Virtus Investment Partners Inc (VRTS) 2010 Q4 法說會逐字稿

Good morning. My name is Corissa and I will be your Conference Operator today. I would like to welcome everyone to Virtus Investment Partners' Quarterly Conference Call. The slide presentation for this call is available in the investor relations section of the Virtus website, www.virtus.com.

This call is also being recorded and will be available for replay on the Virtus website. At this time, all participants are in a listen-only mode. After the speakers' remarks, there will be a question and answer period and instructions will follow at that time. I would now turn the conference over to your host, Mr. Joe Fazzino. Please proceed.

Thank you, Corissa, and good morning. On behalf of Virtus Investment Partners, I would like to welcome you to our call to discuss operating results for the fourth quarter and full year of 2010. Before we begin, I direct your attention to the important disclosures on page two of the slide presentation that accompanies this webcast.

Certain matters discussed on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not statements of fact or guarantees of future performance and are subject to risks uncertainties and other factors that may cause actual results to differ materially from those discussed in the statements. These statements may be identified by such words as expect, anticipate, believe, outlook, may and similar terms or variations.

For a discussion of these risks and uncertainties, please see the risk factors and management discussion and analysis sections of our periodic reports that are filed with the SEC as well as our other recent filings, which are available in the investor relations section of our website, virtus.com.

In addition to results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Reconciliations of these non-GAAP financial measures to the applicable GAAP measures are included in our earnings press release, which is available on our website.

For this call, we have a presentation that is accessible with the webcast through the investor relations section of virtus.com. This presentation, including the appendix, is available on the website following the call.

This morning's call will begin with remarks from George Aylward, our President and Chief Executive Officer, who will review some of our accomplishments during the quarter and the past year. Mike Angerthal, Executive Vice President and Chief Financial Officer, will discuss our financial results. Then George will make some additional comments before we open the call to questions. Now, I would like to turn the call over to George Aylward. George?

Thanks, Joe. Good morning, everyone. Thank you for joining our call today. Mike and I look forward to reviewing our financial results and taking your questions. I'm going to start by putting the fourth quarter and full year into perspective, before I give highlights for the financial results. Following my detailed review of those results, I'll provide some thoughts on how we are positioned as we move into 2011 and then we will take some of your questions.

The fourth quarter continued to cap off the momentum we had throughout 2010, particularly in asset flows and improving profitability. We remained in positive flows throughout the year, ending up with total net positive flows of $1.6 billion, compared with $114 million in 2009.

Adjusted operating income increased 62% in the fourth quarter, compared to the prior year fourth quarter. And it tripled for the full year. And these improvements in profitability took place in spite of the impact of higher costs associated with our significant sales growth.

We set several strategic priorities for Virtus in 2010, including growing sales by maximizing our existing relationships and distribution access, enhancing our investment management capabilities, increasing the profitability of the Company and establishing Virtus as a company that can sustain its growth objectives and consistently deliver value for our shareholders.

We executed on all elements of the strategy in 2010. So let's start by reviewing some of our accomplishments in the fourth quarter and the full year. Total sales in the fourth quarter were our highest since becoming a public company, increasing to $1.7 billion and they were driven by a 31% sequential growth in long-term mutual fund sales.

For the full year, total sales were up 51%, to $5.8 billion, and mutual fund sales increased 63% to $4.5 billion. We have now had a sequential improvement in both total sales and mutual fund sales in six of our eight quarters as a public company. Mutual fund sales were the best quarterly results since the spin-off and the sixth consecutive quarter of a double-digit annualized growth rate.

In the fourth quarter, we delivered positive net flows of $598 million from our mutual funds and total net flows of $553 million. For the full year, our positive net flows improved to $1.7 billion from mutual funds and $1.6 billion for all products.

The primary strength in our mutual fund sales is the balance we've demonstrated on several levels, which has led to our strong growth. The organic growth rate for fund sales grew throughout the year with a rate of 22.4% in the fourth quarter.

For the full year, the organic growth rate was 18.7%. This is significantly higher than the average organic growth rate we see when we look at other fund companies that, like us, sell through financial intermediaries. We have had continued and growing interest in our equity funds during a period where fixed income products were still predominant in the market.

I would point out that the industry has seen the beginnings of a shift in the trend of asset flows with the reallocation to equity funds from bond loans. As you can tell from our flows in the fourth quarter, we are well positioned to capitalize on this change in investor preference. Our ability to offer a variety of attractive products in the range of investment strategies from multiple managers is an advantage for Virtus and was demonstrated again in 2010.

Our best-selling fund for the year was a fixed-income product, the multi-sector short-term bond fund, but it was down despite two strong selling equity strategies, the Alpha Sector Funds and the Emerging Markets Opportunity Fund.

We can trace our sales growth to another strength of the Company, our access and relationships with distribution partners. We have a Board presence with all the major distributors and last year we continued to deepen our penetration with these firms and increased the number of products that are on preferred lists, advisory programs and platforms.

We also maintained balance in our fund distribution, with no one firm representing more than 18% of total retail fund sales this year. We have always said that our balanced quality product offerings and our distribution access are key strengths for the Company, and that was clearly demonstrated by our sales growth, product balance and firm diversification.

In addition to leveraging our distribution strengths, we continue to expand our investment offerings. For example, we launched a few new funds in 2010. One was the international large-cap value strategy we introduced with the International Equity Fund.

The other was the premium out-sector fund, which was only launched in July and has generated almost $400 million in assets in just six months on the market. In fact, premium alpha sector was one of the industry's best selling new equity funds for the second half of 2010.

The premium fund quickly gained traction in the marketplace because many advisors are familiar with our other alpha sector products. And although new funds generally take some time to develop track records and generate flows, this fund has been a positive exception to the rule and a testament to the strength of our product management and development teams and distribution forces.

We also expanded our product set and potential distribution channels when we adopted a Variable Insurance Trust, or VIT, in the fourth quarter. A VIT provides investment options inside variable insurance products.

This transaction added assets to our affiliated managers and gives us greater access to a new distribution channel, that of insurance companies. Mike will provide some additional color about the VIT and its financial impact in the quarter.

Also in the fourth quarter, we announced a secondary rights offering for one of our five closed-end funds, which was completed in January, adding about $98 million to assets. We view the closed-end funds as an attractive product and continue to look for new opportunities in that market.

The growth in sales continued positive flows and the addition of the VIT contributed to an increase in operating income as adjusted to $7.1 million in the fourth quarter, up 62% from the fourth quarter of 2009. Our operating margin, as adjusted, includes the 23% in the third quarter, up from 21% in the third quarter.

The improvement in operating income, as adjusted, came despite the increased strain from the significant growth in sales in the fourth quarter. With our up-front incentive compensation expenses, the significant growth in sales has a negative impact on our current quarter, but it's clearly positive for the future profitability of the Company.

As we have demonstrated in the past, we remain focused on driving top-line growth, while we continue to manage our cost structure and further expand our margins as we move closer to industry averages. In addition to these operating results, I want to briefly touch on a few other items that were referenced in the news release and that we have discussed on previous calls.

As you know, in the first quarter, we initiated a multi-year share repurchase program that allows for the repurchase of up to 350,000 shares of our common stock. The buy-back is one of the ways that we will return capital to our shareholders.

We continue to focus on evaluating the best opportunities to generate increasing value for shareholders. In addition to focusing on sustaining the momentum of sales growth and improving profitability, we are also considering a variety of alternatives and next steps for use of capital.

With any capital assessment, we consider our commitment to business needs, including the working capital needs of the growing business, including consideration for seed capital for new products, we will continue to look for ways to invest in the business, because we believe there are opportunities to grow profitability and generate returns that are above cost of capital.

We'd also look at our outstanding note payable of $15 million. And lastly, the remaining potential obligation that still existed under the current stock repurchase program, which as of year-end was approximately $15 million. Any future decisions, in terms of capital level, will be based on our assessment of these items and our determination of the best ways to increase shareholder value.

Now let me ask Mike to review our results in more detail and provide additional insights into these results and our other achievements in the fourth quarter and for the full year. After Mike's comments, I'll spend a few minutes talking about our positioning for 2011 before we open the lines for questions. Mike?

Thank you, George, and hello, everyone. Today, I will review the slides that outline the fourth quarter and full-year results and discuss the impact of the adoption of the Variable Insurance Trust that we closed during the quarter, and finally, provide an update on our capital position.

Let's begin with slide seven, operating income as adjusted. In the fourth quarter, we delivered improved operating results, prepared with both the third quarter of 2010 and the fourth quarter of 2009. Operating income, as adjusted, our primary non-GAAP metric, increased sequentially by 25% to $7.1 million, from $5.7 million in the third quarter and by 62% from $4.4 million in the prior year quarter.

For the full year, we generated $21.7 million of operating income as adjusted, more than triple the $7 million of 2009. Comparing results on a sequential basis, the positive operating trends of the last several quarters has continued and contributed to the growth. In addition, this quarter's results reflect the benefit of the adoption of the Variable Insurance Trust, or VIT, which I will describe in more detail in a few minutes.

The impact of higher revenues from our open-end mutual funds was the largest driver of the sequential increase in operating income, accounting for more than half of the increase from the prior quarter. In addition, the VIT transaction completed on November 5th contributed a $600,000 net benefit to operating income. One other item I want to highlight is the impact we experienced this quarter from the increased employment expenses from growing retail fund sales, which we refer to as sales strain.

One way to illustrate the sales strain in the fourth quarter is to assume that if we had stayed at the strong levels of the third quarter, we would have had $700,000 less of incentive compensation in this quarter. Clearly, increases in incentive compensation costs related to much higher sales are positive, as they indicate that the business is growing.

Also contributing to the improvement in profitability this quarter was our ability to keep other operating expenses within a reasonable range. And they continue to grow at a much slower pace than revenue. This positive trend highlights the leverage ability and scalability of our model.

This increased profitability is reflected in the increase in operating margin as adjusted, to 23% for the quarter and improvement of 240 basis points from the prior quarter and up 570 basis points from the prior year fourth quarter. For the full year, the operating margin was 20% compared with 8% in 2009, as we continue to demonstrate progress toward achieving the margin levels that we expect of the Company.

Some items to highlight on our GAAP financial results. Realized and unrealized gains on trading securities reflect the mark-to-market of our $10.3 million marketable securities portfolio. In the quarter, we had approximately $300,000 of unrealized gain marks, compared with $1 million in the prior quarter.

Second, the tax expense for the period increased by $403,000 from the prior quarter, reflecting an effective tax rate of approximately 9%. As you may recall, the Company has a federal income tax shield from intangible amortization. So we are subject, primarily, to only state tax payments in certain jurisdictions. The effective rate ticked higher, due to the reconciliation of 2009 returns that were completed during this quarter.

In general, we would expect the effective tax rate to be in the mid-single digit range. Even with the lower unrealized gains and higher taxes, net income in the fourth quarter was $4.5 million, compared with $3.7 million in the prior quarter, or an increase of 20%, benefiting from the impact of the continued improvement in operating results we just reviewed.

Turning to slide eight, AUM. Assets ended the year at $29.5 billion, an increase of $2.4 billion, or 9% from the prior quarter, and up 16% from December 31, 2009. Long-term assets, excluding money market funds, ended the year at $26.6 billion, up $2.2 billion, or 9%, on a sequential basis, and up 24% for the end of 2009.

There were three primary drivers of the sequential change in assets under management. Positive net flows worth $553 million, an increase of 21% from the third quarter, market appreciation of $928 million and the addition of $1.2 billion in assets from the adoption of the VIT.

I would like to point out that as a result of the market appreciation and strong sales in equity mutual funds the mix in our assets has continued to shift. The percentage of equity assets increased by 360 basis points to 48.9% of assets at December 31st, from 45.3% at September 30th. This is our highest level of equity assets since becoming a public company.

It's also a strong signal of how well positioned we are to continue to expand margins and profitability, assuming markets continue in their current trending. Slide nine provides detail on our asset flows and I'll start by saying we're particularly pleased with consistent growth in mutual fund sales this year. The fourth quarter was our best quarter for gross sales and net flows since we became a public company.

Gross sales, which are shown on the chart at the top left, were $1.7 billion for the quarter. Our sixth consecutive quarter of sales greater than $1 billion and our second consecutive quarter with a complex wide annualized sale rate above 25%.

Total sales improved by 9% from the third quarter and 38% from the fourth quarter of 2009, with the greatest impact coming from long-term mutual fund sales. Total positive net flow, were $553 million, an improvement of 21% from the prior quarter.

I do want to spend some time reviewing the details surrounding open-end mutual fund gross and net sales and this had been the main driver of organic growth in 2010. For the year I can characterize our mutual fund sales efforts with two words, consistency and diversity.

During the fourth quarter, long-term open and mutual funds sales were $1.5 billion, an increase of 31% from the third quarter and reflecting an annualized sales rate of 54%, an improvement of 700 basis points from the third quarter and over 1,000 basis points from the prior year quarter.

Open-end fund net sales were $599 million, reflecting a 22.4% annualized organic growth rate, an increase of 280 basis points from the pro quarter and 530 bps from the prior year. As a reminder, we defined the organic growth rate as annualized net sales divided by the beginning of the period assets under management we exclude money market funds and closed-end funds in this calculation.

In addition to higher overall sales, we also had an increase in sales of equity funds in the quarter. And during the fourth quarter 62% of sales came from equity products compared with 56% in the prior quarter and 43% in the prior year quarter.

The shift in the mix of sales reflects the general trend of renewed investor interest and equity products, as well as a particular interest in several of our more popular funds including the Alpha Structure strategy and the emerging markets opportunities fund, which was our best selling fund in the quarter.

Balancing the sales in those equity products will continue strong sales from our multi-sector short-term bond fund, which was our best selling fund for the year and our senior floating rate fund, which we expect you'll hear more about in the future.

In addition, no single fund comprised with a 28% of total sales in the quarter, which is a strong indicator of the breadth of our product offerings. Importantly the growth and sales of equity funds also resulted in a higher average net fee rate for new sales in the quarter.

The net fee rate for the fourth quarter mutual fund sales was 41 basis points compared with 40 bps in the third quarter and 33 bps in the fourth quarter of 2009. We also continue to be well diversified in the sources of our mutual fund sales.

With the balance of our distribution we're not reliant on any one firm for majority of our retail sales. In fact for the fourth quarter and full year, no firm accounted for more than 18% of sales and our number one distribution partner in the fourth quarter was different from our leading firm in the third quarter.

Moving onto investment management fees on slide ten, investment management fees of $26.7 million in the fourth quarter improved 14% from the prior quarter. Driven by the 10% growth in average assets under management.

The 1.4 bps increase in the blended basis points earned on the assets and the impact of the VIT adoption. Importantly ended AUM at [1231] was $900 million grater then average assets, another indication that our business is well positioned for the future.

The largest driver and the increase in investment management fees from the prior quarter was, as expected the increase in fees from our mutual funds. That represented more than half of the change from the prior quarter.

The blended fee rate improved to 37.1 bps for the fourth quarter, from 35.7 bps in the third quarter, primarily because of the shift in our asset profile as we discussed earlier, another factor positioning the business well as we head into 2011.

For the full year investment management fees of $98 million increased 23% from $79.7 million in 2009. Moving over to the expense side, and to page 11, employment expenses. Employment expenses of $17.5 million for the fourth quarter were up $1.6 million or 10% on a sequential basis. For the full year employment expenses were $65.2 million, up $8.1 million or 14% from 2009. The main driver of the sequential $1.6 million increase in expenses is the increase in sale strain during the quarter.

As I mentioned previously, in the fourth quarter we had approximately $700,000 of additional incentive compensation related to increasing sales. The mix of sales and source of the increase sales within the reach-out channel was responsible for some of the increase in employment expenses.

As you know our compensation is variable in nature and is aligned with growth and increasing profitability. Importantly the growth was done while keeping head count and fixed employment expenses, essentially flat from the prior year.

The ability to keep fixed costs in check is measured through the trend of employment expenses and calculates as a percentage of net revenues shown in the box at the lower left portion of the slide. This metric declined to 56.7% in the fourth quarter from 58.2% in the prior quarter.

For the full year it was 58.6% compared with 65.5% in 09'. The decrease highlights the progress we're making in driving the business to full scale. Onto slide 12, other operating expenses. Even as we have significantly grown top-line sales, our other operating expense, which do include sales related costs, have maintained within a relatively stable range as we continue to maintain an expense discipline.

For the quarter other operating expenses of $7.1 million, increased 6% or $40,000 from the third quarter. For the full year other operating expenses were up $1.7 million or 7%. Earlier in the year, we talked about keeping other operating expenses in a very narrow band of around $7 million for quarter and we've maintained those expense levels, while we grew assets by 16% and sales by 51% from 2009.

We track other operating expenses and percentage of revenues as adjusted, which is displayed in the box at the lower portion of the slide. We consider this an important metric to measure our ability to leverage our fixed cost structure.

For the quarter the ratio decreased by 150 basis points from the prior quarter and 180 basis points from the prior year period. The full year change was even more significant with a decrease of 510 basis points to 25.4% of net revenue in 2010, from 30.5% in 2009.

As we see, these results are trending in the right direction. I would like to provide a bit more detail in the financial statement impact and transaction structure on the VIT adoption that closed during the quarter. Please turn to slide 13.

On November 5th, we closed on the transaction, established the Virtus variable insurance trust and adopted 13 funds representing $1.5 billion of assets. After the closing we completed several fund mergers and we now have 8 funds in the VERTUS VIT.

The bars on the left hand side of the chart show the impact of the moves and the incremental changes to assets under management and assets under administration. Specifically, prior to the transaction VERTUS [sub-advised] approximately $0.3 billion of assets and was the fund administrator for the $1.5 billion trust.

We retained our role as administrator and after the adoption VERTUS affiliates were appointed to manage an additional $0.5 billion of assets bringing the total to $0.8 billion of VERTUS managed assets at [1231]. We use external managers for the remaining $0.7 billion if assets in the trust.

As noted in the press release, fee tables, net management fees of the VIT assets were approximately 45 basis points. I will point out that these fees will vary based on several factors including the assets mix and fund reimbursements, which are reflected within the net management fee rate.

Additional because of the timing of the transaction, and the fact that the fourth quarter was not a full period, we would expect to see net management fees drift lower in subsequent periods. One other note on the construct of this transaction, at the time that we announced our agreement, we said the deal was structured to be variable in nature in order to align the interests of both parties to the transaction.

The cash consideration is paid out over a three year period and the consideration is based on assets under management and will vary with the success of retaining and growing the assets in the trust. We both benefit as the assets grow, which is the way that we like to structure a deal such as this.

We reported a $2.7 million intangible asset and a related liability in the fourth quarter, reflecting the projected earn-out payments and certain related costs. A quick housekeeping note on our AUM tables in the press release, we added a new product category, variable insurance trust, to reflect our role as advisor on the $1.5 billion dollars in assets.

Prior to the adoption, the $0.3 billion of assets, managed by our affiliates, were included in institutional products, reflecting the sub-advisory relationship we previously had. The re-classification from intuitional products to the new VIT line is reflected in the acquisitions and other line in institutional products.

Also in that line is the change in value of certain low fee liquidity products that we did not include in flows. Finally, I want to discuss our capital and liquidity position including progress on working capital and a review on each of the elements on our capital structure.

Working capital at December 31, 2010 increased 8% sequentially to $44.2 million from $41 million and up 38% from the prior year-end. Well cash is also up in this case by 19% from the third quarter, as you know we generally build cash throughout the year prior to the payment of incentive compensation made in the first quarter.

So in managing the business, working capital is a more relevant measure as it includes the incentive compensation liability. The improvement in working capital reflects the improved operating results and cash provides a stable platform for continued growth. Our outstanding debt balance remains at $15 million and our facility has additional capacity of up to an additional $15 million.

To aid in your analysis of the facility and the impact of our operations, we added a page in the appendix of the deck that defines and describes the status of the key covenant definitions and results of those covenants on our debt facility.

I won't review each of these measures in detail, however I will point out that we are satisfied that the strong business results we've just reviewed provide adequate operative flexibility for us to deliver on our growth initiatives and further expand profitability, and increase that value to our shareholders.

I want to mention several other items on the slide, first concerning the $35 million of 8% convertible preferred securities, the additional financing right that was in place expired at the end of the quarter on December 31, 2010.

Additionally, VERTUS common stock closed above 175% of the conversion price or above $45.68 for 20 days, which triggered the conversion feature at the end of the quarter. Under the terms of the investment agreement, the shares can be converted to common stock or the preferred holder can elect a forgo participation in dividends on our common stock.

This provision does not expire, we will report on any changes to this status in the future. Concerning our stock of purchase program, we expect to continue re-purchases this year and are pleased to be in a position just two years post spin off and following a very difficult market environment to return capital to our share owners.

We will report and repurchase activity each quarter. The buyback is generally intended to offset dilution from shares issued under equity based plans. We'll continue to review the most effective ways to manage the Company's capital, to meet our business needs in a manner which demonstrates that we are responsible stewards of the Company's capital. With that let me turn the call back over to George.

Thanks, Mike. The continued improvement throughout 2010, that Mike and I detailed, clearly demonstrates we're building momentum in the business and delivering on our goal to grow value for shareholders.

We are very pleased with our position as we enter the New Year, there's up to two years of taking foundationally actions to properly structure the business, we believe that we are now building towards the future from a position of increased strengths.

And the strengths are in several key areas, first is products, our product offerings remain strong particularly with our mutual funds. We have a broad array of products from a selection of distinct assets managers who offer a variety of styles and strategies.

That means that as investor preferences change with different market cycles, as we show in the ladder part of 2010, with sort of a shift into equity fixed, in a range of products to meet market demands. As we demonstrated in 2010, having a diverse portfolio product is an important element for sustained growth during different market cycles.

Looking at distribution, as evidence by our growth we generated in 2010, we have demonstrated we have the access and relationships with all the major firms in the retail space and we have the right strategy and leadership in place to help differentiate VERTUS in what is a very crowded space.

Importantly we achieved our quote last year without expending or investing in additional sales resources. Our ability to further leverage these relationships will help us continue our growth momentum and drive our success going forward.

For our improved balance sheet and flexibility, our improving balance sheet gives us the opportunity to greater grows the business and increased the return of capital to our shareholders. In terms of improved profitability, we said we could significantly improve profitability and that has been demonstrated over the past few years with the improvements in our margins.

The significant sales growth that we achieved in 2010 has had an impact on our operating margin which is building a foundation for future profitability. Lastly, our result has generated a great deal of momentum and enthusiasm among our employees and constituents.

This is an important element as in many ways we are in a people business. The momentum we generated in 2010, would have been impossible without the energy and enthusiasm of the employees throughout the organization.

There's nothing quite like the success we had this year to provide further momentum to achieve even better results in the future. As you will look forward I believe we can further leverage the inherent strength of the Company to build on our 2010 accomplishments.

I'm also confident that we have the right long-term strategic plans, the right team and leadership in place to help us establish VERTUS as a company that can consistently deliver value for our shareholders in 2011 and beyond.

We're now ready to take your questions and I'm going to ask our operator to open up the line. We ask that you limit your questions to two at a time as a courtesy to your fellow listeners on the call who may want to pose questions. If you have more questions, please feel free to get back in the Queue.

(Operators instructions)

And your first question will come from the line of [Justin Evans] of Sonoma Capital. Please proceed.

Hi guys, good morning. Great quarter, fantastic net flows again. Yeah and I wanted to ask about your gross sales rate for your retail mutual fund business. What would you estimate that the average gross sales rate is for other public mutual fund companies?

Well, as we look at the gross sales rate which is again taking the sales in a quarter for the open and mutual funds by the beginning assets and then sort of annualizing the calculation. In that symmetric we look at comparison to other fund complexes and there are some that report in some of the data services that we and others subscribe to. And other companies could be in the low 30s. Some companies, obviously, are not even positive or they're in the negative range in terms of net and then just the low-single-digits in terms of that.

So we look at that for a lot of reasons. One, it's a measure of how large our sales are in relation to our beginning book of business. It's also a help for us -- helpful for us to put it in the context of what it means for our P&L because if you use your beginning assets under management to fund your sales cost, if you're selling at a rate of 54%, that's a much more dramatic larger impact on your bottom line than it would be if you were only selling at a rate of 33% or 20% or a different number. So, again, we look through that. From most of what we see, there's only a few numbers that will be higher than that, and the medium will be much lower.

Gosh, I guess. It looks like these sales are expensive, but this was a -- you hit the ball out of the park with this 54% figure. That's great. Next question is about Morningstar fund rankings. Can you talk about those? I wanted to know, specifically, kind of what the breakdown of your funds are in terms of those with four- and five-star rankings.

Well if you look at the Morningstar rankings -- and there's two ways to sort of look at it -- it's in terms of AUM in different star categories as well as number of funds. So in terms of the AUM, which is -- I sort of think about that as our client's experience, it's about 93%, or in the three- to five-star range. In terms of number of funds, I think the three to five --

It would be seven.

-- now three to five is --

Well about 85%.

-- 85%. In terms of four to five, they are both well above the normal distribution. Remember Morningstar is a normal distribution in the categories of one, you know, of five, four, three, two, one.

More than half of the funds are in four- to five-star categories as of the end of the year.

So 50% of the funds are in four- to five-star categories. But then you also look at it on an AUM-weighted basis, too, right?

I think it's actually currently who is in our funds. Actually, both metrics are actually important. One, in terms of AUM, is what is the current experience of the people that have already invested in you, and that's where 93 is three to five. Mike, how many is four and five?

Over 75.

Over 75. But then in terms of the future opportunities that you want to make sure that you have a number of funds that are attractive for future growth sales. That was the number of fund stats that Mike gave.

So, generally, I mean, obviously those are significantly better than the normal distribution results you would get in any of those categories. Again, we're very pleased to have a variety of high-performing products. More importantly, in different categories; whether its fixed income, whether it is in equities, whether it's international equity or real state, there are several things that are going well.

Okay, great. Then the last part I had was I didn't catch your comment about the mandatory conversion feature. Could you clarify that for me? Did you issue a mandatory conversion notice to the preferred holder? If so, which option did they choose?

I think is what Mike indicated is that they're -- the period in the investment agreement of the 20 days that occurred during the fourth quarter and that, basically, once there is resolution or update on exactly what that is, we will provide that.

But then -- but as a reminder, there is no expiration to that. As the agreement is written, it basically provides for going on participation in common dividends, which at this time are not currently in place. So we will -- we will provide an update when there's some clarity on that.

Yes --

So there's no change in ownership profile or economics in terms of the 8% convertible preferred securities that we're paying in the dividends. You know, there's really no update other than that brief comment.

Yes, I guess, just I'm confused. Does that -- do you automatically -- do you elect to issue the mandatory conversion notice? Or does that happen automatically under the terms of the agreement?

Under the terms of the agreement that the company, Virtus, can issue the notice on that, and then there is the ability for the other party to elect other options.

Got you.

We'll provide clarity on that when there's an update to provide.

That's great. I'm glad you're focused on it. Thank you, guys. Again, fantastic quarter; keep up the great work.

Great, thanks, Justin. (inaudible - multiple speakers)

Your next question comes from the line of Larry Hedden of KBW. Please proceed.

Hi, guys. Thanks for taking my questions. First, are there any non-recurring costs associated with the [closing] funds secondary in the first quarter?

No, there are not any material or items that we would note in terms of the secondary offering for the fund, no.

Okay. Then in terms of the VIT, going forward, are you going to include sort of a full asset role similar, you know, to, you know, your breakout for, say, the mutual fund bucket?

It's a good question. Right now for the VIT, which we just adopted, is -- and it was -- it was a proprietary VIT of an insurance company, which effectively means it was closed to that insurance company. At this time, it is still, you know, closed to one insurance company.

We will look at that. To the extent that we are, you know, we have other opportunities and it -- and it is opened up to -- and there are other customers and clients and opportunities for growth, we'll reevaluate the best treatment for that, whether there -- it makes sense to show the full in and out and performance.

But right now, to be clear, it is -- it is basically still captive just to one insurance company. So we'll reevaluate that and would be very clear if we were going to change that presentation.

Okay, and just a follow-up; are there any asset-based expenses associated with those assets? If so, where do those flow through on the P&L?

Sure, and I'll let Mike go into a little bit of detail. But the [deal] with structure as a variable deal, so there was really no upfront consideration. The structure is to the extent that there is economic benefit provided to Virtus that there would be consideration.

So it's sort of an alignment of interests. Obviously, everything we do in our world is in terms of basis points so that as the level of assets continue or grow or shrink, that is how our economics will be recorded. I think Mike referred to some upfront purchase accounting, et cetera.

Yes.

So.

I noted that we recorded a intangible asset of $2.7 million in the quarter, which reflects the -- two elements; the earn-out component, which has a $2.1 million estimated liability that'll be paid out over three years; and then certain transaction costs.

You'll see that get amortized through the amortization of intangible asset line item on the income statement. Then, in addition, there are variable payments on the asset levels that George referred to that flow through the distribution administrative expense line item. Those are really based on market-level rep share arrangements that are in place.

Okay, that's very helpful. Thanks. I'll hop back in the queue.

Okay. Thanks, Larry.

Thanks, Larry.

Your next question comes from the line of Joseph Magaro of J. Goldman. Please proceed.

Hi, guys. I actually wanted to follow up on the VIT issue again. Piecing together the numbers you've put out, it sounds like there was an incremental $700,000 in revenue, adjusted revenue, in the quarter. You've put out a number of $600,000 in incremental adjusted operating income contribution. So is it fair to deduce that there was roughly $100,000 in adjusted operating expense reflected from VIT in the quarter? Then, secondly, if the transaction had closed at the beginning of the quarter instead of on November 5, you know, what would have -- what would have those three numbers have been? Thanks.

Well I think your assumption -- again, we gave -- Mike gave the gross revenue number, and then we gave the bottom line P&L number. The delta is the incremental costs. Generally, our variable costs are relatively small and generally are around variable incentive how we pay our portfolio manager. So, other than that, of course, I think your deduction is sort of correct.

Yes, I think -- I think that's exactly right. That's the nature of the expense that's offsetting it. I think, with respect to timing, you know, other than the fact that there was some adjustments that may have caused the fee rate that we reported to be a little bit higher than I might expect it on an ongoing basis, I think you'll be able to just, you know, time wait and pro-rate accordingly the run-rate impact of the VIT.

Okay, so it's not a material adjustment from the fee rate issue that you're raising?

I mean, I expect them to drift a little bit lower. You know, we'll have to get a better sense of what that'll -- what that'll be in the first quarter when we have it under management for a full period. You know, so I don't know how materially it might change.

Okay.

I do expect it to drift a bit lower.

Okay. Secondly, could you just help us out in understanding what seasonal expenses we should expect in the first quarter incremental to the fourth quarter?

Generally, the biggest thing that we and others in our space see in the first quarter is the impact. You know, incentive compensation is paid in the first quarter for portfolio managers and, actually, for most people. So there's usually a big tax implication where a lot of people will max out on their taxes in the first quarter. Last year, the number was, Mike, close to $1 million. So it wouldn't be -- you could think that that $1 million -- in other words, to be clear, the first quarter had $1 million more of payroll taxes than the following quarters. That's the one that usually stands out.

You know, in terms of other seasonality, there are not a lot of other things that (inaudible) that's usually more around when sales activities occur. Sometimes, in past years, you know, the summer months would be a little slower than the other parts of the year. But I think a lot of that has been leveling out, that you don't see as much as you do. Mike, is there anything else you would highlight?

Was there board compensation or annual report compensation, something like that also?

Annual is good. Annual report; some of the costs are incurred in the first quarter. So that is something we usually at least [note].

Yes.

Mike, for the --

Yes, I mean, I think maybe there are some puts and takes. But I would just point to, you know, our other operating expenses really have been leveling off within that -- within that -- within a pretty consistent range. So to the extent that there might be some costs specific to an annual meeting, you know, I think we've demonstrated the range of other operating expenses.

Okay. Thank you very much. Congratulations.

Thank you.

Thanks, Joe.

Your next question comes from the line of Steve White of RMB Capital. Please proceed.

Good morning, guys.

Hey, Steve.

How are you?

I'm good, thanks. I want to talk a little bit more about the sales strain just to make sure I understand this. You said it was an incremental $700,000 in expenses. Does that relate to the delta between Q3 and Q4 gross sales, which is something like $135 million? Is that the way to think about it?

Well the number that you cited is looking at the third quarter sales to the fourth quarter sales. Mike, you want to take the --?

Yes, I think you're thinking about it conceptually right, but I'll point you to the press release, specifically in the mutual fund category. It really is related to the open end mutual fund sales and some of the gross sales rate that was responded to in Justin's question that was 54% this quarter. That's reflect -- driven by the $1.5 billion of mutual fund sales.

That's really where we have the upfront commissions that are paid at the time of the sale. So you look at the incremental sale quarter over quarter, and that's primarily what drives it. There are other minor elements that go into the sales strain, but that's the primary driver. We talked about the mix of the assets moving more towards equity. So that's another contributor to commissions paid. The timing of sales is an impact. So those are the key drivers. But it's really retail sales.

Yes, and so that's a great point because that's what we're really sort of looking into it. The upfront -- the retail part of the business is where there really is the upfront impact of sales strain. Other types of businesses are more a level loaded with the -- with the revenue, just to build on one of Mike's points. So hopefully that's a helpful metric for you to look at. If growth equals -- if growth in the sales is X and the cost was Y, it gives you a little bit of a feel for what that cost is.

But I just caution you because there are a few things that do drive it, whether you're selling high basis points equity products or low basis points -- low-basis point fixed product, it would have an impact. Whether these are truly wholesale sales or if there are more platform sales have as a slight difference cost structure related to it.

Then one that shouldn't affect your math but sometimes will affect how it looks in a quarter is if all of your sales were on the last day of a quarter, you'd have 100% of the cost and only one day of the revenue. For us, actually, December was actually our best month of the quarter and the year, where as in some cases you might see the reverse where the first month is.

So there's a few factors that will influence it. So I just, you know, caution everyone. As you try to do the modeling, understand there will be variability based on some of the factors that Mike pointed to and that I just elaborated on.

Can you say what the sales strain was for any prior quarters?

Yes, I mean, sales this year have been pretty consistent. If you remember, we were about $1 billion in the first quarter, $1 billion in the second quarter and $1.1 billion in the third quarter. So as we sort of step through on a quarter-by-quarter basis, it didn't get to the point where we wanted to spike it out. But this quarter, when sales increased so dramatically, it was a point that we felt it was important to spend some time on and elaborate on today.

Right, well and remember. There's two things. What Mike is going over is the increase in sales strain. What he was just describing is how much more additional impact we have on that growth. Fundamentally, you could think of sales strain as -- it really almost goes back to the 54% number that we sort of put out there. If you have -- if you have two complexes that each have $10 billion and one is selling at 54% annualized sale rate and one is selling at 20%, you're going to have a different implication for their P&L because each of them will have the revenue from the $10 billion beginning AUM, but they'll have the cost of either 54% or 20%.

So the numbers and the metrics that Mike was giving are really sort of around, we hope -- we hope, a context for the increases sales strain from Q3 to 4Q. But, you know, the implications of having a growth rate that's really, really high is also part of sales strain.

Okay. Then on the buyback, you mentioned that it was being primarily used to offset option grants. I guess I wanted to get a better sense from you. To what extent do you view the buyback as a tool to maximize shareholder value? Should we basically expect shares to only be -- or purchased when options are granted and the amount that are repurchased are going to offset those grants pretty close to one to one?

No, I would -- I would not think about it that way. I think what Mike alluded to, which is correct, is just the acknowledgement that we use equity in compensation plans, and that has this dilutive effect on shareholders and that offsetting that dilution is a good thing. That is separate and in addition to, you know, the obligation to return capital to shareholders as appropriate and when it's appropriate.

So I -- we're not going to give specifics about when we buy and what we buy and how we buy. But we were not -- Mike was not referring to, nor am I referring to, that we are going to literally target buybacks to be coincident with any other activities. The Board authorized, you know, a total program of [250,000] shares that would expire at the end of three years. The decisions on how to do that will not be solely specifically related to the equity.

What Mike was saying was just more of an acknowledgment is that [comp plans] dilute shareholders and we're cognizant of that. But returning capital to shareholders is in and of itself an important obligation to the Company.

Okay. Thanks a lot, guys. Good quarter.

Thank you.

Thanks, Steve.

Your next question comes from the line of Lee Matheson of Broadview Capital Management. Please proceed.

Thanks. Well done, guys. Great quarter all around. Your -- the holder of your convertible preferred shares is -- has recently executed a very large acquisition, which came with it a relatively substantial asset management division, including a retail mutual fund business. Could you please give us an update on, on terms of whether you've had discussions with them regarding this recent acquisition and how that may have changed your relationship with them?

Sure, and what I can say is again, always as a reminder, we cannot speak for BMO, we cannot be speak for BMO, but what you're referring to is a transaction that they did and then now I think it's going to close later in the quarter.

The primary drivers I think as they announced it were the expansion of their bank franchise and wealth management, which is different then asset management. So, that is a separate initiative that their doing and (inaudible) of their strategic objectives.

Are we personally aware that there are asset management GAAP liabilities within the firm? Absolutely, but again BMO is a separate company and it would really be inappropriate for us to either speak for them and to giving an indication.

We're focused on executed on our growth opportunities, which we believe currently we have several of them, but we are obviously aware of what BMO does and particularly when they do things that might be in our space, but they're -- they're actual business that you're referring to is really sort of captive within that bank and is not, is not something we would come against, come up against, generally in our world.

Okay and then the, I mean there's some mention on their cost specifically related to the martial funds that they acquired and I don't know if you guys are aware of -- if you guys saw the language that was used, but it was sort of certainly specked around what they wanted to do with future fund business. So, I mean but as far as you, you guys have not, have not -- obviously you been started to contemplate what stuff might come down the pipe from this?

Well, again we contemplate counsel and other things. I think what you're referring to is they're not in the mutual funds business areas because obviously they basically allowed us to adopt their fund business several years ago and part of relationship is as a mutual fund distributor.

So, I think if they were to ask questions on that, the assumption would be that that is something that they're going to have to think about going forward.

And, are you -- I mean with it you've obviously done an incredible job taking the Phoenix business and the Harris business and turning it into something quite substantial. Are you -- you know you mentioned the kind of general and excitement around within your -- you know with you people, I think is the - you're taking on another project, something that you have the institutional (inaudible) and institutional bandwidth so-to-speak to tackle?

There's something that a value to help grow the company and create some additional value, everyone here is very used to working very hard on multiple with very shot time lines. So, if opportunities arise I'm very confident that our resources are very skilled at sort of pivoting and taking advantage of those.

But again, I do think we're fortunate that at least we stand here today, that there are several opportunities and ways for us to continue to generate some growth, but we try to keep our eye on anything that could be an opportunity for the company.

Okay and I mean in terms of -- you haven't specifically mentioned him and M&A, but the -- one of your -- a substantial asset that you have is, which you related to earlier is your federal tax shield that is being, starting to be, to be used now as you turn the corner on profitability, but the scale of your M&A is substantial. Is that - would you consider M&A as a way of making use of that asset in a [durative created] degree?

well we have to keep everything on the table, as you're pointed out is that because of our current tax position and tax shield, that were there be an M&A, theoretically, more value to be created because we have some protection against any tax ability related to that.

So, we're confident of that, but any decisions we make in terms of M&A or what's used with our capital are going to be driven by what's in the best interest of the business, but you are correct because of our tax status the evaluation and the ability to approach that would be different then someone who didn't. Yes, the significant tax shield, so that is something that we are confident on.

Okay, thanks again guys and an absolutely stellar course over the year. Keep it up.

Great, we really appreciate it. Thank you.

Your next question comes from the line of [Brian Garnet] of [Sunban]. Please Proceed.

Hi guys, great quarter. (Inaudible) morning. Can you tell us what the basis points of revenue you generated between equity and fixed income?

assuming (inaudible) that the growth kind of fee rate or?

Yes, so what kind of rate of, are you earning on equities and how much are you earning on fixed income?

Yes, you know what I'll do, because we -- I can give you some fee rates on some of the individual funds.

this wasn't our 10K

That's disclosed and you can find, but if you sort of think about some of our emerging markets products, which is at about again, and neither -- remember if it's sub-advised, we would only keep it back after pay.

So, emerging markets is 110 -- I mean alpha sectors are about 110, emerging markets is 100.

You don't have to give me the individual ones, I guess let me ask the questions a different way. You kind of break it out by product a little bit in the Q right? Between institutional accounts and mutual funds and what have you.

I'm just trying to understand and you gave us the overall blended number for the quarter of 37bps, what would -- basically what's the run rate that you're going now coming into January of this year?

and Brian's my (inaudible), how are you?

Good.

We have presented obviously the specific elements of how much of the blended basis points are driven by equity are fixed, what we've been trying to do is talk about what we've been selling and the impact on new sales and I think we reference 41 basis points being the assets that we added this quarter.

40 basis points were the assets that we added in the third quarter, I think the first half of the year the average was 32 or 33. So, clearly it's trending in the right direction, but we haven't provided specifically each piece separately.

and, the other thing.

Any reason why not?

Yes, I mean just at that level of detail we haven't seen a lot of peers go to that level of deepness.

And, I'll give a different reason because what really drives it, a lot of it is going to be the market, so at one point in December, Mike gave you the number 41, so that's based on the average blend. And if you think that equity funds are basically in the 80's and some funds are in the 40's you know what that number is.

What we can't -- what we're careful about, is we're seeing shifts from bond funds into equity funds and if that continues to happen, because we have good equity products that number could go up and up, but if it changes, it could go the other way.

So, that's not something, but we'll think about if we think that an added level of detail is helpful then maybe we'll think about putting that out there.

Yes, so when I look at 37 basis points, which is the average net fee rate for the quarter, what was it at the end of the year? And, coming into the beginning of this year? Obviously higher.

Yes, first of all let's try to understand what the base is kind of coming into 2011.

Well the rate at the end, I think the last month of the year, which would have been higher in equity, that's what happened in the industry and happened for us, maybe we'll circle back for you and figure out why.

Okay. Fair enough. Fair enough.

and, I think there were a bunch of expense GAAPs that as part of the re-pricings on a number of funds, are we now given where the markets mood and the great job you've done on sales, are we kind of above those thresholds now? And, that might explain why our fees are going to go higher.

it's a good question, in terms of expense GAAPs and again we have not pointed to any significant changes in the reimbursements as we discussed the results and I do think there was a material or a noticeable contribution or [detraction] it is something Mike or I would probably spike out.

You are pointing out an important thing, we have a lot of funds that are under expense GAAPs because as a smaller fund complex we make sure we try to GAAP at medium of the expense percentiles so that we're as competitive as our much larger competitors.

As our assets get bigger and as the markets go higher, and is a fund to grow, we have the opportunities for some of those to come off, but again we did not highlight any of that as being a contributor in the fourth quarter, but certainly there is an opportunity if we can continue to be successful for some of that to happen.

And the way you'll see it is that the fee rates that Mike gives are already netted so, you would see that as an increase if it happens and we would absolutely spike that out if that were something that were to occur.

Got it. As far as expenses go, putting aside the issue on pay roll taxes I see in Q1, should we kind of be thinking that the compensation expense as a percentage of revenue is going to be fairly consistent to what it was in the fourth quarter?

Yes, I mean clearly we've been trending in the right direction Brian. We haven't provided that little guidance, we do expect continued ability to see only the movement or primarily the movement in employment expenses be variable in nature, be related to sales commissions that we talked about and be related to the profitability of the company. So, clearly the employment expense construct is clearly aligned with the overall profitability.

Yes. Yes. And, the other expenses what kind of growth is kind of reasonable to think about that kind of year-over-year? Or, sequentially, I don't know how you think about it.

again, we've been trending in the right direction. We've been growing or holding operating expenses to a slower change than revenues and sales, again, reflecting the ability to leverage our scale. So I would like to see those ratios still trend lower as a percentage of net revenues.

And then just as a reminder of what's in there, because again, I think, earlier this year we put out the range that we would sort of expect it in and we sort of stayed there. But there are things included, there are sales expenses in our other operating and while they haven't necessarily risen to the level that we have to point to, generally I think we try to keep most of our fixed costs as stable. We have a -- we have not over invested in a lot of things but there are some variable costs in there particularly marketing, printing and stuff, that has been getting larger as we have been.

But again, as a percentage of revenue, again, our goal is continue to manage that in a way that that rate goes down because we are fully aware that our rate is higher than other firms. But again, I think the growth will help bring everything into perspective.

Right, just the last couple of quick questions. As far as the cash goes and what you pay out in Q1 for bonuses, what's accrued, the excess bonus type accrued payroll that we expect to hit the cash here in the first quarter?

I'm sorry how much -- is the question how much cash compensation will we expect to pay out in Q1 related to the 2010 year?

Yes, yes.

Okay. I mean --

I think because last year we report in the --

We haven't specifically reported that number. I guess our largest operating expense, we don't give that specific number and --

I think going back a couple of years ago, I forget if it was year --

(multiple speakers)

We did it in the Form 10 in the capital liquidity at the time of the spin off but the liquidity of the company was a little bit different and had to give that kind of insight and guidance just to provide some support on our liquidity position.

As our liquidity position has improved we're giving higher level results on working capital and other metrics that we're looking at, to manage the business. So when we look at working capital, which we talked about being the most important and relevant metric, working capital won't be impacted by the change in incentive compensation payments because the reliability will be relieved.

So I think that's the important item to look at.

Well I guess, let me rephrase the question this way, is cash going to go down in Q1?

Well, there are a lot of factors in cash. I would expect Q1 to be the low point of cash for the year.

It usually is, right, and generally that is our biggest cash outflow. And it would just depend on how big that is in relation to whatever our profitability generates to that. But you can look historically every quarter, that is our lowest cash --

Right. When it comes to --

I do think we need to move on, we've gone past the --

I have one last point to make and you guys, operationally are doing a fantastic job I'm very pleased. But when it comes to capital allocation I guess I'm a little disappointed to hear that the purpose of the stock buyback, it sounds like is primarily to offset option issuance. And if the stock were trading at $200 a share would you still buyback stock. There's one reason to buy back stock, that's to create shareholder value and I'm just very disappointed to see you bought back 20,000 shares, you're stock is now well over $50, you could have bought it all back last quarter in the $40's so, it was a missed opportunity to create shareholder value . And frankly, that's the main reason to buy

Well Brian, I'm sorry, you must have missed the earlier question because I think we made it clear that the reference, the general reference that Mike made to the offsetting of equity plans was not the driver of why we do stock buybacks it --

Then why even say it?

It was -- excuse me Brian, it was simply just the acknowledgement of we understand that that happened and that is one of the things that we think about. And last year we did, once we had the ability to do stock repurchases, which we didn't for the majority of the year due to both our debt facility which we renegotiated so we could do it, as well as to the approval from our preferred shareholder after spending months of hard work to be able to have the ability to do it, we did announce it in the fourth quarter and commenced the program in December. And it's the beginning of a program, it's the right thing to do, we agree with you that returning capital to shareholders is a good thing.

And we will continue to provide you on updates on that. But to -- it would not be correct to say that the only reason we're doing stock buybacks is to offset options, that is not what I said and we specifically just said the opposite of that a little while ago. And there are -- we still have limitations in terms of how much cash we can use in any given quarter for a certain series of things including stock buybacks.

So there's a lot of things that come into play in determining in any given quarter how much money we could be very comfortable that we could use for stuff like that and not violate any of the other requirements that we have. So I think we've done a good job of creating value for shareholders. We agree that returning capital is another good usage. And again, we will provide updates on that program as we continue to make progress.

Great job creating value, operating the business George. I really do believe that, I mean that's quite evident. But as far as capital allocation goes, I would disagree.

Thanks Bryan, this is Joe, we need to go on to the next question. Corrissa?

Thanks Bryan.

Your next question comes from the line of [Juarez Goldstein] of [Santa Monica Asset Management]. Please proceed.

Hi, obviously you're doing and have done an excellent job. But there are two big risks existing, one to the business and one to our investment. And you've been discussing them on the last two to three question-and-answer dialogues and I would like to follow up on them.

The big risk to the business is the advent of the ETF. The mutual fund industry assets, I have the opinion and the opinion of some others, will be exceeded in the fullness of time by the ETFs. And latter its $1 trillion in I think mutual funds or it's something like $11 trillion, what is your view of that?

Obviously you deal with advisors who more and more increasingly are making use of ETFs and there are a whole lot of other factors involved and I'm sure you're well aware of.

And the second risk that I see is one you've been discussing, sort of, and that is the risk to our investment in Virtus with the threat coming from, really in the short term let's call it next year, the short term, from the Bank of Montreal which on the one hand has to okay a stock buyback and on the other hand as history shows is not in the investing business. They're in the operating business. And so it should be obvious that they are either going to try to acquire Virtus or they're going to quit.

And that's not to say that there aren't others as well. And the only way I see that you can battle that is to move very quickly to do what should be typical, is typical, in the managing assets under management and that is developing very high profitability.

We all know that in the private world of asset management, everybody feels like they can handle another $1 billion without any additional expense, or billions.

And one final thing I might say with respect to the ETF business, and your business, and the mutual fund business, the ETFs are adding billions monthly. And you're adding gross billion plus quarterly. It's not critical of you, but I'm just giving the framework to -- which I hope you might respond to.

Sure. Sure. And obviously we're cognizant of the impact of ETFs in the overall investment management industry and it is growing very quickly, it's not FSIs or the breadth of the mutual fund business. So we do -- we're cognizant of that. We're cognizant of where it can be competitive. And it's more competitive in some spaces than others.

We, like the other mutual fund companies, do believe that the additional value from the active management and the oversight and the combinations of products and strategies that can be put forward make them competitive with and, in certain instances, from other types of products.

We actually do utilize ETFs in some of our products. The Alpha sector strategy that we spoke about before is basically a model that deals with certain types of market environments, but invests in and out of certain sectors of the S&P through ETFs.

So we've actually been one of the larger customers of some of the ETF programs in the last 12 years.

And that's a value-add that a company like ours can sort of bring to the table.

And in terms of your other question, which generally, I guess, related to sort of BMO in the future, we are a company that has -- we are a separate company from BMO and they're a preferred stockholder and they are important to us. But we have our own strategic plans, our own ways to grow the business and we're executing on those. And ultimately, what BMO may or may not want to do with their investment in us is something that they may eventually reach a conclusion. But Virtus will basically do what's in the best interests of Virtus and it will assess any opportunity or not through that filter.

BMO did not necessarily have any rights or abilities to do things that we don't think are in the best interests of Virtus. It'll be the company, the management and the Board of Directors that will reach any conclusions like that.

So our focus is on doing what's the right thing, in any situation, which is continue to try to grow and improve the company and that includes the increases in profitability and sales growth and everything that we've seen.

So I think that's -- hopefully that is responsive to your question.

And your next question comes from the line of Larry Hedden of KBW. Please proceed.

Hi, guys.

I just want to sort of go back on a couple of housekeeping items.

I'm just wondering if you can give any color around the composition of the institutional SMA and VIT buckets? I mean, do the rough breakouts, are they similar to what the breakout is in terms of the aggregate number?

Equity, fixed income, money market?

Generally, when -- if you look at the SMA types of businesses, there's more of the small and mid-cap type of equity strategies as well as some muni-strategies. Because one of our affiliates, I can't answer [Mudneck], which is the stronger in the SMA space, is basically a small, mid type of a manager.

And on the institutional side, it's probably more heavily weighted to fixed income in general.

So each of those two subsets does not have the exact same profile, again, you're going to see more of this -- the SMAs will be small, mid-cap types of strategies and then like muni fixed income, and then the institutional will have a broad array of fixed income, both core, core plus and then it's equity strategies like REITs, et cetera.

So you do have a slightly different perspective.

And you'll see that, Larry, in the result of the fee rates, where the SMA is our highest fee rate by a category and the institutional is lower because of the blend and the mix.

So institutional will be more heavily weighted towards fixed as George just described, and SMA, led by [Cane Anderson], which is more equity-based products, is generating a bit higher feel level.

Okay. Great.

And then, finally, just in terms of the headcount, what is the headcount at the end of the quarter? And if possible, could you guys give a breakout, in terms of how many are related to the sales effort and how much are investment personnel?

Yes, I think we disclosed headcount last in the 10-K, 2009, which I believe is 278 employees at that point in time and there hasn't been a substantial impact -- change in that level since the prior year and we really haven't given a specific breakout in terms of the different categories, as where a multi-manager, multi-boutique.

So we haven't historically given those levels.

Okay. Thanks for answering my questions.

Okay. Thank you very much, Larry.

Thanks, Larry.

Thank you. And I know there may be some further questions, but in the interest of time, we need to move on and so I encourage you contact us directly if you have any other questions.

And let me just turn the conference back over to George for any closing remarks.

Well, I just want to thank everyone for participating this morning and I hope we gave you a better understanding of the company and the results. And as Joe indicated, if there are any additional questions, please feel free to reach out to Joe or Mike or myself. We will follow-up.

Thank you, everyone.