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| VRTS > SEC Filings for VRTS > Form 10-K on 1-Mar-2013 | All Recent SEC Filings |
1-Mar-2013
Annual Report
Overview
Our Business
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 subadvisers, each having its own distinct investment style, autonomous investment process and brand. We believe our clients value this approach and appreciate individual managers with distinctive cultures and styles.
Investors have an array of needs driven by factors such as market conditions, risk tolerance and investment goals. A key element of our business is offering a variety of investment styles and multiple disciplines to meet those needs. To that end, for our mutual funds, we provide investment capabilities from our affiliated managers and select unaffiliated subadvisers.
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 third-party life insurance companies. Retail separately managed accounts are comprised of intermediary programs, sponsored and distributed by unaffiliated brokerage firms, and 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 fees charged on these various products. These fees are based on a percentage of assets under management ("AUM") and are calculated using daily or weekly average assets or assets at the end of the preceding quarter. In addition to investment management, our services include fund administration, sales, distribution, shareholder services, and transfer agency services.
Market Developments
In 2012, the financial markets produced positive returns. Global equity markets were up for 2012 as evidenced by the MSCI World Index ending the year at 1,339 as compared to 1,183 from the start of the year. The major U.S. equity indexes were also up for 2012 as the Dow Jones Industrial Average ended the year at 13,104, from 12,218 at the beginning of the year, and the Standard & Poor's 500 Index ended the year at 1,426, from 1,257 at the beginning of the year.
Increases and decreases in our assets under management are driven in part by the performance of the financial markets. The financial markets have experienced a period of significant volatility over the past five years, which impacted asset flows and the value of our assets under management. The capital and financial markets could experience further fluctuation and volatility, which could impact relative investment returns and asset flows among investment products as well as investor choices and preferences among investment products, including equity, fixed income and alternative products. Uncertainties remain about the long-term nature of the economic recovery. The inconsistent nature of the recovery, and the possibility that further economic gains could be disrupted by local or global events such as adverse changes in interest rates, significant shifts in commodity supplies or prices, political unrest, or even government initiatives, could adversely impact interest in our investment products and services and, consequently, revenue and earnings.
Financial Highlights
• Long-term open-end mutual fund sales were $12.3 billion in 2012, an increase of 30.2% from $9.5 billion in 2011. Long-term open-end mutual fund sales remained relatively balanced among asset strategies, and in 2012 26.6% of sales were in domestic equity funds; 32.3% in fixed income strategies; and 41.1% in international equity funds.
• Total revenue was $280.1 million in 2012, an increase of 36.9% from $204.7 million in 2011. Investment management fees increased 39.1% in 2012 to $187.9 million from $135.1 million in 2011. Total revenue increased in 2012 compared to prior year as a result of increased mutual fund revenue related to higher average assets under management and an increase in average fees earned.
• In 2012, we launched the Virtus Global Multi-Sector Income Fund Inc. (NYSE:VGI), a new closed-end fund managed by Newfleet Asset Management LLC, an affiliated manager. The fund added $205.4 million in assets under management.
• During the fourth quarter of 2012, we completed the acquisition of the business and assets of Rampart Investment Management Company, Inc. ("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 solution to help its clients generate incremental yield, reduce downside risk and mitigate market volatility. This acquisition added $1.3 billion in assets under management.
Assets Under Management
Assets under management increased 31.7% to $45.5 billion at December 31, 2012 from $34.6 billion at December 31, 2011. The increase in assets under management was driven primarily by positive net flows of $6.7 billion, market appreciation of $3.8 billion and the acquisition of Rampart, offset by a decrease in cash management assets of $0.4 million. Positive net flows of $6.7 billion in 2012 were primarily due to strong sales of long-term open-end mutual funds and the launch of the VGI closed-end fund. The best selling long-term open-end mutual fund, Virtus Emerging Markets Opportunities Fund, represented 36.0% of long-term open-end mutual fund sales for 2012, compared to 2011 when our best selling long-term open-end mutual fund, Virtus Multi-Sector Short Term Bond Fund, represented 29.0% of long-term open-end mutual fund sales.
During 2012, the Company's equity assets increased to 59.1% of total assets under management compared with 54.9% in 2011. Fixed income assets represented 36.4% of total assets under management at December 31, 2012, compared with 38.1% at the end of 2011, and cash management assets declined to 4.5% of total assets under management at the end of 2012 from 7.0% at December 31, 2011.
Operating Results
In 2012, total revenue increased 36.9% to $280.1 million from $204.7 million in 2011. Revenues increased in 2012 as compared with 2011 primarily as a result of an increase in average assets and an increase in average management fee rates. Average assets under management, which corresponds to the Company's fee-earning asset levels, was $39.6 billion for the year ended December 31, 2012, an increase of 20.1% from $33.0 billion for the year ended December 31, 2011. Operating income increased by 334.8% from $13.9 million in 2011 to $60.4 million in 2012, primarily due to increased revenues driven by higher levels of average assets under management.
Assets Under Management by Product
The following table presents our assets under management by product for the
periods indicated:
As of December 31, Change
2012 vs. 2011 vs.
2012 2011 2010 2011 % 2010 %
($ in millions)
Retail Assets
Mutual fund assets
Long-term open-end funds $ 25,827.1 $ 16,896.6 $ 11,801.3 $ 8,930.5 52.9 % $ 5,095.3 43.2 %
Closed-end funds 6,231.6 5,675.6 4,321.1 556.0 9.8 % 1,354.5 31.3 %
Money market open-end funds 1,994.1 2,294.8 2,915.5 (300.7 ) (13.1 )% (620.7 ) (21.3 )%
Total mutual fund assets 34,052.8 24,867.0 19,037.9 9,185.8 36.9 % 5,829.1 30.6 %
Variable insurance funds 1,295.7 1,308.6 1,538.5 (12.9 ) (1.0 )% (229.9 ) (14.9 )%
Separately managed accounts
Intermediary sponsored programs 3,714.9 1,991.6 1,893.5 1,723.3 86.5 % 98.1 5.2 %
Private client accounts 2,114.1 1,942.2 1,939.5 171.9 8.9 % 2.7 0.1 %
Total managed account assets 5,829.0 3,933.8 3,833.0 1,895.2 48.2 % 100.8 2.6 %
Total retail assets 41,177.5 30,109.4 24,409.4 11,068.1 36.8 % 5,700.0 23.4 %
Institutional accounts 3,676.1 3,453.4 4,087.7 222.7 6.4 % (634.3 ) (15.5 )%
Structured finance products 683.4 1,024.8 976.2 (341.4 ) (33.3 )% 48.6 5.0 %
Total institutional assets 4,359.5 4,478.2 5,063.9 (118.7 ) (2.7 )% (585.7 ) (11.6 )%
Total AUM $ 45,537.0 $ 34,587.6 $ 29,473.3 $ 10,949.4 31.7 % $ 5,114.3 17.4 %
Average AUM $ 39,631.5 $ 32,995.6 $ 26,456.6 $ 6,635.9 20.1 % $ 6,539.0 24.7 %
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Asset Flows by Product
The following table summarizes our asset flows by product for the periods
indicated:
($ in millions) Years Ended December 31,
2012 2011 2010
Retail Products
Mutual Funds-Long-term Open-end
Beginning balance $ 16,896.6 $ 11,801.2 $ 8,902.2
Inflows 12,340.9 9,478.4 4,530.0
Outflows (5,921.7 ) (4,424.0 ) (2,868.6 )
Net flows 6,419.2 5,054.4 1,661.4
Market appreciation 2,542.0 181.1 1,347.5
Other (1) (30.7 ) (140.1 ) (109.9 )
Ending balance $ 25,827.1 $ 16,896.6 $ 11,801.2
Mutual Funds-Closed-end
Beginning balance $ 5,675.6 $ 4,321.2 $ 4,256.9
Inflows 444.2 817.1 -
Outflows - - -
Net flows 444.2 817.1 -
Market appreciation 362.7 514.5 375.8
Other (1) (250.9 ) 22.8 (311.5 )
Ending balance $ 6,231.6 $ 5,675.6 $ 4,321.2
Mutual Funds-Money Market
Beginning balance $ 2,294.8 $ 2,915.5 $ 3,930.6
Other (1) (300.7 ) (620.7 ) (1,015.1 )
Ending balance $ 1,994.1 $ 2,294.8 $ 2,915.5
Variable Insurance Funds (2)
Beginning balance $ 1,308.6 $ 1,538.5 $ -
Inflows 48.0 25.8 4.7
Outflows (238.2 ) (267.8 ) (76.0 )
Net flows (190.2 ) (242.0 ) (71.3 )
Market appreciation 177.3 11.1 65.9
Other (1) - 1.0 1,543.9
Ending balance $ 1,295.7 $ 1,308.6 $ 1,538.5
Separately Managed Accounts
Beginning balance $ 3,933.8 $ 3,833.0 $ 3,551.8
Inflows 1,178.4 733.5 539.0
Outflows (980.7 ) (779.5 ) (672.5 )
Net flows 197.7 (46.0 ) (133.5 )
Market appreciation 526.8 197.0 437.5
Other (1) 1,170.7 (50.2 ) (22.8 )
Ending balance $ 5,829.0 $ 3,933.8 $ 3,833.0
Institutional Products (2)
Beginning balance $ 4,478.2 $ 5,063.9 $ 4,798.2
Inflows 435.9 169.0 745.4
Outflows (576.1 ) (544.3 ) (690.1 )
Net flows (140.2 ) (375.3 ) 55.3
Market appreciation 233.4 240.3 483.4
Other (1) (211.9 ) (450.7 ) (273.0 )
Ending balance $ 4,359.5 $ 4,478.2 $ 5,063.9
Total
Beginning balance $ 34,587.6 $ 29,473.3 $ 25,439.7
Inflows 14,447.4 11,223.8 5,819.1
Outflows (7,716.7 ) (6,015.6 ) (4,307.2 )
Net flows 6,730.7 5,208.2 1,511.9
Market appreciation 3,842.2 1,144.0 2,710.1
Other (1) 376.5 (1,237.9 ) (188.4 )
Ending balance $ 45,537.0 $ 34,587.6 $ 29,473.3
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(1) Comprised of mutual fund distributions, net flows of cash management strategies, 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.
(2) Institutional Products consists of Institutional Accounts and Structured Products. Prior period presentations included separate rollforwards for Institutional Accounts and Structured Products.
The following table summarizes our assets under management by asset class:
As of December 31, Change
2012 vs. 2011 vs.
2012 2011 2010 2011 % 2010 %
($ in millions)
Asset Class
Equity (1) $ 26,925.5 $ 18,978.5 $ 14,403.4 $ 7,947.0 41.9 % $ 4,575.1 31.8 %
Fixed income 16,581.7 13,187.9 11,752.5 3,393.8 25.7 % 1,435.4 12.2 %
Cash management 2,029.8 2,421.2 3,317.4 (391.4 ) (16.2 )% (896.2 ) (27.0 )%
Total $ 45,537.0 $ 34,587.6 $ 29,473.3 $ 10,949.4 31.7 % $ 5,114.3 17.4 %
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(1) Includes assets under management related to options strategies.
Year ended December 31, 2012 compared to year ended December 31, 2011. At December 31, 2012, we managed $45.5 billion in total assets representing an increase of $10.9 billion or 31.7% from the $34.6 billion managed at December 31, 2011. The increase in assets under management for the year ended December 31, 2012 was due primarily to overall positive net flows of $6.7 billion, market appreciation of $3.8 billion and the acquisition of Rampart which added $1.3 billion. The positive net flows were primarily the result of strong sales of long-term open-end mutual funds and the launch of the Virtus Global Multi-Sector Income Fund ("VGI") closed-end fund. Cash management assets declined for the year ended December 31, 2012 due to redemptions of cash management institutional mandates.
Year ended December 31, 2011 compared to year ended December 31, 2010. At December 31, 2011, we managed $34.6 billion in total assets representing an increase of $5.1 billion or 17.4% from the $29.5 billion managed at December 31, 2010. The increase in assets under management for the year ended December 31, 2011 was due primarily to overall positive net flows of $5.2 billion. The positive net flows were primarily the result of strong sales of long-term open-end mutual funds and the launch of the Duff & Phelps Global Utility Income Fund ("DPG") closed-end fund. Market appreciation and redemptions for assets under management for the year ended December 31, 2011 were consistent with the uncertainty of the security markets during the same period. Cash management assets declined for the year ended December 31, 2011 due to redemptions of cash management institutional mandates and as investors continued to shift assets out of these products due to historically low interest rates.
Average Assets Under Management and Average Basis Points
The following table summarizes average assets under management and average
management fee basis points:
As of December 31,
Average Fees Earned Average Assets Under Management
(expressed in BPs) ($ in millions)
2012 2011 2010 2012 2011 2010
Products
Mutual Funds-Long-term Open-End (1) 51 46 40 $ 21,446.5 $ 14,799.0 $ 10,187.0
Mutual Funds-Closed-End 59 54 53 6,014.9 4,851.7 4,195.3
Mutual Funds-Money Market (1) 4 4 5 1,845.7 2,516.1 2,990.1
Variable Insurance Funds (1) 48 42 45 1,319.8 1,447.0 237.7
Separately Managed Accounts 51 49 48 4,586.0 3,905.3 3,568.0
Institutional Products 31 27 30 4,418.6 5,476.5 5,278.5
All Products 47 41 37 $ 39,631.5 $ 32,995.6 $ 26,456.6
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(1) Average fees earned are net of non-affiliated sub-advisory fees.
The average assets under management and average fee rates presented in the table are intended to provide information in the analysis of our asset-based revenue. Money market, long-term open-end mutual fund and variable insurance fund fees are calculated based on average daily net assets. Closed-end fund fees are calculated based on either average weekly or daily net assets. Average fees earned will vary based on several factors, including the asset mix and reimbursements to funds. 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 for 2012 increased as compared to 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 as well as due to the internalization of the Newfleet Multi-Sector portfolio management team in the second quarter of 2011, which eliminated a prior sub-advisory fee. The average fee rate earned on closed-end mutual funds increased for 2012 as compared to the same period in 2011 due to the addition of DPG during the third quarter of 2011 and VGI during the first quarter of 2012. The average fee rate earned on variable insurance funds increased in 2012 as compared to the same period in 2011 due to a decrease in fund reimbursements over the same periods. The average fee rate earned on institutional products increased in 2012 as compared to 2011 due to the redemption of cash management institutional mandates on which we earn lower fee rates.
Results of Operations
Summary Financial Data
Years Ended December 31, Change
2012 2011 2010 2012 vs. 2011 % 2011 vs. 2010 %
($ in thousands)
Results of Operations
Investment management fees $ 187,875 $ 135,063 $ 97,996 $ 52,812 39.1% $ 37,067 37.8%
Other revenue 92,211 69,589 46,560 22,622 32.5% 23,029 49.5%
Total revenues 280,086 204,652 144,556 75,434 36.9% 60,096 41.6%
Operating expenses 215,520 186,731 130,363 28,789 15.4% 56,368 43.2%
Amortization expense 4,121 4,018 4,922 103 2.6% (904 ) (18.4)%
Total expenses 219,641 190,749 135,285 28,892 15.1% 55,464 41.0%
Operating income 60,445 13,903 9,271 46,542 334.8% 4,632 50.0%
Other income (expense), net 3,925 (450 ) 1,208 4,375 (972.2)% (1,658 ) (137.3)%
Interest income (expense),
net 433 (461 ) (324 ) 894 (193.9)% (137 ) 42.3%
Income before income taxes 64,803 12,992 10,155 51,811 398.8% 2,837 27.9%
Income tax expense (benefit) 27,030 (132,428 ) 513 159,458 (120.4)% (132,941 ) (25914.4)%
Net income 37,773 145,420 9,642 (107,647 ) (74.0)% 135,778 1408.2%
Noncontrolling interests (101 ) - - (101 ) N/A - -%
Preferred stockholder
dividends - (9,482 ) (3,289 ) 9,482 (100.0)% (6,193 ) 188.3%
Allocation of earnings to
preferred stockholders (64 ) (24,260 ) (1,144 ) 24,196 (99.7)% (23,116 ) 2020.6%
Net income attributable to
common stockholders $ 37,608 $ 111,678 $ 5,209 $ (74,070 ) (66.3)% $ 106,469 2043.9%
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Revenues
Revenues by source for the years ended December 31, 2012, 2011 and 2010 were as
follows:
Years Ended December 31, Change
($ in thousands) 2012 2011 2010 2012 vs. 2011 % 2011 vs. 2010 %
Investment management fees
Mutual funds $ 144,688 $ 95,176 $ 64,221 $ 49,512 52.0% $ 30,955 48.2%
Separately managed accounts 23,245 19,166 17,057 4,079 21.3% 2,109 12.4%
Institutional accounts 13,554 14,596 14,880 (1,042 ) (7.1)% (284 ) (1.9)%
Variable products 6,388 6,125 1,838 263 4.3% 4,287 233.2%
Total investment management
fees 187,875 135,063 97,996 52,812 39.1% 37,067 37.8%
Distribution and service fees 56,866 43,792 29,572 13,074 29.9% 14,220 48.1%
Administration and transfer
agent fees 33,779 23,878 15,324 9,901 41.5% 8,554 55.8%
Other income and fees 1,566 1,919 1,664 (353 ) (18.4)% 255 15.3%
Total revenues $ 280,086 $ 204,652 $ 144,556 $ 75,434 36.9% $ 60,096 41.6%
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Investment Management Fees
Year ended December 31, 2012 compared to year ended December 31, 2011. Investment management fees are earned based on a percentage of assets under management, and are paid pursuant to the terms of the respective investment management contracts, which generally require monthly or quarterly payment. Investment management fees increased by $52.8 million or 39.1% for the year ended December 31, 2012 due to a 20.1% increase in average assets under management and an increase of approximately 6.5 basis points in average fee rate earned. The increase in average assets under management for the year ended December 31, 2012 was due primarily to overall positive net flows of $6.7 billion resulting from higher sales of long-term open-end mutual funds in 2012 and market appreciation of $3.8 billion. Revenues increased at a higher rate than assets under management due to the increase in the average fee rate earned and the mix of assets. Cash management assets represented 4.5% of total assets under management at December 31, 2012 compared to 7.0% at December 31, 2011.
Year ended December 31, 2011 compared to year ended December 31, 2010. Investment management fees increased by $37.1 million or 37.8% for the year ended December 31, 2011 due to a 24.7% increase in average assets under management and an increase of approximately 4.0 basis points in average fee rate earned. The increase in average assets under management for the year ended . . .
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