Virtus Investment Partners Inc (VRTS) 2013 Q4 法說會逐字稿

Good morning. My name is Britney and I'll be your conference operator today.

I would like to look at 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. (Operator Instructions). I will now turn the conference call over to your host for today, Joe Fazzino.

Good morning, Britney, and thank you very much. Good morning, everyone.

On behalf of Virtus Investment Partners I would like to welcome you to the discussion of our operating and financial results for the fourth quarter and full year of 2013. Before we begin I direct your attention to the important disclosures on page 2 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 discussion of these risk and certainties 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 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. Reconciliation of these non-GAAP financial measures for 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 our website. This morning we will begin with remarks from President and Chief Executive Officer, George Aylward, who will review our accomplishments and operating results for the quarter and full year. Mike Angerthal, Executive Vice President and Chief Financial Officer, will then discuss our financial results in further detail and will also review the balance sheet and capital items.

We will conclude by opening the call to our questions. Now I would like to turn the call over to George Aylward. George?

Thank you, Joe. Good morning, everyone. Mike and I are pleased to have the opportunity to talk about our strong financial and operating results and we look forward to your questions following the presentation.

2013 was another very strong year for Virtus. We generated four consecutive quarters of higher revenues, operating earnings and related margin and as we've demonstrated throughout the year we continue to be well positioned for the future.

Let me start by reviewing some of our most significant accomplishments for 2013. First, we had significant growth in all our key metrics and we had our highest levels of sales, flows, revenues and earnings.

Total sales were $21.3 billion, an increase of 48% from sales of $14.4 billion in 2012. Mutual fund sales were $19.1 billion for the year, an increase of 55% from $12.3 billion in 2012. This represented an annual sales rate of 74%, which was comparable to our sales rate in 2012.

Total net flows were $8.1 billion, an increase of 20% from 2012 with fund net flows increasing by 26%. The annual organic growth rate for our long-term open-end funds was 31% for the year, which was amongst the highest in the industry.

The continued strong flows contributed to our higher earnings. Operating income as adjusted was $131 million, an increase of 61% from $81.5 million in 2012. The related margin was 45%, an increase of 650 basis points from the prior year.

These solid results demonstrate the strength of our business model. We have a broad and diverse product set and effective distribution that allows us to meet shifting investor preferences and market conditions.

The industry saw meaningful changes in investor behavior throughout the year based on shifts in the market. At the beginning of the year there were robust flows into fixed income in international equities right up until the fed's mid-May comments about the tapering of quantitative easing. From that point on fixed income flows were challenged and were replaced by some stronger domestic flows in the second half of the year.

We're not immune to changes in the markets and our flows will track general market trends but as we've said many times before we have built our set of product offerings to allow us to be agnostic on the markets. With our highly diversified products we are well positioned to meet changes in the market cycles and investor preferences.

As you saw last year sales in emerging markets strategies were very strong early in the year and as investor preferences changed we had a significant increase in sales of our downside protection domestic equity fund and our alternative long/short fund later in the year. Overall, we had significant year-over-year growth in each of the major asset classes -- domestic and international equities, alternatives and fixed income.

Our basic strategy is to have a well diversified set of product offerings and even as we are very well positioned with our current strategies we continually expand our capabilities. During the year we launched two mutual funds -- the low volatility equity fund managed by Rampart, which specializes in options strategies, and the emerging market small-cap fund managed by Kayne Anderson Rudnick, which has a differentiated approach in emerging markets by focusing on high-quality small-cap companies.

Last quarter we established Cliffwater investments as a key part of our initiative to expand our alternative product offerings. We also filed for the first three mutual funds to be managed by Cliffwater and we expect to launch these funds later this quarter.

Alternative strategy to our growing area of focus for our investors and we expect this product category will gain significant traction in the future as clients heed the recommendations of their financial advisors and increase their allocations to nontraditional asset classes. We had 175% increase in sales of our alternative strategies in 2013 primarily from our long/short products and we believe we will be well positioned with compelling and differentiated funds from Cliffwater.

We added another international equity manager, Kleinwort Benson Investors International, which will represent income-oriented equity and resource strategies. KBII manages our emerging market equity income fund.

We also set the foundation for distributing our strong performing investment strategies to non-US investors by establishing the UCITS platform. In the fourth quarter we seeded the first new fund, the Multi-Sector Short Duration Bond Fund that is managed by our very successful multi-sector fixed income team at Newfleet.

The strength and flexibility of our balance sheet enhances our ability to take advantage of our many growth opportunities. During the year we completed an equity offering that raise $192 million of capital. That allowed us to rightsize the capital available to seed new investment strategies consistent with our many growth opportunities.

We seeded several strategies in the fourth quarter and the additional capital gives us the capacity to seed the new alternative funds we will introduce later this quarter. We completed this year with another quarter of high revenues and cash earnings. Let me review some of the specific results for the fourth quarter.

Total sales were $4.6 billion, which was an increase of 20% from the fourth quarter of last year primarily as a result of higher mutual fund sales. We had $600 billion of positive net flows and a consistency of positive net flows as well as market depreciation resulted in 27% increase in total assets under management over the prior year.

Mutual fund sales were $4.1 billion in the quarter, or 20% higher than in the fourth quarter of last year. Fund sales were down on a sequential basis reflecting general industry trends. We had sequential and year-over-year increases in our domestic equity and alternative strategies while sales declined in emerging market and short-term bond funds.

We had positive net flows of $0.8 billion, which was an annualized organic growth rate of 9%. Although we have several days left in the month, we see fund flows in January running ahead of December with continued strong demand in our defensive equity and long/short funds, and positive net flows in our Multi-Sector Short Term Bond fund.

In addition, as you may recall in the third quarter we deployed $40 million of seed capital into our Wealth Masters fund to facilitate distribution access. We are pleased to see that the fund has gained some early momentum and ranks in our top five for fund flows so far in January. The fund has just recently been approved by our major distributors and we believe this domestic equity strategy is well-positioned in the current market environment.

Operating earnings reached their highest level in the quarter as a result of higher revenues from our asset growth and generally stable fixed costs. Operating income as adjusted increased by 57% to $38.3 million from $24.5 million in the fourth quarter of last year.

The significant growth in the prior year reflects a 35% increase in revenue as adjusted over the past year as a result of our growing asset base particularly in open-end funds which were up 41%. The increased profitability of the business is demonstrated by the expansion of our margin to 48% from 41% a year ago. We continue to benefit from the leveragability of the business as we've maintained a relatively stable fixed cost base and a high proportion of variable costs while significantly growing revenue.

Earnings per diluted share were $2.65 on net income of $24.8 million, an increase of 103% from the fourth quarter of 2012. Net income increased 17% on a sequential basis.

We're very pleased with the results we have produced this quarter, the high-levels of revenue and earnings combined with continued solid sales and flows contributed to another very strong quarter. With that, I'll turn the call over to Mike to provide details on the financial results and then we'll open up the call for your questions. Mike?

Good morning, everyone. Thank you, George.

In the fourth quarter we generated strong financial results across all of our key metrics. This morning I'm going to review our quarterly results starting with assets under management, sales and flows. Then I'll review our key income statement line items and discuss our balance sheet and capital position.

Starting on slide 9, assets under management. We ended the quarter with total assets of $57.7 billion, an increase of 27% from the prior year and 5% on a sequential basis. The $12.2 billion year-over-year increase is primarily attributable to $8.1 billion of net flows or 66% of the increase and market appreciation primarily aided by the domestic equity markets, which contributed $4.9 billion of the increase.

On a sequential basis the asset increase reflects market appreciation of $2.2 billion and positive net flows of $0.6 billion. As a result of consistent positive flows, mutual fund assets are up 41% from the prior year and 6% from the prior quarter. Also separately managed account assets are up 28% from the prior year primarily due to market appreciation and positive net flows at Kayne Anderson Rudnick.

The market and flow trends are reflected in the shift of our mix of assets as equity and alternative assets continue to become a larger percentage of our total. As of December 31, equity and alternative assets now comprise 70% of total assets, up from 63% in the prior year.

Turning to slide 10, asset flows. In the fourth quarter we continued to deliver above-average organic growth in our long-term funds. Increased demand in our domestic equity and alternative offerings offset the declines in demand for international equity and fixed income strategies.

Total sales for the quarter were $4.6 billion, an increase of 20% from $3.9 billion in the prior year quarter. We had our 19th consecutive quarter of positive net flows with total net flows of $0.6 billion.

Mutual fund sales were $4.1 billion in the fourth quarter, an increase of 20% from the fourth quarter of 2012. For the full year, fund sales were $19.1 billion, an increase of 55% from 2012.

We maintained a high level of growth through the wirehouse channel and had a meaningful contribution from the independent RAA channel, where we added dedicated resources in 2012. Fund sales through the independent RAA channel doubled for the full year and contributed approximately one-third of the growth in annual mutual fund sales.

Fund net flows were $0.8 billion and to provide transparency into the flow picture we have additional disclosure about mutual fund flows by asset class in supplemental appendix in our earnings deck. In that context I'll provide some general highlights by category, specifically domestic equity net flows were $0.8 billion consistent with the prior quarter as our defensive equity strategies continue to provide investors an opportunity to increase their equity exposure while managing downside risk.

Alternative strategy net flows were $0.5 billion primarily attributable to continued strong demand in our long/short product offering. Taxable fixed income flows were positive for the quarter as our floating rate offering attracted solid flows which more than offset outflows from our other fixed income offerings. Non-taxable fund flows were modestly negative.

International flows were affected by lower demand due to market trends. Several of our key distribution partners currently have emerging-markets equities at an underweight rating and in the quarter we did have a $213 million rebalance of a discretionary modeled portfolio at one of our key firms. In institutional we had $179 million redemption of a single customized low fee account as a result of the acquisition of a client.

Slide 11 illustrates the sequential and year-over-year growth in operating income as adjusted and the associated margin. In both cases the increase reflects continued growth in revenues from higher assets under management driven by strong net flows in open-end mutual funds and positive equity market returns for the year and the benefit of the highly leveragability business in our variable expense structure.

In the fourth quarter operating income as adjusted was $38.3 million, an increase of 57% compared to a year ago and 7% on a sequential basis. The substantial increase in operating income as adjusted over the prior year primarily reflects revenue growth from the cumulative impact of consistent positive open end net flows.

The operating margin as adjusted was 48%, an increase of 650 basis points from the prior year quarter. And we had consecutive growth in our margin in each quarter of 2013.

For the full-year operating income as adjusted was $131 million, an increase of 61% from $81.5 million in 2012. Our total-year capture ratio, which is calculated as incremental operating earnings divided by incremental revenues, was 62%, was at the high end of our historical range. In any given quarter there can be specific items that impact that result.

Concerning GAAP results. Net income attributable to common stockholders was $24.8 million or $2.65 per diluted common share representing a $0.09 per share, or 4% increase on a sequential basis. This is particularly notable since average fully diluted shares outstanding increased 14% on a sequential basis to $9.3 million, from $8.2 million as a result of the Company's equity offering in September.

The current quarter included $0.24 per share of unrealized mark-to-market adjustments of our marketable securities. And as a reminder, the supplemental appendix in our earnings deck includes a schedule of our marketable securities holdings and the related benchmark index.

Our effective tax rate for the quarter was 35%. A decrease from 37.1% in the prior quarter was primarily due to the income attributable to the consolidated investment products that are included in our pretax income but not subject to income tax expense as well as a modest valuation allowance relief.

Our expectation of a normalized effective tax rate would be approximately 38% excluding the impact of the consolidated investment products. For the full-year net income attributable to common stockholders was $75.2 million, or $8.92 per diluted share, an increase of $4.26, or 91% over the prior year.

Turning to revenues on slide 12. Investment management fees increased to $71.2 million, up 6% on a sequential quarter basis and 34% from the fourth quarter of last year. Average long-term assets under management grew to $55 billion, up 5% from the sequential quarter and 31% from the prior year due to strong mutual fund net flows and market appreciation.

The average fee rate was 50 basis points, an increase of 3 basis points from the prior year and 0.8 bps sequentially. The increase from the prior year and sequential periods primarily reflects the increase in AUM in our higher fee mutual funds. Specifically during the fourth quarter, the fee rate for mutual fund sales was 52.9 basis points, which is up 3.2 bps from the prior year.

Over the past four quarters, 80% of our mutual fund net flows have been into equity and alternative strategies. For the full year investment management fees grew to $260.6 million, up $72.7 million, or 39% from the prior year.

The drivers of our year-over-year increase include higher average long-term assets of $51.3 billion, and increased $13.6 billion, or 36% from the prior year due to strong net flows in market appreciation and an increased net fee rate of 49.2 basis points up 1.8 bps from 2012 level of 47.4. This rate was primarily impacted by net flows and market appreciation in higher fee products.

Total employment expenses for the quarter were $33.5 million up 1% from the prior quarter and an increase of 20% compared to the prior-year quarter. The ratio of employment expenses to revenues as adjusted decreased by 220 basis points on a sequential quarter basis to 41.8% reflecting the operating leverage of the business.

The modest sequential increase primarily reflects increased variable profit-based incentive compensation and the increase over the prior year reflects the higher variable compensation and personnel additions related to the growth of the business. Total employment expenses for the year were $131.8 million, an increase of 25% from the prior year.

And once again the increases over the prior year were driven by our variable compensation and staff additions including our expanded distribution efforts and investment capabilities. The full-year employment expense ratio declined 470 basis points to 45.2%, a ratio that is a very strong result given our business model.

Moving to slide 14, other operating expenses. The trend in other operating expenses demonstrates the leveragability of the business as these expenses continue to represent a relatively low percentage of revenues as adjusted.

Operating expenses in the fourth quarter increased $2 million from the third quarter and were up $1.8 million from the prior-year quarter. Quarterly expenses will vary based on the timing and extent of certain business activities.

The sequential quarter increase was related to an increase in meetings and sponsorships related to retail distribution activities and higher professional fees. The full-year ratio of operating expenses to revenue as adjusted was 13.1%, an improvement of 300 basis points over the prior year. The annual trend of this ratio reflects our ability to leverage our cost structure and expand profitability.

Moving to slide 15 you see that we ended the year with a very strong cash and working capital position. In the fourth quarter we continued to generate strong cash flow while we also invested in future growth opportunities by expanding our seed capital investments.

At December 31, 2013, our cash and marketable securities balance was $398 million, or nearly $43 on a per-share basis up from $15 on a per-share basis in the fourth quarter of 2012. Our seed capital investments at year end totaled $123.6 million, representing a sequential quarter increase of $28.4 million and an increase over the prior year of $73 million.

During the quarter we deployed $23 million in new strategies. First we seeded $20 million into the Virtus Multi-Sector Short Duration Bond UCITS for offshore investors, and secondly seeded the Virtus emerging market small-cap fund managed by Kayne Anderson Rudnick.

We believe the appropriate size for a seed capital program given our current opportunities and pipeline would be in the range of $200 million to $250 million. With the upcoming launch of the three alternative funds as well as requirements for other new strategies, we expect to be near that level later this year.

During the year we repurchased 105,000 shares for $19.7 million and net settled approximately 21,000 shares for $7.5 million, which represents an effective payout ratio of 21% of the free cash flow earned during the year. With our activity this year we completed the repurchase of 350,000 shares for our initial authorization and we have a new authorization to repurchase an additional 350,000 shares.

Over the past year, and as our track record since becoming public five years ago demonstrates, we will continue to manage our capital to provide maximum operating flexibility with the overriding objective of increasing shareholder value. With that let me turn the call back over to George.

Thanks Mike. We're very pleased with the results we've seen in the fourth quarter and throughout the year particularly the continued growth in earnings and our ability to maintain solid sales and flows as markets and investor preferences changed.

As a mentioned earlier, January marks our fifth anniversary as a public company. Over the past five years we've leveraged our business model, executed on our strategy and have focused on doing right by our clients.

As a result we have created a growing company that has provided a solid return to shareholders. We're excited about the many opportunities we have and I'm confident that we have the right products, the right strategies and the right team to continue delivering long-term value to shareholders.

With that let's take some questions. Britney, can you open up the lines, please?

(Operator Instructions). Michael Kim, Sandler O'Neill.

First, it just seems like risk appetites appear to be rebuilding at least on the retail side of the business. So assuming that trend continues, just curious to get your take on what the potential implications could be as it relates to demand for the AlphaSector strategies, which I think you mentioned are sort of marketed as more defensive-type products?

Yes, it's a good question and I think you're right. I think in certain segments you're seeing an increase in the interest in those products that are really more upside participation and the derisking.

For us what that means is that's actually one of the reasons we see a great opportunities to the Wealth Masters funds because I'll contrast that to our premium AlphaSector. The Wealth Masters fund is specifically much more of an upside capture Alpha-type of a product or as you correctly pointed out our premium AlphaSector is really more of a downside equity protection type of an orientation.

But there are still investors who want to access the equity markets with just with less volatility and less risk. So I think they'll appeal to two different types of investors as we continue to see a lot of demand in the premium AlphaSector, which again if you look out on a risk-adjusted basis and with its standard deviation Sharpe ratio, is sort of at the top of the charts in the Lipper rankings, but that would be for someone who is looking for winning with less volatility.

So Wealth Masters is why the derisking is why we think Wealth Masters has a great opportunity here. I'd also contrast the premium AlphaSector to the dynamic AlphaSector, which again is a long/short version.

So while it builds on some of the same concepts, it does take obviously a different approach. So that would not be probably identical to what you're going to sort of see on the demand on the premium side.

Okay, that's helpful. Any color on the potential growth trajectory for the liquid alt strategies?

Are these the type of funds that can maybe gain traction a little bit quicker versus more traditional products that need to establish three-year track records? Is this sort of akin to quicker adoption of the funds similar to what happened with the AlphaSector strategies?

Yes, the environment for these funds is sort of I think a little unusual because I think as I've mentioned in earlier calls and as you're all aware, right now there is this big disconnect between what financial advisors and firms are recommending their clients do in terms of alternative exposure and what they actually have. So there's this big disconnect.

At the same time we see a lot of people like us starting to put out offerings like this. So I think the opportunity set is actually a good set for this product category because again people are recommending 15% to 20% allocations, but their clients probably have a 3% to 5% allocation.

So there is a need in the market for good competitive products. We feel very excited about what we're doing with Cliffwater and the expertise they bring as a very experienced institutional consultant who has spent years understanding and assessing the various managers that you would utilize here.

So we feel good that this is a product category that will have demand. We think our offerings will be differentiated and very compelling.

So I think the environment is there for that. I can't predict what the flows will be but I would say this is a product category that has one of the best opportunities I've seen in many years. And I do think as I look at what the competitive offerings will be that what we're doing our hope would be it would be received very well and again with some very high-quality managers.

And the allocation of asset classes that's done by Cliffwater again is really leveraging what they've done for some of their very high-caliber institutional clients over many years. So we're very excited about the opportunity that we could potentially have with those profits.

Okay. And then finally, just maybe one for Mike. I think you have talked about this in the past.

Can you just update us on some of the distribution economics if you will? So just assuming sales rates continue to decelerate versus the levels we saw in the first half of last year, just trying to get a sense of the potential benefit to margins just given the lower upfront wholesaler payouts?

Yes, Michael, and I guess you're alluding to some of the fact that our sales base compensation is paid at the time of sales to our wholesaling team. And when we look at it we continue to see our sales levels above industry averages.

So we used to talk about our sales compensation versus industry average levels. So from our standpoint I think what you saw in the third and the fourth quarter is representative of an ongoing level that you'd expect to see from the distribution activities that we have in place.

And we're not going to put specific guidance on distribution levels. We've talked about the range of compensation in the 15 basis point range on wholesaler pay, so I think that's a consistent level to think about.

Okay. That's great. Thanks for taking my questions.

Marc Irizarry, Goldman Sachs.

Just on capital employment, can you talk about the seeding strategy going forward? I'm curious what you're seeing in terms of the landscape for building your non-U. S. business and also for what you're seeing in terms of potential new affiliate relationships versus going further down the road with sub-advisory relationships with your existing affiliates.

So starting with the capital, I think as Mike sort of indicated in his comments, we sort of have a view based upon what we think our current product pipeline and opportunity set is of that being in the $200 million to $250 million range. We have about $123 million deployed, and again the deployment of that seed capital will change as a fund reaches scale.

You can recirculate money. So again I refer back to Wealth Masters, where we put in $40 million, but if that fund ends up being successful that money can get redeployed.

So we do think that that's a level at which we can successfully execute on the multiple growth opportunities that we have, which I think with our model are significantly more than a company that will generally be our size. So we see the opportunities in the alts funds.

And then sort of dovetailing that a little bit with your last question about affiliates versus sub-advisory capabilities, our overall product strategy and structural strategy sort of go together. So, again, the whole purpose is to have that diverse set of product offerings and if people were to ask me what other kind of products are you going to add, I would basically would say look at whatever flow category we don't currently have an offering and you should probably expect that we'll have something in that flow category if we don't already have it.

And as we look to do that we do maintain the flexibility to partner and whoever we think is the best firm, whether that be a firm that we take a minority interest in or a majority interest in, or again on a select sub-advisory basis. I do think that there's more and more opportunities for us if we're going to partner with somebody having some type of a true relationship I think is mutually beneficial.

So if you think about what we've done over the last year or so, most if not all of our new relationships, maybe except for one, have been either through creating a joint venture or through a minority interest. We think that creates a much better alignment.

But it'll always for us it will always be about who is the best manager for those funds. And going back to the UCITS, again we are entirely US focused in terms of our distribution today and we still have great opportunities to grow that. Mike alluded to the independent RAA division, which for us was an investment we made in 2012 and we're happy to see that it's starting to have some really significant results, but there is still a great opportunity for us in that channel because it's not at the same level for us as the wirehouse channel.

At the same time we want to make sure that we have the opportunity to take some of what we think are very attractive strategies and look at the non-U. S. investor market. So we adopted and created the UCITS platform in the middle of the year. The first fund that we're now offering is a strategy managed by our Multi-Sector team so it's similar to our Multi-Sector Short Term Bond fund, so that was just seeded.

We see two sets of opportunities. One, the early opportunities will be in the areas of the US where you can access non-US investors, and that can allow us to leverage off of our existing sales resources.

But in the medium-term we really see that opportunity outside of the US. So the platform was built to ultimately take advantage of that much broader opportunity set and we will, as we did with the independent RAA division, where we made some investments in that distribution, we would expect to do the same for the sales of the UCITS outside of the US, though again for us we want to make sure we get that product out there and then supported with the distribution. But we can start here in the opportunities that you have in Miami and New York and Texas, California to utilize those product structures for certain types of clients.

Okay, and relatedly just on the capture ratio, how should we be thinking about 2014 in terms of the incremental profitability going forward? And then I don't know if you know first quarter how we should we think about it sort of the investments that you've made throughout 2013 that you'll expect to see some leverage over that beginning of 1Q, or maybe just some help on the capture ratio.

Yes, on the capture ratio, and both Mike and I have sort of always said there's going to be volatility in some of those numbers, with generally sort of said in the range of 50% to 55% is a reasonable way to think about it. So sometimes we're little above that and sometimes we're below it, but that's usually because of a blip in terms of timing of expenses.

So we think given our structure and our model that is still a good way for you to sort of think about that. In terms of the first quarter, obviously I'm not going to give any specific guidance, etc. First quarter we do have the impact of the timing of our compensation payments, which then does usually create a noticeable uptick in our payroll tax expense.

So I think in every quarter of the year we've sort of pointed that out. But excluding that, generally as you always see the growth that we've had building up from the prior quarters will then manifest itself in the following quarter and maybe circling back a little bit to Michael Kim's question.

You have to look at the variability of our sales expense because our sales expense does vary with the timing of sales. So whether there is an uptick or a downtick in sales in the first quarter would be what you would sort of expect in terms of the hit for the up or down impact of the sales compensation.

And, again, for all of our compensation it's all variable. It's either profit-based or it's sales based, other than big salaries.

It will go up in lockstep with our profitability or down in lockstep with our profitability. Does that answer that question?

Yes, that's helpful. And then just one more quick one, if I can.

On the emerging-market equity you mentioned one of the platforms went to underweight and that there was a rebalancing. Are there any -- is this sort of the start of a trend that you foresee? Are there any indications from the channel that this is going to stick with us as we look to 2014?

No, that's a great question. Actually for EM, and I'll ask Mike to correct me if I am wrong, but the rebalancing you're seeing here was actually the last of the major distributor rebalancings.

So in the prior quarter I think we probably alluded to two others, or three others. So these are discretionary models and when they have a rebalanced and they go from overweight to equal weight or from overweight to underweight, they're sort of an immediate rebalancing and you see the redemption.

So that is what Mike highlighted in his talking points. That is not the last discretionary model we have but that was the last of our major distribution partners.

So you should think about that as the large firms where we have a lot of assets as opposed to the smaller firms. Like I always say with the emerging markets, I've always said, and I said from the first quarter of last year, that that product's going to be about what goes on with that asset class.

So I think now in some ways it's good that a lot of the firms have gone from overweight's to equal and I think in some cases underweight because the only other direction they have to go is up to equal weight and/or to overweight. So I think most firms have gone down in terms of their allocations. Again, this is the last of the majors that has discretionary though there are some other smaller firms where there might be some models.

And, again, I think increasingly you're seeing people thinking that other than maybe this morning as sort of some news is now a good time to get into EM. So you should look at the rebalancing really as the reaction to what other firms were doing earlier in the year.

Okay. Great, thanks.

Steven Schwartz, Raymond James.

Perfect timing because I did want to ask about this and whether it's good to be contradictory given what has gone on with the redistributions, the reallocations if you will away from emerging markets. Does it make sense and is there any thought possibly to reopening the emerging market opportunities fund, or do you try to attack this as well on the new offerings that you've come out with lately?

I do actually, we do actually think and we see it, not that impacts our business, we do see a lot more institutional types of investors seeing this as a great opportunity to invest in EM. And in terms of specifically as it relates to our fund, and what has obviously what has happened with that asset class in the impact that it has had on the assets in that fund and the market value, we have actually just announced to our distribution partners that we have increased the availability of that partnership.

Remember, we had done a soft close first quarter of last year, which was really closing it to anything other than existing investors and platforms that already had it as well as any individual decisions that we made related to access. We have now opened that up a little bit actually, it was discussed yesterday with our distribution partners or last night or this morning, sorry, this morning.

And so, again, I look at that as just there is additional capacity now because of what's happened there. And rather than doing one offs we want to make sure our distribution partners know that they can access that.

George, can you say what the changes were? It wasn't clear to me if this is like prior to the soft close or just something incremental to the soft close?

It's opened up much more. So it's basically open at this point.

Okay. Great.

And then if I could ask some number questions. For Mike, Mike, the very large amount of the noncontrolling interest, what was that?

That's the portion of the consolidated and sponsored investment products that we've seeded. That's the portion of those funds that we do not own that gets eliminated after the consolidation. So the increase in it is just the increased activity that you've seen in the back half of the year in our seed capital investments.

So the way to look at that would be, I don't remember the exact numbers, but $5.7 million less the $2.1 million would be really the gain on the consolidated sponsored products?

That's right, and we'll continue to provide transparency on that. I think George alluded to some of the flow trajectory of the Wealth Masters.

There's a strong likelihood that that product and that investment will be deconsolidated in the first quarter as our ownership level drops below 50% and we gather more third-party client assets. So we'll keep that transparency to aid in the modeling.

And then I heard you correctly that the gain on the consolidated sponsored investment products was not taxed?

The portion of the consolidated products that we do not own is not taxed. That's what I was alluding to in the reconciliation of the tax rate and how to think about the tax rate.

Okay. All right. So I'm trying to figure out the math here, so it'd be really taking $5.7 million less the $2.1 million and that amount is taxed?

Exactly. That's how you would get our appropriate effective tax rate. And when we talk about our projected 38% effective tax rate, it would be exclusive of any impact of the consolidated sponsored products.

Okay. Got you.

And then one more if I could, and it goes back to the question of the revenue capture rate in the first quarter. In my notes I had the fact that there is the payroll tax thing, which always negatively affects the revenue capture rate in the first quarter, but also I have in 1Q 2013 that there was some incentive comp catch up, which affected the revenue capture rate last year. Is that something we can expect for this quarter?

I think we, and I think George alluded to this earlier in the discussion more broadly on the capture ratio, the first quarter is typically focused on the payroll tax item but I think it's been in the neighborhood of $2 million over the last couple of years, and that's all I would expect going forward. I would not think of any other item that would be considering for modeling nor do I recall anything specific from last year. But the payroll taxes is clearly the material thing to think about for Q1.

Okay, great. Thank you very much.

Surinder Thind, Jefferies.

I was hoping to touch base a little bit on the variable insurance segment. Those funds have generally been consistently outperforming in the neighborhood of about $50 million per quarter now.

Can you provide any color there and kind of the outlook for 2014? Is that something we should kind of expect?

For the variable, and just to remind you on the variable piece, so that was a set of variable insurance funds that we had adopted a few years ago that was captive in one insurance company. So basically what has traditionally been in that space is really just the activity of that one insurance company.

Over the last year or two we have actually now signed up some additional firms and clients related to that. The variable market is a very deliberative, slow-moving/deliberative kind of a market, so we have added a few new clients to that.

I would describe that as nascent, in other words some of the relationships have been put in place and some of the products have been put on shelves, but it takes a while to actually see anything from that. So right now what you're seeing is the lot of the legacy business and our hope would be that, which is minimal and basically run off, our hope would be that that would get balanced out a little bit more with the additions of some new insurance clients.

But, again, we haven't specifically highlighted the variable piece in terms of what we're seeing as one of our higher growth opportunities. We absolutely like that space, and we think they have some competitive products.

But I would sort of think about that in terms of what's going on in the overall variable space, which is full of challenges in terms of that. So hopefully that answers the question.

Okay, so it sounds like that one's going to take a little bit of time. So maybe then turning to the institutional segment, it's normally choppy, and again we saw some choppiness, solid inflows last quarter, some outflows this quarter. What is kind of the pipeline look like there, and then how much of a focus is that going to be for 2014?

Yes, and you correctly point out because the size of that business for us, which is at some of our various affiliates, you really see the lumpiness, which is always unfortunate. So you did see in the prior quarter a nice uptick, which was basically one of our managers getting a very significant win.

And then this quarter as Mike alluded to, there was a very unusual customized type of product that the client went through an acquisition. So again both of those things are lumpy and in and of themselves shouldn't be indicative of anything.

Going to institutional, we do still consider institutional one of our best growth opportunities. We have put additional resources into those areas over the past year.

We will continue to do so. We think there are some opportunities for several of our managers to increase their opportunity in that space.

But again that is a very longtailed business. So having put in some of the sales resources and having focused on some of the consulting relationships you saw some of the positive results of that in the prior quarter and this one account will, very low fee account redemption you saw this quarter, literally had nothing to do with that.

That was almost just a very unusual circumstance in terms of that. So I think of the institutional as a great growth opportunity for us and internally we're spending a lot of time focusing on that and we'll be adding additional resources to enhance those efforts.

Thank you. And then maybe one quick follow-up.

I think this is just kind of revisiting the capital deployment policy. I think you guys mentioned a little bit earlier about perhaps looking at new investments through the JV structure or minority interest.

Can you talk a little bit about leadtimes and how that process actually plays out? In terms of when you're looking for -- when you spot an opportunity from the time that you guys first start thinking about an opportunity to maybe actually realizing that opportunity.

Yes, it varies a lot. Because sometimes it's driven on the product side, which is we think that there is a type of a strategy that we want to offer. So then we have to figure out which is the right manager we want to partner with.

But we're almost constantly speaking to managers and to teams and to firms, getting to know what they can do. We get a lot of phone calls, obviously, from firms that would like to access the retail world.

So we're constantly in those kinds of discussions but generally it's going to be less than a year. It depends. Sometimes we can identify an opportunity and meet with someone, and then really be working on a new product within three to four months, sometimes, I'm trying to think through some of our recent relationships, maybe it's taken nine months to do that.

But again because we have the flexibility and particularly if you're not doing an actual acquisition, they don't necessarily have to take a long period of time. And we constantly are in discussions with different firms and different managers.

But in the meantime we still have great opportunities with the existing managers we have. We have a great stable of affiliated managers and select sub-advisors. So there's still a lot of our product opportunities are going to come from some of those existing managers.

But I would think it's fair to say that right now most of your focus is on organic growth and then these are all things that -- yes.

Absolutely. There's great things we should be doing, we can be doing at Newfleet and will be doing. The Cliffwater, again, we think there's great opportunity there, but each of our managers we have several things in the pipeline in terms of what we'd like to do.

Sounds good, and then one quick question. I don't know if I missed this. Was there any commentary around 2014 tax rates or guidance?

Yes, and I reiterated on, to the last call. It's 38%, I think is an appropriate level, excluding --.

38%, okay. Thank you. That's it for me guys, thanks.

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

I just want to thank everyone for joining us this morning, and again we certainly encourage you to just give us a call if you have any further questions. Thank you.

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