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VRTS > SEC Filings for VRTS > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for VIRTUS INVESTMENT PARTNERS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for VIRTUS INVESTMENT PARTNERS, INC.


7-May-2013

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.

We 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 2012 Annual Report on Form 10-K, as well as the following risks and uncertainties: (a) any reduction in our assets under management due to market conditions, investment performance, redemptions or terminations of investment contracts, or regulatory factors; (b) damage to our reputation;
(c) our money market funds do not maintain stable net asset values; (d) our inability to attract and retain key personnel; (e) the competition we face in our business, including competition related to investment products and fees;
(f) limitations on our deferred tax assets; (g) changes in key distribution relationships; (h) interruptions in service or failure to provide service by third-party service providers for technology services critical to our business;
(i) adverse regulatory and legal developments; (j) impairment of our goodwill or intangible assets; (k) lack of availability of required and necessary capital on satisfactory terms; (l) liabilities and losses not covered by our insurance policies; (m) significant reductions to our fee rates; and (n) certain other risks and uncertainties described in our 2012 Annual Report on Form 10-K or in any of our filings with the Securities and Exchange Commission ("SEC"). Any 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 2012 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.

Certain other factors which may impact our continuing operations, prospects, financial results and liquidity or which may cause actual results to differ from such forward-looking statements are discussed or included in the company's periodic reports filed with the SEC and are available on our website at www.virtus.com under "Investor Relations." You are urged to carefully consider all such factors.

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 that offer multiple investment strategies, as well as those from unaffiliated subadvisors. Each affiliated manager and unaffiliated subadvisor has its own distinct investment style, autonomous investment process and brand. 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 believe our customers value this approach and appreciate individual managers with distinctive cultures and styles.


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We offer investment strategies in a number of product 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 open-end funds are 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 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 and are calculated using daily, weekly, or month-end average assets or assets at the end of the preceding quarter. In addition to investment management, our services include fund administration, distribution, shareholder services, and transfer agency services.

Financial Highlights

Total sales of $6.2 billion in the first quarter of 2013 increased $2.7 billion or 77.6% from $3.5 billion in the first quarter of 2012, driven by higher long-term open-end mutual fund sales.

Long-term open-end mutual fund sales increased $2.8 billion or 97.7% to $5.7 billion in the first quarter of 2013 from $2.9 billion in the first quarter of 2012.

First quarter 2013 total positive net flows of $3.7 billion, primarily from long-term open-end mutual fund sales, and market appreciation of $2.2 billion contributed to the increase in assets under management to $51.2 billion at March 31, 2013 from $45.5 billion at December 31, 2012.

Total revenue was $86.2 million in the first quarter of 2013, an increase of 38.1% from $62.4 million in the first quarter of 2012, and investment management fees increased 38.1% in the first quarter of 2013 to $57.8 million from $41.8 million in the first quarter of 2012.

Assets Under Management

At March 31, 2013, we managed $51.2 billion in total assets, representing an increase of $13.2 billion or 34.6%, from the $38.0 billion managed at March 31, 2012 and an increase of $5.7 billion or 12.5% from December 31, 2012. Long-term assets under management, which exclude cash management products, were $49.4 billion at March 31, 2013, an increase of 36.6% from March 31, 2012 and an increase of 13.6% from December 31, 2012. Average assets under management, which generally correspond to our fee-earning asset levels, were $48.3 billion for the three months ended March 31, 2013, an increase of 33.1% from $36.3 billion for the three months ended March 31, 2012.

The increase in assets under management for the three months ended March 31, 2013 was due primarily to overall positive net flows of $3.7 billion and market appreciation of $2.2 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 in the first quarter of 2013, the Virtus Emerging Markets Opportunities Fund, represented 40.1% of long-term open-end mutual fund sales for the three months ended March 31, 2013 and 33.0% of long-term open-end mutual fund sales for the three months ended March 31, 2012.

During the first quarter of 2013, we limited new investments into the Virtus Emerging Markets Opportunities Fund to those from existing shareholders and from shareholders on certain designated broker-dealer platforms. With some investment strategies, it can become necessary to limit the amount of assets managed and to ensure appropriate execution of the strategy.

Market appreciation for assets under management for the three months ended March 31, 2013 was consistent with the performance of the securities markets during the same period in the prior year.


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Assets Under Management by Product

The following table summarizes our assets under management by product:



                                              As of March 31,                       Change
                                            2013            2012          2013 vs. 2012           %
($ in millions)
Retail Assets
Mutual fund assets
Long-term open-end funds                 $ 30,552.5      $ 19,955.1      $      10,597.4          53.1 %
Closed-end funds                            6,621.0         5,992.3                628.7          10.5 %
Money market open-end funds                 1,742.2         1,803.4                (61.2 )        (3.4 )%

Total mutual fund assets                   38,915.7        27,750.8             11,164.9          40.2 %

Variable Insurance Funds                    1,317.8         1,395.8                (78.0 )        (5.6 )%

Separately managed accounts
Intermediary sponsored programs             4,248.6         2,320.1              1,928.5          83.1 %
Private client accounts                     2,186.9         1,984.5                202.4          10.2 %

Total managed account assets                6,435.5         4,304.6              2,130.9          49.5 %

Total retail assets                        46,669.0        33,451.2             13,217.8          39.5 %

Institutional Assets
Institutional accounts                      3,874.3         3,554.5                319.8           9.0 %
Structured finance products                   664.4         1,036.2               (371.8 )       (35.9 )%

Total institutional assets                  4,538.7         4,590.7                (52.0 )        (1.1 )%

Total Assets Under Management            $ 51,207.7      $ 38,041.9      $      13,165.8          34.6 %

Average Assets Under Management          $ 48,287.6      $ 36,288.3      $      11,999.3          33.1 %


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Asset Flows by Product

The following table summarizes our asset flows by product:



                                             Three Months Ended March 31,
         ($ in millions)                        2013                2012
         Mutual Funds-Long-term Open-end
         Beginning balance                 $     25,827.1        $  16,896.6
         Inflows                                  5,710.6            2,888.7
         Outflows                                (2,155.0 )         (1,203.0 )

         Net flows                                3,555.6            1,685.7
         Market appreciation                      1,098.4            1,408.3
         Other (1)                                   71.4              (35.5 )

         Ending balance                    $     30,552.5        $  19,955.1

         Mutual Funds-Closed-end
         Beginning balance                 $      6,231.6        $   5,675.6
         Inflows                                       -               205.4
         Outflows                                      -                  -

         Net flows                                     -               205.4
         Market appreciation                        450.2               89.2
         Other (1)                                  (60.8 )             22.1

         Ending balance                    $      6,621.0        $   5,992.3

         Mutual Funds-Money Market
         Beginning balance                 $      1,994.1        $   2,294.8
         Other (1)                                 (251.9 )           (491.4 )

         Ending balance                    $      1,742.2        $   1,803.4

         Variable Insurance Funds
         Beginning balance                 $      1,295.7        $   1,308.6
         Inflows                                      9.8               10.7
         Outflows                                   (61.0 )            (64.5 )

         Net flows                                  (51.2 )            (53.8 )
         Market appreciation                         73.3              141.0
         Other (1)                                      -                  -

         Ending balance                    $      1,317.8        $   1,395.8

         Separately Managed Accounts (2)
         Beginning balance                 $      5,829.0        $   3,933.8
         Inflows                                    367.0              308.0
         Outflows                                  (234.0 )           (252.3 )

         Net flows                                  133.0               55.7
         Market appreciation                        473.9              399.0
         Other (1)                                   (0.4 )            (83.9 )

         Ending balance                    $      6,435.5        $   4,304.6

         Institutional Products (2)
         Beginning balance                 $      4,359.5        $   4,478.2
         Inflows                                    154.6              102.3
         Outflows                                   (66.0 )           (118.6 )

         Net flows                                   88.6              (16.3 )
         Market appreciation                        109.7              117.4
         Other (1)                                  (19.1 )             11.4

         Ending balance                    $      4,538.7        $   4,590.7

         Total
         Beginning balance                 $     45,537.0        $  34,587.6
         Inflows                                  6,242.0            3,515.1
         Outflows                                (2,516.0 )         (1,638.4 )

         Net flows                                3,726.0            1,876.7
         Market appreciation                      2,205.5            2,154.9
         Other (1)                                 (260.8 )           (577.3 )

         Ending balance                    $     51,207.7        $  38,041.9


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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.

(2) Includes assets under management related to options strategies.

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

                         As of March 31,                  Change                    % of Total
                                                   2013 vs.
                       2013           2012           2012           %           2013         2012
  ($ in millions)
  Asset Class
  Equity (1)        $ 31,033.3     $ 21,940.9     $  9,092.4        41.4 %        60.6 %       57.7 %
  Fixed income        18,389.3       14,249.2        4,140.1        29.1 %        35.9 %       37.4 %
  Cash management      1,785.1        1,851.8          (66.7 )      (3.6 %)        3.5 %        4.9 %

  Total             $ 51,207.7     $ 38,041.9     $ 13,165.8        34.6 %       100.0 %      100.0 %

(1) Includes assets under management related to options strategies.

Average Assets Under Management and Average Basis Points

The following table summarizes the average assets under management and the
average management fee basis points:



                                                                 Three Months Ended March 31,
                                               Average Fees Earned                  Average Assets Under Management
                                           (expressed in basis points)                      ($ in millions)
                                             2013                   2012              2013                   2012
Products
Mutual Funds-Long-term Open-End                     51                 50       $       28,389.9       $       18,634.8
Mutual Funds-Closed-End                             59                 58                6,402.7                5,763.0
Mutual Funds-Money Market (1)                        3                  3                1,838.4                1,997.6
Variable Insurance Funds (1)                        56                 48                1,315.8                1,367.6
Separately Managed Accounts                         50                 52                5,895.7                3,933.8
Institutional Products                              32                 30                4,445.1                4,591.5

All Products                                        49                 46       $       48,287.6       $       36,288.3

(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. Long-term and money market 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 or on an average of month-end balances. 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 months ended March 31, 2013 compared to the corresponding period in the prior year primarily due to continued net flows in higher fee products, as equity assets increased to 60.6% of total assets, as well as the full quarter's effect in 2013 related to the launch of the Virtus Global Multi-Sector Income Fund. Average fees earned on variable insurance funds increased due to a decrease in fund reimbursements.


Table of Contents

Results of Operations

Summary Financial Data



                                              Three Months Ended
                                                  March 31,                           Change
                                             2013            2012          2013 vs. 2012           %
($ in thousands)
Results of Operations
Investment management fees                 $  57,777       $ 41,847       $        15,930           38.1 %
Other revenue                                 28,391         20,551                 7,840           38.1 %

Total revenues                                86,168         62,398                23,770           38.1 %

Operating expenses                            63,958         53,457                10,501           19.6 %
Amortization expense                           1,110            988                   122           12.3 %

Total expenses                                65,068         54,445                10,623           19.5 %

Operating income                              21,100          7,953                13,147          165.3 %
Other income, net                              1,179          1,224                   (45 )         (3.7 )%
Interest income (expense), net                   356            (95 )                 451         (474.7 )%

Income before income taxes                    22,635          9,082                13,553          149.2 %
Income tax expense                             8,450          3,632                 4,818          132.7 %

Net income                                    14,185          5,450                 8,735          160.3 %
Noncontrolling interests                        (225 )           -                   (225 )          N/A
Allocation of earnings to preferred
stockholders                                      -             (64 )                  64         (100.0 )%

Net income attributable to common
stockholders                               $  13,960       $  5,386       $         8,574          159.2 %

Revenues

Revenues by source are as follows:



                                               Three Months Ended
                                                   March 31,                         Change
                                               2013           2012         2013 vs. 2012           %
($ in thousands)
Investment management fees
Mutual funds                                $   45,228      $ 31,750      $        13,478          42.5 %
Separately managed accounts                      7,244         5,033                2,211          43.9 %
Institutional accounts                           3,506         3,423                   83           2.4 %
Variable products                                1,799         1,641                  158           9.6 %

Total investment management fees                57,777        41,847               15,930          38.1 %
Distribution and service fees                   17,361        12,721                4,640          36.5 %
Administration and transfer agent fees          10,695         7,402                3,293          44.5 %
Other income and fees                              335           428                  (93 )       (21.7 )%

Total revenues                              $   86,168      $ 62,398      $        23,770          38.1 %

Investment Management Fees

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 $15.9 million or 38.1% for the three months ended March 31, 2013, compared to the same period in the prior year, due


Table of Contents

to a 33.1% increase in average assets under management as compared to the same period in the prior year. The increase in average assets under management for the three months ended March 31, 2013 was primarily due to the cumulative four quarter impact of $8.3 billion in long-term open-end mutual fund net flows, $3.9 billion of market appreciation and $1.3 billion related to the acquisition of Rampart Investment Management.

Distribution and Service Fees

Distribution and service fees, which are asset-based fees earned from open-end mutual funds and variable insurance funds, for distribution services we perform on their behalf, increased by $4.6 million, or 36.5%, for the three months ended March 31, 2013 compared to the same period in the prior year due to higher assets under management. The increase in fees also resulted in a corresponding increase in distribution and administrative expenses, primarily driven by increased payments to our third-party distribution partners for providing services to investors in our sponsored funds, including marketing support services.

Administration and Transfer Agent Fees

Administration and transfer agent fees represent fees earned for fund administration and transfer agent services from our open-end mutual funds, variable insurance funds and certain of our closed-end funds. Fund administration and transfer agent fees increased $3.3 million, or 44.5%, for the three months ended March 31, 2013 compared to the same period in the prior year due to higher assets under management.

Other Income and Fees

Other income and fees primarily represent contingent sales charges earned from investor redemptions levied on certain shares sold without a front-end sales charge and fees earned for the distribution of unaffiliated products. Other income and fees decreased $0.1 million primarily due to a decrease in fees earned for the distribution of unaffiliated products.

Operating Expenses

Operating expenses by category were as follows:



                                               Three Months Ended
                                                   March 31,                        Change
                                               2013           2012         2013 vs. 2012         %
($ in thousands)
Operating expenses
Employment expenses                         $   32,411      $ 26,318      $         6,093        23.2 %
Distribution and administrative expenses        21,628        18,923                2,705        14.3 %
Other operating expenses                         9,716         8,216                1,500        18.3 %
Restructuring and severance                        203            -                   203         N/A
Amortization expense                             1,110           988                  122        12.3 %

Total operating expenses                    $   65,068      $ 54,445      $        10,623        19.5 %

Employment Expenses

Employment expenses primarily consist of fixed and variable compensation and related employee benefit costs. Employment expenses of $32.4 million in the three months ended March 31, 2013 represents an increase of $6.1 million or 23.2% as compared to the same period in the prior year. The increase is primarily due to increases in sales and profit-based variable compensation, payroll taxes and other benefits that increased by $1.1 million in the 2013 period compared to the same period in the prior year due to higher sales and profits and increases in headcount, primarily from the addition of Rampart Investment Management which added $0.6 million of expense to the three months ended March 31, 2013.

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