Virtus Investment Partners Inc (VRTS) 2012 Q3 法說會逐字稿

Good morning. My name [Francis] 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 will now turn the conference to your host Joe Fazzino.

Thank you, Francis and good afternoon everyone. On behalf of Virtus Investment Partners, I would like to welcome you to the discussion of our operating and financial results for the third quarter of 2012.

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 risk, 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 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 results presented on a GAAP basis, Virtus uses a certain non-GAAP measure to evaluate its financial results. Our non-GAAP financial measures are not substitutes for GAAP financial results and should be read in conjunction with the 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 afternoon, we will begin with remarks from President and Chief Executive Officer George Aylward who will review our accomplishments and operating results for the quarter. Mike Angerthal, Executive Vice President and Chief Financial Officer will then discuss our financial results in further detail. We will conclude by opening the call to your questions.

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

Thank you, Joe. Good afternoon, everyone. We appreciate having you on the call with us today and Mike and I are pleased to have the opportunity to talk about the strong financial and operating results we delivered this quarter, as well as other developments we announced in October. These results continue the positive trend of significant growth in assets, sales, net flows, operating earnings and margins and also reflect solid execution of an effective strategy.

In particular, if you look at the results we achieved and the initiatives that we recently announced, you will see that we are leveraging our business model to build the future and continue to create shareholder value. Let me review some of our significant accomplishments from the quarter.

First, we continue to produce high levels of sales and net flows from our mutual funds. We had a record quarter for long term opening mutual fund sales and a near record quarter for net flows, even after the impact of a large redemption from a single client retirement plan. We have maintained this very high level of sales and flows over multiple quarters because of the breadth of our attractive and distinctive investment products and very strong relative investment funds.

Second, in addition to the consistent topline growth, we delivered higher operating earnings and margin as a result of the accumulated growth and the leveragability of the business. In the past, we have spoken about the upfront sales strain from a high level of sales but that strain in now being offset by the growth in assets and resulting revenue from the cumulative effect of the strong sales and flows.

Our long term open and mutual fund assets have increase by 58% in the past year and the accumulated growth and assets with higher average net fee rates has generated a 30% increase in investment management fees. Importantly, our growth is generally leveraged at existing resources, so as we've increased revenue and maintain stable fixed expenses, a high percentage of the revenue has fallen to the bottom line as demonstrated by the consistent growth in our margins.

The continued and the strength of the business resulted in a 40% operating margin as adjusted. The margin reflects our business model, mix of assets, current scale and growth profile and represents a significant increase over the 31% margin a year ago and 21% two years ago.

Third, we demonstrated our focus on the long term by executing on our growth strategy with specific initiatives this quarter including new strategies and capabilities that we believe will further expand our strong future growth opportunities.

In the past few months, we added one manager that provides the option capabilities, establish another that offers discipline, rules-based strategies introduced in international equity capability from an affiliate and launched and five opened and mutual funds.

These activities reinforce the fact that our multi-manager, multi-styled business model allows us to easily add new capabilities so that we can continue to offer investors a wide variety of strong performing product, whether they're looking for downside protection, current yields, capital preservation or international or non-correlated exposure.

We delivered significant topline and bottom line growth in the third quarter starting with total sales of $3.9 billion, an increase of 17% from the third quarter of 2011 and a sequential increase of 23%. Sales were driven primarily by long term open and mutual funds, but we also had inflows in our closed-in funds from a rights offering from one of our closed-in funds.

Positive net flows were $1.8 billion or 10% higher than last year and 20% higher on a sequential basis. As we discussed in the call last quarter, we had a redemption from a single client retirement plan. Excluding that redemption, we would have had our best quarter of net flows. Fund sales were $3.3 billion, an increase of 36% from the third quarter of last year and up 20% sequentially. Growth continues to be driven by a broad offerings of products, strong investment performance and effective distribution. And our sales were balanced among asset allocation, international equity and taxable fixed income strategy.

Net flows for our mutual funds were $1.6 billion in the quarter which represented a very strong 30% organic growth rate. This is the eighth consecutive quarter within overall organic growth rate above 20%, which is one of the highest organic growth rates among the largest mutual fund families. We maintain this pace in the future quarter and if you track our funds, you will see that we have very strong flows in the month of October.

As a result of our accumulative topline results, our operating income as adjusted in related margin reached new levels in the quarter. Operating income as adjusted with $21.8 million for the quarter, an increase of 70% from $12.8 million in the third quarter of 2011 and a sequential increase of 14%. The results reflect the benefit of higher revenue from our growing assets on a relatively stable expense profile. As we have discussed previously, a high percentage of our cost are variable and will be reflective of growing sales and increased profitability.

We've grown the open and AUM by 58% enclosed in assets under management by 20% over the past year and as a result, the invested manager fees are 30% higher and our admin and TA fees are up 38%. Increasing profitability of the business is reflected in the margin, which was again 40% in the third quarter compared with 31% a year ago and 38% in the second quarter.

Our consistent sales growth and net flows benefitted from the strong relative investment performance that our portfolio managers continue to deliver. 90% of Morningstar rated open and mutual fund assets or 22 of our funds were in the two highest Morningstar ratings as of September 30th. That includes 71% of assets in five star and an additional 13 funds with four stars.

The solid performance is also balanced among equity and fixed income strategies, 17 equity funds and five fixed income funds at four or five stars. This combination of strong distribution, product quality, as measured by relative investment performance and product breadth allows us just the same high level of sales and consistent asset flows. A major part of our strategy is to have a broad offering of competitive and attractive products to meet changing investor needs in market.

In this quarter, we added several new strategies to expand our product mix. First, we added five very distinctive new investment strategies that are available in open and mutual funds that we launched in September. These new strategies are an open-end fund investing in close-end funds that is managed by Thomas Hezfeld, one of the nations leading authorities on the close-end fund industry, a fund that invest in companies managed by individuals who've created significant personal wealth through their companies.

A new fixed income fund that employs new fleets of emerging markets' debt capabilities in a standalone fund and two international equity funds, one that is focused on quality small cap stocks that have competitive market positions and consistent growth. And the other that is focused on high quality, dividend paying companies in the emerging markets.

In addition to the new funds, we expanded our investment capabilities by adding two new affiliated managers and expanding our international equity capabilities. The first of these new affiliates is Rampart Investment Management which provides customized option strategies for high network individuals and institutions. Rampart has a very long and distinguish record in this market and currently manages $1.4 billion in client assets. We see this acquisition as an opportunity to add an attractive investment capability and leverage their capabilities into existing and new investment strategies and products.

The relationship is a good example of our value proposition for affiliated managers. Rampart preserves their culture, investment autonomy and can focus fully on what they do best, which is manage assets. In return, they have access to marketing, distribution, operational and other administrative support to help grow their business. As we disclosed at the time of this transaction, the transaction will have a nominal impact on our results. The transaction structure is very variable and designed to align interest to grow the Company and its profitability over the next three years.

We also established a new majority owned affiliate, Newfound Investments in partnership with Newfound Research. Newfound Investments will employ discipline rule-based approach that incorporates proprietary research and asset allocation models from Newfound Research. Newfound's capabilities will initially be available in the three new Virtus-disciplined mutual funds for which we filed the registrations last month. And we look for opportunities to extend their capabilities to other products.

The third extension of our investment capabilities was the addition of an international equity at Euclid affiliate. They have a high convection core portfolio approach that has a bias towards value and quality but is flexible in responding to market conditions. While we have a broad array of existing products, adding new capabilities is important as clients' preferences and needs do change as we look at certain strategies where we need to be aware of possible capacity constraints.

With some strategies, such as small caps and emerging markets, the manager places a limit on the size of the strategy typically based upon the number of investible securities. A large number of our products have no such constraints such as multi-sector and outfit sector, et cetera. We look to take a thoughtful approach to dealing with capacity constrained strategies considering the replenishment of assets and allowing the existing investors to continue to have access to the strategy.

Given our broad array of attractive products, we have multiple opportunities to gather assets. We have a compelling mix of very attractive investment options including our long-standing strong performing funds, the funds we introduced in the third quarter and the new ones we will launch later this year.

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

Thank you, George. Good afternoon, everyone. In the third quarter, we continue to demonstrate consistently strong financial results across all the key metrics and today, I'll provide perspective on the third quarter starting with sales flows and assets under management. Then I'll review our operating results and our balance sheet and capital items starting on slide 10, assets under management.

We ended the quarter with total assets of $41.8 billion, $8.7 billion or 26% higher than a year earlier and $3 billion or 8% higher than ending assets of $38.8 billion at June 30th. Long term assets, which exclude cash management products are also up 8% on a sequential basis and grew by 34% over the past year to $40 billion at September 30th.

The growth in our long term AUM was balanced in the quarter with strong organic asset growth of $1.8 billion from net flows and positive market appreciation adding $1.4 billion of assets.

Over the past year, long term assets from both our open-end and close-end funds have grown to $30 billion from $20.3 billion, an increase that has been driven by several factors. Strong open-end performance with 90% of our open-end fund AUM rated four or five stars on a load weighted basis according to Morningstar. The effectiveness of our retail distribution which is led by long tenured, dedicated sales professionals who partner with financial advisors to achieve their clients' investment objectives. And close-end initiatives over the past four quarters including the global multi-sector fund launch, our rights offering for the DNP select income fund and a DCA funded option.

Touching on our asset mix, equity assets represented 57.8% of total assets at the end of the quarter, up 40 basis points from the prior quarter, a result of net flows into domestic and international equity products combined with equity market appreciation.

Slide 11 shows the quarterly results and the strength of net flows over the past five quarters. This quarter shows a continuation of a longer term trend of delivering positive flows that have been diversified by manager and asset class and at the high-end of the industry, over the past several years. Total sales of $3.9 billion in the quarter were up 23% from the prior quarter, contributing to an overall annualized sales rate of 40%.

The quarter included a $229 million net raise from a writes offering from our largest close-end fund, the DNP Select Income Fund. Total net flows were $1.8 billion and represent an overall organic growth rate of 18%. This was the seventh consecutive quarter with double digit overall organic growth.

Sales of long term open-end funds were $3.3 billion, a sequential quarter increase of 20%. This translates into an annualized sales rate of 62%, up from 56% in the prior quarter. Open-end fund net flows were $1.6 billion and the 30% annualized organic growth rate from our mutual funds this quarter remains at the high end of the industry. The continued success in gathering assets has been diversified across major investment strategies including international equity, asset allocation strategies and taxable fixed income.

Last quarter, I mentioned the large mutual fund redemption in July from a single client retirement plan. The final part of that redemption occurred in September for a total of $460 million. The redemption was the result of a rebalancing of the retirement plan and as such, it was not related to performance. It was a unique situation, and the only such client of its kind. Excluding the impact of this redemption, the long term open-end mutual fund redemption rate would have been 23.5% and our organic growth rate would have been 39%.

On this slide, we see the very positive trends and operating income as adjusted. In the third quarter, operating income as adjusted was $21.8 million, a sequential increase of 14% from $19.2 million in the second quarter and a year-over-year increase of 70%. The $2.6 million sequential increase reflects the impact of the growth of assets from positive net flows and market appreciation during the quarter. The significant increase from the prior year reflects the benefit of continued positive flows and the incremental earnings from executing on our growth strategy particularly the two new close-end funds we launched and the fund adoption last year.

Operating margin as adjusted grew to 40% representing a sequential increase of 270 basis points and an increase of 970 bps from the prior year quarter. A primary driver of the margin expansion is the leveragability of the business. In the third quarter, we captured 87% of the $3 million of sequential, incremental revenue as adjusted. This is above our recent trend which is closer to 50% to 60% and that more appropriately reflects the reasonable range.

Concerning GAAP results. Net income increased to $11.6 million or $1.43 per fully diluted common share compared with $8.4 million or a $1.04 per share in the second quarter of 2012, or a 38% sequential increase in per share earnings. It's important to note that GAAP results included $0.09 per share of after tax unrealized mark-to-market gains on marketable securities and $0.04 per share of after tax severance costs.

The Company reported a $7.3 million tax expense for the third quarter which reflects the utilization of $6.8 million of our deferred tax assets to reduce our current cash tax obligation. Our quarterly effective tax rate included return to provision adjustment of 1.5% primarily related to state taxes. The year-to-date rate of 39.3% is reflective of the adjustments made this quarter.

Turning now to revenues. Investment management fees increased to $48 million in the second quarter, up 7% on a sequential basis and 30% from the third quarter of last year. The two key drivers of higher investment management fees are increased average long term assets under management and net fee rates. Average long term assets for the quarter was $38.2 billion or a sequential increase of 5% from $36.4 billion, led by the continued strong net flows particularly in open-end funds, and to a lesser extent market appreciation.

We also had a modest sequential increase in the blended net fee rate primarily due to higher equity assets. Over the past year, the fee rate on long term fund assets has increase by 4.6 basis points, reflecting the growth in open-end and close-end funds discussed earlier. Specifically, the strong flows into equity mutual funds have increased the share of equity assets to 65% of long term open-end fund assets from 59% in the prior year quarter and the close-end fund transactions I mentioned earlier have increased close-end fund AUM by 20% over the past year and increased the fee rate on this product type to 59.1 bps from 55.7 bps over that period.

Turning to slide 14, employment expenses, which is the largest driver of total operating expenses. Employment expenses of $25.9 million in the second quarter were up 2% on a sequential basis and a year-over-year basis. In order to provide a clear comparison of ongoing employment expenses, we point the cost related to the new fleet multi-sector team internalization and close-end fund sales compensation at the top of each of the columns.

Excluding these costs, the $2.6 million increase from the prior year is related to the variable nature of the incentive compensation plans, which reflect the continued higher profitability of the Company and select additions to the staff related to our distribution efforts and the expansion of investment capabilities. Total employment expenses as a percentage of revenue as adjusted continued its steady decline and improved sequentially by 210 basis points. When adjusting for the transitional new fleet cost, employment expenses were 47% of revenues as adjusted, which we believe is within industry averages.

Other operating expenses continue to be within reasonable ranges and improved when compared with revenues as adjusted. In the third quarter, other operating expenses were $8.3 million which is a sequential decrease of 8% primarily related to the annual grants for the board of directors retainer and timing of sales meeting sponsorships which occurred in the second quarter. Compared to the prior year, expenses increased $0.9 million or 12% driven by increases in investment research costs related to the addition of new investment capabilities, professional fees associated with our recent transactions and initiatives and an increase in sales related expenses associated with the expansion of our distribution team to add dedicated resources for the RIA and independent channel.

As with the employment expenses, the key metric here is the percentage of other operating expenses to revenues as adjusted. On a sequential basis, the ratio declined 130 basis points excluding the board of directors' retainer in the prior quarter.

Finally, I want to review the highlights of the third quarter balance sheet. During the quarter, we took significant steps to improve our financial flexibility, invest in the business and continue to grow our working capital. In September, we improved our long term capital position by amending our credit facility to increase our borrowing capacity, extend the term and lower our cost of capital.

Specifically, the amended facility improves our financial flexibility by increasing that borrowing capacity from $30 million to $75 million. And the agreement also includes a $50 million increased provision that would take capacity to $125 million, extending the term to five years, maturing in September 2017, reducing the spread in the variable interest rate by 50 basis points, and reviving the covenant package to reflect market terms for the current profile of the Company.

We continue to return capital to our shareholders in the quarter by repurchasing 35,000 shares on the open market for $3.1 million. Under the share repurchase program put in place in the fourth quarter of 2010, we have now accumulatively repurchased 190,000 shares for $11.8 million. In addition, as we discussed previously, we effectively repurchased 140,726 restricted stock units for $11.3 million related to employee net settlement of tax liabilities in connection with divesting of these units. Excluding these repurchases, our total common shares outstanding at September 30, 2012 would have been 4.2% higher.

Cash on hand at the end of the third quarter was $42.3 million, a decrease of $6.4 million or 13%, reflecting $35 million of seed capital investments and $3.1 million of share repurchases, largely offset by the cash generation of the business.

As we mentioned earlier, during the quarter, the Company launched five new mutual funds across multiple asset classes. To support this growth, we deployed $35 million of cash to fund the launches. This increased the Company's new product seed capital from approximately $11 million at June 30th, to approximately $47 million at September 30th. As a result of the ownership levels of these funds, GAAP requires consolidation of the funds, which is now reflected in our financial statements. The consolidation of the funds has the impact of eliminating management fees earned from the funds and adding the operating expenses of the funds.

Our non-GAAP results exclude the operating results from consolidated sponsored investment products as management believes that presentation is useful to investors given that these activities are not part of the Company's ongoing operating results.

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

Thank you, Mike. We are now ready to take your questions. We ask that you limit your questions to two at a time as a courtesy to fellow listeners. If you have more questions, please feel free to get back into the queue. Francis, can you open up the lines, please.

Thank you. (Operator Instructions). Our first question is from the line of Michael Kim from Sandler O'Neill. You may proceed.

First, you've been a bit more active on the M&A front in terms of bringing in new capabilities. So how are you thinking about your product set these days in terms of any product gaps? And then looking ahead, how do you see the mix between M&A and ongoing product development playing out as you maybe look to address some of those needs.

Well, a couple of things. As we look at our current offerings of products, I think we're very pleased with the breadth and the diversity of the types of strategies that we can offer. So we feel incredibly well positioned for that. And I think, generally, as we look at new product development and M&A, which in many instances for us are really part of one thought process, the ultimate goal is to make sure that we maintain that wide variety of attractable offerings. We need to be thinking three to five years out in the future because it takes time to incubate strategies and build track records.

So I think we're constantly looking at the horizon and where we think that there are opportunities to introduce differentiated strategies that will compete very well against things that we think are changing in the market in terms of what investor is looking for. We're constantly looking for those opportunities. And as you can see, one of the -- what we believe one of the strengths of our model is the flexibility of our model because again, it starts with what is the capability that we want to bring to the market. And we do have the flexibility to either do it with the incredible resources we have amongst our existing managers. We're willing to partner with very, very select sub-advisors. And as you see, in terms of either bringing on affiliates or creating majority owned relationships to execute the efforts to bring those strategies to market, we have all of those options available to us.

For your other question in terms of what is it that we see that we don't have, again, I feel we have one of the best and most diverse offerings of products for a company our size that's out there. I think as we look in the future, we see increased demand for liquid alternative types of strategies that are non-correlated, and things that are not like the strategies of the past. I think people are increasingly looking for different ways to access investment strategies. If they want data and they want to play around in that space, there is ETF offerings and there's other more traditional strategies. We really are trying to provide those more differentiated, out for generating strategies and giving them a different type of exposure.

But when we look at product development and M&A, in many ways, they do intertwined because it's all about having the product set for the future being as strong as it is today and using the flexible business model we have to sort of achieve it in multiple ways.

Got it. That's helpful. And then, maybe one for Mike. Has your thinking changed at all as it relates to capital management, particularly as the balance sheet continues to strengthen? So maybe more specifically, are you looking to maybe reinstate a more consistent share repurchase plan going forward?

Good afternoon, Michael. It sort of touches on some of the elements of George's response in terms of capital management, we generated above $20 million in free cash flow in the quarter and we were able to reposition our credit facility. But we'll continue to look to maximize opportunities in the business with our capital and you saw we did repurchase $3.1 million of shares this quarter.

We will look at various factors with our capital on a quarterly basis and we've consistently demonstrated returning capital to shareholders in the form of share repurchases. We also alluded to the net settlement earlier this year. So we'll look at investing in the business and looking to continue to return capital to shareholders as appropriate.

Thanks for taking my questions.

Thank you.

(Operator Instructions). Our next question come from the line Steven Schwartz from Raymond James & Associates. You may proceed.

Thank you very much. Good afternoon, guys. A couple of questions for you. First, I'd like it if you could possibly delve deeper into Rampart. I know that you don't think it's going to be material any time in the short term, but I am kind of interested in -- I know there are option strategies but the $1.4 billion or so that they have in AUM currently, what kind of product is that in?

We'll give you a little bit of a detail. So again, why we look at Rampart as being an attractive opportunity is the capabilities they bring. We see several ways that we can apply them in either existing product or strategies as well as new ones.

In terms of what they're currently doing, they're applying their capabilities really in the SMA space in separate accounts for retail and investors primarily. The $1.4 billion is on that space. So when you see the assets come on, they'll come on primarily in the separate accounts -- in the retail separate accounts with a little bit in institutional. So that will be a smaller piece of that because currently what they're providing -- and the retail piece is really in water house doing concentrated, overlay types of strategies.

So as we said in the original announcement as well as on this call, in terms of financial impact, again, I wouldn't look at it from that perspective. That would be nominal but we really do see a lot of things that we can apply because if you're familiar with how option strategies can be utilized, obviously, we can utilize them in close-end fund types of strategies that we haven't previously been able to employ. Obviously, in open-end strategies, there's applicability there, as well as just a whole host of ways you can either use that type of a strategy to either generate yield or to sort of protect on the downside. So there's things that we can do and we're very excited about the opportunity of adding that capability to our existing capability.

And then on the five new funds that you put the seed capital in, is this a situation where before seeing anything really developed, we're going to have to wait for a track record to develop. You don't have to wait three years?

Yes. I mean, we generally take the approach that whenever we launch a new fund that we fully expect that it may take three years to get off a Morningstar track record or raise assets. Now we have actually been very successful in raising assets well in the advance of that in certain strategies. For example, the Alpha Sector strategies from [S-Squared], we're very successful in raising assets and they still don't have a three-year track record.

But our assumption, when we launched them is we will take that period time but for the ones that I just described, we actually think that they are very compelling. And our wholesales are already, obviously, very well versed in the investment strategies and how they might fit into a well diversified portfolio. But we are fully prepared that it will take a while for those strategies to generate their track records. But we won't wait to try to bring those to market.

And then finally, if I may, it was a fantastic quarter so I don't want to rain on anybody's parade. Performance in the quarter was kind of mixed. I'm looking at the premium Alpha Sector fund and the Emerging Markets Opportunity fund in particular. Maybe if you address performance in the quarter for those two funds and kind of what drove it?

Yes, sure. And again, as we pointed out and included in the slide, the performance on our mutual funds in incredibly high and the number of 4 and 5 star funds we have. In terms of isolating one quarter's worth of performance, generally, you have to be careful looking at any one quarter performance but I'll speak to those two funds very specifically. We don't sell high performance even though we have good performance. We sell a strategy and a manager.

So the Alpha Sector, if you're looking at performance and you're comparing it just against the equity index, since it's a downside kind of protection product that really is mostly attractive to people for its low downside capture rather than its high-upside capture will generally in a period where a market is performing in a certain way or underperform for that period.

But as you can see from this long term track record, over time it outperforms because of its downside protection. So that's exactly what it's sold for. So people that have bought that product and the gatekeepers that assess that product would expect it to behave that way given the last quarter.

And emerging markets, I think is the other fund that you mentioned?

Right.

Similar thing. I mean [Ron Tobles] approaches an incredibly high quality approach to managing money. And generally, they will be and have been in the 99th percentile if it jumps your stocks rally. And they will look very good in terms of those periods where their strategy is in favor.

So again, we would generally not look at either of those managers or any of our managers just purely against the benchmark, but how is their strategy performing given the environment that it should be performing in. And I think we're comfortable with both of those that they're performing exactly as we would have expected given that short period market behavior in the quarter last year.

Okay. Thanks for the insight.

Your next question is from the line of Austin Hopper from AWH Capital. You may proceed.

Nice quarter. Congratulations. I wanted to ask you about the five funds that you launched. You seem to have seeded them with fairly different amounts of money, anywhere from $1 million to $25 million. I was just curious what would drive that, why one versus the other? Thank you.

Well, they're all different. The main thing is when we're seeding a fund that we look at the investment strategy and what the typical holdings would be for that strategy to be executed as the portfolio management intends. And then you make sure that you have enough seeds so they can fully execute the strategy.

So generally, if you're doing something that's going to invest mostly in S&P 500, right, you don't need very much to -- and you're going to have 35 holdings. You don't need to have a lot of capital to see that. Once you're going into the less sufficient markets in terms of like small caps, and so you're going to have 70 names and it's international in 30 countries, you're going to need a higher level of capital to do it.

And fixed incomes are the strategies that need the most capital to fully execute their strategies. So for the emerging market debt fund, which is obviously going to be in multiple emerging markets, so which again, are not necessarily sufficient as our markets. And if you want to make sure you get the appropriate level of a lot size and a fixed income security, the seed on those funds is really at the highest end of the range.

So each seeding is very specific to ensure that there is absolutely enough capital before they manage or fully execute their strategy and not have to leave names off as they're managing the fund.

Great. Thank you.

(Operator Instructions). We have a follow-up from the line of Michael Kim from Sandler O'Neill. You may proceed.

Just one more from me. So you've obviously had tremendous success in the mutual fund channel, but can you maybe just touch on some of the trends you're seeing across some of your other products or channels like variable annuities or SMAs or the institutional channels. So just how do you see kind of organic growth trends playing out maybe across some of those businesses.

No. That's a great question. And again, I think the success of the retail mutual funds, in many ways overshadows a lot of other things that we're obviously focused on. So I won't do it in the same way you gave it but for managed accounts, retail managed accounts, I already mentioned that Rampart is available in that space. So in addition to leveraging them into other product structures, obviously, having another managed account saleable product, which right now for us our bigger products are Kayne Anderson Rudnick. That gives us an opportunity to sort of have another investment strategy to sell in that space.

We've actually -- many of the mutual funds that we do sell, we also sell in the SMA. So even for some of the newer strategies, some of the Alpha Sector, Derivations, those strategies. We actually also are making them more and more available in SMAs. Sometimes, it's a dual contract SMAs which are a harder sell because you literally have to sell it directly. But we have expanded the number of products that are available in managed accounts and our wholesalers have that as an increasingly additive set of opportunities for them to move forward with.

On the institutional side, we had made some resource additions earlier this year. You may have noticed that (inaudible) as well as Kayne Anderson and Rudnick, I think we're very pleased with the resource additions that were made there. And I think the activities that have gone on -- well, institutional is a longer tail business.

But I know, I'm personally have been pleased that to have those individuals and the activities that they have focused on in terms of not only getting [NRPs and RFIs] but actually getting into finals obviously has improved for us because that has always been a flat area over the last three years in relation to what we've done in the retail side.

So we continue to work on all of those other areas and as well as variable funds. The variable, we were a brand new provider of that when we adopted it. So we had to spend a lot of time introducing ourselves to the gatekeepers, particularly, the midsize insurance companies and some of the other provider. And some of our products have been attractive. We did add an additional client other than the insurance company that we adopted it from, and we've made some headway there.

But unfortunately, that space is not growing as it once was growing years ago. So it takes a while for you to get out range due to your products and have the opportunities. But we continue to work on all of them. We see all of them as opportunities. Again, with the strength of the retail mutual funds, everything looks small but those certainly are opportunities that -- we're offering many of the same products except institutionally. We're offering many of the same products in the SMA side and a smaller subset in the variable side.

Okay. That's helpful. Thanks for taking my extra question.

Yes. No, no. Thank you.

Okay. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Aylward for our closing remarks.

Great. Okay, and thank you everyone. I hope you appreciate that we think this was an incredible quarter and in terms of not only the results that we were able to provide but a lot of the initiatives that we're taking. Because I've mentioned earlier in my comments, for us, this is really the very beginning of a long game and we're really building the capabilities we have and the opportunities that we have for continuing attractive levels of growth and creating value.

So we appreciate that and if anyone has any additional questions, please feel free to give us a call. Thank you very much.

And ladies and gentlemen, this concludes your presentation. You may now disconnect. Have a good day.