Virtus Investment Partners Inc (VRTS) 2011 Q4 法說會逐字稿

Good morning. My name is Carma 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 at 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 like to turn the conference over to your host for today, Mr. Joe Fazzino. Please proceed.

Thank you, Carma. On behalf of Virtus Investment Partners I would like to welcome you this morning to the discussion of our operating results for the fourth quarter and full year 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 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, www.virtus.com.

In addition to the results presented on a GAAP basis, Virtus uses certain non-GAAP measures to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with GAAP 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 the remarks from President and Chief Executive Officer, George Aylward, who will review some of our accomplishments during the year and the fourth quarter. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail. George will have some closing comments before we open the call to questions.

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

Good morning and thank you for joining us on the call today. The fourth quarter capped off an exceptional year and this morning I want to start by reviewing some of our most significant accomplishments for 2011. Then I'll review highlights for the fourth quarter and Mike will then provide some detail on the financial results. And then I'll conclude with some perspective on how we are positioned to continue our success into 2012 and beyond. At the end of our presentation Mike and I will be glad to answer your questions.

When we spoke on our call a year ago I was optimistic about 2011 because I believed that we were extremely well positioned for growth. We had completed two years of foundational activities and had demonstrated an ability to achieve growth in sales, flows and earnings.

We saw an opportunity to expand on the foundation we had built since the spinoff and leveraged the momentum to drive the Company to another level of sales and earnings. The financial results and accomplishments we delivered in 2011 show that we succeeded in achieving this next step in our development. Let me review some of these accomplishments for you.

The steady growth and consistent strength in sales and net flows primarily from our mutual funds helped us generate record results for the full year. We began 2011 with a high level of sales and positive net flows and we maintained those strong levels each quarter of the year. We demonstrated a consistency of sales and flows as a result of the breadth of our products, strong investment performance and multiple strategies and the effectiveness of our sales efforts.

For the year sales were $11.2 billion or 93% higher than 2010. The results from our open end mutual funds were the main driver of our sales. With $9.5 billion of fund sales we had a sales rate of 80% for the year. It was far and away our best year ever for open end fund sales and we are pleased to see that January ended up being a very strong month as well.

While our gross sales were impressive earnings were generated by net flows and we had an exceptional year in this regard as well. Total net flows increased to $5.2 billion from $1.5 billion in 2010 driven by $1.5 billion of net flows from open end funds.

This is an organic growth rate of 43% which is significantly higher than what we see in some of the largest companies in the industry. The growing base of assets under management which is a result of the cumulative impact of continued strong sales as well as the positive impact of several initiatives, contributed to significant growth in earnings and profitability last year.

Operating income as adjusted for the full year more than doubled to $43.7 million from $21.7 million in 2010. We also increased our operating margin as adjusted to 28% for the year from 20% for 2010.

As you look at our margins it's important to see them in the context of the high level of sales we have delivered. Even though there has been an understandable drag on earnings and a considerable impact on our margin from our high sales rate, which again was 80% last year, we have now reached the point where the cumulative impact of consistently high sales and net flows is beginning to offset the current period strain.

In addition to the strong sales and flows we executed on several initiatives that had an immediate benefit to the business and should contribute to long-term growth. The internalization of the Newfleet Multi-Sector income team was one of the most significant accomplishments during the year. Dave Albright and his team managed our largest and one of our consistently top-selling funds, Multi-Sector Short-Term Bond.

That fund has $4.7 billion of assets and has been a consistent high-performing fund with almost a 20-year track record. The team joined us in June and now manages about $6 billion of assets. For the seven-month period they contributed $3.4 million of operating income as adjusted, which excludes transition related costs. Importantly the team also gives us a lot of opportunities for future growth in other funds and product structures.

We also expanded our open-end and closed-end mutual fund lineup with five new funds. We launched three open-end funds, the Global Commodities Stock Fund that is managed by the specialty commodities manager, Cox Advisors, and the allocated premium AlphaSector and Global Premium AlphaSector Funds [subdivized] by F-Square.

New funds typically need several years to gain traction, but the two new AlphaSector funds collectively raised about $200 million following their launch in the first quarter of last year and our existing AlphaSector funds represent about $3.4 billion of assets under management since we initiated our relationship with them in '09. We are also introducing another version of the AlphaSector strategies with a dynamic AlphaSector fund that will employ a long-short strategy built on the AlphaSector asset allocation model.

Our most significant product introduction in 2011 was the Duff & Phelps Global Utility Income Closed End Fund that raised $735 million last July. It is the second largest closed-fund offering of the year and about the fifth best raised since 2008. DPG leverages our strong performing and attractive investment strategies and the launch demonstrates the strength of our distribution.

The fifth new fund in 2011 was the Virtus Total Return Closed End Fund that we adopted in December with approximately $111 million of assets. The fund employs a multi-asset class strategy for two of our affiliated managers, Duff & Phelps Investment Management and Newfleet Asset Management.

As you see we continuously look for opportunities to develop new and attractive products. We are confident these new capabilities provide an opportunity for long-term benefits.

We are especially proud of the consistency and strength of total sales and net flows throughout the year and we continued that pace in the fourth quarter. Total sales were $2.6 billion in the quarter, an increase of 53% from the fourth quarter of 2010. Excluding the IPO for the DPG fund in July sales in the fourth quarter were relatively unchanged from the high levels of sales in the third quarter. We have now delivered four consecutive quarters with sales over $2.6 billion and we have done that during a variety of market conditions.

We also maintained net flows that were consistent with the third quarter excluding the closed-end fund raise. Total positive net flows in the fourth quarter were $790 million, an increase of 64% from the prior year. Total net flows were driven by the high level of fund flows which were partially offset by some institutional net outflows.

We delivered a third consecutive quarter of long-term open-end fund sales over $2.4 billion and also maintained significant sales in organic growth rates. While trends across the industry remain a challenge for certain domestic equity funds we continue to have solid sales in domestic equity as well as international equity strategies, in addition to maintaining our strong sales in the taxable fixed income strategies.

Positive net mutual fund flows of $1.1 billion were up 8% for the third quarter as we saw lower fund redemptions. Overall our fund redemptions generally remain at or just below industry levels.

The organic growth rate for our open-end fund was 29% in the fourth quarter, up from the prior quarter and from the fourth quarter of 2010. According to industry statistics our fund organic growth rate remains right at the top when compared with the largest mutual fund complexes.

The cumulative effect of our strong positive net flows throughout the year and the benefit of a full quarter of the DPG fund helped drive the sequential quarter and year-over-year improvement in operating income as adjusted and related margin. We delivered operating income as adjusted of $13.6 million in the fourth quarter which was our best quarter as a public company.

This was an increase of 90% from $7.1 million in the fourth quarter of 2010 and an increase of 6% on a sequential basis. The fourth quarter had the benefit of a full quarter of revenue from the DPG closed-end fund, which contributed $1.4 million to operating income as adjusted, compared with $800,000 in the two months of revenue in two months prior.

Our operating margin as adjusted increased to 32% in the fourth quarter compared with 23% in the fourth quarter of 2010 and 31% in the third quarter. As with operating earnings the margin expansion reflects the cumulative impact of positive net flows as well as the growth initiatives I discussed.

Let me mention one item about our GAAP earnings. Our net income of $141 million for the quarter primarily reflects the one-time benefit of the release of a tax valuation allowance. Mike will provide more detail on this item when he reviews our financial results.

When you look at our operating and financial results for the fourth quarter you see we have demonstrated an ability to consistently deliver higher earnings and greater profitability even as we maintained a strong level of sales. Our sales growth has been so consistent and significant that we've been asked the question how are you doing. And the next two slides may provide some insight into the answer.

The growth in our sales has been drive by the strength of our distribution, the breadth of our products and the very strong investment performance in attractive classes and styles. All these factors have helped us attract and retain assets at significant levels.

As you see on the left of this slide 87% of our open-end mutual funds and 96% of our mutual fund assets have a Morningstar rating of three, four or five stars as of December 31st and these figures are all on a load-wave basis. This means that all but four of the 31 long-term funds rated by Morningstar on a load-wave basis have three stars or better and 18 have earned four or five stars.

For the few funds with the lower rating most have had recent sub-advisor or strategy changes. As you can see from the list on slide eight our strong investment performance is not limited to just one asset class or investment strategy. We have a wide range of strong performing funds in the major asset classes and strategies that investors are looking for.

If you look at this list you immediately notice the breadth of products that are represented here. We have products in all the major style boxes and many of the offerings have top investment performance.

The list of five and four-star funds include a variety of strategies that would be part of a well-diversified portfolio. It is also important to realize that several five and four-star funds were our bestselling funds in 2011, Multi-Sector Short, Emerging Markets, AlphaSector, et cetera. The track records are viewed favorably by investors and this positions us better to retain these assets as well as continue sales.

As we look to the future sources of sales our recently launched funds, which are shown on the bottom right, have done very well on a relative basis. This combination of product breadth and product quality as measured by relative investment performance, supported by our strong distribution has defined the Company and will continue to drive our sales.

With that let me ask Mike to review our financial results in more detail. Mike?

Thank you, George. Good morning, everyone. Today I will take you through the financial results for the quarter and for the full year, which reflect consistent strength across all the key measures of our business. I will also review our capital position and the impact in our financial statements from the release of the tax valuation allowance that we reported this quarter.

Let's start with slide ten, assets under management. We ended the year with total assets of $34.6 billion, which was $5.1 billion or 17% higher than a year earlier. As highlighted in the lighter blue segments of the bars on this chart long-term AUM grew by 23% to $32.2 billion at the end of 2011 compared with the prior year, and we're up 8% from the end of the prior quarter.

We've included the additional detail on long-term assets as the trend from this component of our asset base is the most important driver of our growth in revenue and profitability. Our results are particularly impressive given the investor uncertainty and volatility in the financial markets last year.

Asset growth in 2011 was driven primarily by organic growth in both open-end and closed-end mutual funds and we had a smaller benefit from market lift than in the prior year. We generated positive net flows in both equity and fixed income products in what was a challenged flow environment across the industry.

Unlike many companies in the industry we were very successful last year in raising assets and equity strategies. With the strong net flows and the lift from the equity markets our equity assets grew to nearly 55% of the total portfolio, the highest percentage of total assets since we became a public company. The growing percentage of equity assets drove the increase in average net few rates and positions us for future revenue growth.

Slide 11 provides a quarterly trend of the strong sales and net flows throughout the year. Total sales of $2.6 billion were up from $1.7 billion from the fourth quarter of 2010, and excluding the closed-end fund launch that raised $0.7 billion in the third quarter were comparable to that quarter.

We demonstrated consistent momentum throughout the year with four quarters of sales over $2.6 billion and a sales rate greater than 30%. For the full year sales were $11.2 billion which was our best year ever and up 93% from the prior year.

Mutual fund sales continued to drive our sales growth and we closed out 2011 with a third consecutive quarter of long-term open-end fund sales of $2.4 billion. For the full year we had fund sales of $9.5 billion, more than double the $4.5 billion from 2010.

The mutual fund sales rate increased to 63% in the fourth quarter from 62% in the prior quarter. We were also pleased with the sales trends we saw within the quarter with December contributing the highest total of gross and net sales for the three months. Clearly the performance George alluded to earlier was an important factor in the sales we delivered in 2011.

Finally it is important to note that the mutual fund redemption rate decreased by 250 basis points to 34% from the prior quarter rate of 36%, so we continue to see fund redemptions in line with the industry. When we look at the trend in redemptions over the past two years the range of our open-end mutual funds has been from 24% to 36% and they move in line with industry averages.

The lower end of our redemption rate range, 24%, reflected a constructive market environment and limited redemptions on several of our newer products, most notably premium AlphaSector which was launched in the second half of 2010. The higher end of the range, which was in the second half of 2011, reflected a more volatile market and industry average redemption rates on premium AlphaSector which is now a much larger and more mature fund.

Slide 12 shows the impact of these growth trends on operating income as adjusted. Let me remind you that operating as adjusted is a non-GAAP measure that we use to illustrate the ongoing earnings potential of the Company and is consistent with how management reviews the results. I will discuss the GAAP results in more detail shortly.

Operating income as adjusted was $13.6 million in the quarter, an increase of $0.8 million or 6% from the prior quarter and up $6.4 million or 90% from the prior year. Operating margin as adjusted grew to 32% for the fourth quarter, representing a sequential increase of 120 basis points and an increase of 870 bps over the prior year quarter. For the full year operating margin as adjusted was 28% in 2011, an increase of 870 basis points from 20% in 2010.

Asset management is a leveragable business and the model we have built has given us the opportunity to expand operating margins even as we continue to deliver very high sales. As we have discussed in the past, the upfront nature of our sales costs impacts the current period earnings, a term we have referred to as sales strain.

If we adjust our fourth quarter sales rate for open-end funds to reflect an industry average selling rate, sales-based employment compensation would have been reduced by approximately $1.7 million this quarter, all else being equal. Making that adjustment would add approximately 400 basis points to the quarterly margin.

It is important to note that nearly all of the increase in our revenue as adjusted for the quarter was captured in our bottom-line result. This amount of bottom-line growth as a percentage of revenue growth is defined as our capture ratio and was at an impressive level for the quarter.

This demonstrates how we have leveraged the existing portfolio teams and resources while maintaining consistent sales and net flows. The full year capture ratio, which is the growth in annual operating income as adjusted divided by growth in annual revenue as adjusted, was slightly above 50%, which is more reflective of the variable nature of our incentive costs and the extremely high growth in annual sales.

Let's look into the elements of profitability in more detail, beginning with invested management fees on Slide 13. Investment management fees increased to $37.7 million in the fourth quarter, up 2% on a sequential basis and up 41% from $26.7 million in the fourth quarter of the prior year.

The two key drivers of investment management fees are average assets under management and net fee rates. Average AUM for the quarter was $34.2 billion, essentially flat to the prior quarter. This reflects the market volatility during the quarter when the S&P was up 11% on a point-to-point basis, but the average equity markets were generally flat when compared to the third quarter.

The blended net fee rate was 43.8 basis points for all products in the fourth quarter compared with 42.9 bps in the third quarter and 37.1 bps in the fourth quarter of 2010. The increase in the fee rate is partially attributable to the increase in the average net fee rate on new sales of open-end funds that increased to 51.9 bps in the fourth quarter, up 1.1 bps, or 2% on a sequential basis. In addition, the significant increase in fund assets under management led to lower fund reimbursement levels which also improved the fee rate.

Turning to expenses we will start with employment expenses on slide 14. Employment expenses of $24.4 million in the fourth quarter were down 4% sequentially from $25.5 million as the prior quarter results included $1.2 million of sales costs incurred in connection with the launch of the closed-end fund.

In order to provide a clear comparison of employment expenses we have identified several items of note with a dotted box at the top of the columns. These items are costs related to the NewFleet Multi-Sector team internalization in the second quarter and the closed-end fund sales compensation costs in the third quarter.

I would like to point out that although the internalization happened in the second quarter we continue to have costs specific to the transition of that team that flow through the income statement. Specifically in the fourth quarter we included the adjustments necessary to ensure the team received a full year of incentive payout even though the team joined us midyear. This will be the last quarter you will see that element.

In addition to effect the transition we structured the initial consideration to be earned over time so that the interests of the team are aligned with the interests of the Company and the shareholders. This consideration includes both cash and equity and will continue to be expensed over time and presented separately.

When adjusting for these items employment expenses were flat sequentially at $22.8 million. It should be noted that on this basis employment expenses as a percentage of revenue as adjusted declined 50 basis points to 53.9% from 54.5%.

For the full year on this adjusted basis employment expenses increased to $86.6 million or 33%, reflecting the variable nature of the incentive compensation plans related to the significant growth in sales and profitability and the additional compensation for the Newfleet team. The resulting employment expense-to-revenue metric improved noticeably for the full year, decreasing 270 basis points to 55.9% of revenue as adjusted. As we have pointed out in the past this metric decreased each quarter in 2011 and demonstrates the increasing profitability of the Company.

Slide 15 describes other operating expenses which are generally fixed costs that support the business, including investment research costs, professional fees and other public company related costs. As the quarter trend demonstrates we have maintained these costs within a relatively narrow band throughout the year.

As a result we have increased profitability by adding assets while leveraging the infrastructure that was already in place to support the growth of the business. Looking at the numbers other operating expenses of $7.4 million in the fourth quarter were flat on a sequential basis and up 4% from the prior year.

Other operating expense as a percentage of revenue as adjusted declined a modest 40 basis points to 17.4% from 17.8%. Again for ease of analysis we've identified items to note at the top of the columns with a dotted box. These include costs related to the Newfleet internalization and certain stock-based compensation expenses that were incurred in the second quarter.

When adjusting for these items other operating expenses were up 5% to $29.4 million, primarily attributable to the costs related to the addition of the Newfleet team. It should be noted that on this basis other operating expenses as a percentage of revenue as adjusted declined 610 basis points to 19%, which demonstrates our ability to leverage our cost structure and expand profit margins even as we grow top-line sales.

Moving over to the balance sheet and slide 16 I want to spend a few moments recapping how we used our working capital. We balance our capital allocation decisions between investing in the growth of the business and returning capital to our shareholders.

For the full year these uses of capital accounted for our deploying more than 75% of our annual free cash flow, more than $20 million of our investments for in growth initiatives that included the closed-end fund launch, internalization of the Newfleet team and the closed-end fund adoption. The return to shareholders included the preferred shareholder dividend and common stock repurchases for the year.

During the fourth quarter we deployed $8 million to convert the preferred shares and we completed the adoption of a closed-end fund that added $111 million of assets under management to the business. As a result of these two items we deployed a significant amount of our quarterly cash flow and as such we were not in the market repurchasing common shares in the fourth quarter.

When evaluating our capital uses an important metric we consider is working capital as a percentage of our annual spend. On that metric we ended 2011 at 24%, down from 30% in the prior year and we continue to be at the lowest end of the range of our peers in the industry.

And as we plan for our capital uses and needs going forward it's important we maintain optimal flexibility to fund the core business activities and have capital available for additional accretive growth opportunities. We anticipate providing capital for new open and closed-end funds and other product development activities.

In addition, the initial equity grants issued after the spin will be vesting in the second quarter. And with the significant appreciation of our stock a meaningful amount of capital could be required to net settle those shares. We will continue to be judicious in our use of capital and remain focused on balancing organic and inorganic growth opportunities of the business with return of capital to common shareholders.

My last slide today provides some additional perspective on the balance sheet, specifically in the impact from the release of the tax valuation allowance that we reported yesterday and the impact you can expect from changes to the capital structure related to the conversion of preferred shares. Our GAAP results were impacted by the magnitude of the release of the valuation allowance against the Company's deferred tax assets.

Given the Company's record of operating results since the spinoff and our outlook of future taxable income, we met the more likely than not standard required by generally accepted accounting principles in order to release a valuation reserve that was carried against our deferred tax assets. As a reminder, we had generated these tax assets in prior periods, but they were offset by a valuation allowance.

For tax reporting purposes these assets have been used to reduce federal and state income tax liabilities. By releasing the allowance the assets will be reflected on the balance sheet and the benefit was recorded in the income statement this quarter. This action is the primary driver of the $135 million increase to stockholders' equity you see from the third quarter. In essence the tax accounting for these attributes has now caught up with the successful operating results we have delivered since the spinoff.

Going forward our GAAP income statement will reflect an effective tax rate more consistent with the statutory tax rate of approximately 40%, but the use of the deferred tax assets will reduce our cash tax obligations. With all these changes it is important to highlight there were no economic changes to our tax position. We will continue to primarily pay cash taxes only related to certain states in which we do business and will pay little or no cash federal taxes until we fully utilize the deferred benefits, thereby enabling us to retain most of the free cash flow that we generate for business purposes. Deferred tax assets will shelter approximately $300 million of future taxable income.

Moving to the impact of the conversion of the preferred securities, as you recall in the fourth quarter we reached an agreement with BEMO Bank Corp., the holder of the 8% preferred shares to convert these shares to common stock. Given that the regulatory clearances were received and the shares were converted after yearend we will still presented the two-class method of earnings per share in Q4 and recorded the convertible securities as outstanding on the balance sheet.

From an income statement perspective in the fourth quarter we paid a special dividend of $7.4 million to BEMO, representing the net present value of the dividends that we would have been required to pay through October 31, 2014, the earliest call date of the securities. This special dividend was expensed in the fourth quarter as a reduction to GAAP net income.

Going forward the preferred securities will no longer be outstanding on the balance sheet and we have eliminated $2.8 million in annual dividend payments. As you will note in the pro forma capital structure presented on the right-hand side of the chart that gives effect to the conversion. We have eliminated our most expensive source of capital. The conversion has clarified our capital structure and it has added 1.3 million common shares to our outstanding share count.

Given our current share price our market capitalization is large enough to warrant our being added to the S&P Small Cap 600 Index earlier this year. With that let me turn the call back over to George.

Thank you, Mike. The accomplishments Mike and I detailed clearly demonstrate that we have significant momentum in the business and have delivered on our goal to grow the Company and increase its value for shareholders.

We entered 2012 well positioned for further growth and we can maintain this momentum by continuing to execute on our key operating objective, deliver a broad array of strong performing products using our effective distribution. We delivered consistently strong mutual fund sales during 2011 because we have the access and relationships with all the major firms in the retail space.

This year we have two clear goals, broaden and deepen our distribution relations. Our first step is to deepen the penetration we have in the existing distribution channels. We have strong relationships with the national wire houses where our funds are employed by a number of FAs, but FAs tend to do a large amount of their business with a small group of select fund companies and our goal is to become one of those preferred providers.

Additionally we are expanding our efforts with regional independent advisors and RAs. To focus on these channels we have established a separate sales force within retail distribution. The team just reached full strength and we have added some terrific talent with this initiative. I look forward to the impact the new team will have in expanding our presence among the independents and our RAs.

Product breadth and quality have been two drivers of our success and we continue as we move into the New Year we expect to maintain and build on both. As we've demonstrated in the past we can quickly bring new products or strategies to market. Last year in addition to the new funds we also seated several new small cap strategies, signed up our first new VIT client and established a collective investment trust for the retirement market.

These initiatives and others are just at the incubation stage so we may not see impact for some time, but they will allow us for opportunities in the future. One thing that won't change this year is the importance we place on maintaining strong investment performance. We have delivered exceptional relative performance from our managers and we will continue to actively monitor and manage investment performance to keep our products competitive in the marketplace.

Over the past three years even as we have significantly grown the business we have managed our expenses and balanced our growth with a reasonable return to our shareholders. Moving forward we expect to consider additional opportunities to invest in organic and inorganic growth. We have established a track record of being judicious in considering growth initiatives, but we are willing to move forward on the right opportunity.

We will continue to carefully manage our capital structure to maximize our business flexibility and position ourselves for these new opportunities. The internalization of the Multi-Sector team reinforced the plug and play nature of our business model and that's a significant advantage for us as we look to expand our investment strategies.

Finally, since our people are our most important asset we continue to attract, retain, and develop and align the talent with the needs of the business. As with growth initiatives we have been judicious in our staffing. We are essentially flat to 2009 levels with two exceptions, the Newfleet team and the new RAA independent channel.

We have delivered significant growth over the past three years with a team that is fully aligned with the interests of shareholders and clients. Our results have generated a great deal of momentum and enthusiasm among our employees and we will continue to leverage the strength of our human capital to growth the business.

As we look forward I believe we have many opportunities to build on our 2011 accomplishments. We have demonstrated we have the appropriate attributes of a successful growing asset manager, strong distribution, quality products, outstanding long-term investment performance and a talented team. We also have the experience of building a growing and profitable business. I believe these elements will establish Virtus as a company that can consistently deliver value for shareholders in 2012 and beyond.

We're now ready to respond to your questions. We do 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 some questions. If you have more questions please feel free to get back into the queue. Carma, can you open it up please?

(Operator Instructions). The first question comes from the line of Steve White from RMB Capital Markets Management. Please proceed.

Hi guys, very good results.

Good morning, Steve.

Good morning, Steve. Thank you.

Yes. First question is on the redemption rate. It was still a little bit elevated relative to the historical rate. And I realize that a portion of that is attributable to market volatility. And I was wondering so far in 2012 with the volatility having declined would you expect the redemption rate to also continue to decline throughout the year?

Let me give you some thoughts and Mike can add to it. Generally as we look at our redemption rates we look at them primarily against what's going on in the industry using the ITI redemption stats. And they will be highly influenced by basically what's going on in the market. And Mike alluded to how the trend moved off the last few years.

And ours is almost entirely being consistent with the overall trend. Generally we've had some periods were we've actually had better results than the trend would indicate, but you're correct that there was a lot of volatility particularly in the latter part of last year that did drive up rates, ours as well. So ours have moved generally in line. They will move in line going forward.

The other factor that Mike alluded to is a lot of our sales have been in new, younger funds. So as a result they would have significantly below normal redemption rates because people normally don't redeem a fund that they just moved their money into in a short period of time.

So we would fully expect that our redemption rates will move whatever the trend is in the industry, which will be driven primarily by investor sentiment and what we see sort of in the industry. Mike?

Yes. And we were pleased to see the long-term open-end fund redemption rate decline from Q3 to Q4, but given the market volatility it wasn't surprising that's it been above our, a bit above the trend we've demonstrated since we spun, but really those results have been consistent with the moves that we've seen in the industry.

And even with the heightened redemption rate your sales have kept pace with it to keep your flows still very impressive. And 2012 is already off to a strong start. Is there anything that leads you to believe that you'll see that performance taper off? Or generally speaking how do you feel even though we're early on to the year? Do you have any kind of sense to what those sales if they can maintain the current trajectory?

In terms of the performance what people generally focus in on is strong long-term performance. And I think that's one of the reasons we included an overview of some of the specific performance on our funds. And again Morningstar being basically weighted to a risk-adjusted methodology that sort of looks at long-term performance to have four and five-star performance takes years of risk-adjusted relative strong performance.

So what we basically sort of think about it and in any given year you're sort of basically selling based upon the performance that you ended the recent year with. So people look at Morningstar and they'll look at the trailing three-year kind of numbers. And sometimes they'll look at a trailing one.

So the numbers that you saw on those charts just show how very strong the fund performance was in a variety of investment strategies. That being said, generally all of our managers and strategies are managed by different advisors, some of our affiliates and some advisors. There are a few themes though in terms of we have a lot of managers that are focused usually in more higher quality strategies, so whether it's [Kane] or [Von Toble] and Duff & Phelps as well generally we'll perform better when higher quality, higher performing companies do well.

And they'll -- we'll not perform as well when there's a junk rally or when lower-rated companies perform well. So that would be the only thematic thing that could influence, so generally in the junk rally some of our strategies will not perform as well, but whenever true quality and securities are in favor generally a lot of our strategies perform well, but I can't predict obviously what the future will hold in the market and what will be rally.

Okay. And last question is on the new closed-end fund that you're in the process of launching. I was wondering is it possible to give any kind of status update on how that's going. And generally speaking what's your take on the closed-end fund market for 2012?

Yes. Obviously I can't speak directly to a fund that's currently in registration, so let me just talk a little bit about closed-end funds, closed-end fund market and sort of our view of what our opportunities are there.

Closed-end funds are a great vehicle for investors because they allow investment managers to employ investment strategies with a closed block of assets, which unlike an open-end fund which constantly has money coming in and going out sort of has an impact on how you manage money. So we think the structure is a very attractive one in terms of allowing you to do certain things.

The market itself for closed-end funds has gone through a lot of challenges. It was shut down at some period in 2008 and then just sort of reopened in 2009. And it goes through cycles.

It's basically it's been focused on yield and it started with single state munis. It went to general fixed income type products, MLPs. Senior loans became hot for awhile and then last year there was more of a move towards equity income products, which was the period that we sort of did the DPG fund managed by Duff & Phelps.

Since then I think if you sort of follow it the raises in that market have come down significantly and it was really to the volatility that you were referring to before. So after our raise in July, which was one of the most successful raises, the average raise since then has sort of been in the low $200 millions. And I think a lot of that is about investor sentiment.

So the market goes in cycles. Investors react really based on what they like to participate in and what's going on. We think it's a great opportunity for Virtus because we have great managers that have strategies that can be deployed in closed-end funds and also our model allows us to do multi-asset class type strategies, which you saw when we adopted the DCA fund last year.

So again it's a great product structure. It's an area that we continue to focus in on, but it is a very competitive market that's influenced greatly by the environment.

Okay. Thanks a lot.

Okay. Thanks Steve.

(Operator Instructions). The next question comes from the line of Justin Evans with Sonoma Capital. Please proceed.

Good morning, guys. How are you doing?

Good morning, Justin.

Mike Angerthal. Hey Justin.

Fantastic quarter, obviously. You guys just keep killing it. Question for you on the M&A side, you kind of alluded to that in your comments that you might consider that. Are you looking at anything, well not anything specifically, but what kind of metrics would you look at? What kind of deal might you look at if that was to be on your radar screen in the next couple of quarters?

Yes. Well I think we mentioned it's incumbent upon us to always look at either organic or inorganic opportunities to grow the business. And our primary focus has been on organic growth opportunities just because we're so well positioned to take advantage of those.

That being said, we cannot ignore the opportunities that sometimes arise outside of the normal organic ones. I think as you have seen we're very judicious and very thoughtful in terms of approaching anything like that. So if we were to consider an inorganic opportunity, and again our primary focus is on the organic, it would only be with a view of something that is good for the long-term growth opportunities for the Company and would only be something that would absolutely make a lot of sense from a fit within the business and valuation that was favorable.

Anything we look at in terms of valuation is what is the valuation in cost and how does it relate to how we are valued and how the stock price is valued because obviously we're always looking to look for those accretive opportunities to acquire at one valuation when we are valued and trading at another, but we have an incredible number of organic opportunities, but our ultimate key objective which I alluded to at the end of my comments is really to have that broad array of attractive strategies. And it's important that we keep our eyes open for other things that might fit, particularly as we sort of look to the continued building of the long-term opportunity set.

Great. Well keep up the good work and thanks for everything.

I thank you, appreciate it very much.

And we have no further questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Aylward for closing remarks.

I want to thank everyone for participating this morning. I hope we gave you a better understanding of the Company and the results. And as always if you have any further questions please give us a call anytime.

That concludes today's teleconference. Thank you for participating. You may now disconnect.