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VRTS > SEC Filings for VRTS > Form 10-Q on 2-Aug-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.


2-Aug-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," "opportunity," "pipeline," "predict," "would," "potential," "future," "forecast" or similar statements or variations of such terms.

Our forward-looking statements are based on a series of expectations, assumptions and projections about our Company and the markets in which we operate, and 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, under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2013, and under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report on Form 10-Q, 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 and related 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.


Table of Contents

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, we provide ancillary services which consist of fund administration, distribution, shareholder services, and transfer agency.

Financial Highlights

Total sales of $5.6 billion in the second quarter of 2013 increased $2.4 billion or 75.0% from $3.2 billion in the second quarter of 2012, driven by higher long-term open-end mutual fund sales.

Long-term open-end mutual fund sales increased $2.3 billion or 82.1% to $5.1 billion in the second quarter of 2013 from $2.8 billion in the second quarter of 2012.

Second quarter 2013 total positive net flows of $2.5 billion, increased $1.1 billion or 80.4%, primarily from long-term open-end mutual fund sales. Assets under management increased to $52.7 billion at June 30, 2013 from $45.5 billion at December 31, 2012.

Total revenue was $96.1 million in the second quarter of 2013, an increase of 43.9% from $66.8 million in the second quarter of 2012 and investment management fees increased 43.7% in the second quarter of 2013 to $64.5 million from $44.9 million in the second quarter of 2012.

On April 9, 2013, we acquired a 24% noncontrolling equity interest in Kleinwort Benson Investors International, Ltd. ("KBII"), a subsidiary of Kleinwort Benson Investors (Dublin) for 2.6 million Euros or $3.4 million. KBII is a U.S. registered investment adviser that provides specialized equity strategies to institutional clients. KBII also subadvises the Virtus Emerging Markets Equity Income Fund, an open-end mutual fund that we launched in September 2012.

Assets Under Management

At June 30, 2013, we managed $52.7 billion in total assets, representing an increase of $13.8 billion or 35.6%, from the $38.8 billion managed at June 30, 2012 and an increase of $7.2 billion or 15.8% from December 31, 2012. Long-term assets under management, which exclude cash management products, were $50.9 billion at June 30, 2013, an increase of 37.6% from June 30, 2012 and an increase of 17.0% from December 31, 2012. Average assets under management, which generally correspond to our fee-earning asset levels, were $50.7 billion for the six months ended June 30, 2013, an increase of 36.1% from $37.2 billion for the six months ended June 30, 2012.

The increase in assets under management for the three months ended June 30, 2013 was due primarily to overall positive net flows of $2.5 billion, partially offset by market depreciation of $0.9 billion. The increase in assets under management for the six months ended June 30, 2013 was due primarily to overall positive net flows of $6.2 billion and market appreciation of $1.3 billion. The positive net flows for both the three and six months ended June 30, 2013 were primarily the result of strong sales of long-term open-end mutual fund products. Our best selling open-end mutual fund was the Virtus Emerging Markets Opportunities Fund, which represented 26.4% and 33.6% of long-term open-end mutual fund sales for the three and six months ended June 30, 2013, respectively, as compared to 33.7% and 33.3% of long-term open-end mutual fund sales for the three and six months ended June 30, 2012, respectively.

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 to ensure appropriate execution of the strategy.

Market depreciation for the three months ended June 30, 2013 and market appreciation for the six months ended June 30, 2013 for assets under management was consistent with the performance of the securities markets during the same periods.


Table of Contents

Assets Under Management by Product

The following table summarizes our assets under management by product:



                                               As of June 30,                       Change
                                            2013            2012          2013 vs. 2012           %
($ in millions)
Retail Assets
Mutual fund assets
Long-term open-end funds                 $ 32,351.2      $ 21,126.1      $      11,225.1          53.1 %
Closed-end funds                            6,422.3         6,051.6                370.7           6.1 %
Money market open-end funds                 1,707.7         1,818.7               (111.0 )        (6.1 )%

Total mutual fund assets                   40,481.2        28,996.4             11,484.8          39.6 %

Variable Insurance Funds                    1,250.8         1,295.9                (45.1 )        (3.5 )%

Separately managed accounts
Intermediary sponsored programs             4,393.9         2,334.6              2,059.3          88.2 %
Private client accounts                     2,127.8         2,033.1                 94.7           4.7 %

Total managed account assets                6,521.7         4,367.7              2,154.0          49.3 %

Total retail assets                        48,253.7        34,660.0             13,593.7          39.2 %

Institutional Assets
Institutional accounts                      3,789.1         3,498.5                290.6           8.3 %
Structured finance products                   610.2           680.4                (70.2 )       (10.3 )%

Total institutional assets                  4,399.3         4,178.9                220.4           5.3 %

Total Assets Under Management            $ 52,653.0      $ 38,838.9      $      13,814.1          35.6 %

Average Assets Under Management          $ 50,681.1      $ 37,245.9      $      13,435.2          36.1 %


Table of Contents

Asset Flows by Product

The following table summarizes our asset flows by product:



                                        Three Months Ended June 30,             Six Months Ended June 30,
($ in millions)                            2013                2012              2013                2012
Mutual Funds-Long-Term Open-End
Beginning balance                     $     30,552.5        $ 19,955.1       $    25,827.1        $ 16,896.6
Inflows                                      5,069.9           2,754.0            10,780.5           5,642.7
Outflows                                    (2,462.0 )        (1,363.1 )          (4,617.0 )        (2,566.1 )

Net flows                                    2,607.9           1,390.9             6,163.5           3,076.6
Market (depreciation) appreciation            (886.0 )          (253.3 )             212.4           1,155.0
Other (1)                                       76.8              33.4               148.2              (2.1 )

Ending balance                        $     32,351.2        $ 21,126.1       $    32,351.2        $ 21,126.1

Mutual Funds-Closed-End
Beginning balance                     $      6,621.0        $  5,992.3       $     6,231.6        $  5,675.6
Inflows                                           -                9.6                  -              215.0
Outflows                                          -                 -                   -                 -

Net flows                                         -                9.6                  -              215.0
Market (depreciation) appreciation             (61.6 )           135.7               388.6             224.9
Other (1)                                     (137.1 )           (86.0 )            (197.9 )           (63.9 )

Ending balance                        $      6,422.3        $  6,051.6       $     6,422.3        $  6,051.6

Mutual Funds-Money Market
Beginning balance                     $      1,742.2        $  1,803.4       $     1,994.1        $  2,294.8
Other (1)                                      (34.5 )            15.3              (286.4 )          (476.1 )

Ending balance                        $      1,707.7        $  1,818.7       $     1,707.7        $  1,818.7

Variable Insurance Funds
Beginning balance                     $      1,317.8        $  1,395.8       $     1,295.7        $  1,308.6
Inflows                                         12.3               8.3                22.1              19.0
Outflows                                       (65.7 )           (60.6 )            (126.7 )          (125.1 )

Net flows                                      (53.4 )           (52.3 )            (104.6 )          (106.1 )
Market (depreciation) appreciation             (14.1 )           (47.6 )              59.2              93.4
Other (1)                                        0.5                -                  0.5                -

Ending balance                        $      1,250.8        $  1,295.9       $     1,250.8        $  1,295.9

Separately Managed Accounts (2)
Beginning balance                     $      6,435.5        $  4,304.6       $     5,829.0        $  3,933.8
Inflows                                        324.6             342.0               691.6             650.0
Outflows                                      (295.3 )          (231.6 )            (529.3 )          (483.9 )

Net flows                                       29.3             110.4               162.3             166.1
Market appreciation (depreciation)              87.5             (42.3 )             561.4             356.7
Other (1)                                      (30.6 )            (5.0 )             (31.0 )           (88.9 )

Ending balance                        $      6,521.7        $  4,367.7       $     6,521.7        $  4,367.7

Institutional Products (2)
Beginning balance                     $      4,538.7        $  4,590.7       $     4,359.5        $  4,478.2
Inflows                                        189.0              61.0               343.6             163.3
Outflows                                      (260.6 )          (126.7 )            (326.6 )          (245.3 )

Net flows                                      (71.6 )           (65.7 )              17.0             (82.0 )
Market (depreciation) appreciation             (13.7 )             9.7                96.0             127.1
Other (1)                                      (54.1 )          (355.8 )             (73.2 )          (344.4 )

Ending balance                        $      4,399.3        $  4,178.9       $     4,399.3        $  4,178.9

Total
Beginning balance                     $     51,207.7        $ 38,041.9       $    45,537.0        $ 34,587.6
Inflows                                      5,595.8           3,174.9            11,837.8           6,690.0
Outflows                                    (3,083.6 )        (1,782.0 )          (5,599.6 )        (3,420.4 )

Net flows                                    2,512.2           1,392.9             6,238.2           3,269.6
Market (depreciation) appreciation            (887.9 )          (197.8 )           1,317.6           1,957.1
Other (1)                                     (179.0 )          (398.1 )            (439.8 )          (975.4 )

Ending balance                        $     52,653.0        $ 38,838.9       $    52,653.0        $ 38,838.9


Table of Contents

(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 option strategies.

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

                         As of June 30,                   Change                    % of Total
                                                   2013 vs.
                       2013           2012           2012           %           2013         2012
  ($ in millions)
  Asset Class
  Equity (1)        $ 31,784.7     $ 22,296.8     $  9,487.9        42.6 %        60.4 %       57.4 %
  Fixed income        19,121.7       14,680.1        4,441.6        30.3 %        36.3 %       37.8 %
  Cash management      1,746.6        1,862.0         (115.4 )      (6.2 %)        3.3 %        4.8 %

  Total             $ 52,653.0     $ 38,838.9     $ 13,814.1        35.6 %       100.0 %      100.0 %

(1) Includes assets under management related to option 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 June 30,
                                              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       $       32,447.6        $       20,360.1
Mutual Funds-Closed-End                            61                 59                6,614.4                 5,924.8
Mutual Funds-Money Market (1)                       2                  5                1,700.6                 1,787.0
Variable Insurance Funds (1)                       57                 45                1,303.1                 1,316.1
Separately Managed Accounts                        49                 51                6,505.7                 4,304.6
Institutional Products                             33                 31                4,503.3                 4,510.9

All Products                                       49                 47       $       53,074.7        $       38,203.5

                                                                  Six Months Ended June 30,
                                              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       $       30,418.7        $       19,497.5
Mutual Funds-Closed-End                            60                 59                6,508.5                 5,843.9
Mutual Funds-Money Market (1)                       3                  4                1,769.5                 1,892.3
Variable Insurance Funds (1)                       56                 47                1,309.5                 1,341.8
Separately Managed Accounts                        49                 51                6,200.7                 4,119.2
Institutional Products                             33                 30                4,474.2                 4,551.2

All Products                                       49                 47       $       50,681.1        $       37,245.9

(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.


Table of Contents

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 six months ended June 30, 2013 compared to the corresponding periods in the prior year, primarily due to continued net flows in higher fee products, as equity assets increased to 60.4% of total assets. Average fees earned on variable insurance funds increased due to a decrease in fund reimbursements.

Results of Operations

Summary Financial Data




                                                Three Months Ended June 30,                                  Six Months Ended June 30,
                                                                2013 vs.                                                     2013 vs.
                                      2013          2012          2012             %             2013           2012           2012            %
($ in thousands)
Results of Operations
Investment management fees          $ 64,475      $ 44,878      $  19,597           43.7 %     $ 122,252      $  86,725      $  35,527          41.0 %
Other revenue                         31,665        21,940          9,725           44.3 %        60,056         42,491         17,565          41.3 %

Total revenues                        96,140        66,818         29,322           43.9 %       182,308        129,216         53,092          41.1 %

Operating expenses                    68,142        51,568         16,574           32.1 %       132,100        105,025         27,075          25.8 %
Amortization expense                   1,116           997            119           11.9 %         2,226          1,985            241          12.1 %

Total expenses                        69,258        52,565         16,693           31.8 %       134,326        107,010         27,316          25.5 %

Operating income                      26,882        14,253         12,629           88.6 %        47,982         22,206         25,776         116.1 %
Other (expense) income, net           (3,390 )        (214 )       (3,176 )      1,484.1 %        (2,211 )        1,010         (3,221 )      (318.9 )%
Interest income (expense), net           609          (103 )          712         (691.3 )%          965           (198 )        1,163        (587.4 )%

Income before income taxes            24,101        13,936         10,165           72.9 %        46,736         23,018         23,718         103.0 %
Income tax expense                     9,318         5,569          3,749           67.3 %        17,768          9,201          8,567          93.1 %

Net income                            14,783         8,367          6,416           76.7 %        28,968         13,817         15,151         109.7 %
Noncontrolling interests                 602            -             602            N/A             377             -             377           N/A
Allocation of earnings to
preferred stockholders                    -             -              -              -  %            -             (64 )           64            -  %

Net income attributable to common
stockholders                        $ 15,385      $  8,367      $   7,018           83.9 %     $  29,345      $  13,753      $  15,592         113.4 %

Revenues

Revenues by source are as follows:




                                                    Three Months Ended June 30,                               Six Months Ended June 30,
                                                                   2013 vs.                                                  2013 vs.
                                           2013         2012         2012            %             2013          2012          2012            %
($ in thousands)
Investment management fees
Mutual funds                             $ 51,020     $ 34,454     $  16,566          48.1 %     $  96,248        66,204     $  30,044          45.4 %
Separately managed accounts                 7,910        5,495         2,415          43.9 %        15,154        10,528         4,626          43.9 %
Institutional accounts                      3,706        3,443           263           7.6 %         7,212         6,866           346           5.0 %
Variable products                           1,839        1,486           353          23.8 %         3,638         3,127           511          16.3 %
. . .
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