Virtus Investment Partners Inc (VRTS) 2011 Q3 法說會逐字稿

Good morning. My name is Tanya and I will be your conference operator today. I would like to welcome everyone to the 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 listen-only mode. After the speakers' remarks, there will be a question-and-answer period and instructions will follow at that time.

I will now turn the conference over to your host, Joe Fazzino. Please proceed.

Thank you, Tanya. On behalf of Virtus Investment Partners, I would like to welcome you this morning to the discussion of our operating results for the third quarter of 2011. 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 facts 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.

For a discussion of these risks and uncertainties, please see the risk factors in 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. 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, including an appendix that is accessible with the webcast through the investor relations section of virtus.com. This morning's call will begin with remarks from President and Chief Executive Officer, George Aylward, who will review some of our accomplishments during the quarter. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail before we open the call to questions.

Now I would like to turn the call over to George.

Thanks, Joe. Good morning, everyone, and thank you for joining us on the call today. As Joe said, I will begin by giving you an overview of our third quarter results and some of the actions that contributed to the results for the quarter. Mike will discuss the financial results in more depth and we'll conclude with a question-and-answer session.

I assume you read our news release so let me start by giving you some context for our very strong results during an incredibly difficult period. Several events set the stage for the challenging financial markets during the quarter, including the uncertainty over the debt ceiling debate, the S&P downgrade of the US credit rating, European sovereign debt concerns and renewed talk of a double dip.

The S&P 500 was off 14%, making it the worst quarter for equities since '08. This environment certainly affected retail's investor sentiment towards investing. The industry as a whole had negative flows in July and August with August having the highest level of mutual fund net outflows since November of 2008.

It was against this backdrop of extreme uncertainty in the markets that we had another very solid quarter with sequential improvements in our key financial measures. Slide five summarizes several of our key accomplishments this quarter.

First it was our best quarter yet as a public company for total sales, total net flows and operating income as adjusted. The breadth of our products, the strong relative performance of our funds and the effectiveness of our sales efforts gave us an ability to maintain a high level of sales and net flows even during a period when many others suffered through net outflows.

The accumulative impact of strong sales, a stable base of managed assets and the benefit of the recent initiatives contributed to a 24% sequential increase in operating income as adjusted and the increase in the related margin to 31%. Margin expansion continues to demonstrate the inherent leverage ability of the business.

We maintained long-term open-end mutual fund sales above the $2 billion level for the third consecutive quarter. It was not an easy quarter to maintain our high level of sales given market conditions and the fact that we were very focused on the successful raise for the DPG closed-end fund, but we accomplished both, which reflects the attractiveness of our investment strategies and the effectiveness of our distribution.

Total net flows increased despite the industry-wide experience of higher redemptions, particularly for mutual funds. What was even more important than maintaining fund sales we were able to increase net flows by 11% on a sequential basis as a result of the successful closed-end fund raise and impressive mutual fund net flows.

Investment performance is the primary factor in net asset managers' success and we have delivered consistently solid relative performance of our investment strategies. For example, approximately 82% of all assets exceeded their benchmarks on the three-year basis as of September 30th. We also had 12 top quartile funds among the 32 rated long-term open-end funds with top funds and strategies our clients need for a well diversified portfolio.

Lastly, we continue to pursue other growth opportunities and products other than open-end funds, such as the Duff & Phelps closed-end fund we launched in July and the closed-end fund we expect to adopt this quarter. These accomplishments, increasing earnings and margins as adjusted, consistent growth through both sales and net flows, solid relative investment performance and successful initiatives drove our growth in the quarter and position us well going forward.

Let me talk specifically about our operating results for the quarter. We had an exceptional quarter of sales driven by both consistency in open-end mutual funds and the raise for the closed-end funds. Total sales were $3.3 billion in the quarter, an increase of 26% from the second quarter and more than double the level of total sales in the third quarter of 2010.

The largest single driver of the sequential increase in sales was the IPO of the Duff & Phelps Global Utility Income closed-end fund that we launched in July. The DPG offering demonstrated two of our fundamental strengths, investment management and distribution. Duff & Phelps experience in utility, energy and infrastructure sectors provides a strategy that -- provided a strategy that addresses a growing need for yield among investors.

Our retail sales force leveraged the attractive strategy by partnering with a strong syndicate to raise more than $700 million, one of the larger closed-end fund offerings of the recent past. We also delivered a second consecutive quarter of long-term open-end fund sales over $2.4 billion. Even with the closed-end fund raised we maintained open-end fund sales at $2.4 billion for the quarter and year-to-date we have delivered $7.1 billion in long-term fund sales.

It's important to note that those sales also remain very balanced among domestic equities, international equities and taxable fixed income strategies. In addition to maintaining fund sales and increasing total sales we also grew total net flows this quarter.

We had positive net flows of $1.6 billion, a sequential increase of 11%. For the year-to-date period we have generated $4.4 billion of net flows compared with $1 billion for the comparable period in 2010.

Total net flows were driven by the high level of fund flows and the DPG rates. Long-term open-end fund net flows were $1 billion in the quarter. Our fund redemptions have generally been below industry levels and although redemptions across the industry increased this quarter on a comparative basis our redemptions held up quite well.

The organic growth rate for our open-end funds was 26% in the third quarter. And while that is a decline from the high organic growth rate of 48% in the second quarter, it remains at or near the top of the industry. In fact our organic growth rate remained significantly higher than the average growth rate among the 40 largest mutual fund complexes. And if we were large enough to be included among those companies we would have been near the top of the list.

Several factors drove the sequential improvement in operating income as adjusted and related margin, including the accumulative effect of our very strong positive net flows from previous quarters, as well as the Newfleet and DPG initiatives. Operating income as adjusted was $12.8 million in the quarter, a sequential increase of 24% from $10.3 million in the second quarter.

The third quarter had the benefit of a full quarter of revenue from the Newfleet multi-sector team that joined us in June, contributing $1.5 million to operating income as adjusted. In addition the DPG closed-end fund contributed $0.8 million to operating income as adjusted, which reflects two months of the results for DGP. The full benefit of the fund will be reflected in the fourth quarter.

Our operating as adjusted increased to 31% in the third quarter compared with 28% in the prior quarter, 21% in the third quarter of 2010. The margin expansion reflects cumulative impact of continued growth in assets and sales even as we continue to have the sales strain from high levels of sales.

Generating a 31% margin at a time when we are still experiencing significantly high level of sales in relation to our assets is a considerable achievement. We have demonstrated an ability to consistently deliver higher earnings and great profitability even as we experienced the earnings drag of strong top-line sales.

In addition to these solid operating results we also completed an important capital transaction when we reached an agreement with Bank of Montreal's BMO Corp. subsidiary to convert the $35 million, 8% convertible preferred shares into common stock. As you may recall, when we prepared for the spinoff in 2008 BMO took a $45 million preferred stock position representing approximately 23% interest in Virtus.

The attributes and rights of the preferred stock included 8% annual preferred dividend, the ability to elect one director to represent the preferred shares, a liquidation preference and a put right after October 31st of 2015. And one other right not related to their preferred stock was their ability to nominate an additional director.

And under the terms of the original agreement we could effectively call the shares after October 31, 2014 with BMO having the option to convert to common stock or to redeem at $26.10 per share for a total of $35.2 million. So the agreement we reached last week in many ways accelerates what could have otherwise have happened after October 31, 2014.

BMO will convert the remaining preferred shares to approximately 1.3 million of common shares. They receive the accrued dividend plus the present value of dividends they would have received through October 31st of 2014. They retain the right to nominate one director and they now have the same voting and dividend participation rights as other common shareholders.

The agreement also provides that they will not exercise voting authority over any shares in excess of 24% that arise solely out of stock repurchases by Virtus. The conversion doesn't change BMO's position as our largest equity holder or any aspect of our relationship. It does however significantly improve our capital structure and Mike will describe in more detail when he reviews our capital profile.

So with that let ask Mike to review our results in more detail. Mike?

Thanks a lot, George. Good morning, everyone. Today I will give you some additional perspective on the third quarter starting with sales flows and assets. Then I'll review our operating results and finally our capital position.

Starting on slide nine, assets under management, we ended the quarter with total assets of $33.1 billion, $6 billion or 22% higher than a year earlier and down less than 1% from ending assets of $33.3 billion at June 30th. Given the challenges in the market this quarter the fact that our assets under management remained relatively unchanged on a sequential basis reflects the diversity of our product offerings and the strength of our distribution.

It's important to highlight that we were able to significantly offset the market depreciation of $2.4 billion this quarter with $1.6 billion of positive flows, our highest quarter for net flows since we became a public company. Long-term assets, which exclude retail and institutional cash management strategies, ended the period at $29.9 billion, down about 2% sequentially as market depreciation offset the positive net flows we generated in both open and closed-end funds.

With the weakness in the equity markets in the quarter the percentage of fixed income assets increased by 60 basis points to 39.7% of total AUM at September 30th. And the percentage of equity assets decreased by 180 basis points to 50.7%. Our low fee cash management products continue to represent less than 10% of all assets.

Although total assets under management were down less than 1% sequentially, average AUM ended the quarter at $34.3 billion, up 5% sequentially. This reflects both the strong mutual fund net flows throughout the quarter, the closed-end fund raised in July and the timing of the market depreciation as $1.4 billion of the $2.4 billion occurred in the last month of the quarter.

I want to give some additional color on the closed-end fund launch. The assets we added as a result of the launch total $970 million. We raised $719 million of net assets as shown in the closed-end fund section of the asset flow table.

We added $260 million during September when the investment strategy implemented the use of leverage. It's important to note we generate investment management fees on the total managed assets of the fund, which include the levered assets.

Slide ten provides detail on our continued strong asset flows that are a result of our product breadth, solid investment performance and consistent mutual fund sales. Total sales of $3.3 billion were up 26% sequentially from our previous high mark of $2.6 billion. This is our first quarter of total sales over $3 billion since becoming a public company.

The results were driven by continued strong mutual fund sales and the closed-end fund launch. This is our third straight quarter with more than $2.5 billion of total sales and with a sales rate above 30%. So we have demonstrated an ability to maintain our sales momentum throughout the year.

It's also important to see the continued positive net flow trends as shown in the top line of the table. Total net flows were $1.6 billion for the quarter, an increase of 11% from $1.5 billion in the second quarter, and up nearly four times from the prior year period. We have now delivered positive net flows for ten consecutive quarters.

I want to highlight several key stats regarding long-term open-end funds. Sales were above $2.4 billion for the second quarter and up 118% from the prior year. This translates to an annualized sales rate that remained at the highest end of the industry at 62%, up from 47% in the prior year period, although down from the 72% in the prior quarter.

Positive net flows were $1 billion, which resulted in a strong organic growth rate of 26% this quarter, up from 20% in the prior year. This is the ninth consecutive quarter with double-digit organic growth and the fifth consecutive quarter with an organic growth rate of more than 20%.

The organic growth rate did decline from 48% in the prior quarter as fund redemptions increased to 36% on an annualized basis from 24% in the prior quarter. Although higher than in the prior quarter our redemption rate was consistent with the increase seen in the industry given the market uncertainty.

As we have demonstrated for several quarters we can attribute strength of sales to the solid relative performance and the strategies that are currently in demand. At September 30, 2011, 66% of our long-term open-end mutual funds were rated four or five stars on a load wave basis, compared with 32.5% in the industry.

Finally, comparing this year's nine-month period with last year we see positive net flows in 2011 of $4.4 billion that are more than four times greater than net flows in 2010 on sales that are a little more than double the prior year's. So not only are we raising assets at a very strong pace, we have also been effective at retaining those assets.

Moving from flows to revenue, on slide 11 we show the sequential increases in investment management fees due to the higher average assets under management and increases in the net fee rate. Investment management fees of $37.1 million in the third quarter were up $5.6 million or 18% from the second quarter, and up $13.6 million or 58% from the prior year quarter.

The sequential improvement was primarily driven by three factors, first, the full quarter impact of the Newfleet multi-sector team which resulted in additional investment management fees of $3.4 million compared to the prior quarter when the team was part of Virtus for just 28 days, second, the partial quarter impact of the Duff & Phelps close-end fund which contributed $1.1 million of investment management fees. The fund was launched on July 27th and generated about two full months of revenue on the initial asset raise.

On a run rate basis on total assets of $979 million the quarterly investment management fees would be approximately $1.8 million. Finally the remaining $1 million or 3% increase is attributable to higher average assets of 3%, excluding the DPG closed-end fund assets.

These factors led to a blended fee rate of 42.9 basis points for all products which increased by 4.4 BPS from the second quarter. The most significant sequential improvements were for long-term open-end and closed-end funds, as well as for our variable insurance products. The net fee for long-term open-end mutual funds increased by 7.8 basis points to 49.4 BPS from 41.6 BPS in the prior quarter. And the fees on variable funds increased by 5.3 BPS during the quarter.

Both of these were primarily due to the impact of the Newfleet multi-sector team. This quarter's level should provide a solid benchmark of open-end fees as it represents a full quarter of the fee profile of the teams' assets. The average fee rate for closed-end funds increased by 3.2 BPS to 55.7 BPS as a result of the addition of the closed-end fund.

Let's turn to the expense side, starting with slide 12, employment expenses. The increase in employment expenses in the third quarter includes sales costs related to the closed-end fund and the ongoing transition costs related to the addition of the Newfleet multi-sector team. Employment expenses of $25.5 million in the third quarter increased by $2.4 million or 11% on a sequential basis, primarily due to two items, the sales compensation for the closed-end fund and the full quarter impact of the Newfleet multi-sector team.

The first item was $1.2 million of sales-based compensation for the new closed-end fund. These costs are different from the structuring fees that are paid out to our distribution partners that we expensed through the distribution and administrative expense line item of our GAAP income statement.

The second item is $1.5 million of certain transitional costs associated with bringing the Newfleet multi-sector team on board. As a reminder the transition costs are comprised of cash and equity awards, including those to address the mid-year nature of the transition. These awards will be expensed over time to align the interests of the team with their fund clients and Virtus investors.

Excluding these items and the closed-end fund selling costs, employment expenses were $22.8 million in the third quarter, an increase of $1.5 million or 7% from the quarter. Employment expenses as a percentage of revenues as adjusted decreased 220 basis points to 54.5%. This metric demonstrates the increasing profitability of the firm.

Slide 13 shows that we have continued to maintain our expense discipline even as we have grown the business significantly. In the third quarter other operating expenses were $7.4 million, or a decrease of $500,000 from the prior quarter. The prior quarter included $400,000 for stock grants related to the annual retainer for our board of directors and $400,000 for professional fees that were related to the Newfleet transition.

Excluding those items other operating expenses were up 4% sequentially. This largely reflects a full quarter of the Newfleet multi-sector team. The table at the lower left of this slide shows the very positive trend of the five quarter sequential decrease in the ratio of other operating expenses to revenue as adjusted.

On a sequential quarter basis other operating expenses as a percentage of revenues as adjusted decreased 330 basis points to 17.8%, compared with 21.1% in the second quarter. When we exclude the stock grants and the transition costs in the second quarter this metric still experienced a sequential decrease of 120 basis points. The consistency of our costs is a positive development and demonstrates our ability to leverage our fixed cost structure and expand our profit margins even as we grow top line sales.

On slide 14 we see the impact of these trends on operating income as adjusted. I want to remind you that operating income as adjusted is a non-GAAP measure that is intended to illustrate the ongoing earnings potential of the Company. As such we have adjusted for the incremental closed-end fund launch costs, as well as the transitional items for Newfleet.

This measure is consistent with how management reviews the results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP results.

Operating income as adjusted was $12.8 million in the quarter, an increase of $2.5 million or 24% from the second quarter. We delivered an operating margin as adjusted of 31%, which was our first quarter over 30% since becoming a public company.

Our margin expansion over the past two years reflects the impact of the substantial organic asset growth of our mutual funds, as well as growth initiatives such as the addition of the Newfleet multi-sector team, and last year's VIT transaction and the benefits of a stable fixed cost base.

The 24% quarter-over-quarter sequential increase was driven by the benefit of growth initiatives, both the addition of the Newfleet multi-sector team and launch of the closed-end fund, as well as the impact of consistently strong net flows into our mutual funds over the past several quarters.

Looking at the five quarter trend of operating income as adjusted in the bar charts on the page you see the benefit of higher mutual fund revenues and leverage ability of our cost structure as we have substantially increased AUM and maintained a relatively stable fixed cost base. Our variable based sales costs are reflective of our very high 62% sales rate.

If our long-term open-end sales rate were closer to industry averages we would have had approximately $1.7 million less of sales-based compensation in the quarter, all else being equal. This is notable as it would have added approximately 400 basis points to our margin.

Spending a moment on the GAAP results we reported a GAAP net loss attributable to common stockholders of $3.5 million or $0.56 per share. This loss includes $12.3 million of pretax expenses and $11.9 million after tax attributable to the closed-end fund launch and the Newfleet transition. Also contributing to the loss were pretax mark-to-market unrealized losses of $1.6 million, reflecting the market decline in the quarter.

Moving over to the balance sheet for the first time in two years there was a sequential decrease in our working capital position as we took advantage of our financial flexibility to fund the important third quarter initiatives we discussed. Working capital decreased by $4 million or 8% on a sequential basis, ending the quarter at $43.4 million down from $47.4 million at June 30. The decrease was driven by $10.8 million of costs related to the launch of the closed-end fund.

In the third quarter we also repurchased 50,000 shares of common stock at a cost of $3 million. We have now repurchased a total of 155,000 shares or approximately 2.5% of the common shares outstanding at September 30, 2011.

Year-to-date we have returned $10.7 million to our shareholders, or 47% of our free cash flow metric, compared with 23% for the same period last year. As a reminder, we are limited on a quarterly basis on the level of capital we can return to shareholders. The limit is 75% of our prior quarter's free cash flow. In the third quarter we paid out 65% of our available free cash flow.

Slide 16 provides some additional detail about the impact of the $35 million preferred share conversion on our capital structure. One of our strategic priorities since we became public has been to improve our balance sheet and provide additional operating flexibility within our capital structure. And we have made notable progress.

Specifically, we entered into a credit facility with a banking syndicate. We converted $9.8 million of preferred shares in 2010. We added approximately 250,000 shares to the common stock float by completing an on lot program and we've repurchased 155,000 shares of common stock.

The agreement we announced this week is an important development for Virtus. The conversion of the 8% preferred shares immediately gives us a more efficient, simplified and flexible capital structure. It effectively eliminates our most expensive source of capital and replaces this preferred financing which banks and rating agencies refer to as hybrid securities with permanent equity capital.

The transition to permanent capital has several benefits. It provides clarity and transparency of our capital structure to our investors and lenders as we look to improve our debt capital profile given the remaining term and size of our current credit facility and our continued growth.

It reduces risk in the capital structure, which will lower the incremental costs of new capital going forward. It is an important step towards obtaining an investment grade credit rating that will result in us having access to long-term, more flexible debt capital. And with the provision related to voting rights we now have additional capacity to repurchase shares. It eliminates the two-class method of accounting for net income and earnings per share and the acceleration of the dividend improves the ongoing fixed cost base.

Looking at the chart on the left-hand side shows a pro forma of our revised capital structure as of September 30, 2011 as if the conversion had occurred on that date. By eliminating the preferred class of shares we have only outstanding common equity and bank debt. You can also see that our working capital balance will be reduced by $8.1 million in the fourth quarter.

As we have just reviewed on the prior slide, we have efficiently deployed working capital by reinvesting in the business this year and using capital to retire the securities represents another appropriate use of capital that will increase shareholder value. From an accounting standpoint in the fourth quarter we will expense $7.4 million of the $8.1 million dividends as a reduction to GAAP net income. The other $700,000 was accrued and expensed in the third quarter,

The last area I want to cover this morning relates to income taxes. In 2010 we recorded a deferred tax asset and corresponding valuation allowance for a capital loss carried forward in the amount of approximately $93 million related to the dissolution of an inactive subsidiary.

Earlier this year we submitted a request for a private letter ruling to allow the capital lost to be claimed as an ordinary loss on our 2010 Federal Income Tax Return. As a result of the favorable ruling we received in the third quarter we re-characterized $92.6 million of deferred tax assets related to the capital loss as $88.9 million of NOLs and intangible assets.

Both items had full valuation allowances recorded against them. We've presented a table that provides an illustration of the elements of the deferred tax inventory looking back to the disclosure as presented in the Virtus 2010 Form 10-K. The $88.9 million of benefits is comprised of two components, $20.4 million of intangible assets that will be amortized in future periods to provide deductions against future taxable income, and $78.5 million of NOLs that can be used to offset future ordinary income.

It's important to highlight that of the $78.5 million of NOLs $31.8 million was recorded in the third quarter of 2011 as a derecognized tax benefit in accordance with GAAP rules. The remaining $46.7 million, or $78.5 million less the $31.8 million, will continue to have a full valuation allowance recorded against it until Virtus demonstrates a longer record of generating taxable income. As an important reminder, as of the of third quarter of 2011 we continued to have a valuation allowance reserve against substantially all of our deferred tax assets.

With that let me turn the call back over to George.

Thanks, Mike. Before we open the lines for questions we just want to reiterate how pleased we are with the strong sales and flows this quarter and how excited we are about the opportunities ahead of us. We have consistently demonstrated that we have the product, investment performance and distribution to help us maintain our growth, and we have the ability to leverage our business model in additional ways with teams, products and other growth initiatives. These are very good trends and we look forward to maintaining momentum.

We are now ready to respond to your questions. I'm going to ask our operator open up the lines. We do ask that you limit your questions to two at a time as a courtesy to fellow listeners who may want to post additional questions. If you have more questions please feel free to get back into the queue. Tanya, can you open it up please?

(Operator Instructions). Our first question will come from the line of Michael Kim with Sandler O'Neill. Please proceed.

Hey guys, good morning.

Good morning, Michael.

Hi, Michael.

Hey, first can you maybe just talk a little bit more about kind of the drivers of your ongoing mutual fund inflows? You've got obviously a diversified platform and strong performance, but so do a lot of firms that are struggling in this type of environment. So is it just a function of having the products that are increasingly in high demand? Or is it maybe a function of being in the early stages of kind of broadening distribution? Just any color there would be helpful.

Sure. And then we're very pleased with the sales that we've been able to generate. And you hit on a lot of the highlights. The first thing is having relatively attractive investment strategies, and it's in a couple ways, the relative performance, and again we quoted some stats in terms of what percentage of our funds are in top quartile and in some cases top decile type performance. So that's sort of a key thing to have.

And then it's having strategies that are in categories that are attractive at a given point in the market cycle. And we've been very fortunate. We've spoken about the three bigger drivers for us. It's the short-term bond fund. It's an emerging market equity fund. And it's actually a domestic equity fund, the AlphaSector products that actually have flexibility to move into cash in uncertain times.

So if you sort of think about those as three strong opportunity sets they have remained relatively attractive to different sets of investors even through this market cycle. Our AlphaSector product at periods again does move into cash in volatile periods.

And then behind that we continue to have very strong small cap equities as well as real estate, infrastructure and other products. So the nature of our suite of products is such that there, as long as there is the strong wealth of investment performance there's really something that's been very attractive to a very class of investors.

And I couple that with our distribution efforts. We are a smaller firm than many of the large fund companies that we compete against. And I always say we have to try harder and do a slightly better job. And I think pound for pound our sales force and our sales leadership are amongst the best in the industry.

And we've been able to take advantage really of our value proposition in the markets, particularly to through [mediaries], the FAs, is really one point access to a number of highly differentiated strategies and managers. And that sort of resonates well with a financial advisor whose time is very, very busy and through us they can get a different access to different managers.

And in some ways I also think we benefit from the fact that our name, our brand is relatively new and not well known. So I think that creates the value of somebody providing a new name or brand when they're trying to show a client the work that they're doing in terms of identifying good strategies.

So again it's just having really good performing strategies. It's having the broad diversity of offerings that appeal to different needs. And it's executing well on the distribution side. So it's really all of those things and just to hit on the other point you made about the distribution access, we have great -- we have broad access in terms of our number of selling agreements is actually quite large. And we've indicated in the past that a lot of the growth that you've seen over the last year or so has really been coming primarily from increased penetration in the wire houses.

And while we absolutely do participate in the regionals and independents and RAs, we actually see that as a further opportunity, but for the time being we've just had such great success in further penetrating the wire houses that that's been our major priority. We think there are some great opportunities to really sort of expanding that same success into again the regionals, the independents, RAs, et cetera.

Okay. That's helpful. And then maybe if you could talk a little bit about the outlook for bringing additional closed-end funds to market, aside from the one that you reference earlier. And then related to that are you seeing any pressure on the distribution side where maybe some of the upfront structuring fees may be on the rise?

So for closed-end funds, and again we like closed-end funds. We think it's a great product structure where you can affect certain strategies because of the closed nature that are harder to execute in an open-end fund dealing with the daily liquidity issues. So we definitely like closed-end funds.

We participate in the market to the extent that we have attractive offerings. And now what generally the market has been looking at for the last year and a half is a reasonable, respectable yield in 6% to 7% kind of range. So back in the day when it was 11% or 12% we didn't participate because we will not go that far out the risk spectrum to generate those kinds of returns.

So we now are in an environment where a lot of our capabilities have attractive offerings. And importantly remember in our model we can actually utilize sub-advisors or other partners to augment what we have. And I think in some ways that makes us a little different than some of the other participants in the space.

So we continue to look for opportunities where our strategies will be attractive in a closed-end fund vehicle. We maintain our ongoing dialogues with the bankers that work there. Clearly our successful rates of DPG I think surprise quite a number of people as it has been awhile since Duff & Phelps or we had done a new closed-end fund offering, so that success sort of is helpful in having future dialogues.

I think we have several strategies that could be quite attractive in the market. And again a lot of it will depend on where the closed-end funds space go because as you know it can move from when it reopened it started with like single state munis, and then it went into generic fixed income and has now moved more towards equity income type products, which is again where the category where DPG was based.

We think there's lots of other things you can do and particular multi-asset class. The small funded option that we announced will actually be a multi-asset class where we will combine one of our equity income strategies managed by Duff & Phelps with a fixed income strategy by Newfleet. And we do think multi-asset class is something we can do quite well given the multi-manager model that we have and our long experience of dealing with multiple managers as well as external sub-advised managers.

In terms of pressure on the structuring fees, et cetera, from the perspective of someone who wants to offer closed-end funds there's a lot of competition. A lot of asset managers would like to do that.

So whether there will be pressure on the structuring fees or not I don't know, but I -- what I can determine is we have a lot of competition to get shelf space from the bigger players in this space. I think the more important trend from the perspective of the issuer, as well as the banks, is the recent experience of some of the recent IPOs.

A lot of the IPOs if they go at a certain price and then go down they can have challenges and we are sort of pleased on how ours has done on a relative basis, but some of the recent IPOs of closed-end funds have been challenged not through any fault of the investment strategy, just the incredible challenges in the market, et cetera.

So we will see how that unfolds, but again our goal is to be there, is to have competitive, attractive strategies. And I think we have already demonstrated that if given the opportunity we can raise a significant amount of assets in a good investment strategy.

Okay. Thanks for taking my questions.

Great, no problem. Thank you.

Our next question comes from the line of Mac Sykes with the Cabelli & Company. Please proceed.

Good morning gentlemen.

Good morning.

So for the early conversion from BMO's perspective the conversion benefits of them as a shareholder because of the benefits you highlighted at Virtus, what other reasons would they have converting early? And are there any capital implications to their parent?

And I get the question, but to be clear we don't really and can't speak for Bank of Montreal, but just to take a step back generically I think you pointed out one thing as our largest equity shareholder anything that is good for Virtus, and I think it is clear why this is a good thing for Virtus, are also good for them.

In general I think if you look at other situations where people have converted from preferreds, either out of preferreds or into other securities generally the factors that people will think about will be the value of having money up front rather than over time and the other alternatives that it might possibly give you, but really specifically answer for what the benefits would be for BMO wouldn't really be appropriate for me.

Okay. Thank you.

Okay. Thank you very much.

(Operator Instructions). This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward for closing remarks.

Thank you. And I want to thank everyone who participated this morning and I hope we gave you a better understanding of the Company and results. And as always if you have any further questions please call us at any time. Thank you very much.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.