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VRTS > SEC Filings for VRTS > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for VIRTUS INVESTMENT PARTNERS, INC.

Form 10-Q for VIRTUS INVESTMENT PARTNERS, INC.


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements that are, or may be considered to be, forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995, as amended, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. These statements may be identified by such forward-looking terminology as "expect," "estimate," "plan," "intend," "believe," "anticipate," "may," "will," "should," "could," "continue," "project" or similar statements or variations of such terms and relate to, among other things:

The expected impact of pending legal and regulatory matters.

Our future capital requirements, the anticipated uses of our cash and the sufficiency of our cash resources.

Our forward-looking statements are based on a series of expectations, assumptions and projections about our Company and the markets in which we operate, are not guarantees of future results or performance, and involve substantial risks and uncertainty, including assumptions and projections concerning our assets under management, net cash inflows and outflows, operating cash flows, and future credit facilities, for all forward periods. All of our forward-looking statements contained in this Quarterly Report are as of the date of this Quarterly Report only.

The Company can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. The Company does not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections, or other circumstances occurring after the date of this Quarterly Report, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. If there are any future public statements or disclosures by us which modify or impact any of the forward-looking statements contained in or accompanying this Quarterly Report, such statements or disclosures will be deemed to modify or supersede such statements in this Quarterly Report.

Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including those discussed under "Risk Factors," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2011 Annual Report on Form 10-K, as well as the following risks and uncertainties: (a) the effects of changes and volatility in political, economic or industry conditions, the interest rate environment, or financial and capital markets; (b) any poor relative investment performance of our asset management strategies and any resulting outflows of assets; (c) mutual fund sales in any period may be through a limited number of financial intermediaries, from a limited number of investment strategies, and impacted by relative performance and the breadth and type of investment products we offer; (d) any lack of availability of additional and/or replacement financing, as may be needed, on satisfactory terms or at all; (e) any inadequate performance of third-party relationships; (f) the withdrawal of assets from under our management; (g) our ability to attract and retain key personnel in a competitive environment; (h) the ability of independent trustees of our mutual funds and closed-end funds, and other clients, to terminate their relationships with us;
(i) the possibility that our goodwill or intangible assets could become impaired, requiring a charge to earnings; (j) the competition we face in our business, including competition related to investment products and fees;
(k) potential adverse regulatory and legal developments; (l) the difficulty of detecting misconduct by our employees, sub-advisors and distribution partners;
(m) changes in accounting or regulatory standards or rules; (n) the ability to satisfy the financial covenants under existing debt agreements; and (o) certain other risks and uncertainties described in our 2011 Annual Report on Form 10-K or in any of our other filings with the Securities and Exchange Commission ("SEC"), which are available on our website at www.virtus.com under "Investor Relations." An occurrence of, or any material adverse change in, one or more risk factors or risks and uncertainties referred to in this Quarterly Report or included in our 2011 Annual Report on Form 10-K or our other periodic reports filed with the SEC could materially and adversely affect our operations, financial results, cash flows, prospects and liquidity.

Overview

We are a provider of investment management products and services to individuals and institutions. We operate a multi-manager investment management business, comprised of affiliated managers and unaffiliated sub-advisors, each having its own distinct investment style, autonomous investment process and brand. We believe our customers value this approach and appreciate individual managers with distinctive cultures and styles.

We provide our products in a number of forms and through multiple distribution channels. Our retail products include open-end mutual funds, closed-end funds, variable insurance funds and separately managed accounts. Our fund family of open-end funds is distributed primarily through intermediaries. Our closed-end funds trade on the New York Stock Exchange. Our variable insurance funds are available as investment options in variable annuities and life insurance products distributed by insurance companies. Retail separately managed accounts are comprised of intermediary programs, sponsored and distributed by unaffiliated brokerage firms, and


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private client accounts, which are offerings to the high net-worth clients of our affiliated managers. We also manage institutional accounts for corporations, multi-employer retirement funds, public employee retirement systems, foundations and endowments and special purpose funds. Our earnings are primarily driven by asset-based investment management fees charged on these various products. These fees are based on a percentage of assets under management and are calculated using daily or weekly average assets or assets at the end of the preceding quarter.

Financial Highlights

Total sales of $3.9 billion in the third quarter of 2012 increased $0.6 billion or 18.2% from $3.3 billion in the third quarter of 2011, driven by higher long-term open-end mutual fund sales.

Long-term open-end mutual fund sales increased $0.9 billion or 37.5% to $3.3 billion in the third quarter of 2012 from $2.4 billion in the third quarter of 2011.

Third quarter 2012 total positive net flows of $1.8 billion, primarily from long-term open-end mutual fund sales, and market appreciation of $1.4 billion contributed to the increase in assets under management to $41.8 billion at September 30, 2012 from $38.8 billion at June 30, 2012.

Total revenue was $72.0 million in the third quarter of 2012, an increase of 29.7% from $55.5 million in the third quarter of 2011, and investment management fees increased 29.4% in the third quarter of 2012 to $48.0 million from $37.1 million in the third quarter of 2011.

On October 1, 2012, we completed the acquisition of the business of Rampart Investment Management ("Rampart"). Rampart is a registered investment advisor that specializes in customized options strategies for institutional and high-net-worth clients by providing a systematic and disciplined options solutions to help its clients generate incremental yield, reduce downside risk and mitigate market volatility.

Assets Under Management

At September 30, 2012, we managed $41.8 billion in total assets, representing an increase of $8.7 billion or 26.3%, from the $33.1 billion managed at September 30, 2011. Long-term assets under management, which exclude cash management products, were $40.0 billion at September 30, 2012, an increase of 33.8% from September 30, 2011 and an increase of 24.2% from December 31, 2011. Average assets under management, which generally correspond to our fee-earning asset levels, were $40.1 billion for the nine months ended September 30, 2012, an increase of 23.0% from $32.6 billion for the nine months ended September 30, 2011.

The increase in assets under management for the three months ended September 30, 2012 was due primarily to overall positive net flows of $1.8 billion and market appreciation of $1.4 billion. The positive net flows were primarily the result of strong sales of long-term open-end mutual fund products. Our best selling open-end mutual fund, Virtus Emerging Markets Opportunities Fund, represented 40.9% of long-term open-end mutual fund sales for the three months ended September 30, 2012, compared to the same period in 2011 when our best selling open-end mutual fund, Virtus Multi-Sector Short-Term Bond Fund, represented 30.5% of long-term open-end mutual fund sales.

The increase in assets under management for the nine months ended September 30, 2012 was due primarily to overall positive net flows of $5.0 billion and market appreciation of $3.3 billion offset by the early liquidation of one of our structured finance products of $0.4 billion. The positive net flows were primarily the result of strong sales of long-term open-end mutual fund products and the launch of a new closed-end fund, Virtus Global Income Fund Inc. (NYSE:VGI) during the first quarter of 2012. Our best selling open-end mutual fund, Virtus Emerging Markets Opportunities Fund, represented 36.1% of long-term open-end mutual fund sales for the nine months ended September 30, 2012, compared to the same period in 2011 when our best selling open-end mutual fund, Virtus Premium Alpha-Sector Fund, represented 30.0% of long-term open-end mutual fund sales.


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Market appreciation for assets under management for the three and nine months ended September 30, 2012 was consistent with the performance of the securities markets during the same period.

Assets Under Management by Product

The following table summarizes our assets under management by product:



                                                  As of September 30,
                                                  2012           2011
             ($ in millions)
             Retail Assets
             Mutual fund assets
             Long-term open-end funds          $ 23,615.7     $ 14,952.0
             Closed-end funds                     6,365.3        5,318.7
             Money market open-end funds          1,763.8        2,407.8

             Total mutual fund assets            31,744.8       22,678.5


             Variable Insurance Funds             1,311.9        1,244.7


             Separately managed accounts
             Intermediary sponsored programs      2,420.6        1,854.3
             Private client accounts              2,110.4        1,837.7

             Total managed account assets         4,531.0        3,692.0

             Total retail assets                 37,587.7       27,615.2


             Institutional Assets
             Institutional accounts               3,525.8        4,422.3
             Structured finance products            686.9        1,035.2

             Total institutional assets           4,212.7        5,457.5

             Total Assets Under Management     $ 41,800.4     $ 33,072.7

             Average Assets Under Management   $ 38,185.1     $ 32,604.9

Assets Under Management by Asset Class

The following table summarizes our assets under management by asset class:



                                             As of September 30,
                                 2012           %            2011           %
            ($ in millions)
            Asset Class
            Equity            $ 24,143.4        57.8 %    $ 16,763.3        50.7 %
            Fixed Income        15,846.5        37.9 %      13,129.1        39.7 %
            Cash                 1,810.5         4.3 %       3,180.3         9.6 %

            Total             $ 41,800.4       100.0 %    $ 33,072.7       100.0 %


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Asset Flows by Product

The following table summarizes our asset flows by product:



                                            Three Months Ended September 30,               Nine Months Ended September 30,
($ in millions)                               2012                     2011                  2012                   2011

Mutual Funds - Long-term Open-end
Beginning balance                       $       21,126.1         $       15,471.7       $      16,896.6        $      11,801.2
Inflows                                          3,304.8                  2,427.0               8,947.5                7,114.9
Outflows                                        (1,708.9 )               (1,418.8 )            (4,275.0 )             (3,147.7 )

Net flows                                        1,595.9                  1,008.2               4,672.5                3,967.2
Market appreciation (depreciation)                 911.9                 (1,496.8 )             2,066.9                 (733.1 )
Other (1)                                          (18.2 )                  (31.1 )               (20.3 )                (83.3 )

Ending balance                          $       23,615.7         $       14,952.0       $      23,615.7        $      14,952.0


Mutual Funds - Closed-end
Beginning balance                       $        6,051.6         $        4,545.1       $       5,675.6        $       4,321.2
Inflows                                            229.2                    719.1                 444.2                  817.1
Outflows                                              -                        -                     -                      -

Net flows                                          229.2                    719.1                 444.2                  817.1
Market appreciation (depreciation)                 181.5                   (113.8 )               406.4                  172.9
Other (1)                                          (97.0 )                  168.3                (160.9 )                  7.5

Ending balance                          $        6,365.3         $        5,318.7       $       6,365.3        $       5,318.7


Mutual Funds - Money Market Open-end
Beginning balance                       $        1,818.7         $        2,122.6       $       2,294.8        $       2,915.5
Other (1)                                          (54.9 )                  285.2                (531.0 )               (507.7 )

Ending balance                          $        1,763.8         $        2,407.8       $       1,763.8        $       2,407.8


Variable Insurance Funds
Beginning balance                       $        1,295.9         $        1,511.6       $       1,308.6        $       1,538.5
Inflows                                             13.5                      7.6                  32.5                   19.5
Outflows                                           (52.8 )                  (62.7 )              (177.9 )               (208.2 )

Net flows                                          (39.3 )                  (55.1 )              (145.4 )               (188.7 )
Market appreciation (depreciation)                  55.3                   (211.8 )               148.7                 (106.1 )
Other (1)                                             -                        -                     -                     1.0

Ending balance                          $        1,311.9         $        1,244.7       $       1,311.9        $       1,244.7


Separately Managed Accounts (2)
Beginning balance                       $        4,367.7         $        4,091.0       $       3,933.8        $       3,833.0
Inflows                                            246.6                    144.2                 896.6                  508.3
Outflows                                          (211.1 )                 (144.8 )              (695.0 )               (516.7 )

Net flows                                           35.5                     (0.6 )               201.6                   (8.4 )
Market appreciation (depreciation)                 128.0                   (412.8 )               484.7                  (75.5 )
Other (1)                                           (0.2 )                   14.4                 (89.1 )                (57.1 )

Ending balance                          $        4,531.0         $        3,692.0       $       4,531.0        $       3,692.0


Institutional Products (2) (3)
Beginning balance                       $        4,178.9         $        5,582.3       $       4,478.2        $       5,063.9
Inflows                                            112.6                     41.5                 275.9                  134.8
Outflows                                          (159.5 )                  (99.3 )              (404.8 )               (304.1 )

Net flows                                          (46.9 )                  (57.8 )              (128.9 )               (169.3 )
Market appreciation (depreciation)                  74.2                    (90.0 )               201.3                   76.0
Other (1)                                            6.5                     23.0                (337.9 )                486.9

Ending balance                          $        4,212.7         $        5,457.5       $       4,212.7        $       5,457.5


Total
Beginning balance                       $       38,838.9         $       33,324.3       $      34,587.6        $      29,473.3
Inflows                                          3,906.7                  3,339.4              10,596.7                8,594.6
Outflows                                        (2,132.3 )               (1,725.6 )            (5,552.7 )             (4,176.7 )

Net flows                                        1,774.4                  1,613.8               5,044.0                4,417.9
Market appreciation (depreciation)               1,350.9                 (2,325.2 )             3,308.0                 (665.8 )
Other (1)                                         (163.8 )                  459.8              (1,139.2 )               (152.7 )

Ending balance                          $       41,800.4         $       33,072.7       $      41,800.4        $      33,072.7


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(1) Comprised of open-end and closed-end mutual fund distributions, net flows of cash management strategies, net flows and market appreciation (depreciation) on structured products, and net flows from non-sales related activities such as asset acquisitions (dispositions) and the impact of leverage on assets under management. For the three and nine months ended September 30, 2011, closed-end mutual fund dividends distributed were previously included in market appreciation (depreciation) and have been reclassified to "Other" to conform with the current period classification.

(2) Excluding cash management products, Separately Managed Accounts and Institutional Products ending assets under management were:

                                                       As of September 30,
                                                        2012          2011
         Separately Managed Accounts-Ending Assets   $  4,485.6     $ 3,648.6
         Institutional Products-Ending Assets        $  4,211.4     $ 4,728.4

(3) Institutional Products consists of Institutional Accounts and Structured Products. The prior periods presented include separate rollforwards for Institutional Accounts and Structured Products.

Average Fee Earning Assets Under Management and Average Basis Points

The following table summarizes the average amount of fee earning assets under
management and the average management fee earned expressed in basis points for
the periods shown:



                                                            Three Months Ended September 30,
                                               Average Fees Earned                Average Fee Earning Assets
                                                (expressed in BPs)                      ($ in millions)
                                             2012                 2011              2012                2011
Products
Mutual Funds - Long-term Open-End(1)                51                 49      $      22,246.3       $  15,631.0
Mutual Funds - Closed-End (1)                       59                 56              6,114.2           5,004.7
Mutual Funds - Money Market (1)                      4                  3              1,805.6           2,443.7
Variable Insurance Funds (1)                        47                 44              1,307.6           1,394.2
Separately Managed Accounts (2)                     51                 50              4,367.7           4,091.0
Institutional Products (2)                          30                 25              4,222.1           5,741.6

All Products                                        48                 43      $      40,063.5       $  34,306.2

                                                            Nine Months Ended September 30,
                                              Average Fees Earned              Average Fee Earning Assets
                                               (expressed in BPs)                   ($ in millions)
                                              2012              2011             2012                2011
Products
Mutual Funds - Long-term Open-End(1)                50             44       $     20,413.8        $ 14,334.5
Mutual Funds - Closed-End (1)                       59             54              5,934.0           4,650.7
Mutual Funds - Money Market (1)                      4              4              1,863.4           2,581.2
Variable Insurance Funds (1)                        47             41              1,330.4           1,491.9
Separately Managed Accounts (2)                     51             50              4,202.0           3,976.4
Institutional Products (2)                          30             27              4,441.5           5,570.2

All Products                                        47             40       $     38,185.1        $ 32,604.9

(1) Average fees earned are net of unaffiliated sub-advisory fees, fund expense reimbursements and advisory fee waivers.

(2) Excluding cash management products, Separately Managed Accounts and Institutional Products average assets under management and average net fees earned were:


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                                            Three Months Ended September 30,             Nine Months Ended September 30,
                                               2012                   2011                 2012                   2011
Separately Managed Accounts-Average
Assets                                   $        4,325.7       $        4,036.0     $        4,156.3       $        3,896.5
Separately Managed Accounts-Average
Fees (in basis points)                                 51                     51                   52                     50
Institutional Products-Average Assets    $        4,217.7       $        4,912.3     $        4,421.7       $        4,903.7
Institutional Products-Average Fees
(in basis points)                                      30                     29                   30                     30

The average fee earning assets under management and average fees earned expressed in basis points presented in the table above are intended to assist in the analysis of our asset based revenue. Open-end mutual fund and variable insurance fund fees are calculated based on average daily net assets and closed-end fund fees are calculated based on average weekly net assets. Average fees earned vary based on several factors, including the composition of assets and fund reimbursements. Separately managed account fees are generally calculated based on the end of the preceding quarter's asset values. Institutional product fees are calculated based on an average of month-end balances. Structured finance product fees, which are included in institutional products, are calculated based on a combination of the underlying cash flows and the principal value of the product.

The average fee rate earned increased for the three and nine months ended September 30, 2012 compared to the corresponding periods in the prior year as equity products, which generally have higher fees, represented a higher percentage of our assets under management due to strong sales, positive flows and market appreciation. The average fee rate earned on long-term open-end mutual funds also increased for the nine months ended September 30, 2012 as compared to the same period in 2011 due to the internalization during the second quarter of 2011 of the Newfleet Multi-Sector portfolio management team, and the corresponding elimination of the prior sub-advisory fees. The average fee rate earned on long-term closed-end mutual funds increased for the three and nine months ended September 30, 2012 as compared to the same period in 2011 due to the addition of the Duff & Phelps Global Utility Income Fund Inc. during the third quarter of 2011 and the Virtus Global Multi-Sector Income Fund during the first quarter of 2012. The average fee rate earned on variable insurance funds increased for the three and nine months ended September 30, 2012 as compared to the same period in 2011 due to a decrease in fund reimbursements over the same periods.

Results of Operations

Summary Financial Data



                                         Three Months Ended                                 Nine Months Ended
                                            September 30,               Change                September 30,                Change
                                          2012          2011         2012 vs. 2011         2012           2011          2012 vs. 2011
($ in thousands)
Results of Operations
Investment management fees             $   47,985     $ 37,053      $        10,932      $ 134,710      $  97,365      $        37,345
Other revenue                              23,966       18,404                5,562         66,457         51,115               15,342

Total revenues                             71,951       55,457               16,494        201,167        148,480               52,687


Operating expenses                         53,153       56,672               (3,519 )      158,178        139,736               18,442
Intangible asset amortization               1,031          978                   53          3,016          3,035                  (19 )

Total expenses                             54,184       57,650               (3,466 )      161,194        142,771               18,423

Operating income                           17,767       (2,193 )             19,960         39,973          5,709               34,264
Other income (expense), net                 1,154       (1,572 )              2,726          2,164           (945 )              3,109
Interest expense, net                          -          (108 )                108           (198 )         (400 )                202
. . .
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