Virtus Investment Partners Inc (VRTS) 2015 Q3 法說會逐字稿

Good morning. My name is Kristy, and I will be your conference operator today. I would like to welcome everyone to the Virtus Investment Partners quarterly conference call. The slide presentation for this call is available in the Investor Relations section of the Virtus website, www.virtus.com. This call is also being recorded and will be available for replay on the Virtus website. (Operator Instructions).

I will now turn the conference to your host, Jeanne Hess.

Thank you, and 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 third quarter of 2015.

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 a discussion of the risks and uncertainties, please see the Risk Factors and Management Discussion and Analysis sections of our periodic reports that are filed with the SEC, as well as our other recent filings, which are available in the Investor Relations section of our website, virtus.com. We do not undertake any obligation to update forward-looking statements.

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. 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 within the webcast and on virtus.com.

Now I would like to turn the call over to our President and CEO, George Aylward.

Thank you, Jeanne, and good morning, everyone. I'll start by providing an overview of the quarter, followed by a discussion of capital, including the increase to our share repurchase program that was announced this morning. Mike will then discuss the financial results and balance sheet in more detail.

Third quarter market conditions were challenging for the asset management industry and for us. Our ending assets under management were $47.9 billion, a 9% sequential quarter decrease, reflecting broad market declines and the impact of investor uncertainty during the quarter.

Total sales were $2.5 billion compared with $3.3 billion in the sequential quarter, due primarily to lower sales of international equity as concerns on the attractiveness of emerging markets impacted investor interest in that asset class. Lower third-quarter mutual fund sales were consistent with what we've seen in the retail intermediary channel.

Total net outflows were $1.6 billion in the quarter compared with $1.3 billion in the sequential quarter, as outflows in open-end funds offset positive flows in ETFs and institutional. Current quarter mutual fund net outflows reflect an improvement in the flows for the former AlphaSector funds, offset by a decline in flows in international equity.

Net outflows in domestic equity and alternative asset classes improved sequentially, reflecting the lowest level of redemptions for the former AlphaSector funds since the third quarter of 2014. Net outflows in these funds improved to $0.9 million from $2.1 billion in the prior quarter.

International equity was in outflows even though our emerging markets opportunity fund continued to have strong relative performance and ranked in the top decile on a 1-, 5-, and 10-year basis at September 30. We've been pleased with the flows we have seen in this fund in October.

In terms of total open-end mutual fund flows, October is tracking to be the best month since October 2014, with the exception of the month in the second quarter when we benefited from a significant emerging market rebalance.

Given the market conditions in the quarter, I wanted to share some perspective on our investment strategies. As we've stated on previous calls, our products are generally more quality-oriented or risk-managed and will be expected to perform well in challenging market conditions. The recent volatility provided the opportunity, and our managers delivered strong relative performance in the quarter, and those results benefited our long-term performance rates.

As of September 30, we had 19 four- or five-star funds, representing 82% of our assets. This is an increase from 14 and 73% at June 30, and 15 and 60% at September 30.

Some of our funds that have strong long-term relative performance include our emerging markets, foreign and global opportunities funds, managed by Vontobel. We believe that our five-star EM fund represents an opportunity for investors looking to increase allocations to emerging markets, and foreign and global opps are two top-performing four-star funds in popular categories.

Newfleet, our fixed income manager, had six four- and five-star funds that employed both its multi-sector and single-sector strategies. We see increased opportunities for our five-star low duration fund, given the current environment. Newfleet's high yield product was upgraded to four stars in the quarter.

Our quality-oriented equities manager, Kayne Anderson Rudnick, has had strong relative performance and manages attract small and mid-cap offerings, including a small-cap core product that was elevated to four stars in the quarter.

Our Duff & Phelps Investment Management affiliate also employs a quality-oriented approach. Duff's real estate securities strategies continued to perform very well, and its global strategy is now a five-star fund.

As we've mentioned in the past, the ability to offer a broad array of differentiated product offerings from boutique managers is a benefit of our multi-manager model.

Turning over to the financial results, operating income as adjusted and related margin declined in the quarter to $25.3 million and 36% respectively. The sequential quarter decline reflects a $4.6 million negative impact of a variable incentive fee, which had a margin impact of 390 basis points. Excluding that fee, our operating income as adjusted would have been $29.9 million and our margin would have been 40%.

Third quarter earnings per diluted share as adjusted, declined sequentially to $1.74, reflecting the impact of lower average assets and the variable incentive fee, which had a negative impact of $0.32 per share, partially offset by a lower share count, which declined 1% sequentially as a result of share repurchases.

GAAP earnings were a net loss of $0.6 million, or $0.07 per share, that includes $16.6 million or $1.89 per share of unrealized losses on investments, reflecting the impact of the market decline at the quarter end. This compares to second-quarter earnings per share of $1.08 that included $0.22 per share of unrealized losses as well as an $0.82-per-share after-tax loss contingency related to the previously-disclosed regulatory matter.

I would point out that the loss contingency that was reserved for as of June 30, was unchanged in the third quarter. In October the Company reached an agreement in principle with the staff of the Securities and Exchange Commission to settle the previously-disclosed regulatory matter. The agreement is subject to review and approval by the Commission, and therefore we cannot provide any additional information or answer any questions.

Turning to capital and our balance sheet, in the quarter we returned $21.2 million, or 136% of our net income as adjusted, through share repurchases, dividend payments, and the net settlement of restricted stock units. The third quarter marked our highest level of share repurchases to date. As a result of continued repurchases, our outstanding shares have declined by 4% from September 30, 2014.

We announced a $1.5-million share increase to our existing repurchase program that had 256,000 share remaining as of September 30. The increase in the amount of shares available to repurchase enables to even be more opportunistic, as appropriate, and reflects our commitment to returning a meaningful amount of capital to shareholders. We will continue to balance returning capital to shareholders with investing in the business, which remains a priority use for our capital.

Now, I'll turn it over to Mike to provide a more detailed review of the financial results and balance sheet.

Thank you, George. Good morning, everyone. Starting on slide 8, assets under management. We ended the quarter with assets of $47.9 billion, which represents a decrease of 20% from the prior year, excluding money market accounts, and a 9% decline from the prior quarter.

On a sequential basis the $4.5 billion decrease in assets is primarily attributable to market depreciation of $2.7 billion, reflecting declines in global equity markets; and net outflows of $1.6 billion, primarily due to net outflows in open-end funds that offset positive flows in institutional and ETFs.

The $11.7 billion year-over-year decrease in assets under management is primarily attributable to $7.4 billion of net outflows, $2.7 billion of market depreciation, and $0.9 billion from changes in leverage. The former AlphaSector funds accounted for $7.9 billion of the net outflows on a year-over-year basis, while our other mutual funds had net inflows of $0.5 billion.

Turning to slide 9, asset flows, in the second quarter we had total net outflow of $1.6 billion, compared with $1.3 billion in the prior quarter. Net outflows in the former AlphaSector funds improved to $0.9 billion from $2.1 billion sequentially. At September 30, these funds had $3.3 billion of AUM, which represented 7% of total assets.

Partially offsetting the sequential quarter improvement in outflows in the former AlphaSector funds was a $1.3 billion decline in net flows in our emerging market opportunities fund, reflective of overall industry trends in the asset class.

Gross sales in open-end mutual funds were $1.9 billion, which represented a decrease of $0.8 billion, or 29%, from the second quarter. As I noted, the current quarter results primarily reflect lower sales in international equity strategies.

Let me provide some insight into mutual fund net flows by asset class. International equity had net outflows of $0.3 billion compared with net inflows of $1.1 billion in the prior quarter.

Our emerging market opportunities fund was essentially net flow-neutral, compared with $1.2 billion of net inflows in the prior quarter.

Fixed income net outflows were $0.4, consistent with the prior quarter.

Alternative strategies had net outflows of $0.3 billion in the quarter.

Domestic equity net outflows were $0.9 billion, an improvement from $1.8 billion in the second quarter. Outflows in both the domestic equity and alternative categories were primarily attributable to the former AlphaSector funds.

ETFs had positive net flows of $204 million, compared with $55 million in the second quarter. During the quarter, we introduced the Virtus Newfleet multi-sector unconstrained bond ETF, which contributed $130 million of net flows.

Institutional had positive net flows of $89 million in the quarter. Inflows are primarily attributable to additional flows on existing accounts. Institutional flows are always hard to project, the quarter represents the fourth consecutive quarter of positive net flows in this product category.

Turning to slide 10, investment management fees as adjusted of $65.2 million decreased 7% on a sequential quarter basis, and 17% from the prior-year quarter. The components of the change in investment management fees are average assets and fee rates.

Average assets under management of $50.6 billion decreased 7% sequentially and 16% compared to the prior-year quarter. The 7% sequential decline is due to a 9% decline in open-end funds. The average fee rate decreased 1.3 basis points from the prior quarter as the open-end fund fee rate declined 1.9 basis points.

The 1.9-basis-point decline in the open-end fund fee rate primarily reflects the $4.6 million negative impact of the variable incentive on one mutual fund. Previously, the majority of the fee was attributable to the fund's former subadvisor, and is now recognized entirely by the Company. The third quarter open-end fund fee rate was 47.3 basis points, and excluding the variable incentive fee it was 53.1 basis points.

A quick note for modeling. For the fourth quarter, using the 47.3 basis points we reported is appropriate, as the variable incentive fee continues in the fourth quarter. In terms of 2016, we do not expect the impact to continue, and 52 to 53 basis points would be a good rate to use.

The average fee rate on long-term assets declined 2.3 basis points from the prior-year quarter, as a 3.5-basis-point decrease in the open-end fund fee rate was partially offset by a 3.2-basis-point increase in separately managed accounts due to a larger percentage of assets in Kayne's higher-fee products.

In addition, the average fee rate on ETFs increased to 22 basis points from 9 basis points in the prior quarter. The higher fee rate is reflective of the mid-quarter introduction of the Newfleet managed fixed income ETF. We anticipate the fee rate on ETFs increasing to 30 to 35 basis points in the fourth quarter.

Slide 11 shows the 5-quarter trend in employment expenses as adjusted. Total employment expenses as adjusted for the quarter were $33.5 million, a modest decrease of $0.1 million sequentially and a decrease of $1.7 million from the prior-year quarter.

The decrease from the prior year reflects lower variable incentive compensation, both sales and profit-based, partially offset by incremental costs associated with higher staffing levels, primarily at our affiliates, including Virtus ETF Solutions.

The key metric to consider is employment expenses as a percentage of revenues as adjusted. The increase to 47.1% in the quarter primarily reflects lower revenues, as employment expenses were essentially flat. Given current asset levels, we expect the employment ratio to remain at this level in the fourth quarter, all things being equal.

The trend in other operating expenses as adjusted reflects the timing of product distribution and operational activities. Other operating expenses as adjusted were $11.3 million in the third quarter and continue to trend within a relatively tight range on an absolute basis.

Operating expenses decreased by $0.3 million, or 3%, on a sequential quarter basis, and increased $0.2 million, or 2%, from the prior year. The decrease from the prior quarter is primarily due to $0.7 million annual equity grant to the Board of Directions that is made in the second quarter. Excluding the grant in the second quarter, other operating expenses as adjusted increased $0.4 million, primarily due to higher professional fees.

The ratio of other operating expenses to revenues as adjusted was 15.9% for the quarter. The increase in this ratio reflects the decline in revenues as adjusted.

Slide 13 illustrates the trends of adjusted results. In the third quarter, operating income as adjusted was $25.3 million, a decrease of $6.1 million, or 19%, from the prior quarter. The decrease primarily reflects lower revenues as adjusted due to lower average assets and lower fee rates.

Operating margin as adjusted for the third quarter was 36%, a decrease from 41% in the second quarter and 47% in the prior year. Excluding the variable incentive fee mentioned earlier, our operating income as adjusted and margin would have been $29.9 million and 40% respectively.

The fee also had a $0.32 impact on earnings per diluted share as adjusted, which was $1.74 in the third quarter. Excluding the fee, earnings per share would have been $2.06.

GAAP net loss attributable to common stockholders was $0.6 million, or $0.07 per diluted share. The quarter included $16.6 million, or $0.89 per share, of unrealized mark-to-market adjustments net of tax on the Company's investments, of which a substantial portion has been recovered in October; and an effective tax rate of 162%.

The rate was impacted by a $6.2 million valuation allowance associated with the unrealized losses on the Company's investments. Excluding the valuation allowance and the impact of consolidated sponsored investment products, the quarterly effective rate was 38.5%, consistent with prior periods.

We ended the third quarter with strong cash and investments and working capital positive; had no outstanding debt, and $75 million of unused capacity on our credit facility. At September 30, 2015, cash and investments were $445 million, a decrease of 2% sequentially and an increase of 1% over the prior year. Cash investments on a per-share basis were $51.

Our seed capital investments totaled $277 million, reflecting the two new seed investments in the quarter. Our target range for the size of our seed portfolio remains $200 million to $250 million.

Working capital of $107 million decreased $79 million, or 39%, primarily due to $75 million of new investments. The Company seeded $55 million into two new open-end mutual funds, the multi-strategy target return fund, subadvised by Aviva Investors, and the MLP energy fund, managed by our Duff & Phelps affiliate.

In addition, the Company invested $20 million in the quarter to establish a CLO that will be managed by our Newfleet affiliate, that we expect to launch in the first half of 2016.

The key metric we evaluate with respect to working capital is working capital to spend, and we have said on prior calls that we target a range of 50% to 75%. Given the size of the seed capital portfolio is greater than the long-term target, we believe our current level of working capital is reasonable at this time.

The third quarter marked the highest level of repurchases in terms of shares and dollars, with approximately 156,000 shares repurchased in the quarter. Our shares outstanding have declined by 400,000, or 4.3%, from September 30, 2014.

The $21.2 million of capital returned to shareholders in the quarter represented 136% of our net income as adjusted, bringing the year-to-date payout ratio to 111%. As we've previously indicated, the return level could vary in any given quarter, and we evaluate our payout ratio on an annual basis.

In October the Company increased the existing share repurchase program by 1.5 million shares, representing a significant increase over the prior authorization of 500,000 shares.

The terms of the program have not changed. The Company may repurchase shares at its discretion; there's no specified term; and it may be suspended or terminated at any time. As we've consistently stated, the primary goal of our capital management strategy is to balance investments in the business with returning a meaningful level of capital to shareholders.

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

Thanks, Mike. That concludes our prepared remarks. Let's take some questions. Kristy, can you open up the lines, please?

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

First, can you maybe just walk through the negative variable incentive fee that hit this quarter, just in terms of which strategy that related to, and sort of the underlying structure behind the financial impact, if you will?

Yes. So, we have one fund that has a variable incentive element related to it. And as we pointed out, this is on a fund where previously that element of the fee was borne by the former subadvisor. And generally, the way you should think about the way the fee works is, it does have a performance-related variable element. And the calculation sort of takes into consideration average historical asset.

So, previously, the portion of the negative fee that you're seeing the impact on our quarter, would have been appropriately absorbed and paid by the fund's subadvisor. And that fund subadvisor's no longer that subadvisor.

So, you're seeing the impact in this quarter for us. And as Mike indicated in his comments, you can expect that to continue in the fourth quarter. However, we're indicating for 2016, we do not expect that impact to continue. So, is that helpful?

It is. Just maybe to follow up, is that based on some underperformance rolling off? Is that why you can't sort of expect that to normalize, if you will, looking out to next year?

Yes. I mean, our expectation is that it won't continue into 2016. And the reason that there is the magnitude of the number in this quarter, was because of the underperformance from the previous subadvisor prior to their termination.

Got it. Okay. And then, just wondering where you are in terms of distribution partners, reviewing the transition from F-Squared to DWA.

And then, just in light of the slowing outflows from the trend funds, which I assume have been mostly a function of slowing redemptions, have you started to see any step-up in new sales or do you think you need those funds to vintage a bit more, if you will?

Yes. And I'll start with the end pieces. Absolutely, I think it'll be helpful for the funds to vintage under the new strategy.

But just to revisit the whole scenario -- so, upon the termination of the former subadvisor and the introductions of the strategies, where we employ input from Dorsey, Wright, as you know, that occurred May 11. And as appropriately, all of our distribution partners invested the time and work in understanding how the strategies would work and how they were different than what we'd previously had.

So, there was a period of time where those funds were not available for sale. To think in terms of -- we indicated in the second quarter that most of them had made it available at that point, or we knew when they would be making it available. So, that was in probably the late August-ish timeframe, when that happened.

So, I think everyone admires the contributions that Dorsey, Wright has made in their area of expertise in terms of relative strength. And as we indicated when we made the change, they're a firm that's sort of very widely known. So, people know what they are.

I think what was very interesting for us this quarter -- as you know, those are risk-managed strategies that invest in effectively the sub-sectors of the broader universe and then can pivot to cash, based upon relative strength and whether the market is in a higher- or a lower-risk state.

And the third quarter, as challenging as it was for all of us, was actually a great quarter to test those types of strategies. And our -- the larger funds, the equity trend fund and the sector fund, had very strong performance over that quarter, both in the top decile. I think one was probably the 8 and one was in the top 1%. And that's because they did move into cash for a period of time. So, it was very good to have an opportunity to actually demonstrate the value proposition of those types of products.

Now, they won't do as well, obviously, when the market goes up and up and up. But it was great to have that opportunity right after the introduction of the Dorsey, Wright input and the rule changes that we made, that we had a volatile quarter and the funds did what they were expected to have done. So, that was -- that, to us, is a very positive outcome.

But absolutely, [spec] financial advisers -- those who previously liked the old strategy, getting comfortable with the new strategy. And again, we still think that new financial advisers who maybe previously never used the old strategy, could find a place for this in their clients' portfolios.

Got it. Okay. And then maybe just one for Mike. Just at a high level, curious to get your take on the outlook for margins, looking out to next year, just assuming more normalized flow and market assumptions. And then, related to that, does the 50% to 60% incremental margin range still hold at these AUM levels?

Yes. It's a good question. And certainly, we've talked about the incremental margins at 50% to 60%. I think that's still a good target to think about. And when we're looking ahead, and the assumption is based on current asset levels and current revenue levels, and certainly the third quarter was a somewhat tumultuous environment.

But we look at the three key elements when we do the modeling, and it's on the investment management fees -- and we've provided some insight with respect to the fee rate to think about, and the open-end fund fee rate.

So, when we get into 2016 and that gets into a more normalized environment, when this variable incentive fee runs off early in 2016, I think 52 to 53 basis points is probably a good way to think about your modeling. And then it -- that sort of drives the employment expense row, as we talked about. There's a significant degree of variability in employment expenses. And as profits change and sales change, we should expect to see that on the employment row.

And I would think about that at about a -- this quarter it was 47%. As the fee rate gets normalized, you're at about a 45% level of your revenues. And I think that's a good way to think about it.

And then other operating expenses -- we've talked about that in an absolute dollar range, and we've been between $11 million and $12 million consistently over a period of time. And I think, in any given quarter, we could vary within that range. But I think that's a good way to think about modeling going forward. And again, that's all else being equal on the current asset levels.

Got it. Okay. Appreciate all the color. Thanks for taking my questions.

Ryan Sullivan, Credit Suisse.

Thanks for taking the question. I just want to talk big-picture here on the ETF business. I mean, I know the Newfleet product seems to be doing really well there. Is there anything else near-term? And maybe I missed this in the prepared remarks, but is there anything near-term that you would also consider using that as a distribution tool for? Thank you.

Yes. I mean, ETFs -- we completed our investment in a majority ownership of the firm now called Virtus ETF Solutions, because we fundamentally think that that is a critical opportunity and product set for us to employ, and financial advisers -- I think you see some reporting where, in many firms for the first time, sales of ETFs are greater than mutual funds.

And in the ETF space, I think as we've said before, we're not focused on the pure beta, lower-cost type of product. We think there's some very differentiated, either smart beta-type products; or, as you've seen with Newfleet, a true actively-managed ETF. So, we want to make sure that we have that offering available to financial advisers who find the benefits of an ETF versus an open-end fund. We want to make sure we have it available to them.

So, we made that investment because it was an important part of our strategy. We have a great team at Virtus ETF Solutions. They've introduced that product in addition to their existing products.

And again, we don't have any specifics in terms of the next products, but our goal there has been to build out our capabilities, which we've done, and you've seen a little bit of that in our employment expense. But we have a very robust plan in terms of the product introductions that we intend to execute over the next few quarters.

Great. And are those going to be mostly fixed income-type products, or is there a consideration to introduce an active equity product into that as well?

Well, the issue with the active is the transparency of ETFs, because there is not yet a solution in terms of how to not be too transparent, and an equity manager would have more sensitivities about being front-run on their strategies. So, on the actively managed side, the fixed incomes will probably be the more likely of those introductions, until there is a solution on the transparency side of the equation for equity managers.

Great. Thanks very much for taking the question.

Michael Carrier, Bank of America Merrill Lynch.

I just -- I guess, a question on the growth outlook. And I think on one hand, the third quarter was pretty volatile across the board, so not a good proxy. But, wanted to get a sense of where the assets stand in the former AlphaSector fund in terms of the remaining balance.

And then, when you look at some of the momentum you're seeing, outside of that product in the EM for the quarter, just wanted to get a sense -- like, you mentioned the range for your seed capital, and it seems like you're in that range. But on the flip side, it seems like there are still some opportunities. I mean, you're doing work on creating some new strategies.

So, just wanted to get a sense on, can the seed portfolio turn? Meaning, are some of those products get to a mature standpoint, where you can continue to innovate and create new products to generate further or future growth?

Yes. And I'd break the growth opportunities, for the purpose of answering your question, into two pieces, one being mutual funds and one being outside of mutual funds. And I'll start with the latter.

We have been -- as the previous question, in terms of ETFs, and some of what you've seen us speaking about in terms of institutional, and Mike's color around the CLO -- our mutual fund business has clearly been the -- was the strongest part of our business, and where a lot of our legacy was.

And the expansion and the growth in the non-mutual-fund areas has been -- have been more recent investments. We're very pleased that institutional, albeit still being a small part of our business, has now consistently generated some positive flows for several quarters at this point. I'm very happy with the start on the ETF business. And as I indicated in response to the earlier question, that really is a very important part of our strategy going forward, and we think we have great opportunities there.

And then items like the CLOs, which gives us an opportunity to leverage the very strong management capabilities that our Newfleet affiliate -- and couple that with the fact that we have a balance sheet that allows us to make the types of investments that are really required to launch those types of structures.

And again, those, as opposed to open-end funds, have sort of a finite life, where you sort of have a stable book of assets. And we think that's a nice balance to the more volatile open-end fund business, where you have to deal with the daily investments and redemptions, and obviously the cyclical periods.

So, for that, growing the non-mutual fund part of the business, continues to be a very important area of focus. You've seen a lot of our activities and our investments on that side.

But flipping back to the mutual funds, which is the largest part of our business, and where we've continued to be very prolific in terms of seeking to deploy differentiated strategies and capabilities, and we think there's a lot of opportunities for us there.

And as I've said on previous calls, and I just referred to -- I think, once, someone asked me, what's the market that's actually worst for our product set. It's actually markets that literally go up and up and up and up, and leave investors feeling sort of frothy, and taking the -- and only want high alpha.

So, this third quarter was actually a good opportunity, we think, to remind retail investors that there is risk in the markets and that you should have a balance of products, including those that are a little more quality-oriented or risk-managed. And I already made references to the great, strong performance we have. So, I think that gives us some good opportunities.

In terms of the newer funds and how we're using the seed -- and we -- as we said when we first increased the seed program to where we were, we have high expectations of the return on that seed program. It's not just a return of the investments, which we think should be compelling in and of themselves.

But we've been successful with some of our fund launches. They all won't be successful; that's clear. But we feel good about a lot of the things that we've done, that we think are differentiated. It just sometimes takes a long time for things to become available.

I mean, our most recent offering, which is the Virtus multi-strategy target return fund that's subadvised by Aviva, and that's the one we put the $50 million in this quarter -- it's a great strategy. We think it's going to be very compelling because of the incredible breadth of capabilities. And the legacy of the manager and the firm that's doing it has been very positively received. But again, as I've explained before, it do -- it does take the firms a period of time to turn on some of these types of funds.

And then, just lastly, in terms of the equity trend funds and the related suite of those -- again, having a really strong third quarter in a period where they should have had a strong quarter, we believe is a very good statement for us to use in terms of attracting those investors that like that type of strategy, particularly those that previously liked the older version. And at this point they're down to $3.3 billion, or 7% of our AUM. So, at this point right now, they're not a large part of our business. We do hope they attract new investors going forward.

Okay. That's helpful. And then just a quick followup, just on the buybacks, given the authorization and then given the pace that we've seen this quarter, I just wanted to get a sense -- you obviously still have a decent amount of cash on the balance sheet.

So, what do you like to maintain or keep on the balance sheet, versus how much flexibility do you have, to maybe continue at this pace, or take advantage, given where the valuation is?

Sure. But again, I'll start with, as we said, in terms of increasing, and the Board authorizing the increase of 1.5 million shares to the program, as we said, we do think that that is important in give us the flexibility to even be more opportunistic than we have previously been. And that just alludes to the fact that generally what we've said historically when we first launched the share repurchase program, was that it was primarily used to offset the dilution created by issuing equity.

But obviously, above and beyond that, there's opportunities, given where our stock is trading, for us to return capital to shareholders through repurchases. And as Mike alluded to, and I alluded to as well, this last quarter was the highest level we have previously done. So, we increased it by 1.5 million. You may recall the last increase we made was a year ago, and that was 0.5 million shares. And we do think having that flexibility is a great thing for us to have as we balance those things.

But we do balance investment and growth with the repurchases of the shares. So, we'll continue to find things, like investing in the multi-strategy target return fund and the CLO, as important uses of our capital.

But as you allude to, we do have $51 per share of cash and investments on our balance sheet, so we do have the ability to also focus on the return of capital side. And again, that is, in part and parcel, the reason we increased those shares outstanding.

In terms of how we look at capital, just a few of the metrics that Mike pointed out on this call, and we've pointed out previously -- we look at working capital as a percentage of annual spend. We pointed out, it's a little lower than the range that we normally have spoken about. But because the seed capital is higher than the range, we think in -- when you put those two things together, that those are at reasonable levels.

But we still think the seed capital level that Mike indicated, of $200 million to $250 million, is the reasonable ongoing pipeline seed capital level that we had originally targeted, and that working capital a little higher than it currently is, is a good level. And we continue to generate cash, as you know, on an ongoing basis. And this quarter we took 137% or 136% of that and returned to shareholders.

So, we work on protecting the business in terms of the working capital; investing in the business in terms of the $200 million, $250 million of seed. As you know, we have no debt. And we do think that there's opportunities on the share repurchase side, above and beyond offsetting dilution of equity [plans].

Okay. Thanks a lot.

Surinder Thind, Jefferies.

I'd like to just start with a point of clarification regarding the variable incentive fee. In terms of -- like, when you talk about that you don't expect that to be an [oncurring] expense or element in terms of 2016, is that that the fund's -- the fund no longer has an incentive variable component? Or, just that it's a -- getting back to kind of a normalized performance level?

Well, we're giving the indication that we don't expect that it'll continue as we get into the beginning of 2016. And again, it is a variable fee and it is not something, obviously, that we would want to continue, in terms of having such a negative impact. So, our expectation is that it won't continue in the first quarter.

Okay. But the fund -- it's still subject to having the variable fee an on an ongoing basis?

Yes, it is. And again, that is based upon calculations of average assets, and performance, and all of that. But we would not want to continue to have that situation. So, we've indicated we do not expect it to continue into the first quarter.

That's helpful. And then, in terms of -- any update on the JV with Cliffwater, and kind of maybe the penetration with the -- on any platforms with the three liquid alt products?

Yes. No. On the liquid alt products, in terms of the three products that we have with Cliffwater -- and again, in the third quarter when you have the volatility that you do, alternative products come back into attention.

I think I had mentioned on some previous calls in -- earlier in the year, as the market was seemingly just going up and up and up, a lot of investors had less interest in those risk-managed and those alternative strategies. And -- but obviously, there's been a few in the industry that have been able to gather significant flows based upon how they're doing.

In terms of our funds, the experience that we are having for those funds is, during those periods in which investors were a little less interested in those alternative strategies, the firms that we do business with were also not pushing them as much.

So, there hasn't been a big change in terms of the availability of that fund. So, it's -- the availability is still a little bit on the limited side. I think that's really more of a function of where firms are trying to focus their clients and their product offerings at this point.

That's helpful. And then maybe one quick question. One of the things that you mentioned was there's some additional head count over within the ETF segment. How should we think about general head count [firm-wide] point forward, as we look into 2016 and beyond?

Sure. In terms of our overall expense structure, we have a very variable expense structure. Obviously a large part of our employment expense, and even a lot of our operating expenses, to the extent that we can have them variable, we like that. Because then, as assets go down, you have some self-correcting. Clearly, with the market declines and the impact of the quarter, it makes everyone a little more focused and conscious on any kind of expenditure.

In terms of head count, what we've indicated in terms of the costs -- on the cost side, is that it really has been focused on those of our affiliates that are growing and we want to keep up with the resources for their growth. ETF -- Virtus ETF Solutions being one of those. Other than that, we're being very prudent in terms of any kind of expenditures.

That's helpful. Thank you.

Steven Schwartz, Raymond James and Associates.

I want to revisit the variable incentive fee again if we could. Looking at page 10 of your presentation, we see a net fee rate, 51.7 basis points to 51.5 basis points through Q3 2014 and Q1 2015. And then it goes down in Q2 2015. Was there -- did you have to eat some of the variable incentive fee in the second quarter?

Yes, Steven, (inaudible).

It wasn't mentioned. I'm just wondering if -- looking back on it now.

Yes, Steven. This is Mike Angerthal. If you recall in the second quarter, we had multiple moving parts in the fee rate discussion. It was during that quarter where we changed the former subadvisor on the trend funds and shifted to a new model provider. So, that was partial quarter impact in the prior-quarter fee rate. And we tried to normalize that in some of the fee rate discussion that we had.

So, I think that the best way to think about the fee rate is as we've described it this quarter. With the impact of the variable incentive fee, this quarter's fee rate of 47 basis points is how we've reported it, and then adjusting for that is 53 basis points. And I think I alluded earlier that, when I think of the open-end fund fee rate into 2016, 52 basis points to 53 basis points is probably the best way to think about it for modeling.

Okay. And then one more for me. George, I didn't catch this totally. Were you indicating that you've reached some type of agreement with the SEC? At least some type of initial agreement with the SEC?

Yes. As I said in my prepared remarks, we have reached an agreement in principle with the staff of the Securities and Exchange Commission to resolve the matter. But that is subject to the Commission itself. And really, other than that, we're not making any other comments or answering any questions.

Okay. I just wanted to make sure that I understood that correctly. Thanks, guys.

Alex Blostein, Goldman Sachs.

Sorry to beat the dead horse, but I guess just another one on the variable fee component. Is it ultimately measured against a benchmark, or when you try to assess whether it's a positive or negative number?

And maybe for us to kind of think through that math, go-forward -- on the go-forward basis, I guess, maybe some clarity around specifically which funds, specifically which benchmark, and just kind of how to think about the mechanics of this component of your revenue stream.

I understand that you'd prefer not to have them next year. But I guess, unless you change the actual structure of it, it could happen again. So, just trying to understand the moving pieces there.

Yes. To be a little -- to be more affirmative in what we're saying is, we do not expect it to continue into next year, and we would not continue to incur that type of charge, managing a fund. So, that is what we're saying in terms of how to sort of think about it.

In terms of -- I'm not going to get into the details of the overall calculations -- all that. But it does relate to historical periods of performance and the calculation relates to historical assets. And again, I think we've been clear in terms of our expectation that you should expect it to continue into the fourth quarter, and that we don't expect it to continue much past that.

Got it. Okay. And then just a couple on modeling once this -- when we look at the distribution and underwriting fees, and then I guess to some extent the offsetting distribution and administration expenses, that ratio of expenses to revenues has been grinding higher a little bit. And the fee rate on the distribution and underwriting fees has been coming down over the last couple of quarters. What's driving that, and where do you guys ultimately expect that to shake out? Thanks.

Yes. And that row, as we've talked about, includes the fees -- the distribution and administrative expenses and other asset-based expenses, includes the fees that we're paying to third-party technical service providers.

So, as those assets have declined due to the elevated redemptions that we've talked about, that rate has drifted, I think between 25 basis points and 27 basis points. And we'll sort of -- I think that's a good level to think about, going forward.

Got it. So, kind of stable from here.

Yes. And you continue to think about it with respect to open-end fund AUM.

Got it. Great. Thanks so much.

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

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

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