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VRTS > SEC Filings for VRTS > Form 10-Q on 4-Nov-2013All Recent SEC Filings

Show all filings for VIRTUS INVESTMENT PARTNERS, INC.

Form 10-Q for VIRTUS INVESTMENT PARTNERS, INC.


4-Nov-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," "likely," "targets" 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 future 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 Reports on Form 10-Q for the fiscal quarters ended March 31, 2013 and June 30, 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 use a multi-manager, multi-style approach, offering investment strategies from affiliated managers and unaffiliated subadvisers, each having its own distinct investment style, autonomous investment process and individual brand. By offering a broad array of products, we believe we can appeal to a greater number of investors and be less exposed to changes in market cycles and investor preferences, allowing us to participate in growth opportunities across different market cycles. Our earnings are primarily driven by asset-based fees charged for services relating to these various products including investment management, fund administration, distribution and shareholder services.

We offer investment strategies for individual and institutional investors in different product structures and through multiple distribution channels. Our investment strategies are available in a diverse range of styles and disciplines, managed by a collection of boutique investment managers, both affiliated and unaffiliated. We have offerings in various asset classes (equity, fixed income,


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money market and alternative), in all market capitalizations (large, mid and small), in different styles (growth, blend and value) and with various investment approaches (fundamental, quantitative and thematic). Our retail products include open-end mutual funds, closed-end funds, variable insurance funds and separately managed accounts. We also offer certain of our investment strategies to institutional clients.

We distribute our open-end mutual funds through financial intermediaries. We have broad access in the retail market, with distribution partners that include national and regional broker-dealers, independent broker-dealers and independent financial advisory firms. In many of these firms, we have a number of products that are on the firms' preferred "recommended" lists and on fee-based advisory programs. Our sales efforts are supported with two teams of external and internal regional sales professionals (for the national wirehouse and regional broker channel and the independent /registered investment advisor channel), and a national account relationship group, and separate teams for the retirement and insurance markets.

Our separately managed accounts are distributed through financial intermediaries and we also serve high net-worth clients through specialized teams at our affiliated managers who develop relationships in this market and deal directly with these clients. Our institutional distribution strategy is an affiliate-centric and coordinated model. Institutional resources at affiliates and certain combined resources work collaboratively on institutional sales efforts. Through relationships with consultants, they target key market segments, including foundations and endowments, corporate, public and private pension plans.

Financial Highlights

Total sales of $4.9 billion in the third quarter of 2013 increased $1.0 billion, or 24.6%, from $3.9 billion in the third quarter of 2012, driven by higher long-term open-end mutual fund sales.

Long-term open-end mutual fund sales increased $1.0 billion, or 28.8%, to $4.3 billion in the third quarter of 2013 from $3.3 billion in the third quarter of 2012.

Third quarter 2013 total positive net flows were $1.2 billion primarily from long-term open-end mutual fund sales. Assets under management increased to $55.0 billion at September 30, 2013 from $45.5 billion at December 31, 2012.

Total revenue was $100.4 million in the third quarter of 2013, an increase of 39.6% from $72.0 million in the third quarter of 2012 and investment management fees increased 39.9% in the third quarter of 2013 to $67.1 million from $48.0 million in the third quarter of 2012.

Assets Under Management

At September 30, 2013, we managed $55.0 billion in total assets, representing an increase of $13.2 billion or 31.6%, from the $41.8 billion managed at September 30, 2012 and an increase of $9.5 billion or 20.8% from December 31, 2012. Long-term assets under management, which exclude cash management products, were $53.4 billion at September 30, 2013, an increase of 33.4% from September 30, 2012 and an increase of 22.6% from December 31, 2012. Average assets under management, which generally correspond to our fee-earning asset levels, were $51.8 billion for the nine months ended September 30, 2013, an increase of 35.6% from $38.2 billion for the nine months ended September 30, 2012.

The increase in assets under management for the three and nine months ended September 30, 2013 was due primarily to overall positive net flows of $1.2 billion and $7.5 billion, respectively, and by market appreciation of $1.3 billion and $2.6 billion, respectively. The positive net flows for both the three and nine months ended September 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 25.6% and 31.4% of long-term open-end mutual fund sales for the three and nine months ended September 30, 2013, 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 appreciation for the three and nine months ended September 30, 2013 for assets under management was consistent with the performance of the securities markets during the same periods.


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Assets Under Management by Product

The following table summarizes our assets under management by product:



                                             As of September 30,                     Change
                                             2013            2012          2013 vs. 2012          %
($ in millions)
Retail Assets
Mutual fund assets
Long-term open-end funds                  $ 34,173.0      $ 23,615.7      $      10,557.3         44.7 %
Closed-end funds                             6,379.4         6,365.3                 14.1          0.2 %
Money market open-end funds                  1,610.2         1,763.8               (153.6 )       (8.7 )%

Total mutual fund assets                    42,162.6        31,744.8             10,417.8         32.8 %

Variable Insurance Funds                     1,286.8         1,311.9                (25.1 )       (1.9 )%

Separately managed accounts
Intermediary sponsored programs              4,744.6         2,420.6              2,324.0         96.0 %
Private client accounts                      2,206.1         2,110.4                 95.7          4.5 %

Total managed account assets                 6,950.7         4,531.0              2,419.7         53.4 %

Total retail assets                         50,400.1        37,587.7             12,812.4         34.1 %

Institutional Assets
Institutional accounts                       4,017.1         3,525.8                491.3         13.9 %
Structured finance products                    589.8           686.9                (97.1 )      (14.1 )%

Total institutional assets                   4,606.9         4,212.7                394.2          9.4 %

Total Assets Under Management             $ 55,007.0      $ 41,800.4      $      13,206.6         31.6 %

Average Assets Under Management           $ 51,780.8      $ 38,185.1      $      13,595.7         35.6 %


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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)                                2013                     2012                 2013                   2012
Mutual Funds - Long-term Open-end
Beginning balance                        $       32,351.2         $       21,126.1      $      25,827.1        $      16,896.6
Inflows                                           4,256.0                  3,304.8             15,036.5                8,947.5
Outflows                                         (3,125.3 )               (1,708.9 )           (7,742.3 )             (4,275.0 )

Net flows                                         1,130.7                  1,595.9              7,294.2                4,672.5
Market appreciation                                 635.2                    911.9                847.6                2,066.9
Other (1)                                            55.9                    (18.2 )              204.1                  (20.3 )

Ending balance                           $       34,173.0         $       23,615.7      $      34,173.0        $      23,615.7

Mutual Funds - Closed-end
Beginning balance                        $        6,422.3         $        6,051.6      $       6,231.6        $       5,675.6
Inflows                                                -                     229.2                   -                   444.2
Outflows                                               -                        -                    -                      -

Net flows                                              -                     229.2                   -                   444.2
Market appreciation                                 118.7                    181.5                507.3                  406.4
Other (1)                                          (161.6 )                  (97.0 )             (359.5 )               (160.9 )

Ending balance                           $        6,379.4         $        6,365.3      $       6,379.4        $       6,365.3

Mutual Funds - Money Market Open-end
Beginning balance                        $        1,707.7         $        1,818.7      $       1,994.1        $       2,294.8
Other (1)                                           (97.5 )                  (54.9 )             (383.9 )               (531.0 )

Ending balance                           $        1,610.2         $        1,763.8      $       1,610.2        $       1,763.8

Variable Insurance Funds
Beginning balance                        $        1,250.8         $        1,295.9      $       1,295.7        $       1,308.6
Inflows                                              13.1                     13.5                 35.2                   32.5
Outflows                                            (59.4 )                  (52.8 )             (186.1 )               (177.9 )

Net flows                                           (46.3 )                  (39.3 )             (150.9 )               (145.4 )
Market appreciation                                  82.3                     55.3                141.5                  148.7
Other (1)                                              -                        -                   0.5                     -

Ending balance                           $        1,286.8         $        1,311.9      $       1,286.8        $       1,311.9

Separately Managed Accounts (2)
Beginning balance                        $        6,521.7         $        4,367.7      $       5,829.0        $       3,933.8
Inflows                                             312.7                    246.6              1,004.3                  896.6
Outflows                                           (283.4 )                 (211.1 )             (812.7 )               (695.0 )

Net flows                                            29.3                     35.5                191.6                  201.6
Market appreciation                                 399.7                    128.0                961.1                  484.7
Other (1)                                              -                      (0.2 )              (31.0 )                (89.1 )

Ending balance                           $        6,950.7         $        4,531.0      $       6,950.7        $       4,531.0

Institutional Products (2)
Beginning balance                        $        4,399.3         $        4,178.9      $       4,359.5        $       4,478.2
Inflows                                             287.3                    112.6                630.9                  275.9
Outflows                                           (155.0 )                 (159.5 )             (481.6 )               (404.8 )

Net flows                                           132.3                    (46.9 )              149.3                 (128.9 )
Market appreciation                                  96.4                     74.2                192.4                  201.3
Other (1)                                           (21.1 )                    6.5                (94.3 )               (337.9 )

Ending balance                           $        4,606.9         $        4,212.7      $       4,606.9        $       4,212.7

Total
Beginning balance                        $       52,653.0         $       38,838.9      $      45,537.0        $      34,587.6
Inflows                                           4,869.1                  3,906.7             16,706.9               10,596.7
Outflows                                         (3,623.1 )               (2,132.3 )           (9,222.7 )             (5,552.7 )

Net flows                                         1,246.0                  1,774.4              7,484.2                5,044.0
Market appreciation                               1,332.3                  1,350.9              2,649.9                3,308.0
Other (1)                                          (224.3 )                 (163.8 )             (664.1 )             (1,139.2 )

Ending balance                           $       55,007.0         $       41,800.4      $      55,007.0        $      41,800.4


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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 option strategies.

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

                      As of September 30,                Change                     % of Total
                                                  2013 vs.
                      2013           2012           2012            %           2013         2012
 ($ in millions)
 Asset Class (1)
 Equity (2)        $ 31,595.9     $ 23,388.3     $  8,207.6         35.1 %        57.5 %       56.0 %
 Fixed income        15,855.2       14,303.5        1,551.7         10.8 %        28.8 %       34.2 %
 Alternative (3)      5,907.4        2,298.1        3,609.3        157.1 %        10.7 %        5.5 %
 Cash management      1,648.5        1,810.5         (162.0 )       (8.9 %)        3.0 %        4.3 %

 Total             $ 55,007.0     $ 41,800.4     $ 13,206.6         31.6 %       100.0 %      100.0 %

(1) Amounts in prior periods have been recast to conform to the current period presentation.

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

(3) Includes assets under management primarily related to options, long/short strategies and real estate securities.

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 September 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 (1)                   51                   51       $       33,604.3        $       22,246.3
Mutual Funds-Closed-End                               63                   59                6,442.9                 6,114.2
Mutual Funds-Money Market (1)                          1                    4                1,672.5                 1,805.6
Variable Insurance Funds (1)                          57                   47                1,280.4                 1,307.6
Separately Managed Accounts                           48                   51                6,495.8                 4,367.7
Institutional Products                                34                   30                4,484.3                 4,222.1

All Products                                          49                   48       $       53,980.2        $       40,063.5

                                                                  Nine Months Ended September 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 (1)                    51                 50       $       31,480.6        $       20,413.8
Mutual Funds-Closed-End                                61                 59                6,486.7                 5,934.0
Mutual Funds-Money Market (1)                           2                  4                1,737.2                 1,863.4
Variable Insurance Funds (1)                           57                 47                1,299.7                 1,330.4
Separately Managed Accounts                            49                 51                6,299.0                 4,202.0
Institutional Products                                 33                 30                4,477.6                 4,441.5

All Products                                           49                 47       $       51,780.8        $       38,185.1

(1) Average fees earned are net of non-affiliated sub-advisory fees.


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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 and nine months ended September 30, 2013 compared to the corresponding periods in the prior year, primarily due to continued net flows in higher fee products, as equity and alternative assets increased to 68.2% of total assets under management as compared to 61.5% at September 30, 2012. Average fees earned on variable insurance funds increased due to a decrease in fund reimbursements. Average fees earned on closed-end funds increased due to decreased fund reimbursements and external subadvisory fees.

Results of Operations

Summary Financial Data



                                              Three Months Ended September 30,                          Nine Months Ended September 30,
                                                                  2013 vs.                                                 2013 vs.
                                        2013           2012         2012           %           2013           2012           2012            %
($ in thousands)
Results of Operations
Investment management fees            $  67,119      $ 47,985     $  19,134        39.9 %    $ 189,371      $ 134,710      $  54,661          40.6 %
Other revenue                            33,290        23,966         9,324        38.9 %       93,346         66,457         26,889          40.5 %

Total revenues                          100,409        71,951        28,458        39.6 %      282,717        201,167         81,550          40.5 %

Operating expenses                       67,654        53,153        14,501        27.3 %      199,754        158,178         41,576          26.3 %
Amortization expense                      1,125         1,031            94         9.1 %        3,351          3,016            335          11.1 %

Total operating expenses                 68,779        54,184        14,595        26.9 %      203,105        161,194         41,911          26.0 %

Operating income                         31,630        17,767        13,863        78.0 %       79,612         39,973         39,639          99.2 %
Other income (expense), net               1,720         1,154           566        49.0 %         (491 )        2,164         (2,655 )      (122.7 )%
Interest income (expense), net              519            -            519         N/A          1,484           (198 )        1,682        (849.5 )%

Income before income taxes               33,869        18,921        14,948        79.0 %       80,605         41,939         38,666          92.2 %
Income tax expense                       12,567         7,279         5,288        72.6 %       30,335         16,480         13,855          84.1 %

Net income                               21,302        11,642         9,660        83.0 %       50,270         25,459         24,811          97.5 %
Noncontrolling interests                   (213 )          -           (213 )       N/A            164             -             164           N/A
Allocation of earnings to preferred
stockholders                                 -             -             -           -  %           -             (64 )           64        (100.0 )%

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