Q4 2022 Virtus Investment Partners Inc Earnings Call
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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Good morning, My name is Michelle and I will be your conference operator today.
I'd like to welcome everyone to vertex.
That's meant partners quarterly conference call.
Slide presentation for this call is available in Investor Relations section of the various furthest website at www Dot Virtus dotcom.
Call is being recorded and will be available for replay on <unk> 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 will now turn the conference over to your host Sean Park.
Thanks, Michelle and good morning, everyone on behalf of Virtus investment partners I would like to welcome you to the discussion of our operating and financial results for the fourth quarter of 2022.
Our speakers today are George L word president and CEO .
And Michael and Christoph Chief Financial Officer.
Following their prepared remarks, we will have a Q&A period.
Before we begin please note the disclosures on page two of the slide presentation.
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.
Certainties, 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 the statements.
In addition to results presented on a GAAP basis, we are certain non-GAAP measures to evaluate our financial results.
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 .
<unk> measures to the applicable GAAP measures are included in today's news release and financial supplement which are available on our website.
Now I'd like to turn the call over to George George.
Thank you Sean good morning, everyone.
Start with an overview of the results we reported earlier today before turning it over to Mike to provide more detail.
The fourth quarter remained challenging consistent with the trend throughout the year.
In addition to a volatile market and heightened uncertainty open end fund flows industrywide, we're particularly negative most notably in December as investor sentiment driven activity resulted in and among the most elevated fund net outflows and what was already a historically difficult year.
Well, we had net outflows in the quarter due to higher redemptions, we did have a meaningful increase in sales across products and asset classes.
Positive institutional net flows.
A higher average fee rate, which has been resilient despite an industry trend.
Continued solid investment performance and significant balance sheet flexibility and a net cash position at December 31.
We have built the organization to navigate challenging environments like these in our position for market stabilization recovery with increasingly well diversified products and capabilities that can attract assets across market cycles, and changing investor preferences to continue to be focused on the execution of our strategy and building out capabilities to position us for future.
<unk> growth as the environment improves.
Turning now to a review of the results total assets under management increased 3% to 149 billion, primarily due to market appreciation, partially offset by net outflows.
Sales increased 27% to seven 3 billion with increases across all product types and most asset classes.
Institutional sales doubled to 3 billion benefiting from a large inflow into an existing mandate contributions from non U S clients and the issuance of the new CLO.
<unk> sales also increased with open end funds up 5% due to higher sales of equity fixed income and alternative strategies and retail separate accounts rose, 4% due to investment grade fixed income.
Net outflows were $3 4 billion essentially unchanged from the prior quarter and again, primarily due to elevated redemptions.
Those were primarily mutual funds consistent with industry trends were also included in net outflows in the intermediary distributor retail separate accounts, while institutional and private client generated positive net flows.
Byproduct institutional net flows were positive <unk> 8 billion, reflecting the meaningful increase to a domestic large cap growth equity mandate and 300 million from the issuance of the CLO.
<unk> net flows have been positive in each of the last nine quarters and considering the challenging environment. We are pleased with this consistent level of activity.
But net outflows of $3 8 billion were elevated in line with market trends, particularly negative in the month of December .
Retail separate account net flows were again negative due to higher redemptions, reflecting retail investor sentiment.
In terms of what we saw in January mutual fund net flows while still negative improved meaningfully from the fourth quarter and represented the best month of flows since September of 2021, including the improvements in both sales and redemption rates.
In particular, we saw positive net flows in our international and global products as well as certain of our small cap and fixed income products.
Institutional pipeline remains strong with known wins exceeding known redemptions over the next two quarters.
Our fourth quarter financial results again reflect the impact of market declines over the course of the year operating income as adjusted was $56 million down from 65 million sequentially and the related margin of 31, 8% decline from 35% due to lower revenues and relatively stable operating expenses.
Earnings per share as adjusted decreased 10% to $5 17, reflecting the impact of the decline in average assets under management.
Turning now to capital given our solid cash flow generation and balance sheet, we continue to return capital to shareholders, while maintaining appropriate levels of working capital and leverage during.
During the quarter, we repurchased $10 million of our common shares totaling $90 million for the full year and we reduced shares outstanding by four 3% in 2022.
We ended the quarter net cash position of $77 million and continue to have significant flexibility in managing our capital needs with total cash on hand at year end of $338 million $175 million, undrawn revolver and $128 million in investments, providing ongoing flexibility to invest in the business.
And continue to return capital to shareholders.
Before I turn the call over to Mike I would like to provide a brief update on our agreement to add up simplex, a leading provider of liquid alternative investment solutions as an affiliated manager.
As we've discussed previously offer simplex will enhance and diversify our investment offerings provide additional product and distribution growth opportunities and expand our presence in the alternatives category.
The transaction, which we expect to close near the end of the first quarter will be funded with existing balance sheet resources that include our undrawn credit facility.
It will be immediately accretive to earnings consistent with the 10% level. We previously provided.
Given the timing of the close the first quarter outlook, Mike will provide for various metrics will not include the impact of the transaction.
We will update you on the modeling for offer simplex and its impact on our outlook on the next call.
Turn the call over to Mike Mike.
Thank you George good morning, everyone.
Starting with our results on slide seven assets under management.
At December 31 assets under management were $149 4 billion up 3% from 145 billion at September 30.
The sequential change reflected $8 8 billion of market appreciation.
At $3 4 billion of net outflows.
Average assets under management in the quarter were $148 6 billion down 5% due to market performance and net outflows.
Our assets under management remained well diversified by product type and asset class.
<unk> represented 34% of total AUM at December 31.
With U S retail funds and retail separate accounts.
At 32% and 24% respectively.
By asset class equity was 55%.
Fixed income and multi asset strategies were combined 38%.
And alternatives were 7% of AUM.
We continued to generate strong relative investment performance across strategies.
At December 31, approximately 57% of rated fund assets had four or five stars.
And 90%.
We're in three four or five star funds.
We had nine funds with AUM of 1 billion or more that were rated four or five stars representing a diverse set of strategies.
From five different managers.
On a five year basis, 75% of our rated fund AUM was outperforming the median performance of their peer groups.
In addition to strong fund performance as of December 31, 87% of retail separate account assets.
And 61% of institutional assets were outperforming their benchmarks over five years.
Also 57% of institutional assets were exceeding the median performance of their peer groups on the same five year basis.
Turning to slide eight asset flows.
Total sales increased by 27% to $7 3 billion.
<unk> growth in each product, particularly institutional.
Byproduct institutional sales were $3 billion.
From $1 5 billion in the third quarter due to a significant additional funding into a domestic large cap growth equity mandate.
In addition to the $300 million CLO issuance.
Fund sales of $3 billion increased 5% with particularly strong growth in alternatives.
<unk> small cap.
And global equity.
Retail separate account sales of $1 2 billion increased 4%.
Largely driven by investment grade fixed income.
Total net outflows were $3 4 billion, primarily due to open end funds.
Reviewing byproduct.
Institutional generated positive net flows of <unk> 8 billion with meaningful contributions from non U S clients.
Strength in non U S came from multiple affiliates and included both new mandates and fundings to existing accounts.
For open end funds net outflows were $3 8 billion up from $2 8 billion in the third quarter due to elevated redemptions and consistent with negative retail trends.
In retail separate accounts net outflows of <unk> 4 billion.
Compared with <unk> 2 billion in the third quarter with investment grade generating positive net flows.
And our private client business net flows remained positive as they have for 16 consecutive quarters.
Turning to slide nine investment management fees as adjusted of $156 1 million declined $7 9 million or 5%, reflecting the 5% sequential decline in average assets under management.
The average fee rate of $41 seven basis points compared with 41 five basis points in the prior quarter.
The fee rate increased modestly on a sequential basis for each product category and on an overall basis. The fee rate has remained in the 41 to 42 basis point range over the course of 2022.
Performance fees in the quarter were <unk> 5 million up from <unk> 3 million in the prior quarter favorably impacting the fee rate by one basis points in both periods.
Looking forward into the first quarter, we believe the range of 41 to 43 basis points remains reasonable.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $88 3 million decreased sequentially from $88 7 million.
Lower profit and sales based compensation was partially offset by market valuation adjustments investment related compensation utilized in deferred plans.
These valuation valuation adjustments are hedged and fully offset by a corresponding amount included in other income.
Okay.
As a percentage of revenues employment expenses were 51%.
Up from 47, 8% in the third quarter.
Primarily due to lower revenue.
For the first quarter.
The fourth quarter ratio would be a reasonable level to expect though I would note it will be subject to variability based on market performance profits and sales.
For modeling purposes. The first quarter will also include seasonal employment expenses, which are incremental to this outlook.
Turning to slide 11.
Other operating expenses as adjusted were $30 8 million compared with $31 1 million in the prior quarter, which included approximately $1 million of costs associated with the alpha simplex transaction.
Excluding these transaction costs from the prior period other operating expenses as adjusted increased by <unk> 7 million or two 3%.
Largely due to higher sales and marketing activity, which continues to normalize as well as efficiency and distribution initiatives.
For the first quarter of 2023, we anticipate other operating expenses as adjusted will be at a similar level as the past three quarters.
We continue to closely manage all discretionary expenditures at initiatives.
While our expenses have been impacted by inflationary pressure, increasing cost of contracts with key vendors service providers and suppliers as well as by the ongoing resumption of sales activity toward more normalized levels.
Our focus on discretionary spending is generally offset those increases, allowing us to maintain other operating expenses at a relatively stable level over the past several quarters.
In addition, our expense management efforts have supported our ability to continue to invest in select strategic initiatives that we expect will benefit future operating leverage and expand our growth capabilities.
Okay.
Yeah.
Slide 12 illustrates the trend in earnings operating income as adjusted of $56 1 million declined $8 8 million or 14% sequentially.
Due to lower revenues.
The operating margin as adjusted of 31, 8% compared with 35% in the third quarter.
Net income as adjusted of $5 17 per diluted share declined 10% from the prior quarter.
Regarding GAAP results net income per share of $4 77.
Increased from $4 25 per share in the third quarter.
And included.
The $1 53.
Benefit from the fair value adjustments to affiliate Noncontrolling interests and.
78, <unk> of net realized and unrealized gains on investments.
Partially offset.
By $1 three a CLO issuance expense.
50.
Of negative fair value adjustments to contingent consideration.
And 41 of discrete tax adjustments.
Okay.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Working capital was $181 million at December 31.
Down from $195 million at September 30, as an investment in our new CLO.
And return of capital to shareholders exceeded cash earnings.
Contingent consideration, which includes estimated revenue participation that earn out payments was $128 million at December 31.
Down sequentially from $134 million.
This amount will vary over time based on changes in the underlying related revenue streams.
Yes.
During the fourth quarter, we repurchased 53320 shares of common stock for $10 million and AUM.
Over the past year, we have reduced shares outstanding.
By four 3%.
Yes.
At December 30, <unk> gross debt to EBITDA was <unk> eight times and net cash of $77 million increased from $47 million at September 30.
First quarter 2023 cash obligations include payment of annual incentives.
Seasonal employment expenses.
Revenue participation payment.
As mentioned, we expect to close on Alpha simplex near the end of the quarter.
With that let me turn the call back over to George George Thank.
Thank you Mike we will now take your questions Michelle would you open up the lines. Please.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced can withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.
Okay.
And our first question comes from the line of <unk> <unk> with Piper Sandler. Your line is open. Please go ahead.
Thanks, Good morning, guys. So nice to hear retail flow starting off well for the year sorry, if I missed this can you guys talk about what youre seeing on the institutional and SMA channels as well in January so far.
Sure so for mutual funds that we commented on the on the month of January after.
Really challenging 2022, particularly December was very nice.
We closed out January that on in terms of the level of even sales rate or redemption rate as well as in terms of overall dollars as I noted it was the best month since September of 2021, So that was really good to see particularly seeing some categories like international and global actually as a category in the fund set.
Be positive as well as the select areas of strength within some of the small caps, but not all of them and as well as some of the fixed income.
And do I have more optimism for fixed income later on in the year hopefully institutional pipeline remains strong that's been a lot of area of focus for us where we put our attention and our resources in several of our initiatives are related to maximizing that so we're really happy to see the consistency of it.
What's in a lumpy business that was still generating strong levels over the nine quarters. We've noted <unk> been positive pipeline is good the non U S concentration.
Continues to get a little bit better.
So that was something we were underweight several years ago, but they've now become significant contributors and that's across affiliates and across strategies. So that's that's great to see on the retail separate accounts side, given the nature of that business, particularly the intermediary sold channel where some of the strategies are are really sort of.
Either done model only or through other provisions, we don't have as much real time access to some of that information, but generally because that business is concentrated in our equity strategy, particularly growth in smaller cap mid cap kind of strategies, it's going to go with the broader market. So I think what you saw in the fourth.
Order for that it was really just reflective of the sentiment on those equity strategies and while we have a smaller piece that in fixed income, that's where you kind of saw a little bit of an uptick in the January comment.
Great. Thanks really helpful. And then on the Alpha simplex transaction, what was the AUM to end the year for that and can you maybe talk about some of the demand youre seeing on the institutional side, specifically for them and how that's been going to start the year as well.
Yes, so fabless simplex until we close we're not going to make comments on their business or their business results, obviously, they're part of another company.
So we're not going to comment on that but where we're continuing to do a lot of work related to the preparation of the integration very excited about having them as an addition to the family of boutiques to great team over there. We spent a lot of time internally here thinking about ways to leverage their capabilities and their expertise.
Again theyre in the alternative space. So in the periods in the beginning of the year last year, where traditional strategies underperforming. They were outperforming so again there'll be meant to be kind of cyclical to some of our more correlated strategies, but we're really excited about the opportunity for us to sort of apply what they can do.
Across a whole host of things in there they are still in our view best in class in terms of what they do.
Got it great and then last one for me on the ETS side of the business just I know, it's been pretty stable over the last few years can you just maybe update us on the growth strategy more long term or are you focusing on growing that kind of organically or kind of more M&A opportunities over the next year or two.
Okay present themselves yes.
Yes, I mean, we always focuses on making sure that we have at <unk>.
Organic growth strategy for products and in the ETF space.
Including with some of our product introductions.
Seen more in terms of the active fixed income Etfs.
So that continues to be an area, where we've had some existing strategies, where we actually lost money in the quarter right. However.
Etfs.
<unk> continues to be an area of product introduction and one of the things we actually were working on throughout the latter part of last year, we really kind of that sort of optimizing ways to more fully.
Incorporate them into our our overall retail distribution they've been part of it but the data on Etfs as a little more challenging than the data on the open end funds. So we absolutely feel that we're in addition to building out our products I think we've made a few further refinements in terms of leveraging our existing <unk>.
Tail.
Resources to be even more effective in bringing those to market and again I do think that's an area where.
Investors will increasingly be looking at Etfs and again for us.
It may be more in some of the active strategies as opposed to the passive strategies, which we will continue to do.
Great. Thanks George.
Okay. Thank you.
Thank you and one moment for our next question.
And our next question comes from the line of Michael Cyprus with Morgan Stanley . Your line is open. Please go ahead.
Hey, good morning, Thanks for taking my question, maybe just on fixed income just curious to hear your perspectives and views on the prospects for potentially a strong year of flows into fixed income just given the higher interest rate backdrop, which strategies that produce do you think would be well positioned to capture that maybe you could talk to.
Which strategies have pretty good performance right now and your view on the fixed income side that could stand to benefit.
Yes, I mean.
My General view is and particularly going into this year. This could be a good opportunity for credit strategies for fixed income strategies.
I am not going to make any predictions because every time I E.
Turn on the TV.
<unk> slightly conflicting thoughts around where the market is going to go I do think there is that opportunity for those strategies I do think there is some broad opportunities because again not all investors are going to be approaching it. The same way. So I do think there will be opportunities on our shorter duration products, particularly one of our flagship.
Products are the multi sector short term bond fund.
And low duration.
A related kind of product I think those are opportunities. There I also think that emerging market debt, which has been an area where people have obviously not been.
Gathering money Thats, a very cyclical area and depending on your global views there could be good good opportunities there as well so I really do think across the continuum of fixed income products I think as people are sort of reevaluating what is the right.
Diversified set of our portfolio and what should it look like going forward. It is 60 40 makes sense.
It's not 60 40, what should it be.
I do think theres going to be increasingly be opportunities, particularly for those things in the fixed income space that have very targeted approaches like the loan types of products like the <unk> or something that just really works the relative valuation of the sectors, which again is the whole suite of our nuclear products.
Great and just on the international distribution I was hoping you could update us on the build out there how that's progressing and how much that contributed in terms of AUM and flows and maybe talk about some of the initiatives from the sales and distribution team standpoint.
Yes, no we continue to be very happy about that might give a little color around the relative contribution, but as I noted.
We continue to be increasing that business, which for us non U S clients have gone from roughly zero to 5% to 10% to 15% ish as we stand here now.
Give some attribution for the quarter that we had that contribution.
So a lot of things that are going on there is the non U S has been a great opportunity for many of our managers because previously they hadn't been big participants in it right. So.
There is a lot of open opportunity for various manager so over the last year and a half two years.
We have commented several times on large mandates outside the U S mandates for multiple affiliates large mandates from multiple affiliates in the same quarter.
And so that's been an area that we had been focused on and one of the attributes of the stone Harbor transaction was that brought along some additional high caliber non U S. Institutional distribution resources that have done a tremendous job of.
Getting themselves ready and prepared and have been very active in marketing our managers to markets, where we might otherwise not have had the ability to market readily. So some of the initiatives. We've had behind that are you really sort of support that maximize that theres, a different obviously regulatory environment and some of those areas.
So we've been focused on streamlining some of the ways that we can sort of maximize the footprint that we can have there and then the resources that are supporting them, but we've been happy with that Mike distribution on the contribution yes I.
I think you highlighted it but just to put a finer point on it we've had.
Where in the past we've had maybe one affiliate or two affiliates contributing selectively internationally.
We had four or five affiliates deliver both new mandates at additional fundings to existing mandates and George alluded to the pipeline that trend continues in the pipeline, where we're seeing it across affiliates and across geographies. So it really is gratifying to see that investment.
Bring us to a level of consistency, especially in this market environment.
Great and maybe just last one for me maybe coming back to your point earlier, George that you are looking to build out capabilities to position the firm for growth. So I guess as you look at the firm today, how well positioned is it relative to the opportunity set and where you'd like to see that where might there be opportunities to further.
<unk> extend into either from a footprint or a product set opportunity. How are you thinking about that either organic as well as inorganic and maybe you can update us on some of those conversations how those are progressing today versus a year ago.
Sure. So on the organic side, so long, we heard things about the product offering set again, we feel very well.
Represented in terms of traditional active right and then our area of focus.
On the inorganic side has less to have really been in the <unk>.
Non correlated or less correlated alternative types of strategies. So we still think that there's opportunities there.
Other areas where.
We see an opportunity and where we have a focus is taking advantage of the.
Individuals' strengths, we have amongst our affiliates with more multi asset as well as more model based and more collective types of products again, we have them provide the building blocks of a well diversified portfolio, but while we do provide some comprehensive solutions I think there is great opportunities in some of the recent.
Resources that we've added will allow us to sort of accelerate some of the work we want to do in that area. So we do think that that that is a good opportunity I already alluded to alpha simplex I do believe that there is.
A much broader application of their capabilities.
We can utilize across our product set because again most of our managers, our active fundamental managers and they bring to that some quantitative capabilities and we also separately brought in a team the very systematic team.
That also provides us capabilities.
See great opportunities there on the market side.
The non U S again, as a high priority for us because it's a fertile playground for us we haven't had a lot of <unk>.
Resources, there over 10 or 15 years. So we think that that is a good priority for us and that would also include the UCITS in the global funds.
So we've been in the process of building out those products and some of those resources will actually dovetail into both institutional as well as our use of products, but we've actually been in most of our product introductions recently have been focused on Etfs and use it.
Actually not on the open end side. So I think all of that is.
As part of the comment that I made in terms of the increasingly diversified set of offerings that we have as the market environment becomes a little more.
Or less uncomfortable so we feel good about that.
Terms of the inorganic again, while our growth strategy is not predicated upon doing M&A, we continue to make sure that we're in active dialogues those dialogues continue so.
So we've been as active as we've always been we're very selective in terms of what we do does it make sense strategically either from a.
Addition of capability broadening of our market or some other kind of scaled enhancing or otherwise strategic value enhancing transactions. So continue to be active on those again, our focus is always on the organic but as you have seen we are quite busy on the inorganic side as well.
Great. Thank you.
Thank you.
Thank you. This concludes our question and answer session and I'd like to turn the conference back over to Mr. Outward.
Great well I just want to thank everyone today for joining us and certainly we encourage you to give us a call. If there's any other further questions and enjoy the rest of your day. Thank you very much.
This concludes today's call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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