy there, maybe you could talk a little bit down on mobile engagement with customers, where exactly that stands today and where you'd like this capability set to be when you look out over the next couple of years what are your aspirations there and strategically if you could talk about how you are executing to accomplish that.
Sure. So our goal has been to create a digital marketplace.
And expand our digital marketplace beyond just mutual funds and 529 plan and we've started to do that with adding victory funds, adding a fixed income SMA capability, adding a portfolio of planning capability.
We have perfected I think our client service over a period of time in a sense that we've got very good client service scores I think we have very good client service and as we move forward I would expect us to expand our product offerings there.
You know I would also expect us to expand our educational offerings.
And areas.
In financial literacy and in areas specific potentially to military.
So over the next few years I look at this this channel or the direct investor business as an area, where we can increase wallet share with their existing clients. We can gain new clients. We can provide excellent service a wide range of investment choices.
And we can help people really guide their financial guide them through their financial future with lots of different products.
With really you know servicing in ways that the clients select either through the phone.
You know lives through the phone or through chatting or through just on digital.
Digital interaction, where you're going on a website in investing kind of on you know.
From a self servicing perspective.
It's an area that it Mike had said this earlier that we've invested in will continue to invest in there are lots of green shoots.
In this business I called out that our 529 plan has had.
Registration growth net registration growth net flow growth since we've acquired it and there are many other areas like that you know going into 2022, I would imagine that we would be.
Putting out Kpis on the business on we've talked about that so there's some more transparency as the business starts to normalize and we get to more of a final state.
And just in terms of action items or could use I guess, what sort of on the come would you say over the next you know.
6 months 12 months or so in terms of what you're looking to bring to market and versus what you have already I think there was some reference to mobile.
In the summer is do I have that right.
Yes.
Mobile as well.
We will be live here this month.
And I would tell you theres product development coming up.
Behind the scenes there's data.
And technology and digital marketing coming in digital really client service.
But when I when I look at it.
From a client perspective, there'll be more product choices.
You know continuing to have great service and the <unk>.
Mobile will be will be live here on this.
This month as well.
Great. Thanks for taking my questions.
Thank you there are no further questions at this time Mr. <unk>.
David Brown.
Hum.
Thank you for joining us this morning and for your interest in victory capital on Tuesday of next week, we will be presenting at the UBS Financial services Conference and next month, we'll be attending the Barclays Global Financial Services Conference on September 14th.
We hope to see you there virtually and look forward to keeping you updated on our progress have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Have a great day.
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