Q3 2023 Virtus Investment Partners Inc Earnings Call
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Good morning, My name is D D and I will be your conference operator today I would like to welcome everyone to the Virtus investment partners quarterly conference call the.
The slide presentation for this call is available in the Investor Relations section of the Virtus website, Www dot farthest dot com.
This call is 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 will now turn the conference over to your host Sean work.
Thank you 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 third quarter of 2023.
Speakers today are George Aylward, President and CEO, and Mike Andriole, Chief Financial Officer.
Following the 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.
It may contain forward looking statements within the meaning of the private Securities Litigation Reform Act.
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As such are subject to known and unknown risks and uncertainties included 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 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.
GAAP measures 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.
I'll start with an overview of the results we reported earlier today before turning it over to Mike to provide the detail.
In the third quarter, we continue to operate in a challenging and volatile environment and the key highlights of our results included.
Our retail sales and positive net flows in retail separate accounts global funds and Etfs.
Increased net earnings and operating margin.
However, return of capital, including our sixth consecutive annual dividend increase.
Investments in the growth of the business, including in the CLO and then in the affiliate.
Attractive investment performance across strategies and products, both long term and year to date and repayment of debt ending the quarter with a well positioned balance sheet and modest net leverage.
So turning now to review the results total assets under management decreased 3% to 163 billion, primarily due to market impact. In addition to net outflows in retail funds.
Sales were $5 8 billion with a 16% increase in retail sales more than offset by a decline in institutional which had a large mandate and the prior quarter.
In retail open end fund sales increased 5% with sequentially higher alternatives fixed income and domestic equity and retail separate account sales were significantly higher up 37% due to strength in smid cap.
Net outflows of $1 5 billion down from breakeven last quarter.
Institutional had net outflows of <unk> 4 billion compared with net inflows of $2 2 billion last quarter, which included a large mandate is.
<unk> is inherently variable on a quarterly basis, but has generated organic growth year to date and in each of the last three calendar years with contributions across affiliates strategies and geographies.
Retail separate accounts generated positive net flows of <unk> 3 billion and were positive for the year to date period.
We continue to build out additional strategies and capabilities from retail separate accounts, where we continue to see meaningful growth opportunities.
Open end fund net outflows of $1 5 billion improved from $2 2 billion in the second quarter with a favorable net flow trend across most strategies and notably in alternatives with Alpha simplex generating positive net flows since they joined US in April.
Smid cap and global equities again generated positive net flows and we are seeing particularly strong traction in mid cap are key.
Within the open end funds Etfs again generated positive net flows and we continue to see opportunities to further broaden the product lineup with additional actively managed fixed income funds as well as other distinctive strategies. We also saw positive net flows in global funds, where we continue to expand that product set.
In terms of what we're seeing in October the trend for retail open end funds remained similar to the third quarter for institutional the pipeline remained strong with one but not funded mandates exceeding known redemptions.
Operator: Good morning.
Dede: My name is Dede and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website www.virtus.com.
Though the timing of institutional fundings and redemptions is very difficult to predict and can be lumpy from quarter to quarter, especially in this volatile market in which we are seeing a longer funding cycle.
Our third quarter financial results reflected higher average AUM levels, and our ongoing management of expenses.
Dede: This call is 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 speaker's remarks there will be a question and answer period and instructions will follow at that time.
The operating margin was $33 nine up sequentially from 32, 3% due to higher investment management fees and relatively unchanged costs.
This demonstrates the leverage ability of the business as it is also illustrated by 78% incremental margin.
Sean Rourke: I will now turn the conference over to your host, Sean Rourke. Thank you 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 third quarter of 2023. Our speakers today are George Aylward, President and CEO and Michael Angerthal, Chief Financial Officer. Following the prepared remarks will have a Q&A period. Before we begin, please know the disclosures on page two of the slide presentation.
Earnings per share as adjusted of 6021 increased 14% for <unk>.
$5 43 in the second quarter due to higher revenues and the stable expenses as well as higher interest income largely related to a CLO we issued in 2022.
Turning now to capital during the quarter, we invested in the growth of the business repay debt and increased capital return.
Sean Rourke: Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Security's litigation reform act of 1995, and as such are subject to known and unknown risks and uncertainties, included but not limited to those factors set forth in today's news release and discussed in our SEC violence. These risks and uncertainties may cause actual results to defer materially from those discussed in the statements. In addition to results presented on a gap basis, we certain non-gap measures to evaluate our financial results.
In August we announced a 15% increase in our quarterly dividend, which we have raised annually for six consecutive years.
We also repurchased over 74000 shares for $15 million up from $10 million in the prior quarter as repurchases were attractive given the valuation.
We also continue to invest in the growth of the business, including $26 million to sponsor a new CLO issued by site in.
$21 million to increase our ownership in SGA, reflecting equity purchases that were part of the original transaction intended to facilitate succession.
Sean Rourke: Our non-gap financial measures are not substitutes for gap financial results. It should be read in conjunction with the gap results. Reconciliation of these non-gap financial measures, the ethical gap measures are included in today's news release and financial supplement, which are available on our website.
We ended the quarter and modest net debt position after repaying $20 million of our credit facility and we continue to generate significant cash flow, providing ongoing opportunities to invest in the growth of the business return capital to shareholders.
George Aylward: Now I would like to turn the call over to George. Thank you, Sean.
George Aylward: Good morning, everyone. I'll start with an overview of the results we reported earlier today before turning it over to Mike to provide the detail. In the third quarter, we continue to operate in a challenging and volatile environment and the key highlights of our results included higher retail sales and positive net flows and retail separate accounts, global funds and ETFs, increased net earnings and operating margin, higher return of capital, including our sixth consecutive annual dividend.
I'll turn the call over to Mike Mike.
Thank you George.
Everyone.
Starting with our results on slide seven assets under management.
At September 30 with assets under management were $162 5 billion.
Down 3% from $168 3 billion at June 30.
Due to $3 $6 billion of unfavorable market impact.
Net outflows of $1 5 billion.
George Aylward: Investments in the growth of the business, including in the CLO and in an affiliate, attractive investment performance across strategies and products both long term and year to date and repayment of debt ending the quarter with a well-positioned balance sheet and modest net leverage. To turn the analysis review of the results, total assets under management decreased 3% to $163 billion primarily due to market impact in addition to net outflows and retail funds.
Average assets in the quarter increased 3% to 167 9 billion.
With ending assets under management, 3% lower than the quarter's average.
Our assets under management represent a broad range of products and asset classes.
Byproduct.
Institutional and retail separate accounts continue to grow as a percentage of our assets.
George Aylward: Fails were $5.8 billion with a 16% increase in retail sales more than all step by decline and institutional, which had a large mandate in the prior quarter. In retail, open and fund sales increased 5% with sequentially higher alternative fixed income and domestic equity and retail separate account sales were significantly higher up 37% to the strength in Smithcat. Net outflows were $1.5 billion down from break even last quarter. By product, institutional had net outflows of $0.4 billion compared with net inflows of $2.2 billion less quarter, which included a large mandate.
With institutional now 37% of AUM up from 32% a year ago.
And retail separate accounts at 24% of AUM up from 23%.
While U S retail funds represented 29% of AUM down.
Down from 34%.
We are also well represented within asset classes.
Equities between international and domestic.
And within domestic nearly evenly split amongst small mid and large cap strategies.
George Aylward: Committee. This business is inherently variable on a quarterly basis but has generated organic growth year-to-date and in each of the last three calendar years with contributions across affiliates, strategies and geographies. We still separate accounts generated positive net flows of .3 billion and were positive for the year-to-date period. We continue to build out additional strategies and capabilities in retail separate accounts where we continue to see meaningful growth opportunities. Open and fund net outflow is a 1.5 billion improved from 2.2 billion in the second quarter with a favorable net flow trend across most strategies and notably in alternatives with alpha-simplex generating positive net flows since they joined us in April.
And fixed income well diversified across duration credit quality and geography.
We also continue to have compelling long term relative investment performance across products and strategies.
As of September 30th approximately 65% of institutional assets and.
84% of retail separate account assets were outperforming their benchmarks over five years.
Pro rated mutual funds, 80% outperformed the median of their peer groups over the five year period.
In addition, approximately 74% of rated fund assets had four or five stars.
George Aylward: Smincap and global equities again generated positive net flows and we are seeing particularly strong traction in mid-cap became. Within open and funds ETFs again generated positive net flows and we continue to see opportunities to further broaden the product lineup with additional actively managed fixed income funds as well as other distinctive strategies. We also saw positive net flows and global funds where we continue to expand that product set. In terms of what we're seeing in October, the trend for retail open and funds remains similar to the third quarter.
Up from 62% last quarter.
And 89% were in three four or five star funds.
We had 39 funds that were rated four or five stars, including 11 with AUM of $1 billion or more.
I would also note that our managers performed well year to date in challenging markets with 67% and 89% of institutional and retail separate accounts AUM respectively.
Beating benchmarks for the period.
George Aylward: For institutional, the pipeline remains strong with one but not funded mandates exceeding known redemptions. As always, the timing of institutional funding and redemptions is very difficult to predict and can be lumpy from quarter to quarter, especially in this volatile market in which we are seeing a longer funding cycle. Our third quarter financial results reflected higher average AUM levels and our ongoing management of expenses. The operating margin was 33.9 of sequentially from 32.3 due to higher investment management fees and relatively unchanged costs.
And 73% of mutual funds AUM outperforming the median performance of the peer group.
Turning to slide eight asset flows.
Total sales of $5 8 billion declined from $7 6 billion due to institutional which included a large mandate last quarter.
While retail sales increased 16%.
Byproduct institutional sales of $1 3 billion included the issuance of a $300 million CLO.
George Aylward: This demonstrates the leverageability of the business as is also illustrated by 78 percent incremental margin. Turning for shares adjusted of 6,021 cents increased 14 percent from 5,043 cents in the second quarter due to higher revenues in the stable expenses. As well as higher interest income largely related to a CLO we issued in 2022.
We're down from $3 7 billion last quarter.
Okay.
Retail separate account sales of $1 $8 billion increased 37% from $1 3 billion largely due to smid cap.
Fund sales of $2 7 billion increased 5% from $2 6 billion with higher sales in alternatives.
George Aylward: Turning now to capital. During the quarter, we invested in the growth of the business, repaid debt and increased capital return.
Fixed income.
Domestic equity.
George Aylward: In August, we announced the 15 percent increase in our quarterly dividend which we have raised annually for six consecutive years. We also repurchased over 74,000 shares for 15 million up from 10 million in the prior quarter as repurchases were attractive given the valuation. We also continue to invest in the growth of the business, including 26 million to sponsor a new CLO issued by Sykes. In 21 million to increase our ownership in SGA, reflecting equity purchases that were part of the original transaction intended to facilitate succession.
And multi asset.
Total net outflows were $1 5 billion, which compared with breakeven net flows in the prior quarter with net outflows largely driven by U S retail funds.
Reviewing byproduct institutional net outflows of <unk> 4 billion.
Compared with positive net flows of $2 2 billion in the prior quarter as flows will fluctuate depending on the timing of client actions.
Over the past four quarters institutional has generated a 5% organic growth rate with flows well diversified.
George Aylward: We ended the quarter in modest net debt position after repaying 20 million of our credit facility and we continue to generate significant cash flow providing ongoing opportunities to invest in the growth of the business, return capital shareholders.
Across affiliates strategies.
Strategies and geographies.
In retail separate accounts positive net flows of <unk> 3 billion improved from modest net outflows in the prior quarter at both the intermediary sold and private client channels generated positive net flows.
Michael Angerthal: That I'll turn the call over to Mike. Mike. Thank you George.
Michael Angerthal: Good morning everyone. Starting with our results on slide 7, Assets Under Management At September 30th, Assets Under Management were 162.5 billion, down 3% from 168.3 billion to June 30th due to 3.6 billion of unfavorable market impact and net outflows of 1.5 billion. Average assets in the quarter increased 3% to 167.9 billion with ending assets under management 3% lower than the quarter's average. Our assets under management represent a broad range of product and asset classes.
For open end funds net outflows improved to one 5 billion from $2 1 billion in the second quarter.
Net outflows were primarily due to U S retail funds as both Etfs and global funds continued to generate positive net flows.
We'll then open end funds, both small and smid cap and global equity generated positive net flows.
And net flows improved in alternatives fixed income.
And domestic equity strategies.
Michael Angerthal: By product, institutional and retail separate accounts continue to grow as a percentage of our assets. With institutional now 37% of AUM up from 32% to a year ago and retail separate accounts at 24% of AUM up from 23% while US retail funds represented 29% of AUM down from 34%. We are also well represented within asset classes. Inequities between international and domestic and within domestic nearly evenly split among small, mid and large gap strategies and fixed income well-diversified across duration, credit quality and geography.
Okay.
Turning to slide nine investment management fees as adjusted of $177 4 million Inc.
Increased $6 3 million or 4%, reflecting.
Reflecting the sequential increase in average assets under management.
The average fee rate of 42 basis points was relatively unchanged.
Declining slightly from $42 two in the prior quarter.
The modest decline reflected a full quarter impact of the large institutional funding in the second quarter.
<unk> offset by a higher average open end fund fee rate.
Yes.
Performance fees in the quarter of $1 6 million compared with <unk> 3 million in the second quarter and looking ahead.
Michael Angerthal: We also continue to have compelling long-term relative investment performance across products and strategies. As of September 30th, approximately 65% of institutional assets and 84% of retail separate account assets were outperforming their benchmarks over 5 years. For our rated mutual funds, 80% outperformed the median of their peer groups over the 5-year period. In addition, approximately 74% of rated fund assets had 4 or 5 stars up from 62% last quarter. And 89% were in 3 or 4 or 5 star funds.
We continue to expect the average fee rate to be in a range of 42 to 44 basis points.
Given the current environment, we would expect to be at the low end of the range in the fourth quarter.
As always the fee rate will be impacted by markets and the mix of assets.
Slide 10 shows the five quarter trend in employment expenses.
Total employment expenses as adjusted of $98 $8 million increased 3% sequentially.
The modest increase reflected higher incentive compensation due to affiliate profitability.
Stronger retail sales.
Michael Angerthal: We had 39 funds that were rated 4 or 5 stars including 11 with AUM of 1 billion or more. I would also note that our managers performed well year-to-date in challenging markets with 67% and 89% of institutional and retail separate accounts AUM respectively, leading benchmarks for the period. And 73% of mutual funds AUM outperforming the median performance of the peer group.
And higher noncash performance based stock compensation.
As a percentage of revenues employment expenses.
We're 51%.
Down modestly from 53% of revenues last quarter.
Looking ahead, we continue to expect employment expenses to be in the range of 49% to 51% of revenues.
At the high end of the range for the fourth quarter.
Given current market levels.
As always it.
Michael Angerthal: Turning to slide 8, asset flows. Total sales of 5.8 billion declined from 7.6 billion due to institutional, which included a large mandate last quarter, while retail sales increased 16%. I product institutional sales of 1.3 billion included the issuance of a $300 million CLO and were down, from 3.7 billion last quarter. Retail-separate account sales of 1.8 billion increased 37% from 1.3 billion largely due to smid gap. Fund sales of 2.7 billion increased 5% from 2.6 billion with higher sales and alternatives, fixed income, domestic equity, and multi-asset.
It'll be variable based on market performance in particular.
As well as profits and sales.
Turning to slide 11, other operating expenses as adjusted were $30 1 million.
Down $1 6 million or 5% from the second quarter.
Excluding the $9 million of annual board grants in the prior quarter. Other operating expenses declined 2% sequentially, reflecting continued management of discretionary expenditures.
Looking ahead, we would anticipate that other operating expenses as adjusted will be in a quarterly range of $30 million to $32 million.
Down modestly from the previous range.
Slide 12 illustrates the trend in earnings.
Michael Angerthal: Total net outflows were 1.5 billion, which compared with break-even net flows in the prior quarter, with net outflows largely driven by US retail funds. Reviewing by product institutional net outflows of 0.4 billion, compared with positive net flows of 2.2 billion in the prior quarter, as flows will fluctuate depending on the timing of client actions. Over the past four quarters, institutional has generated a 5% organic growth rate with flows well-diversified across affiliates, strategies, and geographies. In retail-separate accounts, positive net flows of 0.3 billion improved from modest net outflows in the prior quarter, and both the intermediary stalled and private client channels generated positive net flows.
Operating income as adjusted of $67 million increased by $5 4 million or 9% sequentially due.
Due to higher average assets under management.
Flat operating expenses.
The operating margin as adjusted of 33, 9% compared with 32, 3% in the second quarter.
Okay.
With respect to certain non operating items.
Other expense as adjusted improved by <unk> 9 million, reflecting lower unrealized losses on investments.
Total net interest income increased by $1 5 million, primarily reflecting interest income on the CLO issued late last year.
Net income as adjusted of $6 21 per diluted share.
Increased 14% from $5 43 in the second quarter.
Michael Angerthal: For open-end funds, net outflows improved to 1.5 billion from 2.1 billion in the second quarter. The net outflows were primarily due to US retail funds, as both ETFs and global funds continued to generate positive net flows. Within open-end funds, both small smith cap and global equity generated positive net flows, and net flows improved in alternatives, fixed income, and domestic equity strategies.
Regarding GAAP results net income per share of $4 19, compared with $4 10 per share in the second quarter.
That included a 67% expense for fair value adjustments to affiliate Noncontrolling interests.
At 30, <unk> of acquisition integration and restructuring costs.
Slide 13 shows the trend of our capital liquidity and select balance sheet items.
Michael Angerthal: Turning to slide 9, investment management fees, as adjusted, of a 177.4 million increased 6.3 million or 4% reflecting the sequentially increase in average assets under management. The average fee rate of 42 basis points was relatively unchanged, declining slightly from 42.2 in the prior quarter. The modest decline reflected a full quarter impact of the large institutional funding in the second quarter, mostly offset by a higher average open-end fund fee rate. Performance fees in the quarter of 0.6 million, compared with 0.3 million in the second quarter, and looking ahead, we continue to expect the average fee rate to be in a range of 42 to 44 basis points. So given the current environment, we would expect to be at the low end of the range in the fourth quarter. As always, the fee rate will be impacted by markets and the mix of assets.
We ended the quarter with net debt of $84 million, representing net leverage of three times.
Our strong balance sheet supported continued balanced capital management in the quarter.
Including investments and growth.
Return of capital and debt repayment.
Investments in growth during the quarter included $26 million to sponsor a new CLO.
As well as a $21 million investment to increase our ownership in SGA to 75%.
In August we announced a 15% increase in our quarterly dividend to $1 90 per share and over the past six years, we have increased the dividend by over 300%.
We also repurchased 74015 shares during the quarter.
For $15 million.
Up from $10 million in the prior quarter.
We continue to pay down our revolving credit facility repaying $20 million in the quarter.
We have adequate levels of working capital and modest leverage providing meaningful financial flexibility to repay debt.
Michael Angerthal: Slide 10 shows the five quarter trend in employment, and Expenses. Total employment expenses as adjusted of 98.8 million increased 3% sequentially. The modest increase reflected higher incentive compensation due to affiliate profitability, stronger retail sales, and higher non-cash performance-based stock compensation.
Investing in the business and return capital I would also note as a reminder that.
That are intangible assets continued to provide a cash tax benefit.
Which grew with the acquisition of Alpha simplex earlier this year.
The increase in our ownership of SGA.
At current tax rates, we estimate the tax attributes could provide a cash tax benefit of approximately $19 million per year over the next 10 years.
Michael Angerthal: As a percentage of revenues, employment expenses were 50.1% down modestly from 50.3% of revenues last quarter. Looking ahead, we continue to expect employment expenses to be in the range of 49% to 51% of revenues, albeit at the high end of the range for the fourth quarter, given current market levels. As always, it will be variable based on market performance in particular, as well as profits and sales.
With that let me turn the call back over to George George.
Thanks, Mike So we'll now take your questions DB would you open up the lines. Please.
Thank you.
Reminder, to ask a question. Please press star one on your telephone and wait for your name to be announced.
To withdraw your question. Please press star one again, please standby, while we compile the Q&A roster.
Okay.
Michael Angerthal: Turning to slide 11, other operating expenses as adjusted were 30.1 million, down 1.6 million or 5% from the second quarter. Excluding the 0.9 million of annual board grants in the prior quarter, other operating expenses declined 2% sequentially, reflecting continued management of discretionary expenditures. Looking ahead, we would anticipate that other operating expenses as adjusted will be in a quarterly range of 32.2 million, down modestly from the previous range.
And our first question comes from Michael Cyprus of Morgan Stanley. Please proceed.
Hey, Good morning, I was hoping you could talk about the international distribution efforts how that is progressing maybe you can elaborate on how much that is already contributing just in terms of AUM and flows. It maybe talk about some of the steps you anticipate taking as you look out over the next 12 months or so with respect to international.
<unk> effort.
And then the other question would be just around the pipeline. If you wouldn't mind, just giving a little bit more color on the institutional pipeline, what youre seeing there how would you characterize it now versus like last quarter.
Sure sure on the first so.
We're very pleased with the traction and the outcomes from our non U S institutional distribution team.
Michael Angerthal: Slide 12 illustrates the trend in earnings. Operating income has adjusted of 67 million increased by 5.4 million or 9% sequentially due to higher average assets under management and flat operating expenses. The operating margin as adjusted of 33.9% compared with 32.3% in the second quarter. With respect to certain non-operating items, other expenses as adjusted improved by 0.9 million, reflecting lower unrealized losses on investments. Total net interest income increased by 1.5 million, primarily reflecting interest income on the CLO issued late last year. Net income as adjusted of $6.21 per diluted share increased 14% from $5.43 in the second quarter.
And then as we've said before.
Done a great job in terms of.
Getting familiar with all of the capabilities that we've had and very early on from the very beginning very quickly starting to create some opportunities as we've said before the reason we think the non U S is a great growth opportunity for us is because until a few years.
No.
A large number of our management really relatively unknown outside the U S. So we.
We've had traction outside the U S. For a few years is now grown to about 17 or 18% of our AUM.
It continues to be a very active part of our pipeline and we think we have a lot of opportunities and generally what we've seen over the last few years as well.
We see a lot of increased activity, but I think in a few quarters we've commented.
The amount that is actually coming from the non U S client base as opposed to the U S client base and how pleased we have been that it has been.
Michael Angerthal: Regarding gap results, net income per share of $4.19 compared with $4.10 per share in the second quarter and included a 67 cents expense for fair value adjustments to affiliate non-controlling interests and 37 cents of acquisition, integration and restructuring costs.
More broadly.
Split between various affiliates as well as strategies right.
And so to dovetail that into the pipeline and then I'll ask Mike to talk a little bit more about the non U S distribution in terms of the pipeline and the reason we know what we like about the pipeline is not always necessarily in terms of the sheer dollars, but in terms of the diversity of that so we continue to see a pipeline that has diversity of echo.
Michael Angerthal: Slide 13 shows the trend of our capital liquidity and select balance sheet items. We ended the quarter with net debt of 84 million, representing net leverage of 0.3 times. Our strong balance sheet supported continued balanced capital management in the quarter, including investments in growth, return of capital, and debt repayment. Investments in growth during the quarter included 26 million to sponsor a new CLO, as well as a $21 million investment to increase our ownership in SGA to 75%.
These strategies of of non correlated strategies, our fixed income strategies. So we think thats, great. We did make some comments.
For instance.
Institutional is always going to be Lumpiness nature in terms of when money comes in and when you when money goes out, particularly as clients are looking to either rebalanced their portfolios et cetera, and we are we did comment that we are starting to see a little bit more of a longer funding cycle I don't think thats unusual in this type of a market, but it just kind of makes it.
Predictability of that law.
Little more challenging Mike commented on the institutional team, yes, I think George laid it out.
Pretty well when we look at.
Michael Angerthal: In August, we announced a 15% increase in our quarterly dividend to $1.90 per share, and over the past six years, we have increased the dividend by over 300%. We also repurchased 74,015 shares during the quarter for 15 million, up from 10 million in the prior quarter. We continue to pay down our revolving credit facility, repaying 20 million in the quarter. We have adequate levels of working capital and modest leverage, providing meaningful financial flexibility to repay debt, invest in the business, and return capital.
Recent fundings and the expansion of the international business, we're certainly getting strong contributions from the global team that only the team in Europe, but the team in <unk>.
In Singapore and Asia.
That the pipeline is comprised of opportunities from from each of those areas and it's across affiliates and across those geographies.
We do have.
Significant contributions in the pipeline from those teams.
Give us gives us confidence over the long term any quarter can certainly.
Have different results, but when we look at each of the last.
Three years as well as trailing 12 months a year to date, we continue to.
Michael Angerthal: I would also note, as a reminder, that our intangible assets continued to provide a cash tax benefit, which grew with the acquisition of Alpha Simplex earlier this year, and with the increase in our ownership of SGA. At current tax rates, we estimate the tax attributes could provide a cash tax benefit of approximately 19 million per year over the next 10 years.
Be excited about.
The pipeline of opportunities and about what that team is contributing.
And.
The activities that they have upcoming with.
With many of our affiliates.
Great. Thanks, and then just a question on your ETF platform I was hoping you might be able to speak to.
How are you guys thinking about continuing to build that out any thoughts around mutual fund ETF conversions as well as scope for launching some new active etfs as we've seen others start to have some success with that across the industry.
George Aylward: With that, let me turn the call back over to George.
George Aylward: George? Thanks, Mike.
D.B.: So we'll now take your questions. D.B., would you open up the online please? Thank you. As a reminder to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
Yes, and we definitely.
As we sort of look at.
How are retail investors increasingly want to access capabilities. Obviously the growth is really going to be in the retail separate accounts and the Etfs.
Operator: Please stand by while we compile the Q&A ruster.
<unk> funds as a product category.
Has.
Various challenges in terms of where it is in terms of its trajectory and is currently.
Michael Cypress: And our first question comes from Michael Cypress of Morgan Stanley, please proceed. A good morning. I was hoping you could talk about the international distribution efforts, how that is progressing. Maybe you can elaborate on how much that's already contributing just in terms of AUM and flows that maybe talk about some of the steps you anticipate taking as you look out over the next 12 months or so with respect to international distribution efforts.
Apparently the preferred source of funding when you need to move money into cash.
So Etfs again, we had positive flows in Etfs we've been.
Forcefully putting out our capabilities on the ETF side. So the small part of our business, but it is definitely growing and it's also where we have a lot of our focus for new offerings and to your specific comment and I think we referenced in our prepared remarks.
Michael Cypress: And then the other question would be just around the pipeline. If you wouldn't mind just giving a little bit more color on the institutional pipeline, what you're seeing there, how you'd characterize it now versus like last quarter. Sure, sure. On the first, so we're very pleased with the traction and the outcomes from our non-US institutional distribution team. Then as we said before, they've really done a great job in terms of getting familiar with all the capabilities that we've had and very early on from the very beginning, very quickly starting to create some opportunities.
We're in the process of expanding our actively managed fixed income strategies in particular, so we've had several we've actually.
Expect to expand that and expand those capabilities as well as in some of our other non correlated strategy. So as we look at that space for us. It will generally be more of the actively manage differentiated in those products that are attractive.
In the ETF wrapper, which is.
Chuck there for a lot of reasons and increasingly we're seeing a lot of those reasons really relate to the to the tax efficiency of that so and I think thats kind of similar to the retail separate accounts, which again has been a very strong part of our business, where we continue to see that as an area to sort of expand our area of success, which has been.
Michael Cypress: As we've said before the reason we think the non-US is a great growth opportunity for us is because until a few years ago, a large number of our managers were really relatively unknown outside the U.S. So we've had traction outside the U.S, for a few years. It's now grown to about 17 or 18% of our AUM. It continues to be a very active part of our pipeline and we think we have a lot of opportunities in generally what we've seen over the last few years is obviously a lot of increased activity.
Michael Cypress: But I think in a few quarters, we've commented the amount that is actually coming from the non-US client base as opposed to the U.S, client base and how pleased we've been that it has been more broadly split between various affiliates as well as strategies, right? And to dubtail that into the pipeline, then Aless Mike that talked a little bit more about the non-US distribution. In terms of the pipeline, the reason we, you know, what we like about the pipeline is not always necessarily in terms of the sheer dollars, but in terms of the diversity of that.
Overweight equity types of capabilities and we continue to develop and launch other types of retail separate accounts because again there are very attractive access point for a lot of what we're seeing the growth the retail market.
Great. Thank you and if I could just squeeze one more question in here just on the expense side.
Curious what it would take to bring.
The comp ratio below 49% below that low end of the range, what you would need to see for that to happen as you look out on a maybe a multi year basis and then just on the G&A side.
Non comp maybe you could just talk about some of the actions that you guys are taking that enabled you to bring down the range and just how you think about that pace of growth going forward.
A couple of comments and Mike will add to that so in terms of the expense ratio.
Generally the biggest driver of it is actually the revenue impact as opposed to the employment expense.
Michael Cypress: So we continue to see a pipeline that has diversity of equity strategies, of non-correlated strategies, of fixed income strategies. So I think that's great. We did make some comments, you know, and institutional is always going to be lumping in its nature in terms of when money comes in and when money goes out. Particularly as clients are looking to either rebounds their portfolios, etc. And we are, we did comment that we are starting to see a little bit more of a longer funding cycle.
In fact, because we have a high percentage of variable employment costs and they'll vary as Mike stated in terms of profitability in terms of sales in terms of other kinds of metrics. So a lot of times the volatility seen in the metric is really going to be driven by.
So we had that period, where there was just really.
Strong market trajectory and then that ratio is going down and it was really not about the expense line. It was actually about the revenue line. So we continue to think that variable expenses are.
George Aylward: I don't think it's unusual in this type of a market, but it just kind of makes the predictability of that, you know, it's just a little more challenging.
Michael Angerthal: Mike, comments on the institutional team? Yeah, I think George laid it out pretty well. When we look at, you know, recent fundings and the expansion of the international business, we're certainly getting strong contributions from the global team, not only the team in Europe, but the team in Singapore and Asia, and that the pipeline is comprised of opportunities from each of those areas. And it's across affiliates and across those geographies. And, you know, we do have significant contributions in the pipeline from those teams and give us, you know, gives us confidence over the long term.
A benefit to have and it will be impacted based upon that Mike you want to comment on the appointment and then yet.
Just generally speaking on the expense side, we were pleased this quarter that incremental margins above 75% of them.
Really all we said the business is Levered to bowl and you see that in those incremental margins that emerged this quarter I think on the employment row as George said, there is significant amount of variability in the compensation structure.
Which will vary based on profitability and sales and then certainly the biggest driver will be market. So.
Michael Angerthal: Any quarter can certainly have different results, but when we look at each of the last three years, as well as trailing 12 months of year to date, we continue to be excited about the pipeline of opportunities and about what that team is contributing and the activities that they have upcoming with many of our affiliates.
That's something that we'll continue to provide information on if we get to the lower end or below that range and in the market environments.
Other operating.
We've been focused on the discretionary.
Expenditures.
For the last year year, and a half really trying to offset the impacts that we've seen from inflationary pressure from our service providers and vendors.
We've consolidated significant.
Michael Cypress: Great, thanks.
Michael Cypress: And then just a question on your ETF platform. I was hoping you might be able to speak to, you know, how you guys are thinking about continuing to build that out. Any thoughts around mutual fund ETF conversions, as well as scope for launching some new active ETFs, as we've seen others start to have some success with that across the industry.
Middle office systems and platforms that have enabled us to maintain our other operating.
In a pretty tight range I think two quarters in a row, we modestly reduced that.
That range and we will continue to focus on.
George Aylward: Industry. Yeah, and we definitely, you know, as we sort of look at, you know, how are retail investors increasingly want to access capabilities? Obviously, the growth is really going to be in the retail separate accounts in the ETFs. You know, open-end funds is a product category. You know, has, you know, various challenges in terms of, you know, where it is in terms of its trajectory and is currently, you know, apparently, the preferred source of, you know, funding when you need to move money into cash.
Ways to drive efficiency in our.
And our operating <unk>.
Spencers.
To increase the leverage ability and provide a strong platform for growth.
Great. Thanks for taking my questions.
Thank you.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Edward.
Thank you and again as always I want to thank everyone for joining us today, and certainly encourage you to give us a call or any other further questions. Thank you very much.
George Aylward: So ETFs, again, we have positive flows in ETFs. We've been, you know, fully putting out our capabilities on the ETF side. It's a small part of our business, but it is definitely growing. And it's also where we have a lot of our focus for new offerings and, you know, to your specific comment. And I think we referenced it in our prepared remarks, you know, we're in the process of expanding our actively-managed fixed income strategies in particular.
George Aylward: So we've had several. We've actually expect to expand that and expand those capabilities as well as in some of our other non-correlated strategies. So as we look at that space, you know, for us, it will generally be more of the actively-managed, differentiated, and those projects that are attractive, you know, any ETF wrapper, you know, which is, you know, attractive for a lot of reasons. And increasingly, we're seeing a lot of those reasons really relate to the tax efficiency of that.
Okay.
This concludes today's call. Thank you for participating and you may now disconnect.
Okay.
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George Aylward: So, and I think that's kind of similar to the retail separate accounts, which, again, has been a very strong part of our business. But we continue to see that as an area to sort of expand our area of success, which has been, you know, overweight, you know, equity types of capabilities. And we continue to develop and launch other types of retail separate accounts, because, again, they're a very attractive access point for a lot of what we're seeing in the growth of the retail market.
Yes.
Yes.
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Michael Cypress: Great.
Operator: Thank you.
Okay.
Hum.
Michael Cypress: And I think it just squeezed one more question in here, just on the expense side. Just curious what it would take to bring the compression below 49 percent below that low end of the range. What, what you would need to see for that to happen as you look out on maybe a multi-year basis.
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George Aylward: And then just on the GNA side, not company, you could just talk about some of the actions that you guys are taking that enabled you to bring down the range and just how you think about that pace of growth going forward. A couple of comments on Mike will add to that. So, you know, in terms of the expense ratio, you know, generally the biggest driver is actually the revenue impact as opposed to the employment expense impact.
Yes.
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Okay.
George Aylward: Because most of, we have a high percentage of variable employment costs, and they'll vary as Mike stated, you know, in terms of profitability, in terms of sales, in terms of other kinds of metrics. So, a lot of times the volatility C in the metric is really going to be driven by, you know, we had that period where there was just a really strong market trajectory, and then that ratio was going down, and it was really not about the expense line, it was actually about the revenue line.
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Okay.
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George Aylward: So, we continue to think that variable expenses are, you know, a benefit you have, and it will be impacted based upon that. Mike, you want to comment on the appointment, and then, yeah, I think. Just generally speaking, on the expense side, we were pleased this quarter to have incremental margins of about 75 percent. We really always said the business is leverageable and you see that in those incremental margins that emerged this quarter.
George Aylward: I think on the employment row, as George said, there is a significant amount of variability in the compensation structure, which will vary based on profitability and sales, and then certainly the biggest driver will be markets. So that's something that will continue to provide information on if we get to the lower end or below that range in market environments. I think on other operating, we've been focused on the discretionary expenditures for the last year and a half, really trying to offset the impacts that we've seen from inflationary pressure, from our service providers and vendors.
George Aylward: We've consolidated significant middle office systems and platforms that have enabled us to maintain our other operating in a pretty tight range. I think two quarters in a row, we've modestly reduced that range and will continue to focus on ways to drive efficiency in our operating expenses to increase the leverageability and provide a strong platform for growth.
Michael Cypress: Great, thanks for taking my question.
Operator: Thank you.
George Aylward: This concludes our question and answer session.
George Aylward: I would like to turn the conference back over to Mr. Alward. Great, thank you. Again, as always, I want to thank everyone for joining us today and certainly encourage you to give us a call. There are any other further questions. Thank you very much.
Operator: That concludes today's call.
Operator: Thank you for participating and you may now disconnect. Thank you for joining us today, and we'll see you in the next video. Thank you. Thank you for joining us today, and we'll see you in the next video. Thank you very much. Thank you for your time, and I'll see you in the next episode of Michael Cyprys. Thank you for your time. Michael C. Williams, George Aylward, Michael C. Williams, Sean Rourke Michael C. Williams, George Aylward, Michael C. Williams, Sean Rourke, Michael C. Williams, George Aylward, Michael C. Williams, Michael C. Williams, George Aylward, Michael C. Williams, Sean Rourke,
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