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MN > SEC Filings for MN > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for MANNING & NAPIER, INC.

Form 10-Q for MANNING & NAPIER, INC.


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which reflect our views with respect to, among other things, our operations and financial performance. Words like "believes," "expects," "may," "estimates," "will," "should," "could," "intends," "likely," "plans," or "anticipates" or the negative thereof or other variations thereon or comparable terminology, are used to identify forward-looking statements, although not all forward-looking statements contain these words. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ materially from our expectations or beliefs are disclosed in the "Risk Factors" section, as well as other sections, of our Annual Report on Form 10-K which include, without limitation: changes in securities or financial markets or general economic conditions; a decline in the performance of our products; client sales and redemption activity; and changes of government policy or regulations. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview
Business
We are an independent investment management firm that provides a broad range of investment solutions through separately managed accounts, mutual funds and collective investment trust funds. Founded in 1970, we offer equity and fixed income portfolios as well as a range of blended asset portfolios, such as life cycle portfolios, that use a mix of stocks and bonds. We serve a diversified client base of high net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, and endowments and foundations. Our operations are based principally in the United States, with our headquarters located in Fairport, New York.
Our Products
We derive substantially all of our revenues from investment management fees earned from providing advisory services to separately managed accounts and mutual funds and collective investment trusts-including those offered by the Manning & Napier Fund, Inc. (the "Fund") and Exeter Trust Company. Our separate accounts are primarily distributed through our Direct Channel, where our representatives form relationships with high net worth individuals, middle market institutions or large institutions that are working with a consultant. To a lesser extent, we also obtain a portion of our separate account distribution via third parties, either through our Intermediary Channel, where national brokerage firm representatives or independent financial advisors select our separate account strategies for their clients, or through our Platform/Sub-Advisory Channel, where unaffiliated registered investment advisors approve our strategies for their product platforms. Our separate account products are a primary driver of our blended asset portfolios for high net worth and middle market institutional clients and financial intermediaries. In contrast, larger institutions and unaffiliated registered investment advisor platforms are a driver of our separate account equity portfolios. Our mutual funds and collective investment trusts are primarily distributed through financial intermediaries, including brokers, financial advisors, retirement plan advisors and platform relationships. We also obtain a portion of our mutual fund and collective investment trust distribution through our direct sales representatives, in particular within the defined contribution and institutional marketplace. Our mutual fund and collective investment trust products are an important driver of our blended asset class portfolios, in particular with 401(k) plan sponsors, advisors and recordkeepers that select our funds as default options for participants. In addition, financial intermediaries, mutual fund advisory programs and retail platforms are a driver of equity strategies within our mutual fund offerings.
Our assets under management ("AUM") was $52.2 billion as of March 31, 2014. The composition of our AUM by vehicle and portfolio is illustrated in the table below.

                                                             March 31, 2014
AUM - by investment vehicle and        Blended
portfolio                               Asset          Equity        Fixed Income         Total
                                                             (in millions)
Separately managed accounts          $ 13,339.6     $ 12,781.5     $      1,096.4     $  27,217.5
Mutual funds and collective
investment trusts                      11,173.7       13,758.4               41.8        24,973.9
Total                                $ 24,513.3     $ 26,539.9     $      1,138.2     $  52,191.4


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The composition of our separately managed accounts as of March 31, 2014, by channel and portfolio, is set forth in the table below.

                                                            March 31, 2014
                                       Blended
                                        Asset          Equity       Fixed Income         Total
                                                         (dollars in millions)
Separate account AUM
Direct Channel                       $  9,560.5     $  9,887.5     $       902.5     $  20,350.5
Intermediary Channel                    3,778.5        1,067.7             193.9         5,040.1
Platform/Sub-advisor Channel                0.6        1,826.3                 -         1,826.9
Total                                $ 13,339.6     $ 12,781.5     $     1,096.4     $  27,217.5
Percentage of separate account AUM
Direct Channel                               35 %           36 %               3 %            74 %
Intermediary Channel                         14 %            4 %               1 %            19 %
Platform/Sub-advisor Channel                  -              7 %               -               7 %
Total                                        49 %           47 %               4 %           100 %
Percentage of portfolio by channel
Direct Channel                               72 %           77 %              82 %            74 %
Intermediary Channel                         28 %            9 %              18 %            19 %
Platform/Sub-advisor Channel                  -             14 %               -               7 %
Total                                       100 %          100 %             100 %           100 %
Percentage of channel by portfolio
Direct Channel                               47 %           49 %               4 %           100 %
Intermediary Channel                         75 %           21 %               4 %           100 %
Platform/Sub-advisor Channel                  -            100 %               -             100 %

Our separate accounts contributed 30% of our total gross client inflows for the three months ended March 31, 2014 and represented 52% of our total AUM as of March 31, 2014.
Our separate account business has historically been driven primarily by our Direct Channel, where sales representatives form a relationship with high net worth investors, middle market institutions, and large institutional clients working in conjunction with a consultant. The Direct Channel contributed 74% of the total gross client inflows for our separate account business for the three months ended March 31, 2014 and represented 74% of our total separate account AUM as of March 31, 2014. We anticipate the Direct Channel to continue to be the largest driver of new separate account business going forward, given the Direct Channel's high net worth and middle market institutional client-type focus. During the three months ended March 31, 2014, blended asset and equity portfolios represented 56% and 37% of the separate account gross client inflows from the Direct Channel, respectively, while fixed income portfolios accounted for 7%. As of March 31, 2014, blended asset and equity portfolios represented 47% and 49%, respectively, of total Direct Channel separate account AUM, while our fixed income portfolios were 4%. We expect our focus on individuals and middle market institutions to continue to drive interest in our blended asset class portfolios, where we provide a comprehensive portfolio of stocks and bonds managed to a client's specific investment objectives. Historically, relationships with larger institutions have been a driver of growth in separately managed account equity strategies. Going forward, we expect many of these larger institutions may seek exposure to non-U.S. equity strategies through commingled vehicles to limit related custody expenses rather than separately managed accounts, and our U.S.-based equity strategies may continue to be attractive to large institutions in a separate account format. To a lesser extent, we also obtain separate account business from third parties, including financial advisors or unaffiliated registered investment advisor programs or platforms. During the three months ended March 31, 2014, 15% of the total gross client inflows for separate accounts came from financial advisor representatives (Intermediary Channel), and an additional 11% came from registered investment advisor platforms (Platform/Sub-advisor Channel). The Intermediary and Platform/Sub-advisor Channels represented 26% of our total separate account AUM as of March 31, 2014.
New separate account business through the Intermediary Channel flowed into both our blended asset and equity portfolios, driven by advisors' needs to identify either a one-stop solution (blended asset portfolio) or to fill a mandate within a multi-strategy portfolio. During the three months ended March 31, 2014, blended asset and equity portfolios represented 91%


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and 8%, respectively, of the separate account gross client inflows from the Intermediary Channel, while fixed income portfolios represented 1%. As of March 31, 2014, 75% of our separate account AUM derived from financial advisors was allocated to blended asset portfolios, with 21% allocated to equity and 4% allocated to fixed income. We expect that equity and fixed income portfolios may see additional interest from financial advisors over time as more and more advisors structure a multi-strategy portfolio for their clients.
In contrast, gross client inflows through the Platform/Sub-advisor Channel are primarily directed to our equity strategies, where we are filling a specific mandate within the investment program or platform product. During the three months ended March 31, 2014, 100% of our separate account gross client inflows from the Platform/Sub-advisory Channel were into equity portfolios. Our annualized separate account retention rate across all channels was approximately 98% during the three months ended March 31, 2014, representing the strong relationship focus that is inherent in our direct sales model, which is the primary driver of our separate account business.
During the three months ended March 31, 2014, market appreciation for our separate account AUM was 2.8%, including 2.6% in our blended assets and 3.1% in equity portfolios.
The composition of our mutual fund and collective investment trust AUM as of March 31, 2014, by portfolio, is set forth in the table below.

                                                             March 31, 2014
                                       Blended
                                        Asset          Equity        Fixed Income         Total
                                                             (in millions)
Mutual fund and collective
investment trust AUM                 $ 11,173.7     $ 13,758.4     $         41.8     $  24,973.9

Our mutual funds and collective investment trusts contributed 70% of our total gross client inflows for the three months ended March 31, 2014 and represented 48% of our total AUM as of March 31, 2014. As of March 31, 2014, our mutual fund and collective investment trust AUM consisted of 45% from blended asset portfolios and 55% from equity portfolios. During the three months ended March 31, 2014, 46% and 53% of the gross client inflows were attributable to blended assets and equity portfolios, respectively. For the three months ended March 31, 2014, market appreciation for our mutual fund and collective investment trust AUM was 2.3%, including 2.5% in our blended assets and 2.0% in our equity portfolios.
Our mutual fund and collective investment trust business is driven by financial intermediaries and to a lesser extent, our direct sales representatives. Intermediary distribution of our mutual fund and collective investment trust vehicles is achieved via financial advisors, brokers and retirement plan advisors. Through our Intermediary Channel, we are increasingly focused on our blended asset life cycle fund vehicles given our emphasis on advisors that work with retirement plans. Our blended asset portfolios are also used by advisors seeking a multi-asset class solution for their retail clients. In addition, our allocation to equity portfolios within the Intermediary Channel is anticipated to increase due to national brokerage firm representatives who wish to use our mutual funds as a component of a larger portfolio.
Through our Platform/Sub-advisor Channel, we have relationships with consultants and advisors at platforms. We derive equity portfolio assets in this channel through the selection of our funds within advisory programs where our mutual funds are used within a multi-strategy portfolio, or through placement on platforms' approved lists of funds. To facilitate our relationships with intermediaries, we currently have more than 280 dealer relationships. These relationships are important to the expansion of our retail business as well as our 401(k) life cycle and institutional business.
Our Direct Sales Representatives distribute our equity portfolios, in particular our non-U.S. portfolios, to large institutional clients with which we have direct relationships, and often the client's consultant. Through the Direct Channel, we also form relationships with middle market and large market defined contribution plan sponsors seeking to use our life cycle mutual funds and collective investment trusts as default options on their investment menu. We expect this channel to be focused on distributing blended asset and equity portfolio funds, particularly as the breadth of our mutual fund and collective investment trust offerings expands.
Results of Operations
Below is a discussion of our consolidated results of operations for the three months ended March 31, 2014 and 2013.


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Key Components of Results of Operations
Overview
Changes to our operating results over time are largely driven by net client asset flows and changes to the market value of our AUM.
An important factor influencing inflows and outflows of our AUM is the investment performance of our various investment approaches. Our variety of stock selection strategies, absolute pricing discipline and active asset allocation management approach generally results in specific absolute and relative return characteristics in different market environments. For example, during a fundamental-driven bull market when prices are rising alongside improving fundamentals, we are likely to experience positive absolute returns and competitive relative returns. However, in a more momentum-driven bull market, when prices become disconnected from underlying fundamentals, we are likely to experience positive absolute returns but lagging relative returns. Similarly, during a valuation-driven bear market, when markets experience a period of price correction following a momentum-driven bull market, we are likely to experience negative absolute returns but strong relative returns. However, in a momentum-driven bear market, which is typically characterized by broad price declines in a highly correlated market, we are likely to experience negative absolute returns and lagging relative returns. Essentially, our approach is likely to do well when markets are driven by fundamentals, but lag when markets are driven primarily by momentum. Other components impacting our operating results include:
asset-based fee rates and changes in those rates;

the composition of our AUM among various portfolios, vehicles and client types; and

the rate of increase in our variable and fixed costs, which is affected by the rate of revenue increases, changes to base compensation and year-to-year changes in incentive bonuses, vendor-related costs and investment spending on new products.


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Assets Under Management
The following tables reflect the indicated components of our AUM for our
investment vehicles for the three months ended March 31, 2014 and 2013.
                                            Mutual funds                                       Mutual funds
                            Separately     and collective                     Separately      and collective
                             managed         investment                         managed         investment
                             accounts          trusts            Total         accounts           trusts          Total
                                            (in millions)
As of December 31, 2013    $ 26,835.0     $      23,991.2     $ 50,826.2           53 %              47 %            100 %
Gross client inflows            716.3             1,689.7        2,406.0
Gross client outflows        (1,076.0 )          (1,248.5 )     (2,324.5 )
Market appreciation
(depreciation)                  742.2               541.5        1,283.7
As of March 31, 2014       $ 27,217.5     $      24,973.9     $ 52,191.4           52 %              48 %            100 %
Average AUM for period     $ 26,900.4     $      24,187.7     $ 51,088.1

As of December 31, 2012    $ 24,683.6     $      20,525.3     $ 45,208.9           55 %              45 %            100 %
Gross client inflows            980.1             1,747.7        2,727.8
Gross client outflows        (1,154.9 )          (1,592.7 )     (2,747.6 )
Market appreciation
(depreciation)                1,722.4             1,168.9        2,891.3
As of March 31, 2013       $ 26,231.2     $      21,849.2     $ 48,080.4           55 %              45 %            100 %
Average AUM for period     $ 25,770.8     $      21,417.4     $ 47,188.2

The following tables reflect the indicated components of our AUM for our portfolios for the three months ended March 31, 2014 and 2013.

                            Blended                        Fixed                      Blended                 Fixed
                             Asset          Equity        Income         Total         Asset      Equity     Income      Total
                                               (in millions)
As of December 31, 2013   $ 23,710.2     $ 25,977.0     $ 1,139.0     $ 50,826.2        47 %        51 %        2 %       100 %
Gross client inflows         1,137.5        1,201.7          66.8        2,406.0
Gross client outflows         (942.9 )     (1,299.1 )       (82.5 )     (2,324.5 )
Market appreciation
(depreciation)                 608.5          660.3          14.9        1,283.7
As of March 31, 2014      $ 24,513.3     $ 26,539.9     $ 1,138.2     $ 52,191.4        47 %        51 %        2 %       100 %
Average AUM for period    $ 23,987.8     $ 25,967.9     $ 1,132.4     $ 51,088.1

As of December 31, 2012   $ 20,470.7     $ 23,472.5     $ 1,265.7     $ 45,208.9        45 %        52 %        3 %       100 %
Gross client inflows         1,299.9        1,385.9          42.0        2,727.8
Gross client outflows       (1,097.4 )     (1,580.6 )       (69.6 )     (2,747.6 )
Market appreciation
(depreciation)               1,235.4        1,655.8           0.1        2,891.3
As of March 31, 2013      $ 21,908.6     $ 24,933.6     $ 1,238.2     $ 48,080.4        45 %        52 %        3 %       100 %
Average AUM for period    $ 21,371.6     $ 24,579.8     $ 1,236.8     $ 47,188.2

Revenue
Our revenues primarily consist of investment management fees earned from managing our clients' AUM. We earn our investment management fees as a percentage of our clients' AUM either as of a specified date or on a daily basis. Our investment management fees can fluctuate based on the average fee rate for our investment management products, which are affected by the composition of our AUM among various portfolios and investment vehicles. We currently do not have revenues from performance fee based products. Manning & Napier Advisors, LLC ("MNA"), a subsidiary of Manning & Napier Group, serves as the investment advisor to the Fund and Exeter Trust Company. The Fund is a family of open-end mutual funds that offer no-load share classes designed to meet the needs of a range of institutional and other investors. Exeter Trust Company is an affiliated New


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Hampshire-chartered trust company that sponsors a family of collective investment trusts for qualified retirement plans, including 401(k) plans. These mutual funds and collective investment trusts comprised $25.0 billion, or 48%, of our AUM as of March 31, 2014, and investment management fees from these mutual funds and collective investment trusts were $52.1 million, or 53% of our revenues for the three months ended March 31, 2014. MNA also serves as the investment advisor to all of our separately managed accounts, managing $27.2 billion, or 52%, of our AUM as of March 31, 2014, including assets managed as a sub-advisor to pooled investment vehicles and assets in client accounts invested in the Fund.
Operating Expenses
Our largest operating expenses are employee compensation and distribution, servicing and custody expenses, discussed further below, with a significant portion of these expenses varying in a direct relationship to our AUM and revenues. We review our operating expenses in relation to the investment market environment and changes in our revenues. However, we are generally willing to make expenditures as necessary even when faced with declining rates of growth in revenues in order to support our investment products, our client service levels, strategic initiatives and our long-term value.
Compensation and related costs. Employee compensation and related costs represent our largest expense, including employee salaries and benefits, incentive compensation to investment and sales professionals, reorganization-related share-based compensation and equity-based compensation issued under our equity compensation plan. These costs are affected by changes in the employee headcount, the mix of existing job descriptions, competitive factors, the addition of new skill sets, absolute and relative investment performance, variations in the level of our AUM and revenues, changes in our stock price reflected in share-based compensation and/or the number of awards issued.

Distribution, servicing and custody expenses. Distribution, servicing and custody expense represent amounts paid to various platforms that distribute our mutual fund and collective investment trust products as well as costs for custodial services and 12b-1 distribution and servicing fees. These expenses generally increase or decrease in line with changes in our mutual fund and collective investment trust AUM.

Other operating expenses. Other operating expenses include fund fee waiver and/or expense reimbursement, professional fees, including accounting and legal fees, occupancy and facility costs, as well as other costs related to travel and entertainment expenses, insurance, market data service expenses and all other miscellaneous costs associated with managing the day-to-day operations of our business.

Non-Operating Income (Loss)
Non-operating income (loss) includes interest expense, interest and dividend income, changes in liability under the tax receivable agreement and gains (losses) related to investment securities sales and changes in values of those investment securities designated as trading. We expect the interest and investment components of non-operating income (loss) to fluctuate based on market conditions, the performance of our investments and the overall amount of our investments held by the Company to provide initial cash seeding for product development purposes.
Provision for Income Taxes
The Company is comprised of entities that have elected to be treated as either a limited liability company ("LLC") or a "C-Corporation". As such, the entities functioning as LLC's are not liable for or able to benefit from U.S. federal or most state and local income taxes on their earnings, and their earnings (losses) will be included in the personal income tax returns of each entity's unit holders. The entities functioning as C-Corporations are liable for or able to benefit from U.S. federal and state and local income taxes on their earnings and losses, respectively.
Critical Accounting Policies and Estimates There have been no significant changes in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
This management's discussion and analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2013 together with the consolidated financial statements and related notes and the other financial information that appear elsewhere in this report. Revenue Recognition
Because the majority of our revenues are earned based on AUM that has been determined using fair value methods and since market appreciation/depreciation has a significant impact on our revenue, we have presented our AUM using the U.S. GAAP ("GAAP")) framework for measuring fair value. A fair value hierarchy is provided that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The following three-tier fair value hierarchy prioritizes the inputs used in measuring fair value:
Level 1-observable inputs such as quoted prices in active markets for identical securities;


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Level 2-other significant observable inputs (including but not limited to quoted prices for similar securities, interest rates, prepayment rates, credit risk, etc.); and
Level 3-significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments).
The table below summarizes the approximate amount of AUM for the periods indicated for which fair value is measured based on Level 1, Level 2 and Level 3.

                     Level 1     Level 2     Level 3       Total
                                    (in millions)
March 31, 2014      $ 32,009    $ 20,174    $       8    $ 52,191
December 31, 2013   $ 30,049    $ 20,769    $       8    $ 50,826

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